Q4 2019 Earnings Call
[music].
Welcome to be Q4, 2019 Air Transport Services Group incorporated earnings Conference call. My name is that effort and I will be your operator for today's call.
At this time, all participants are in listen only mode.
We will conduct a question and answer session. During the question answer session. If you have a question. Please press Star then one on your touched telecom.
Please note that parts is being recorded I will now turn the call over to Joe Haiti feel.
Thank you Vanessa.
Good morning, welcome to our fourth quarter 2019 earnings Conference call.
With me today are Quint Turner, our Chief Financial Officer, and Rich Corrado, our president and as we announced last week, our CEO elect.
We should our earnings release in our form 10-K yesterday after market close they are on our website Ats <unk> Inc. dot com.
I'm very happy to report to you that in 2019, we beat the annual adjusted EBITDA goal, we set for ourselves as well as the markets expectations for our adjusted EPS.
[laughter] third year in a row, we have exceeded our adjusted EBITDA goal and a fourth quarter was the best Kinda ROE that our adjusted EPS has exceeded the consensus on the analysts who follow us.
In 2019, we substantially outperformed our 2018 results.
Revenues rose, 63% to 1.4 or 5 billion a record since we became a public company in 2003.
Excluding the reimbursements were used to including revenue.
Our adjusted earnings were 32% to a record 105 million or dollar 51 per share.
And our adjusted EBITDA Rose, 45% to 452 million, both a record and 2 million above our $450 million guidance.
That was despite significant on budget investments in pilot training costs during the year.
Due to fly schedules that expanded what Amazon adopted one day delivery service.
We are growing and generating strong returns for two main reasons.
At least aircraft fleet is growing and we acquired on near in November 2018.
We're leasing more 767 freighters, because ecommerce is driving delivery speed.
Well, we bought omni because its principal customers the department of defense and other government units are largely immune from the business cycle like our aircraft lease investments.
Because we're confident that we can continue to grow and generate superior returns. We're setting a 2020 goal a 487 to 492 million and adjusted EBITDA.
That includes completing our current 767 freighter lease commitments to Amazon in U.P.S.
Leasing other sevensix sevens to new and existing customers.
And growing our airline in other businesses.
I'll say more about those goals shortly first quite as ready review, our consolidated results for 2019 and retro cover our businesses well.
Thanks, Joe Good morning to all of you on the call right now and so those who will listen later 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 and other future events may differ materially from those we described here.
These forward looking statements are based on information plans and the estimates as of the data 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 the market demand for our assets and services, including potential reduce flight operations arising from the outbreak of Cobiz 19.
Our operating airline's ability to maintain on time 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 in 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 changes in general economic and our industry specific conditions.
And other factors that are contained from time to time and Ats. These filings with the U.S. Securities and Exchange Commission, including the form 10-K, we filed yesterday.
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 she's financial position and results.
These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refurbish reconciliations to GAAP measures, which are included in our earnings release and on our website.
As Joe said 2019 was another record year for Ats Gee with both fourth quarter, an annual results well above our results from a year ago.
We also took several steps to secure continued access to growth capital at today's very attractive long term rates.
Say more about that in a moment.
Our revenues again rose sharply this time by 44% for the quarter and by 63% to 1.4 or 5 billion for the year.
Our work for the U.S. Department of Defense and other government units by all three of our airlines Omni Abby Xtant HDR once again, the biggest source of our gains last year.
The U.S. Deo D. is Ats g.'s largest customer and represented 34% of our revenues for the year, 23% of our 2019 revenues came from Amazon and 14% from DHL.
That's a lot different from just five years ago, when DHL represented more than half of our 2014 revenues.
Our GAAP earnings from continuing operations were 60 million for the year.
And a loss of 41 million for the fourth quarter.
For several years, our GAAP numbers have included large unrealized effects of quarterly revaluations of several financial instruments.
These are mainly the effects of revaluing interest rate hedges on our bank debt and the noncash effects of changes in the projected value a number of the warrants we have already issued to Amazon or those we anticipate issuing in the future.
Another significant item this quarter that favorably affected both our GAAP and non-GAAP earnings as a reduction in our projected state tax rate a greater portion of our flight operations. During 2019, including accommodates were outside of state tax jurisdictions that resulted in a onetime fourth quarter.
Our state tax benefit of 4.9 million or seven cents per share.
The company expects its effective tax rate for this year to be 24% after excluding the impact of warrant remeasurements and related amortization of aircraft lease incentives.
Yes, she did not pay cash federal income taxes in 2019, and we don't expect to pay significant federal taxes until 2024 or later.
Diluted GAAP earnings per share from continuing operations were a positive 78 cents for the year and a negative 70 cents for the quarter.
GAAP earnings exclude the per share effects of mark to market changes and warrant liabilities when they are accretive.
