Q3 2019 Earnings Call
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Buyer call will begin momentarily once again please standby.
Welcome to the Q3 2019 Air Transport Services Group incorporated earnings Conference call. My name is John I'll be operator for today's call.
At this time all participants are in works and only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you do a question.
Press Star then one on your Touchtone phone.
Please note that this conference is being recorded.
Now I'll turn call over to joke eating Chief Executive Officer Ats G. Mr. Eating you may begin.
Thanks, John Good morning, and welcome to our third quarter 2019 earnings Conference call.
With me today is Quint Turner, our Chief Financial Officer, Rich Corrado, who became president of Ats June September is traveling overseas today.
We issued our earnings release yesterday after the market close it's on our website Ats unique dot com.
We will file our Form 10-Q later this week.
Once again I'm pleased to report you that this year, we're performing at levels consistent with the adjusted EBITDA guidance, we've shared and exceeding our targets for adjusted bps.
Our business strategy of investing in and leasing midsize aircraft to major expressed an ecommerce customers in combining those assets with crew maintenance outage and insurance services, where those are required continues to be a winning formula.
Our purchase of omni a year ago has continued to provide accretive contributions to our operating results.
For the third quarter, we get substantially outperformed our prior year results.
Our revenues are up 79% to 366 million.
Our adjusted earnings are up 10% to 21 million or 31 cents per share.
And our adjusted EBITDA rose, 47% to 109 million.
Our airline operations are expanding and our leased aircraft leaders growing our air network services for the Department of Defense and Amazon are up versus the prior year and we have Nike more aircraft in our operating fleet than a year ago.
These results plus significant increases in scheduled peak season flying support my confidence in our ability to achieve our 450 million target for full year adjusted EBITDA. Despite a few headwinds to our plan.
What is ready to review our consolidated results, including the release, we also issued yesterday about a new amendment to our senior credit facility.
I'll close with comments on our outlook.
Quinn.
Thanks, Joe Good morning to all of you on the call right now and to those who will listen on replay.
As always I'll start by saying that during the course of this call we will make projections or other forward looking statements that involve risks and uncertainties. Our actual results. Another feature events may differ materially from those we described here.
These forward looking statements are based on information plans and the estimates as of the date of this call and Air Transport Services Group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions factors, new information or other changes.
These factors include but are not limited to.
Changes in market demand for our assets and services.
Our operating airline's ability to maintain ontime service and control costs.
The cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.
Fluctuations and Ats cheese traded share price and interest rates, which may result in mark to market charges on certain financial instruments.
The number timing and scheduled routes of our aircraft deployments to customers.
Our ability to remain in compliance with our agreements with key customers and lenders and other factors as contained from time to time in our filings with the FCC, including the Form 10-Q , we will file the sweet.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings adjusted earnings per share.
Adjusted pre tax earnings and adjusted EBITDA.
Management believes these metrics are useful to investors and assessing ats cheese financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to reconciliations to GAAP measures, which are included in our earnings release and on our website.
As Joe said, our third quarter results compare very favorably with our results from a year ago and show sequential improvement from results for this year second quarter.
Our revenues again rose sharply this time by 161.2 million or 79% from the prior year.
Once again, a solid contribution from omni was a principal positive factor.
Our work for the Department of Defense with contributions from all three of our airlines make it Ats g.'s largest customer representing 34% of our revenues in the third quarter, 26% of revenues came from Amazon and 13% from DHL.
Once again, our GAAP earnings include large unrealized effects of quarterly revaluations of several financial instruments. These are mainly the effects of revaluing interest rate hedges on our bank debt plus the noncash effects of changes and the value of the warrants we have issued to Amazon, which this time was positive due to a reduction.
In the value of our warrant liability.
Those factors contributed to a tripling of our GAAP third quarter earnings from continuing operations to 105.1 million this year compared with 32.9 billion a year ago.
Diluted GAAP earnings per share for the third quarter were 19 cents versus 24 cents a year ago.
Warrant accounting excludes from GAAP earnings per share effects of mark to market changes in warrant liabilities when they are accretive.
