Q4 2020 Air Transport Services Group Inc Earnings Call
Welcome to the fourth quarter 2020 Air Transport Services Group incorporated earnings Conference call. My name is yoga and I will be your operator for today.
At this time all participants are in a listen only mode and later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press star and then one thing you touched on the phone.
Please note that this conference is being recorded.
And we'll now turn the call over to Mr. Joe Payne, Chief legal officer of ATSG.
Payne you may begin.
Good morning, and welcome everyone to our fourth quarter 2020 earnings Conference call. We issued our earnings release yesterday. After the market closed its on our website H ESG I N C dot com.
Let me begin by advising you that during the course of this call we will make projections and other forward looking statements that involve risks and uncertainties, our actual results and other future events may differ materially from those that we described here.
These forward looking statements are based on information plans and estimates as of the date of this call.
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 the following which relate to the current COVID-19 pandemic and related economic downturn.
The pandemic may continue for a longer period or its effects on commercial and military passenger flying may be more substantial and we currently expect it.
It may also affect our work force and staffing capability, our ability to access the airports and maintenance facilities and our customers creditworthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels.
Other factors could also impact the market demand for our assets and services.
These include our airline's ability domain on time service and control costs the <unk>.
Cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.
Fluctuations in Atsg's traded share price and and interest rates, which may result in mark to market changes on certain financial instruments.
The number and timing and scheduled routes of our aircraft deployments to customers.
Our ability to remain in compliance with the key agreements with customers of lenders and government agencies.
Changes and general economic and industry specific conditions and other factors as contained from time to time and our filings with the SEC, including the form 10-K, we will file next week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings adjusted earnings per share adjusted pretax earnings and adjusted EBITDA manner.
Management believes these metrics are useful to investors and assessing atsg's financial position and the results. These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
Right.
And now I'll turn the call over to rich Corrado, President and CEO for his opening comments.
Thanks, Joe and welcome everyone and I want to begin by again thanking our employees for the outstanding service. They provided this past year to our customers under all kinds of adverse conditions.
We continued to invest more on safety and productivity measures to improve performance across all of our businesses. This is atsg's culture and action will keep improving and innovating to improve services long after the pandemic and additionally.
Additionally, all three of our airlines have flown vaccines and other COVID-19 related supplies and support of our customers.
For all of 2020, we exceeded our adjusted EBITDA goal with revenue and growth from all of our principal businesses. The pandemic continues to affect our results overall and our passenger flying in particular.
But demand for our Boeing 767, freighters, both leasing and flying remains very strong and.
And not just for those coming out of the conversion every month, we are redeploying returned freighters to new customers at a faster pace than before.
I have great confidence and our results for 2021 and beyond.
Just on the strongest order book and our history for our 767 freighters and support from customers, who choose us to fly for them.
But I'm also tempered by the knowledge that the end of the pandemic has proven hard to predict <unk>.
Including the willingness of the flying public to return to the air and pre pandemic numbers.
I'll have more to say about our outlook shortly quint Turner, our CFO is standing by to recap of our 2020 results.
And.
Thanks, Rich and welcome to everyone on the call this morning and.
As rich said, we beat our $490 million target for 2020, adjusted EBITDA by a healthy margin.
And on a consolidated basis fourth quarter revenues were down a bit from 403 million to $399 million.
And the principal factor was lower block hours for passenger flying and omni from a year ago and.
And Ati's Combi flying.
Our fourth quarter GAAP earnings of $2 3 million or <unk> <unk> per share basic was substantially better than our loss of $41 million or <unk> 70 per share a year ago. The.
Quarterly non cash loss from revaluing, our liability for the Amazon warrants was $38 million.
Roughly half of what it was a year earlier.
We also booked $12 million and fourth quarter benefits from our 2020 Cares Act grants.
Finally, we had of $4 5 million positive swing and our retiree benefit adjustment and a smaller loss from our joint venture and the prior year.
Interest expense was down for most of the quarter and year, we had lower rates on our credit facility balances and lower debt levels overall, and then in 2019 dipped.
Depreciation and amortization expense increased $5 million for the quarter, and 2000, and a $5 million for the year from more aircraft in service.
Those and other items are excluded from our adjusted EBITDA, which was $122 million for the fourth quarter down $2 million and $497 million for the year up $45 million.