The adjusted earnings adjusted EPS, and adjusted EBITDA, We reported this quarter exclude those weren't related gains and losses.
They also leave out the amortization of warrant lease incentives for Amazon from Cam affiliate losses from Airbus Athree 21 development costs and the not service related cost of our retiree benefit plans.
You can see how each of those items affected our results in the tables included in our earnings release.
Netting those effects our adjusted earnings for the fourth quarter were 39 million or 56 cents per share.
From $23 million or 33 cents a year ago.
Annual adjusted earnings were 105 million or $1.51 per share in 2019 up 32% versus 79 million or $1.16 per share in 2018.
Fourth quarter, adjusted EBITDA increased by 29% to 124 million.
Which pushed our total for the year, 45% higher to $452 million.
Or 140 million better than a year ago.
Operating income for 2019 rose, 59% to 177 million.
Our revenue growth offset significant increases and fuel depreciation and amortization and salaries and benefit expenses.
Almost all of the increases stem from aircraft and head count additions, including those related to harmony.
And from expanded flight operations for Amazon.
Interest expense, including 9 million that was non cash increased 18% to 66 million in 2019.
Higher borrowings for the Ami acquisition and aircraft investments were the principal factors.
Cash flow from operations in 2019 increased nearly a 100 million to 397 million.
And capital spending rose 161 million to 454 million.
The bulk of that spending 328 million was to acquire 11, Boeing 767, 300 passenger aircraft and for passenger to freighter modification costs.
One of those acquired aircraft was deployed and passenger service from these customers.
When we announced our third quarter results in November we also announced another amendment to our secured credit facility.
Which reduced our rate markups overlying bore for our revolver and term debt expanded our capacity and extended the use of the senior secured credit agreement until late 2024.
It also pave the way for our initial publicly rated debt offering in January a 500 million private offering of eight year unsecured notes response to the offering was so favorable that we were able to raise it size to 500 million from the anticipated 400 million and it priced at.
An attractive 4.75% fixed rate.
Proceeds were used to pay down the balances on our revolver debt.
Which will provide us great flexibility in accessing capital going forward.
The addition of the unsecured bond and our debt capital structure late vents, our remaining debt duration and along with the favorable Bank Amendment in November also reduces our annual interest expense.
That completes our financial highlights for the quarter year rich is ready to cover our operations rich.
Thanks, Quint and good morning, everybody.
Our eight TSG business has stepped up to the challenge of integrating omni and its people and assets into our operation as they continue to deliver superior service, while all of their customers.
Hey, Jim are foundational aircraft leasing business grew revenues net of warrant related these incentives by 18% for the quarter and 25% for the year.
Tim had a full year results from the 11 passenger aircraft that are acquired from omni and lease back to them in 2018, plus revenues from seven more newly converted 767 freighters added during the year.
External customer revenues increased 8% for both the quarter end the year.
Cams pre tax earnings for the fourth quarter were 18 million up 17% and 69 million up 5% for the year.
Cans allocated interest and depreciation expense each increased by 16% for the fourth quarter.
Interest expense rose, 76% and depreciation rose, 25% to the year due to both organic and acquired fleet growth.
A 2019 highlight for Cam.
With lease commitments for 5767 freighters for you PS two of which were delivered in 2019.
Third was delivered in January and the remaining two will be ready later this year.
While we have a long history of peak season CMI flying for you as this was the first time they have leased aircraft from us.
Our airlines had a strong quarter and year. Thanks to the addition of omni and more CMR flying for Amazon.
Total block hours increased 47% for the fourth quarter and 40% for 2019, which included an expanded flight schedule for us and supportive Amazon's one day delivery commitment and stepped up HCM I operations for yes.
AC My services revenues increased 51% in the fourth quarter and nearly doubled for the year topping $1 billion for the first time.
The fourth quarter include a full three months of omni contributions compared with less than two months worth in 2018.
Pre tax earnings from HCM services increased 83% for the quarter and nearly tripled for the year over 2018.
Good margins on airline operations by omni year, where the principal factor.
Our air and ground operations employees, including mechanics flight crews and ground and logistics employees did a great job during peak and that continues into this year.
Adx their management continues to negotiate with Union Representatives representatives of its flight crews for an amended agreement and made progress on some fronts. There next meeting is scheduled for later this month.
Our overall Sevensix seven fleet expansion plan includes two leased in passenger 300 that on the agreed to take before we acquired that.
That will bring on these overall fleet to 16, including 10 passenger 7673 hundreds.
37672, hundreds and three triple Sevens.
On the is already lining up customers for its two additions.
This year, our airlines are scheduled to fly 6767, the aircraft that Cam does not own up from two at the end of 2018.