The adjusted earnings EPS, and adjusted EBITDA, We reported this quarter exclude those weren't related gains as well as amortization of warrant incentives for Amazon.
Affiliate losses, reflecting our share of Airbus Athree hundred 21 development costs and the non service related costs of our retiree benefit plans.
As a result, our adjusted EPS for the third quarter was 31 cents as Joe mentioned, a moment ago versus 28 cents in the third quarter of 2018.
Our third quarter adjusted EBITDA increased by 35 million to 109.2 million and we are at 328 million through nine months up 52% over the first nine months of 2018.
Operating income for the quarter also rose, 52% to 40.8 million.
Operating expenses increased to 325 point threemillion with significant increases in fuel depreciation and amortization and salaries and benefits.
The increases are primarily related to omni and expanded operations for Amazon.
Quarterly interest expense increased from 5.6 million to 16.7 million, which includes the effect of higher borrowings for the omni acquisition and aircraft investments.
Our capital spending was 336.9 million through nine months of 2019.
We have acquired nine Boeing 767 aircraft today and place for Sevensix Sevens into service through September .
Our projection for full year Capex is now 460 million down 15 million from our August forecast, Joe will talk more about our fleet development plan shortly.
You probably saw last night that we also completed another amendment to our senior credit facility.
The principal changes increase our revolver capacity by 105 million.
Consolidate our two term loans into one and reduce our interest rates at a given level of borrowing on the prior pricing schedule.
We estimate that these favorable changes will cut our interest costs by approximately 4.7 million per year and our current borrowing level.
On the operating side, our principal aircraft leasing and airline businesses continued to improve our bottom line as they expand their topline business volume.
A semi services on a pre tax basis earned 4.4 million in the third quarter compared with a loss a year ago, Ana and earnings of $1 million in the prior quarter.
We had advised you in August that third quarter ramp up costs for expanded second half flight operations for Amazon would be about $4 million, which was roughly where we wound up.
We're now expecting another couple of million of those costs in the fourth quarter as the updated flight schedules, we receive from Amazon in September require more crews than we had projected.
That includes the effect of two more aircraft, we will operate on a CMO basis for them.
Cam our leasing business performed as expected revenues net of warrant related lease incentives increased 21% due mainly to 17 more aircraft in service versus a year ago, including 11 from omni.
Cams pre tax earnings were 17.4 million down from a year ago and flat with the second quarter.
Thats net of 4.8 million more in allocated interest expense and 7.7 million more for depreciation than a year ago.
That's a bit related to the addition of omni owned passenger fleet.
Cost and revenue shortfalls from delays in leasing newly converted aircraft.
And from aircraft transitioning between lessees, we're also factors.
External customer revenues from other activities for the third quarter increased 4.6 million, primarily due to additional revenue for ground services and fuel sales.
That was offset by the termination of sort facility management services for the U.S postal service in the third quarter of last year.
Pre tax earnings from our other businesses were flat for the third quarter the loss of business with the U.S Postal service was offset by additional revenues to support Amazon's expansion, including gateway and aircraft fuel services and sort of equipment maintenance.
That completes a summary of our operations for the quarter Joe. Thanks.
They TSG look substantially different today than it did a year ago.
On November eight last year, we acquired Omnicare.
Before the year ended we won rice to acquire 20 more 767 feedstock aircraft and agreed with Amazon of leases for 10, more sevensix freighters and extensions on 20, others, we lease and operate for them.
Last spring, we added three years to our freighter leases and operating agreements with DHL.
We are bigger company now ill keep growing over the next several years as we meet increased demand for our freighters and now the passenger Sevensix Sevens and Triple seven Saddam the operates.
We have also diversified revenue stream with the defense Department now representing a third of our revenues.
Our growth is exceptional in comparison to the overall air cargo industry.
Our operating fleet will reach 100 aircraft by the end of the year up 19 from this date last year and all are available freighters will be flying during peak.
We are growing because we principally serve the north American domestic express in integrator market.
Which is driven by e-commerce demand that is growing rapidly year over year.
We're also growing because we have in omni the passenger assets and reliable earnings stream front and other market largely insulated from economic volatility.