Adjusted EPS for the fourth quarter was 38 versus <unk> 56, a year ago.
Our fourth quarter adjusted share count increased 10% Europe over year related to an increase and our stock price.
Our 2020 capital expenditures totaled $510 million that.
And that included purchases of non Boeing 767, 300 passenger aircraft for freighter conversion plus ongoing mod costs.
The total was more than we anticipated last november but necessary to respond the strong demand for our 767 freighters that has pushed our backlog well into 2022.
One factor was Amazon's request to Frontload, It's 2021 freighter deliveries five of the 11 767, three hundreds we released them. This year, we will enter service and the first quarter and seven and the first half.
Today, we project that we will spend slightly less in 2021 and last year and rich will cover our 2000 and 'twenty, one capex plan and a moment.
On the segment basis Cam our leasing business led the way for both the quarter and year came as pre tax earnings increased 21% for the quarter and 13% for the year.
Its externally leased fleet grew by $4 760 sevens during the fourth quarter and by 11% for the year.
Eight of Cam 760, Sevens RIN conversion at year and down from nine at the end of September versus eight a year ago.
It purchased two 767 freighters and non passenger 760 sevens for conversion last year or 11 overall seven of which are for 2021 delivery.
And expect to buy 13, more 760 Sevens and 2021 for freighter conversion.
Pretax earnings for our <unk> services segment.
Which includes our two cargo and one passenger airlines were down $4 million for the fourth quarter, but more than doubled to $67 million for the year. Our express package networks line for e-commerce customers increased sharply for the quarter and year, but passenger flying dropped significantly and fourth.
Quarter block hours were up 1% overall, but all of these hours were down 23% and our Combi block hours fell 41%.
<unk> will likely remain down at least through the first half.
We mentioned and our earnings release that Omni Air has been awarded another $37 million and grant funds. This year from funding and the federal governments PSP to program set aside to help passenger airlines coping with the pandemic.
Those funds require and enable us to keep omnis entire workforce onboard through March.
That is on top of the $75 million of total grant funds. We were awarded last year to help us retain our combi flight crews and ATI and omni as passenger aircraft crews.
Please keep in mind that our practice is to exclude those grant funds from our adjusted results, while continuing to absorb the salary and benefits for the employees, we might otherwise have furloughed.
So to the extent, we carry cost to maintain staffing levels in 2021 due to this and other federal support we may seek our adjusted EBITDA and earnings would be reduced.
We also said and our release that the December ratification of the New amendment to the collective bargaining agreement with our AVX Air pilots will add $7 million to $8 million to our wage and benefit costs in 2021.
This amendment became effective January one and will add to an already difficult first quarter comparison to last year when the pandemic effects were not fully realized.
AVX Air has always had a great on time performance record, we believe that the six year of amendment will cause both potential pilot recruits and customers. So look with greater confidence towards AVX Air is the long term provider of <unk> and CMI support.
Revenues from our other businesses grouped as other activities grew 8% and 6% respectively for the quarter and year largely on growing fuel sales to Amazon.
But the had pre tax losses for the quarter and year.
We incurred startup costs at two postal facilities that our logistics group has opened recently and higher margin heavy maintenance work for external customers remained down as many of the passenger aircraft we support remained parked.
With that summary of our financial and operating results for the quarter and the year I'll turn it back to rich for some comments on our outlook rich.
Thanks Quinn of <unk>.
A year ago and the early stages of the pandemic. We took note of the risk that posed but advised you that our business model was resilient enough to adjust and we would achieve good results for the year.
That was true and those early days of 2020 and remains true now and early 2021 as we look ahead toward what we hope will be a year of recovery for the economy and the transportation sector as a whole.
Despite continuing uncertainty, we expect our business model to provide and other year of revenue and adjusted EBITDA growth and 2021 when.
And when the pandemic took hold last year, we had the dial back our expectations. We were fortunate last spring and summer to pick up several short term passenger charter assignments to offset the loss of commercial passenger charter demand, resulting from the pandemic.
But as Paul arrived the vacation and other commercial charter companies. We typically serve were facing their own pandemic effects, which impacted our fourth quarter and we will continue at a minimum through the first half of this year.
And the meantime, our businesses are performing and projected levels. This year, we are on track with our aggressive afraid of deployment schedule and our customer service remains strong through the winter months.