That includes four omni passenger sevensix sevens, and 2767 freighters Amazon leases from another hour, but opted to shift to 80, I foresee EMI operations last fall.
Revenues from other activities increased by 10% for both the fourth quarter and full year.
Both maintenance in ground services for external customers increased our ground operations for Amazon continuing to evolve as we added gateways for them in Charlotte Tampa and our support services here in Wilmington, offsetting the loss of gateways, we manage for them through mid 2019.
Pre tax earnings from other businesses more than tripled during the fourth quarter and rose 20% for the year.
Fourth quarter gains came mostly from more ground support for Amazon.
That's a summary of our operations for the core and 2019 I'll turn it back to Joe for his outlook comments.
Thanks Rich.
Yes. These results for 2019 were a remarkable for more than just the records, we posted against our own prior results.
They also speak to the sustained cash flow that our business strategy yields and ecommerce and other growth driver spring demand for our aircraft and support services.
Nearly five years into our Amazon relationship and after a year and the charter Nacier My pastor business via omni, we're executing on all cylinders.
Are you usually begin any presentation about 80, SG with the comment that our business starts with the lease.
The nearly 100 aircraft, we Havent service today, including 63 freighters, which are leased externally make us far different from most of our peers and others in the air cargo and passenger charter space.
Our contracted cash flow from a growing share of these aircraft extensive the end of this decade and soon moral extend beyond it.
Also that external lease cash flow continues regardless of changes in customer payload fuel price volatility health risks are other events beyond our control.
Even with army in the folders and AC Maya charter operator, we are still freighter lease driven today.
Eight to 10 additional seven successes are due to emerge from model this year.
Seven of them have lease contract commitments from Amazon, you PS and we have allies for the others.
Our order book as indicated by our Capex appetite of 420 million for 2020 is nearly full for the next two years.
We continue to look forward to Epay approval later this year of our Airbus Athree 21 freighter certificate.
Once approved we may acquire 321 feedstock aircraft later in 2021, if values indicate a good potential return.
Our capex budget for 2020, however, does not assume any 321 feedstock purchases.
In the leasing business deployments are not the entire story.
Lease terminations and returns our normal part of it as well.
This year, we expect returns of three currently leased 7672, hundreds and all four of our 757 freighters as our wet lease arrangements with DHL expire.
We have factored transitioning time for those aircraft into our 2020 plan and it's reflected in our adjusted EBITDA goal for 2020, a 487 to 492 million, what we know and can commit to today.
As always we'll update you on our outlook is a year progresses.
At that level, our adjusted EBITDA will have increased nearly 60% in the last two years.
The business, we have built as a strong producer of sustainable cash flow.
Our maintenance Capex requirements are approximately 100 million per year.
That means we have significant discretionary cash flow to produce shareholder value.
At today's share price, our discretionary cash flow yield after maintenance Capex and interest expense is more than 25%.
We expect our debt to adjusted EBITDA leverage ratio to come down from 3.3 times today to around three times by the end of the year ended client further in 2021 as our Capex spend drops.
Like you were watching what appears to be an extreme response from wall Street to go around a virus threats.
We are particularly concerned about what we see as investors inability to differentiate Ats GE from other companies that are far more vulnerable to its near term effects.
Our operations are primarily domestic and mostly time death and express package related.
Apart from that however, our business model also has built in flexibility.
We can reallocate discretionary capital quickly towards opportunities that promise better returns than freighter investments.
That could include subject to lender approval redeploying solve our cash toward our share repurchase program, if our current stock price persists.
As always our focus is on maximizing long term returns from the businesses, we operate and investments we select.
Our track record for delivering on that commitment is hard to be and much better than investments tied to the major market indexes.
The job of this management team and those who execute their plants is to keep outperforming and show investors a value we're creating.
That concludes our prepared remarks, Vanessa we are ready for the first question.
Thank you we will now begin remark question and answer session. If you have a question. Please press star one on your Touchtone phone.
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And we have our first question from Jack Atkins with Stephens.
Hey, guys good morning, great corner.
Thanks, Jack Thanks, Jack.
Congratulations on your.
So my retirement, I guess and rich congratulations on your new your new role.
Thank you Jack Jack.
So let me kind of start out with a question just around.
When you look at the feedstock.
Available to you guys. This year and next year could you kind of update us in terms of where you think you'll be in terms of those 20 aircraft.
That that you secured the rights for I guess of that the into 2018, how many of those will be.
Through conversion or at least will be in service at the end at the end of 2020 is there a way to kind of think about that.
Yeah, I think if you look at Weve already started deploying some of those one the first one went to omni.
Passenger.
Configuration.
We've got some lined up this year to to go and fulfill our Amazon commitment.
And some other commitments that we've got for this year.
At the ended the year, we'll have an additional three that will actually be converted for 2021 deployment and then about five airplanes that traunch left.