Specifically transported military personnel.
On these leadership in that Arena continues as we look back on a year's worth the results from Ami since we acquired we can tell you that it has performed just as we expected and is poised to do well again in 2020.
While other space strong headwinds from slowing economies abroad, and tariffs are us based operations are moving forward.
The evidence of that trend is easy to find.
DHL reports that its Americas market continues to outgrow its other global regions.
Yes, recently said that its second quarter overnight growth was up 30% and third quarter was up 24% year over year.
E Commerce volume is being driven by the convenience of mobile technology and the integration of transaction platforms with social media.
To projections, we follow call for 20% growth in e-commerce worldwide and 15% growth in USA through 2021.
Anticipating that trend our 767 freighter growth pipeline is in good shape.
We will convert and to deliver to awaiting customers eight to 10 Sevensix Sevens next year, the majority of which are under agreement.
Our growth opportunities are primarily in the Americas, but also in southeast Asia and the Mideast.
In addition to our agreement a year ago with jet trend for 20 X American Airlines seven successor funds, we have been acquiring feedstock from other sources to meet specific customer requirements and market demand through 2021.
To date, we have purchased three of the Sevensix Sevens in our jet Tran allotment.
In short we have largely locked up the feedstock we expect to require for the next two years.
This puts us in excellent position to service customer demand as a feedstock market remains tight.
Even as we manage significant growth in our airline operations, we're leading the way in providing safe reliable on time service to our customers every day.
Both the words and actions of our customers from our performance quality.
Our freighter deliveries are back loaded this year as we told you would be the case from late June 30 ended the year, we will put 8767 freighters into service for Amazon.
That six that Cam is leasing them and to others Amazon has shifted from another carrier.
We're also dry leasing for converted 767 to U.S. plus a fifth in January .
We expect to end 2019 with 5767 in we're awaiting modification.
Given the short 2019 lease and operating periods for these new assets they will deliver much greater cash flow in 2020 than in the fourth quarter. When we will also absorbed their startup costs.
So our guidance remains unchanged from the 450 million we gave you in August .
Our fleet growth profit profile for next year is shaping up to look much like this year as well.
Full year contributions from the aircraft were placing now plus cash flow mainly in the second half from deliveries of 2020 aircraft.
Quint mentioned that we have just amended our credit facility in ways that add flexibility and reduce our interest cost.
Thats, a strong endorsement from our banks of our ability to generate exceptional cash flow to fund most of our growth. While we continue to operate a comfortable or even decreasing debt leverage.
We are aware that many investors it turned away from the air cargo sector because of the macro factors, we're all aware of.
Certainly our stock prices, reflecting a lot of that skepticism.
Those who look closely at Ats GE. However, we'll find a company with almost no fuel price or payload risk.
Reliable performance and in demand assets.
We're looking forward to years of strong cash flow without federal tax cash obligations generated from long term lease and operating contracts.
Some of those leases extend late into the next decade.
That's the performance we have been saying for years that our business model can and does deliver.
We expect to moderate our fleet investments next year and do so further if ecommerce and other long term trends driving our growth subside.
We would instead use more cash to pay down debt and returned some to shareholders.
But we have no intention of forfeiting today's growth opportunities to competitors because they drive the shareholder value we are generating today.
That concludes our prepared remarks, John we're ready for the first question.
Thank you and I'll begin the question and answer session. If you do have a question press Star then one on your Touchtone phone, if you assume ROE from the Q expressed outside or the hash key.
If you're seeing a speaker phone you may need to pick up the handset set first before pressing the numbers.
Our first question is from Jack Atkins from Stephens.
Hey, Good morning, guys you got weighed on for Jack Congratulations on the quarter and thanks for taking my question.
Yes.
To start when we think about the puts and take.
Of your guidance it sounds like there some increased customer demand in the fourth quarter, but also some ramp up costs related to that and then some timing issues related to some aircraft deliveries the first our and we reading that correctly and while this might be some upside this year does that provide greater visibility into additional.
Growth for next year.
Well I think the upside for peak season is just strictly related to peek interbody demand for the assets that we normally have tied up in maintenance et cetera. So we've got increased demand there in terms of its utilization and as we mentioned until in addition to that we've got two aircraft that were in originally part of our plan.