We have good people, we're attracting more of them and we are giving them, even more and better tools to work more effectively.
The continuous improvement processes, we have discussed before includes the new software and other systems that monitor more components of our aircraft and real time.
And we use that data to compare and predict performance and focus our preventative maintenance.
Driving out costs from our parts and maintenance operations has been one of my foremost goals at ATSG and we are on course and 2021 to start seeing results from those investments and our procurement optimization efforts.
While the pandemic has hurt demand for the passenger routes that we fly the bigger story is that our cargo airlines are very competitive sources for flexible on time performance and the networks that they serve.
They are the number one providers of domestic outsourced air lift for the principal customers and are growing as a group.
We expect them to continue to grow in 2021 under expanded Amazon flight schedules and steady demand from the department of defense and DHL.
But as Quint noted the adjusted EBITDA contributions will reflect among other things the impact of our AVX Air Labor agreement and.
True cost that would have been lower except for our federal support.
The pandemic has clearly stimulating demand for mid sized cargo aircraft are core assets not only are replacing record numbers of our own newly converted freighters into service, including the five we have leased to EPS over the last 18 months.
But we're also re leasing the 767, and we get back faster than ever before.
Many of you are going to new international customers like moths Air and Mexico.
Astral aviation of Kenya, and Ryan Airways and Malaysia.
We're confident that we'll be able to deploy more of our 760 sevens outside the U S and this and future years.
Ladies and venture as a way to leverage cans conversion and leasing expertise for other airlines don't want to build their own cargo fleets and January we agreed to buy two 767 passenger jets from air Canada convert them to freighters and leased them back in the air Canada's own cargo operations.
We think we can find more such opportunities as other airlines assess the long term passenger versus cargo potential of their fleets.
In addition to the $11 six 767, and we are scheduled to lease the Amazon this year you'd.
And you've likely read that they are purchasing and converting some 760 sevens on their own.
We're not surprised that this development as the Amazon has been investing heavily.
To expand its air network and and.
Dissipation of the opening of its new U S hub at the Greater Cincinnati Airport. This fall.
We anticipate the Amazon like other large network operators may source freighter capacity from both acquisition and leasing and the future and we anticipate Cam will remain an excellent source for any leasing capacity they may require.
Atsg's business model is uniquely structured to support our customers and a variety of ways, including through our airlines fast operating experience and and expedited air cargo network.
We are proud of the level of service of our airlines offer their customers and as I mentioned earlier, we invest and continuous improvement.
Customers, such as Amazon and DHL, certainly notice of our focus on service.
And we anticipate that they may ask us to operate aircraft of aon or lease from other sources.
We believe that by the end of this year, we will be operating at least 46 aircraft and Amazon's network under our CMI agreement compared with 33 at the end of 2020.
You may recall that we began flying the first five of those aircraft for Amazon more than five years ago and completed our first dry lease and CMI agreement with them in March of 2016.
Today, we have of commitments for at least 15, 767, and 300 leases and 2021, including 11, 767, and 300, and we will lease to Amazon This year.
We are negotiating with customers for nine 767 300 leases in 2022.
And we have indications of interest from several customers, some and new global markets for multiple leases of 767 freighters beginning as far out of 2025.
We are sourcing more feedstock, making conversion slot commitments and setting prices and terms that meet our rate of return requirements, we will spend more for capex and hire more flight crews and 2021 than we had expected.
But that spending will build our leasing and airline cash flow projections well into the next decade.
The Airbus <unk> hundred 21 freighter conversion desire, we developed with our joint venture partner precision is and the final stages of FAA review and we're hoping for approval in March.
Owners of <unk> hundred 21 aircraft they have already approached us about conversions and we intend that our PEMCO conversion subsidiary can begin by mid year.
Our 2021 Capex budget of about $500 million does not.
Include any money for purchases of our own <unk> hundred 21, feedstock, but we do expect to be and the market before the end of the year.
We exceeded both our initial projection and our November update for 2020, adjusted EBITDA through a combination of great service.
More first half charter opportunities and strong e-commerce demand.
This year the adjusted EBITDA target is at least $525 million, we're taking a wait and see approach to positive indicators about the economy and fewer pandemic limitations as the year progresses, particularly and the second half.