For conversion in 2021.
So it's kind of thats the way the flow has gone.
So thats about eight rich if I'm hearing your right, yes, so about the about eight.
There are some of that tranches and conversion now.
And so those will be the help us fulfilled the the Amazon commitment for.
Second part of this year, Okay, Gotcha gotcha that makes that makes sense.
And I guess is you're looking out through this year you sort of have your your 2020 plan fairly well committed to permit from your customers at this point.
You mentioned in the press release, you are seeing very strong customer demand for 2021 already can you talk about sort of.
The types of customers or the types of sort of mission that that those planes would be going into service for maybe.
Geographic comment as well in terms of where that demands coming from.
Sure.
Obviously, we specialize in the 767 freighter, it's what we're talking about and if you look globally.
You know about 90% of those 767 freighters on a global basis are deployed in express networks, you are talking Fedex GPS DHL Amazon.
The U.P.S. network in Europe. Some of the aircraft we have deployed the thumb with West Atlantic Flying for multiple express carries over there and so and that's pretty much where our aircraft to targeted we lease our aircraft currently to either the express carriers or carries that fly for them.
Cargojet to good example, we have four aircraft with them up in Canada.
And they fly for the <unk> and Canada post for you as for Amazon.
So that's that's where those aircraft are going if you look at the global demand for airfreight right now.
In 2019 was a very poor year, the worst year in a decade for.
Global Air cargo and that share Intercontinental moves the ones are impacted by trade and tariff disruption that we saw in 2019, but if you look at the the other side of the coin which is the express business.
It is growing very well.
Yes had over 25% growth in 2019 in the overnight product.
You saw Amazon still going through some great growth DHL in several parts of the world was up between six and 8%. So that the express business power by the E. Commerce is growing very well and that's where the Sevensix sevens.
Our deployed in those types of networks now for what were looking at.
The U.S.
The far East we've got a couple of opportunities in the far east we've got to.
Assigned agreement for one airplane already.
And then we've got another deployment.
Looking to two more down in South America, So our where I should say Mexico in South America. So it's the Americas the far east we don't see much growth out of Europe right now at on the express side, but keep in mind. They have a very strong road network in Europe, and so aircraft or not as prevalent as they are over here and given the size of the U.S.
Okay Thats it thats very helpful. Thank you for that Richard I guess last question for me I'll turn it over but rich.
You bet in a senior leadership roles. This company for for a long time, so you've had a very clear.
Role in the direction TSG is taken for quite some time, but I guess now as you assumed the role of.
So here in a few mindset how are you thinking about your priorities for the organization.
You look out over the next several years, yes, great question Jack.
We have built the Greg Joe has built a great company, we have a great culture here, we had a great team.
We've.
One of the strength of the company has been our conservative approach to our balance sheet to ensure that we've got capital to invest in the market. When it's growing we look at ourselves the very efficient.
[music].
User capital so if the markets growing like it has been for the past five years, then we'll take our cash flow and invest that an airplanes and growth would rather get the growth an advocate if somebody else.
But if you look at the market slows then we'll have that cash available to do other thanks and that could include returning some cash to shareholders. So on one level, we're going to continue that conservative view of our balance sheet and continuing investing to get the best returns for our shareholders.
I believe that the most important thing that this company can do is to maintain its service leadership. If you look at the way we both meet our commitments the customers from a leasing basis.
And the way that we deliver 25 for them on an express basis. Our heritage is as an express airline and so quality service at the I believe is going to win the day.
And so were investing now and a lot of things internally to maintain that service leadership that includes updating a lot of our IP systems.
Our developing a much more robust.
Continuous improvement program, so we're going to maintain our quality service approach.
And that at that we feel will be our best ticket to maintain our growth on the flying side, so leasing and flying.
The other thing is we've got a.
Real solid culture here in terms of the way we approach our customers. We strongly believe in the commitments that we make in that that will always be a hallmark of of who a TSG is.
So I hope that answers your question, Jack and Doug Thanks, Rich really appreciate it.
Thanks Jack.
And we have our next question from Kevin Sterling with the benchmark company.
Thank you good morning.
Kevin Kevin.
First of all rich, let me say congratulations.
Just as would tell you how much have enjoyed working with you over the many years.
I hope you fanatical, we've fully retired but to do hope you enjoy.
The joystick semi retirement, we don't drive your way too Crazy if your home.
I would be the other way around Kevin.
[laughter].
Congratulations certainly enjoyed working with you for many years.
Same here.
So.
Real quick.
Can you guys.
I guess talk a little bit about the corona virus and kind of maybe some customer conversations you're having I know your business regional with it does seem isolated but maybe a little bit about from the conversations you're having with some your express customers and how they're viewing the world today.
Hey, Kevin.