That were transferred over from another operator that we had to gear up for so we're going to see costs associated with that and then when you look forward going into 2000 and.
The 21 of the things you run into his is all training for example, ceases for line crew members.
Other than the upgrade side in the fourth quarter and then it picks back up again in the first so we continue to have to add people into the mix to accommodate the existing lift in and be able to transition into the first of the year to keep the aircraft Bill.
Okay that makes sense. Thank you.
So when we think about the goal for 10 deployment and ask why 20 with five already under contract and sounds like a strong demand for the other five that plan for can move any higher.
No I think were constricted by the with the production lines from a conversion standpoint, Thats why we usually sates eight to 10, because you can always run into an issue where you can't kicked the airplanes out as quickly as you would like to.
We pretty much occupy all of the modification lines at III from a conversion standpoint, there is another airplane or two from other operators in there, but we pretty much monopolize them. So the ability to kick that up is probably will be extremely difficult.
The most likely wouldnt happen.
Okay and that last one now I'll hand, it off.
We talk preliminary Capex outlook for 2020, you guys have that yet.
Yes, we we this is Clint we would foresee some reduction certainly from.
2009 teams level, which we've guided for this year at 460, I think you would see us more closer to the.
400 type level somewhere in that and that vicinity. Obviously, we're not we haven't totally finalized all that we hope to give more guidance on that of course. The next next time, we talk but but it is a we foresee a lower capex requirement certainly as we go into 2020.
All right awesome thank shelf.
Yes.
Our next question is from Helane Becker from Cowen.
Hey, guys, it's actually kind of Creganna for lane how are you.
Got a good.
Just on maybe coming at 2020, a little bit different.
For the EBITDA outlook I know you don't do Youre, giving formal guidance and I think you spoke to a little bit today, but.
When we think about 2020.
Maybe thinking about in the context of it have EBITDA growth of at least the growth in your fleet I mean, just given what you did this year I realize there's some startup cost would be can give a little some puts and takes on what you're expecting maybe on the cost side and maybe on that on revenues. If you have any visibility there.
Yes contracted.
Did you say we of course will give the.
The guidance when we as we always do and February come out with the end of year, but.
Because of the timing of the aircraft entrance this year, you're right that.
The full year contribution next year will be evident.
We've got I believe six.
Well eight counting the to that.
Came in from.
From Amazon from a different carrier, but we have six that cam will be leasing that we'll be starting in the fourth quarter.
And so.
Youre going to see a full year contribution from those and we sort of I think.
The analysts to follow us kind of know roughly what we expect to see in terms of contributions release.
For those as we look forward.
We've also had a lot of startup costs in 2019, you know given the growth.
And the number of aircraft that we brought on so we would hope to see some efficiency there. Although there will be more new aircraft coming online next year certainly it doesn't appear to be the number that we've had to gear up for this year. We also had to gear up for a heavier flight schedule in the second half and that was pretty soon.
Yes, again significant driver of the startup costs that we've talked about this year, so having that behind us we would expect to see.
Some efficiencies in our airline CMI operations next year.
Once a clear those those the startup costs. So I do think that we'll have a tailwind on our EBITDA going into next year and we expect us.
Double digit type.
Growth rate.
Our next year.
Great and then just on on the maybe on the deal the business. So.
How is that looking into 2020 are you expecting there.
Right.
Well that you're seeing now.
Yeah from India de perspective, we don't anticipate there we're going to see any reduction in that as the if you look out from a military perspective, we said on previous calls what are the things that they are trying to do is minimized somewhat the utilization of the military's own assets, which means anything it cannot be and could be done by the the commercial sector.
We will drive some of that it's not going to be a significant growth number but on a year over year basis, we expect to see growth.
Great and then maybe one on on the Athree 21 conversions, so you're targeting certification in mid 2020.
When do you expect to start looking for feedstock for that aircraft and have you already starting to have some discussions with customers on that plane and does it actually open you up to additional customers that you don't actually have right now.