We are taking note as well of potential competition from scheduled passenger carriers seeking charter opportunities for other idle aircraft.
Our current outlook factors and continued pandemic effects on our commercial passenger and Combi flying.
Our planned projects, 57% of our adjusted EBITDA to be realized and the second half.
If we see early signs of progress, particularly in our commercial passenger and the aircraft maintenance businesses, we may be able to give you a better assessment when we meet again in may.
That concludes our prepared remarks, Quintin I, along with Mike Berger, our Chief commercial officer are ready to answer your questions maybe.
And we are pleased to have the first question operator.
Thank you.
The first question comes from David Ross from Stifel. Please go ahead.
Yes.
Good morning, Rich and team.
One of the.
The first day gets about the <unk> hundred 21 free.
Greater use.
I guess, there's an article of the DHL is already putting some into service overseas.
Sure.
How.
Do you expect.
And we'll be able to compete with the others and maybe already doing the conversions and <unk>.
And with the the appetite look like from the customers Youre talking to over the next couple of years.
Yes, it's a good question, Dave So the <unk> hundred 21, we're hoping to have the <unk>.
As to the approval by the end of March.
And there's only one other <unk>.
Conversion house Thats delivering aircraft right now and Thats, the FW and I think there of a couple of aircraft out there.
One of which was produced for a lessor called Val Air and Valor and leasing that air craft of smart links which is the operator thats flying for DHL.
Our first aircraft R. R. That's and conversion right now Thats, our prototype model is actually a valley air carrier.
Air aircrafts, as well and and slated to go to smart lengths and so we believe that that'll and of that same.
Profile of network and that article I believe they indicated that <unk> was lined up for a couple of more aircraft for this year.
And so and we believe we welcome the competition as it relates to DHL and smart links looking at both aircraft and we believe our design is superior.
We worked with precision and ads and the operator, we focused on looking at this aircraft.
And operator would want to would want to view it.
And so there were some differences and our design.
That would make the aircraft more operator friendly both on the sortation and container of loading and also and the way the crews.
Would would utilize the aircraft boats and jumped seating and being able to have their luggage and the upper deck. So we welcome that opportunity and we're hoping to start the production line mid year. This year, we're also getting PEMCO.
Our conversion subsidiary, that's part of our airborne maintenance and Engineering services group, that's located in Tampa and the conversion business mid year as well and.
Start of line going to to deliver more aircraft.
So I just would add I would just add that.
And the DHL has indicated and I do plan to.
Compare of the airplanes as you as you mentioned.
Okay, and then just to follow up on that as we think about the opportunity over the next several years.
Because of the idea of that Theres a lot of seven.
<unk> seven is being retired that need to be replaced.
If you think about Atsg's revenue stream from the 321 conversions.
Are you expecting most of the business to come through.
The traditional CMI route or the a plus CMI and.
And Cam and.
And the other segment or is there going to be of bigger revenue stream coming out of pimco and the conversions and then how do you think about that.
On the 321 opportunity.
Yeah. So initially beginning this year 2021.
We will be taken advantage of the of the joint ventures STC. So there will be participating and the kind of the kit and the conversion piece of this on the touch labor side as I said PEMCO will also be participating so there'll be converting the aircraft directly. So those two segments. We will go into play this year.
We will be and the market.
This year.
Call it the second half of the year.
Looking for we're looking for feedstock now, but we'll be looking to make some transactions towards the second half of the year into 2022.
Two.
The building of leasing portfolio of Cam.
The prognosis of whether we would fly the aircraft or not depends on our large customers and what they want us to.
To fly it.
And as we have and the past, we generally don't do a lot of spec work and throw aircraft onto our certificates.
Two.
Try to.
The leverage new charter businesses, it's not the big robust piece of what we do and so we're going to we're going to move the in that direction, our existing one of our existing customers DHL does fly a lot of $75 seven and test is EPS and Fedex.
And there were a number of airlines around the world and Europe and Asia, The fly 750 sevens as well so the the.
On the kind.
Kind of the operating and leasing side.
And there should be robust demand and the other.
The interesting thing and you see this and most.
The situations with new conversions as leasing companies that have passenger aircraft portfolios that are coming off lease generally look to.
And whether they can get a second and third lease on an airplane and passenger wise and if not then they look to may look to convert that aircraft and create a new revenue stream and the new life frankly on the aircraft and.