The reality is is just since most of our operations are domestic we haven't seen any impact per se, but I'm sure you've seen some of the announcements were.
Ill customer like Amazon for examples restricting travel et cetera, and some people are pulling back from conferences and things of that nature, but where we have the greatest potential.
Disruption from our revenue stream would be in the things we do for the military.
Because of the number of foreign countries that we fly through some some you can come through but then you have got crews would be quarantined on the other end.
So far we haven't had any any disruptions.
In our service levels, but you just don't know how that things kind of play out over time, So thats, probably where were most exposed would be on the international portion of our business, which is the the military side.
Got you, but on the flip side, the military or move and troops around and out of some of these affected countries that can help you as well I am I thinking about that right possible. Yes, I mean, there is that potential veggie Blake said, it's a very fluid situation. There's calls almost on a daily basis with folks at DMD.
So that everybody is up to speed on what how things changing.
Okay.
Also you guys you talked about returning capital to shareholders. I know you you mentioned, a buyback and things like that would you consider possibly looking at buying back some of the convert that are in open market, possibly everything on the table as you think about returns of capital to shareholders.
Hi, Kevin it's clear that yeah, I mean, we don't mess with nothing would be off the table per se, but.
I think.
The.
I think our references were more and with regard to the current share price being where it's at and we certainly think that the reaction to the Corona viruses been extreme with respect to our stock adjusted we really haven't seen disruption.
To this point.
And so I think that was more theres about I think we have about little over $60 million left on the authorization the board put in place.
As we've mentioned on previous calls you know there we have a bank covenant.
Requires you to be under three times after giving effect and we're currently around 3.3 times, but certainly there's there's.
Based upon the allocation alternatives that are front of us and that the stock price persists. There thats something were going to take a very hard look at it becomes more attractive option to do that certainly.
When you're talking about share prices that's been in our view.
Yes.
Adjusted fully.
Punched.
Yes no.
Great. Thanks.
Maybe out with the Bath water.
Lastly, in and I know this I know we're just in 2020, you guys have given 2020 guidance as I look at your Capex.
I think for 2020 is down roughly 30 million from 2019.
We view you briefly referenced 2021.
That it might be even a little bit lower in 2021.
In.
I mean, we talk at significantly lower kind of that $400 million plus level, you know, possibly just to kind of maintain growth capex maintenance capex for 2021 is.
As we think about that.
$400 million range I.
I guess my questions, we don't see goal materially lower but also it's probably not could go higher but maybe that 400 million dollar range give or take for 2021 right way to think about.
A combination of growth Capex plus maintenance.
Yes, Kevin.
If you think about of course, we are down versus last year. I think we had guided to 460 for 2019. So we came in I think 7 million below that so part of what you're seeing in the 420 were projecting for 2020 is just the spillover of that and then we talked about the eight to 10 aircraft and.
Service, we've said that maintenance capex for us is about $100 million. So that kind of gets you in that 420 ZIP code <unk>, but as rich said at the end of the year. We'll have projections are to have 8763, hundreds and mott about three of those the investment is pretty much in as of the end.
For the year. So in some respects were pre paying on 21 deployments a little bit that has to do with the.
Timing and the mob slots and so that really.
Has the effect of reducing their requirement will have in 2021, So I think that the 400, you're referring to could be.
Quite a bit less than 400.
And that's what we mentioned yet when we talk about the improving picture for free cash flow, we expect to de lever this year.
But most of that comes from the growth in our EBITDA.
And then as you look at 2021.
Certainly there's significant opportunity for free cash flow I mean, our maintenance Capex is about $100 million. We've got cash interest of about 55 million, we probably could in $7 million pension plans. So if you're thinking about EBITDA for 90.
That's about roughly 328 million of discretionary.
Cash flow call. It that can go towards what we view as the best alternative to create value for the shareholders. That's been growth of late because as rich said you don't want to advocate growth when those good opportunities are there, but when we're looking at 21 I think you could see.
A lot of that cash flow, making it.
You know being available as free cash flow.
So it could be significantly less than the 400.
Okay, No that's great.
Are you.
Our goal right now is you're going to de lever, maybe get down about three times by year end, and then 2021 could really be a massive massive free cash flow year.
For you guys give you a lot optionality.
That's a.
Fair statement.
Yes, I mean the company.
When you look out for share basis, if you got that much discretionary cash flow that's like $4.
4.5 to $5 per share of of discretionary cash flow that you've got available on our current share price you know that's over a 25% yield. So I mean, we're going to have a lot of opportunities certainly we don't want to disappoint, our customers who are waiting on aircraft and when those opportunities look good they generally argon.
I would be the first option for us but.
I think that very good chance 21 has a lot of.
Capex reduction and cash flow.