Just curious on your thoughts there beyond the 321 right now the target is to get the certification called the latter part of the second quarter of next year.
The aircraft from a conversion standpoint is down off Jackson sitting on its own landing gear, we're still doing some testing expects to start test flying in the first part of the year going forward.
As far as the aircraft itself feedstock are always on the look out for feedstock if the right opportunity would come along but right now when you think about things like to 737, Max being grounded et cetera.
The 21 is an equivalent lift actually a little bit more but thats going to hold feedstock availability down.
But we're talking to a number of customers both ourselves and precision obviously, we can leverage the 321 from the perspective of buying aircraft converting them and leasing them out ourselves we can leverage it from the standpoint that were part owner of the ultimate STC that would come out so we'd share and those proceeds as well.
Only from a production standpoint, if you are talking about a second quarter.
Certification of the aircraft you might get couple more aircraft into the mix in the latter part of 2020 and from a full production standpoint, I don't see of being a big production line.
Going forward until probably the latter part of 20 122.
Okay.
Like the actual conversion is it similar timeframe as the other aircraft that you normally do or is there any now and talk about the the elapsed time to convert an aircraft.
Yes.
Yes, that's difficult to say at this point it is a fairly extensive mohd. Although you are actually tablets, obviously talking about a smaller airframe than the this 767 is but until we get through the certification process itself and understand all the piece parts as you can imagine during the certification there's a lot of form and fit issues as you have to deal with.
But in no way shape or form shape or form should it be any longer than what the 767 years, which right now is call it to 120 days.
Okay.
Great. Thank you.
Our next question is from David Ross from Stifel.
Good morning to actually make Nick.
I said on the.
Yes, I guess on on omni first.
It's been almost exactly a year so what's the post deal post mortem senior urinalysis after having omni.
As part of the TSG for the last year is it better than expected worse than expected how is it different.
Hi, Dave its client and we are honored that you actually joined us on the call today.
Yes, it's a good question Greg question, Amit as Joe said in his remarks.
Earlier, you know it's performing.
As expected and I would say better in some respect certainly than expected. So we are.
As far as oppose more of it was accretive from the beginning and has remained so to our to our earnings.
We talked about.
What our assumptions when we purchased it about its trailing 12 month, EBITDA and cash flow production.
And I would we as you know we've taken the 11 owned aircraft on their part of Cams portfolio. So part of that EBITDA manifests itself with Cam, but in total if you. If you look at it I think it is it has met and or exceeded what our expectations were for cash flow production and more.
Over in terms of I think.
Putting us putting our revenue book and a place where it's less exposed to volatility.
From things like to general cargo market it really.
Was a game changer for us and I think.
Given all the growth opportunities that remain with us in the ecommerce space, it's going to provide a nice balancing.
You know immunization impact on our on our exposures to the broad economy, Dave If you look at it from a utilization standpoint, obviously mix comes into play if you're talking about triple Sevens versus seven six sevens, but if you look the third quarter for example on a year over year bases omni block hours were up 16% versus third quarter last year. So.
It's hits growing in addition to what we expected to get from baseline perspective.
Over the long term and of course, we as we mentioned I think on last call. We've given them an additional 767 300 odd the American fleet to operate in the nail not the military sector with commercial sector and it's right now as Quint mentioned, it's doing everything we expected it to.
The block hours are up.
Mostly on an apples to apples basis, but there's one more plane in there.
No because the via one more plane isn't going to drive a 16% increase in block hours on a year over year basis. If you look at that from Iran numbers perspective in terms of the if you look at it there was 9000 block hours flown by omni in the third quarter. This year versus June but 7800 prior year, so you're not going to get that kind of utilization auto lender.
Aircraft so everything in total is growing.
Okay.
And omni did also bring some charter business Q, although it's not the long haul cargo charter that both to the air freight market and what's going on.
Great tariff issues.
How do you think about the charter business as part of a semi.
Change the profile of the earnings longer term is it more volatile is there something about passenger target market. That's.
More stable than the Carter chart cargo target market.
No I wouldn't say, it's more stable I mean charter is what it is I mean think about omni in total per member. If you look at the book of business. They had it was 70% Deo de 15% government and 15% commercial and one of the commercial on the commercial side. They had one long term customer.