And we've already got a lot of interest from leasing companies that have portfolios of obviously with the pandemic and the.
Utility if you will of of <unk>.
New leases and putting those passenger aircraft back into service.
As more challenged right now so we're seeing an uptick certainly.
The interest on the conversion on the.
FTC of conversion side from leasing companies looking to get in as.
Well, so it's a unique stream that debt we're watching closely.
Excellent. Thank you.
Thank you. Our next question comes from Jack Atkins from Stephens, Inc.
Great. Good good morning, and good morning, Thanks, guys.
I guess, maybe just two.
Kind of go back to the outlook for 2021 Richard.
And if you want to take this as well just curious.
You're absorbing a fair amount of cost related to the the passenger charter and the Combi flying that you know I guess the the hope is that we'll come back at some point once the world normalizes.
To think about.
The headwind that that's maybe serving the profitability in 2021, and just kind of help us think about that because the the idea would be one day that would return back closer to normal and you'd be able to absorb that overhead of that that would go from being a headwind to more of a tailwind.
Okay.
Yeah, Amit Jack is and Quint.
As <unk> as you noted.
If we have of headwind going into this year. It is related strictly to the pandemic and the passenger operations and and we talked a lot and earlier quarters about our success.
Successful efforts to really mitigate some of that through.
Taking the opportunity to do some charters.
Some of those charters were also driven by the pandemic requirements.
The PPE and taking and you're repatriating citizens and so forth and so we saw more and I think we told you guys and we've talked in November or.
For October we expected to see more of that and the fourth quarter, because we didn't foresee as many of those opportunities and thats kind of what we're looking at as we head into at least the first half of this year. Our view is that we're going to continue to see those pandemic effects.
The primary places you see them obviously is in on the commercial operations in particular and also and the Combi flying that we do I mean, we've been we've seen our hours dropped for example, and the Combi by something like 40% over what what the add Dan.
And.
The the offer and the opportunities to mitigate that.
They may come about and there may be some of those are not as clearly visible as they were heading into the pin debit and so that's kind of the I think rich mentioned that.
The first half, we're expecting about 43% of our EBITDA and the first half and 57 and the second and that reflects our view that we will see recovery and.
Some of those opportunities as we move forward and we also get more scale as we put additional cam leases in place moving through the second half of the year.
Some of the opportunities we had early on in 2020 for those charters tended to be pretty profitable opportunities.
As is often the case with charters that need to be done and of compressed timeframe.
And typically are able to realize a little better margin on some of those and so that that again presents a little bit of a headwind going into the.
And the coming year.
In terms of where we invest our capital and for.
And for aircraft.
And as rich said on the cargo side.
We've not really seen any more robust environment for demand and we're seeing right now and we're achieving the returns we're getting there and of course that was also a big part of our story last last year.
Absolutely, absolutely and and all that makes sense and thanks for that additional sort of color there I mean.
Rich when you sort of think about where the business is today, you've got I think just and on <unk>.
And the level of visibility into customer demand and.
I think there is a concern of the market that.
Air freight has been a beneficiary from from the pandemic to some degree.
But but I guess, what your customers are telling you with there.
The desire to lease planes in 2022, and then you've got visibility you said through 2025 for multiple aircraft and what is that telling you about the stickiness of whats happening and the business right now and the rise of e-commerce penetration not just in the United States, but more globally.
Well, Jack I think before the even before the pandemic.
E Commerce was dominating growth and air cargo if you look at air cargo and.
And generally you've got two broad segments and generally our cargo which is the intercontinental large aircraft moves.
And that ebb and flow with global trade and you saw in 2019, the market dipped by 3% and you saw the impact that that had on large charter operators that have large aircraft.
And they had they had a very rough and rocky year.
2019 was a record year for us and 2020 was even it wasn't even better year.
We're finally tuned towards express.
And that's been powered by E. Commerce. So that's the other second and the other segment is this express and network operator, and that's over 50% of the global fleet of aircraft as with the integrators.
And so and that's where we play if you look at ecommerce now it's growing significantly it's up depending on which which analysts do you look at it is up 30% to 40% and the U S. Depending on which month you look at.
And in 2020, obviously that was powered by the pandemic, but it's bought it's brought a whole host of new consumers that would not have otherwise used E. Commerce that are now using ecommerce and are predicted to stay.