Got you that's all had thanks, so much for your time and once again, Joe Best of luck to you.
Thanks, Kevin.
And we have our next question from Chris Stephanopoulos with Susquehanna.
Good morning, everyone.
Chris when Chris So.
Continuing along the line of the.
The Corona virus. So you know your stock has been trading.
Payload sensitive airline stock and let's say the virus accelerates and how are you thinking about the various risks to your businesses, perhaps with the look towards the.
Various subsidiaries and I'm guessing Cam, which is one of the largest contributors to your pre tax earnings is fairly an immune but what about the other segments, such as LG sp airborne or maintenance.
Well, Chris as you know alive, it's going to be dependent upon how wide widespread viruses and in terms of their customers I think the customers are still going to be there LG Stx. For example is servicing the Amazon business.
And of course on the.
Aims piece or the MRO side, how people have to get their airplanes fixed. So it's really a matter of the always are going to is going to get severe enough that you would end up with significant number of people being quarantined at held for lack of a better definition to where they can't come to work and produce the the revenue side of the equation, but as you pointed out.
From a camps perspective, I mean, the leases the lease payments come in regardless of whether the airplanes flying one hour up to 100 hours or whether its carrying one pound or 1000 pounds on board. So that cash flow stream still comes in over time, but as I said earlier the biggest exposure we have from a revenue perspective would be in the military side.
The equation, but since most of time are flying in the military bases.
The.
That is that the data will still continue to have those troop movements and I think as Kevin pointed out the or is the potential that you may even have an acceleration of the number of troop movements going on or around the globe.
Okay.
So along those lines I know you have a relatively small commercial cargo charter business. So theres less opportunity to participate in any demand surge is ones China production is back on line, but at the same time I'm guessing there's opportunity on the scheduled services side, perhaps with the the flying with with DHL.
Yes, we've got limited resources for.
Extra flying in its 767 flying so to regional based right. So we're not going to fly a 767 from China into the US it's not an efficient use of the aircraft. So there is a little bit of opportunity there, but not a lot. It's not like we have four or five airplanes sitting around waiting for work. It's not really we don't we don't do much charge.
Our pure charter work anymore. We have aircraft that are available some of our aircraft remember like every other week because they fly military route one week and then they're available the backup and network. So it's not a big part of our business today.
If if.
Opportunities that would probably be in the fourth quarter, where we do have a lot of aircraft available and we tend to use those to fly during peak.
Okay.
And then with all the pressure on the passenger airlines, you know, particularly in China and of course, there aircraft values are are there any opportunities you're seeing in the market with perhaps on opportunistic Pita F.
Freight and passenger to freighter conversions and then also are any concerns around credit profiles with any of your customers at this point. Thank you.
We havent seen any.
You know any kind of.
Flooded the market of feedstock.
We we track the 767.
Fleet out there and is still over 300 up on left in the world and there are some large some airlines that have large fleets them and we keep a very good.
You have those and the ones that where we know will come available in 2021 and 2022 as an example, they have not made any decisions to release those aircraft early yeah. The 77, Max is still having an impact on the way Airlines view their fleet and the way they view there.
What they're going to leasing and what they need to hang onto so at this point in time, we havent seen any impact as it relates to.
Feedstock availability.
Okay. Thanks for the time.
Thanks, Chris.
We have our next question from Steve O'hara, with Sidoti and company.
Hi, good morning.
These days.
First.
First just like to echo the comments.
Regarding Joe and the new team.
Congrats on everything and.
I'm sure you guys seem to have a deep bench that's a good thing.
Thanks, Steve.
You're welcome and then just I guess on.
Looking at the.
7672 hundreds.
And I mean, you have I think or had 33 at the end of year.
Good down to 32 by year end 2020, but is there potential after that to speed up in terms of.
These aircraft coming back or are they.
What's the possibility of those going back sooner and as they come back you expect those your place by 76 of three hundreds.
So.
Couple of things one as is the aircraft is.
The 767 200 to still on demand is still an efficient aircraft.
That is still very reliable aircraft, that's just as reliable and so as the 7673 hundreds.
We met with DHL.
Late last week on a quarterly review meeting and they commented we have 67672 hundreds flying that they fly.
In the Middle East network and they commented on how how great the reliability as for the airplane.
We're taking the aircraft out of service when there's several maintenance events that occur.
As there is a 50000 cycle limit that requires you to significantly step up your maintenance program.
Is that pressure bulkhead, thats about a million and a half.
The 2 million in three quarter.
Event and there's.
A large esports C check.
You have to do every four checks that and when those when two or three of those things come together it doesnt make sense to invest that much money in the aircraft depending on how many cycles are left field 50000. So.
Thats why weve been taken aircraft out of service. They are still very much in demand and so where we're pretty bullish on the aircraft going forward we do.