It had a dedicated aircraft to it so it's not going to be a huge.
Driver of revenue for us from a charter standpoint in terms of comparison to total book revenue that we have but certainly if you can put the hours on an asset that otherwise might be sitting on the deck. It certainly helps to bottom line.
And then.
We're looking at the fourth quarter and maintaining EBITDA guidance for the year do you expect Ace HMI margins, given the puts and takes with the more aircraft more hours, but somewhat increased training costs.
Sure.
Margins be up year over year, or flatter or little bit down.
No they should be up on a year over year basis, just because the number of additional assets, we have flying out there, but as Quint mentioned weve incurred a significant amount of.
Investment in training cost for crews and that will roll into the fourth quarter as well.
We had about $4 million. So this past quarter third quarter in terms of just training costs associated with bringing crews online and that will continue not to that degree in the fourth quarter.
So margin should improve as we go through the fourth and start off the year and remember day, we only had nominees for partial quarter a year ago right. So that'll have you know.
That'll help margins, having them for a full quarter this year.
And last question quit on interest expense at an up I was writing to faster what did you say that with the new credit agreement that interest expense is going to be down 4.7 million any year.
Morley had 16 million a quarter.
Yes at the current at right at the current borrowing level.
We essentially we're able to achieve a lower lower pricing in terms of the spreads.
No.
Based on the the pricing grid that the banks charge interest to us on.
And so I think at our current current pricing level immediately it would drop 37.5 basis points, which if you just take that across our our secured debt.
At current level.
Equates to about $4.7 million per year of lower interest costs.
Okay. Thank you.
Once again, Jeff a question Press Star then one of your Touchtone phone.
Our next question is from Steve O'hara from Sidoti Company.
Hi, good morning.
Okay.
Thanks for taking my question I guess just first on the.
Startup costs and things like that for the I assume it's just Amazon but.
Can you just.
I mean, I think the total is something in the neighborhood of 13 million or something.
That kind of I mean that should be a tailwind for next year.
And then.
Assume this is kind of ramping up faster than expected.
But the way Amazon you to utilize the aircraft is that turning to sort of having extra crews maybe not as heavily utilized.
One Q2, Q does that you're into more of a headwind having extra cruise or how does that work.
From a crew costs, our training standpoint, Steve the number isn't quite as high as is $13 million for the for the year on a forecasted basis.
But as I said, we still will incur some in the fourth quarter as well.
As we transition into the.
Next year, obviously, we have to again start people running through their recurrent training cycles, which they haven't had.
As well as you open up vacations again for folks so you need people to backfill where otherwise they would the we're not in the training mode and then you're gearing up for regular.
Utilization of the aircraft themselves. So it will be a tailwind for us in the first part of the year, but then again it all depends on what the demand is in terms of the flying we came into this year with expecting of less than half of what we think we're going to incur this year from training costs, but that change pretty quickly.
On the aircraft utilization.
Changed, which primarily driven by Amazon to go into a one day delivery service.
Okay. All right. That's helpful and then in terms of the impact in the Max.
Grounding.
You know kind of roughly what that impact is.
Maybe so far this year and that may be.
What you expect be for full year.
Assuming that plane eventually start supplying them.
Well from the Mac standpoint, I'm not sure what you mean by the impact now we are flying one aircraft for Canada to cover for their Max being grounded.
So we're getting utilization out of one aircraft for that.
As I mentioned earlier it does have some impact from a feedstock standpoint, particularly on a light kind asset basis. The the Athree 21, there may be some folks out there that are holding onto a 767 for example to cover four and a Max and may be grounded but.
Outside of that Theres really no direct impact to us today other than the fact that we are operating that one additional aircraft for air Canada.
Okay. So I guess that that was the impact I was talking about so it's really just one aircraft.
Probably not huge driver of anything or negative when it goes away.
No it won't be.
Okay and.
And then maybe just lastly in terms of the.
Did you say kind of what the expected EBITDA run rate was the ended the year.
We didn't we didn't give another for that Steve.
Of course will give that guidance.
In February .
So I think I think you know, it's certainly north of 460.
And less than 500, how about that so somewhere in the envelope in between.
Okay, all right thank very much.
Our next question is term, Chris well off from Susquehanna.
Morning, Thanks for taking my question.
Chris Harris.
I was wondering though if you talk about given all the changes in a semi over the last.
Two three years with Amazon certainly omni how we should think about pre tax margins on a steady state basis, assuming that there aren't any other significant acquisitions and perhaps in the kind of 2% to 3% GDP backdrop.
Yes, I mean steep our Chris we've always.
I think said that the CMI services margin is a single digit type margin.
It has more volatility associated with it because.
The changes in customer demand such as we've had this year, where you're ramping up operations can impacted omni.
If you look back at our historic AC of my margins.
You'll note that that Theres been improvement certainly with the addition of omni.
And with their customer base and the nature of their contracts. So I still believe we are looking longer term at a single digit margin target for that it's certainly omni has helped move that a little higher.
That is that helps.
Okay.
It's helpful. Thank you.
You don't the release, you talk about lower capex in the out years or reducing leverage.
And Joe and his prepared remarks, so that you have.
Your visibility into your feedstock I think for the next two three years, so putting all that altogether are you, suggesting that beyond 2020, or so we could see.
Free cash flow positive free cash flow into sustained basis, which I know is kind of contrary to the way the model works with.
The aircraft to growth et cetera, but I was just curious how to reconcile that.
Versus what you called out in the release thanks.
I think that.
Certainly we've been in an investment cycle given the growth opportunities that were in front of us and as Joe said when when good growth opportunities are there we'd like to to pursue those because that produces the best value long term.
I do think that we're in and a great position in that.
Our our maintenance Capex needs are pretty low we've said only about $100 million.
We were proactive and securing feedstock when we bought to 20 aircraft.
Fleet X American fleet.
And it's fit well into this investment cycle, but if you look beyond that I mean, I think you will see.
Plenty of opportunity for free cash flows deleveraging and free cash flows and there's a lot of.
Capital allocation option, certainly that we'll have at our disposal.
If you look out really you don't even have to look that that far for that.
Okay, and then just one follow up here. So you know how dynamic the peak season.
Ben over the last few years.
Looking specifically at the integrators and all the changes investments, they're making in their network to handle volumes and curious is a lesser.
Operate some of these planes, how you've seen the peak shape, what's perhaps easier today as an operator are more challenging.
How are you bouncing utilization in on time performance or a business that continues to grow.
Double digits. Thank you.
Well, Chris Mike Burger happens to be sitting here with us and since rich Corrado, usually fields those kind of questions, but he's traveling up we're going to bring up Mike our chief commercial officer into play here, So Mike and good morning.
We'll have all of our all of our aircraft flying during peak this year and we've been.
Committed to that for a number a number of weeks now so we saw extremely strong demand early on from some of our customers. So we'll get full utilization.
And of our fleet this year.
It's also a little bit more condensed this year.
Thanksgiving falling in the last the last week of November so they'll make crunch time, so to speak even even more important in terms of on time performance, but as Joe stated in his remarks earlier remarks, we continue to see all of our airlines performing.
Very high on time performance levels. So.
Peak this year shorter in terms of condense standpoint, and full utilization of all of our aircraft in our fleet. So.
Very good season for for US one of the challenges going forward, Chris from that from industries perspective is there's very few assets that are already dedicated to utilization on a 12 month of your basis. When you start talking about peak assets you have to have something that either has some book of business at the occupies it for tenant a half.
11 months out of the year, and then frees up which those are just really are out there too to any great degree at all so it's going to be a challenge for the industry as a whole from a service perspective to deal with peak volumes as ecommerce sector. The business continues to grow and stuff has to move by Airbar via versus service movements.
Okay and last when you say riches overseas and Joe you talk about ecommerce.
Actual overseas outside of Amazon Flying and say Europe , just curious what other retailers are operators are out there that you can point to that might look to supplement their existing air capacity or perhaps startup dedicated fleet. Thank you, yes, I mean theres not a lot out there in terms of that have the bandwidth do I mean people always.