We don't think where we're going to have a lot coming back we are having some returns this year, but we're also having some deployments and so.
The softness is that time between the transitioning when you get the aircraft back at the C check and repayment for the new customer et cetera, et cetera, then you lose lease lots and so although we're getting some aircraft back we're also.
Redeploying some of those aircraft and and just having to go through the transition which is normal for a lesser of aircraft.
Right. Okay. Thank you and then maybe just looking at the improvement within the other.
Business segment.
I mean is that something that you think is sustainable.
Going forward.
Is there further improvement may become.
Like you.
Revenue in the fourth quarter was up very significantly.
Just wondering about maybe the trajectory there, but it seemed like pretty steep growth in 2019 for the most part.
Backend loaded, but I'm just curious maybe going forward. Thank you.
Steve on the the maintenance side the aims which is a big part of that obviously, we have a limited amount of hangar space. So the additional growth potential there is somewhat limited.
In light of the facility space as well as the continuing challenge of trying to find qualified maintenance technician. So it's a very nominal growth rate that we would expect in the maintenance side of the equation on the logistics side of the business. If you recall last year about midyear, we lost the management that we had over a number of locations for the.
As on gateways, where we manage third party providers.
We backfill some of that with the opening of about two of our own manage gateways one of them in Tampa, Florida and the other one in Charlotte.
We continue to have both of those in place this year, albeit they Tampa, one will will scale down.
Bob mid year, when Amazon opens up its own facility over in Lakeland, which is 20 or 30 miles away from Tampa.
We still expect to have not operation and Tampa, all the it'd be a lot less than what it was last year. So when you. When you look at the guidance that we gave them. The I want to things that was factored in there was a fact that part of the business would show a lower returns than what we saw in 2019.
In 2020 at least based on what we know today, we are chasing another number of other opportunities with Amazon with DHL Dps on the logistic side of the business.
So we're fortunate enough based on our track record of how we manage with our express heritage. How we can manage those facilities better than your normal third party providers.
We hope to be able to recoup some of that business as well.
Okay, and then maybe finally on the I guess the loss Nonconsolidated consolidated affiliates I assume that's all of.
Kind of the 321.
Conversion process.
You talked about maybe what you expect the total investment to be there and.
If theres any.
You know if you have any customers lined up or how that process is going thank you and from 321 perspective, Steve Thats really where those those numbers coming from.
And essentially we're still targeting having the STC approved.
Call it mid year of this year.
The prototype aircraft already has a and end user customer.
Well as the second aircraft, which will be inducted shortly for to begin its modification process.
The end of the day, we'll have sales probably 25 $30 million invested on our our piece of that for the development of that STC.
But as you noticed in our remarks, one of the things we pointed to was that the DHL.
No longer wanted to utilize the seven five sevens in their network.
And a blip as we've said on previous calls one of the reasons, we jumped into the 321 is because it gives you essentially the same cubic capacities of 757 for significantly or lower operating costs.
And I guess that probably bears that out more than anything else is that Doug DHL says you know they need to reduce the number seven fives and in their network. So that bodes well for the 321 as it's the most likely replacement joining it comes through with an equivalent amount of cubic capacity and at a significant lower operating costs. So that's why we believe it's going to be in the long pole.
A significant portion of our up our our fleet complement.
Okay, and maybe just a follow up to that.
I know the seven three.
Design is to take seven three sevens.
And I'm just wondering is it the athree 21, a decent.
To that or is it more for larger aircraft types. So thanks for the questions sure as rich the Athree 21 of the larger aircraft, it's got about 95% of the queue of a.
Have a 757, so if you look at a 757 today. It's good for 15 upper deck positions. As 737 800 has 11. So it's about 30% large larger Q. If you will but if lies with the same engines and and so if you look at this if you're carrying the same weight and Athree hundred 21, and a seven 370 100.
It's about 8% higher operating costs and Athree 21, but you've got that much more Q capability to carry another.
Another three pallet three to four pallets worth of.
Okay.
So it it can compete with the 737 800, a little bit higher cost, but but if you look at different express carrier you could fly an athree toy Athree 21 place with 737 800, but then during peak you get an automatic lift 30% of Q.
To fill those lanes.
On the the seasonal market aren't it's a great airplane.
And.
Obviously, the investment we make were really high on it.
But it is it isn't isn't necessarily a direct replacement for the second 378 hundred it's a direct replacement for the 757 200.
Okay. Thank you very much.
I Wonder if you have a question. Please dial star then one on your Touchtone phone. We have our next question from Travis task of this with him count.
Hi, everyone. Thanks for taking my question part of it would just answered, but maybe if you could just take a step back and describe.
The relationship with DHL and anything we should reach into in terms of the change it doesn't sound like it given the context and last question, but.
Yes.
That I would ask indirect.
Yes.
Thanks for the question Travis now we have a very good relationship with DHL.
No we like I said, we had our quarterly meeting with them.
It was a great meeting the service we provide to them is best in class.
So the the flying that we do for them in the us and again, we release other aircraft to in other parts of the world and the very happy with that as well 757 decision by them was.
More directed at.
Kind of optimizing and Rightsizing their fleet as they grow the 757 as an example, we had some lanes that hopped through a couple of market. So they will take some 7378 hundreds that they're taking and put them on direct direct grass to some of those markets. Just as an example, and so it's not reflective at all of the relationship.
We have with them now we're looking for more opportunities going forward, both on the leasing and flying basis. This happened to be.
Hi, our.
Our airline that flies and some five seven is the only 757.
Airline cargo airline in the country other than you PS.
And and Fedex.
And there's a reason for that it's not an efficient aircraft. If it works, okay and in expressed environment, if you've only got enough freight to fly the lanes that it flies.
But it really is at a higher cost aircraft and that's why you havent seen us grow the airframe. We've we've always tried to push our customers towards the 767 to 200, rather than the 757 and I think DHL is all has looked at the seven five and looked at the alternatives if they happen.
And they recognize as much to anybody that that that aircraft is.
There are other opportunities to right size or network and and be more efficient.
Do you expect those to be.
Really done or will those be retiring I missed that part.
So we're looking for different opportunities for those aircraft. The one thing about the aircraft. The Pratt powered 2037 engines and those are very much in demand right now.
And so.
We may make more money leasing the enters than we did leasing haven't given the lease revenue on the airplane through the PMI operation.
But we're looking for other opportunities we've got a company interested in taking two of them right now of course that there we've still got.
We're still flying one of them right now.
Two of them right now for DHL and will fly one into April.
But in two of them are on the deck here, but we believe we'll be able to get more revenue out of those aircraft by the end of the year and we'll be able to deploy.
At least two of them and then maybe some of the actions, but we believe will gets more value on those aircraft.
Great. Thanks, a lot for the quick question.
Thanks Travis.
And we have a follow up question from Chris Stephanopoulos with Susquehanna.
Hey, Thanks for the follow up I was wondering if you could give us an update on labor and where you are with the CBVA on X and whether this year's EBITDA guide includes any new labor deals.
Yes, Chris.
Right now I think last we mentioned to the number investors water at Stifel Conference. For example, this that we met in February.
At the National Mediation Board headquarters in Washington, DC or scheduled to go back to the table. The week of the 23rd fourth three days I believe it is of negotiations we actually have one of the board members involved in the negotiations at this point in time to try to move much longer.
And more rapid pace of what we've seen in the past we have not factored any of those costing potential cost increases into our guidance for twentytwenty. So anything that we would commit to would be.
Induction of our overall guidance.
For labor settlement, but as I've said, a number of occasions.
The field cautiously optimistic that we will get a deal done this year.
Just a matter of what the Ed and amount looks like.
From our perspective as I've said on many occasions, we already have one airline calling cargo for Amazon.
At 80, I add real we know what the cost is for that particular agreement and there is no rational reason for us to have any higher cost structure, what the ex folks assuming we get a deal done so that's kind of our guide guideline.
Going through the negotiation process, but.
Cautiously optimistic we'll get something done this year.
Okay, and then as a follow up to that how should we think about head to head count growth for this year is mid teens or similar to.
12, 14%, we saw in 2019, a good place to start.
Now I head count will probably be less I mean in terms of the number of flight crews, we had to add last year, but combination of the additional aircraft for Amazon plus the fact, they went to the one day service.
Added thoughts on the 80 ISI for example, like 118 pilots overall.
The just the additional five aircraft for aircraft that we owed them this year.
That number will come down significantly and other driver and the overall headcount was the two gateways I mentioned earlier in Charlotte and Tampa.
As Tampa Spools down from the current volume afraid going through there to something less by the end of the year that head count will come down as well, so I wouldn't anticipate as anywhere near as many.
As much of a head count increase in 2020 as we saw in 2019.
Okay, alright, thanks for the time.
Thank you.
We have no further questions at this time.
Now I'll turn the call back over to Joe Hedy for closing remarks.
Thanks for NASA as Ben mentioned by a couple of people here and I'm sure. Most people are whereby now that and asset will be retiring after the conclusion of the shareholder meeting on may 7th.
I do have to say that it was an honor and privilege and most times pleasurable working with you folks over the years.
I think I'm, leaving you in very capable hands with rich and Joe pain. Our general Counsel went to of course, who most of you know and the newest addition to our senior team here at co Herrick and of course, Mike Berger, Our Chief commercial officer. So I think you're in good hands I appreciate all the support over the years and have a quality day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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