Talk about Walmart for example, the Walmart has such an expansive surface distribution network.
That.
Be difficult and as far as I know they don't do a darn thing by air today.
I think you have to start looking around the globe.
To find other opportunities certainly Amazon as you mentioned in Europe could be one you could get into two Asia for example, but.
Our ability to operate there is pretty limited, but certainly it would be a potential outlet for leasing aircraft in there, especially when you start talking about something like the 321, one of the reasons, we like that airplane is great QB capacity.
Much better than the the 7378.
800, so we see potential markets in the long pool, if for example, and Alibaba or somebody like that sets up a network in the in the Asian sector.
That would certainly be a great location for the 321, because right now a bunch of the things that they do in China. For example is point to point as opposed to hub and spoke.
Thank you.
Thanks, Chris.
Our next question is from Christopher Hillary of Roubaix.
Hi, good morning, everyone.
And Chris.
Just just a quick question I know there's lot differences, but.
Do you have any observations on.
The acquisition of Aircastle as earlier, you kind of commented on how the stock price might have reacted to some.
Negative trends in the freight market UBS curious if you thought there's any.
Read across from what happened with their cost.
No nothing we can see I mean generally your larger leasing companies are focused more on new buying new assets, primarily focused on the passenger market, where it is were unconverted assets in the cargo market. So I don't think there's much overlap there.
Okay.
We didn't have another question Q up from Chris stuff from Susquehanna.
And Chris Thanks for taking me again just I.
I don't think anyone's asked about labor, but the open CBVA with one of the subsidiaries I think if they tie and that also given all the aircraft additions for this year and next year you to how we should think about head count and maybe if you could split that between piloting crew versus corporate thanks.
Well I think from if it's actually Adx that has the open collective bargaining agreement not 18.
They are still under the auspices of the National Mediation Board they met for three or four days last week with the federal mediator. So negotiations continue now that we're heading into peak season, you probably won't see any additional mediated discussions until after the after we get through the first of the year.
But it sounds like is it from our perspective, even though we've got this.
Collective bargaining agreement, it's open the cruise continue to move the airplanes on an on time basis. Their performance remains at their usual high level. So things are on an even keel there.
Second part of your question Chris was.
Just with all the aircraft additions you know how we should think about headcount growth for 2020 that if you could maybe split that between piling crew versus corporate.
Well, it's difficult to say until we know the schedules would be from a pilot standpoint like set for the aircraft go to Amazon One do you PS of the 10 of the five that we have from commits on.
Yes, as they add aircraft into the network it could lower the utilization.
On other assets as they add those in so it's difficult to say what the actual number would be until we receive schedules.
For that as far as he called the admin side of the equation.
It's a pretty small number overall that you have to add in order to support the growth of the airlines themselves probably the bigger driver is on the maintenance side of the equation as you have to add technicians, depending upon whether you're using an existing location to run that airplane through or a new location and you. All the talk you hear out there in the industry about pilot shortage is.
Here and tell you that I think theres a much more acute shortage of qualified maintenance technicians and there is pilots and of course, if you can't fix the airplane you don't need a pilot to fly.
So we've had no difficulty attracting pilots to date with a T.I. because a quick great opportunities.
So, it's we're able to put button the seat so to speak.
Okay, and then last one on the Amazon warrants have any been exercise and remind us again when the 2016 in 2018 tranches expire. Thank you.
Yes, Chris no nothing exercise as of yet the first warrant tranche, which we issued in.
What March of 2016 was a five year exercise periods. So march of 2021.
And then last December .
We issued the other traunch associated with the lease extensions on the 20 aircraft. The additional 10 leases in the CMO by agreement five year extension.
Those warrants have an exercise period of seven years from that date, so that would be what 2020 fives late 2025.
Okay. Thanks for the time today.
Thank you.
We have no further questions at this time.
Thanks, John .
Half of the board of directors I want to thank those of you on the call today, who shared their thoughts last month about the factors affecting our stock price.
We appreciate all the ideas about how we can make a TSG is stronger more profitable or more shareholder focused company.
Thank you for your continuing support and have a quality day.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.