And continue to use that even out when the pandemic is fine the over so that that stickiness and your words.
And.
As predicted to state, what's great for us and we've talked about the slot.
As we're not of other than our passenger operations on the cargo side, we don't we're not a big charter operator, we don't have a lot of assets hanging around waiting for charters. They are all utilized on generally.
Generally on CMI.
For customers and so.
What's great about what's happening with our business model is this spike and cargo is leading to long term dry leases. So long. After this pandemic is over.
We'll still be getting very strong cash flow from these aircrafts that are leased and will be leased all over the world.
Both into the large integrators.
And cargo networks and.
And then the networks and other parts of the globe.
I don't know Mike if you have just.
And just to add a little bit and then Jack I appreciate your bringing of some of the growth opportunities that happened on the E Commerce.
As rich said, it really stands up for what our model.
It is all about right I mean, we saw great great support and great growth price free up.
And <unk> and certainly through the pandemic.
And we're going to see it coming out of it but.
And the statistical side of E. Commerce, you have gone from <unk>.
<unk> thousand 14%.
E Commerce and.
In terms of retail U S retail sales in 2018, all the way to well over 21% now.
But what we're excited about is is that from a global standpoint retail ecommerce sales across the globe are really really starting to propel and places that were starting to grow into so for Latin America for example, and over 36% growth and E Commerce, and we've talked about we're putting airplanes down and therefore.
Part of the World.
Into into places like Africa, where Theyre, just just under 20% so we see.
Great e-commerce growth.
Across the globe and as we penetrate new markets.
That's what makes us really excited and as rich talked about it's not only our dry lease piece of it its where they are going to and who our customers are serving and that plays right into where the growth engine is and that's e-commerce and M commerce across the board.
Okay. Okay that makes sense, maybe maybe last last question and I'll turn it over but.
Just given given the the level of demand that youre seeing for your assets right now.
Is that.
Giving you incremental positive opportunities to maybe.
And more aggressively.
Some of these.
Leases.
Question. One question two are you.
Are you seeing opportunities to maybe extend the term.
Of these leases.
The Amazon leases of 10 years of at least the most recent leases.
Some of these other customers or are they multi.
Multi year leases could you maybe kind of help us kind of think about about that so curious on pricing and then and then lease terms as well.
And we've seen we see and our leases are normally Jack five to seven plus years or so and we have seen.
Tick up for.
Our lease our monthly leases, so youre absolutely right about that the demand has allowed us.
Not only to stabilize prices, but also take take increases the other thing. It's done it's allowed us to work on our re leases, we've gone out and been able to as.
And as leases and and we go into new ones with different customers are the same customers. That's allowed US also to go out for multiple years five plus years not only on our three hundreds, but even on our two hundreds.
Which is which has really done a great job and it still remains a very reliable claim so.
Yes, no doubt about it the market has certainly allowed us to.
To take our rates up slightly and also allow us to take our lease terms out into multiple years of the future.
That's great to hear thanks, again for the time guys and congratulations on a great 2020.
Yes.
Thank you. Our next question comes from Helane Becker from Cowen.
And thanks, very much the operator, hi, everybody and thank you for the time and just over.
Couple of questions.
Air out there I'm looking at Steve stock are you seeing a lot of competition to the same aircraft and is it driving up prices.
That's a good question Helane, it's interesting because.
There's a lot of talk and the market about because of the pandemic.
Operators are looking to get out of aircraft other parking aircraft and looking.
Flip airplanes, and the cash flow et cetera, et cetera, but frankly, we have not seen any spike in demand related to aircraft.
And there is the competition, we tend to see out there is from the large integrators.
And and.
And and operators, we don't see it from necessarily from other leasing companies.
The other thing is we.
We did this program with Air Canada that we thought was unique.
And the process of acquiring to air Canada Jets from a leasing company and then we got into a conversation with air Canada directly.
And one of the things we thought about.
As a result of the pandemic.
Combination carriers or carriers that were a combination of carriers handling both passenger and cargo or even the passenger carriers and we're going to rethink what cargo means and cargo revenue means to the overall growth profile, particularly as you saw and the pandemic, where a lot of them were training.
And we're customizing if you will their passenger jets to operate the mass freighters. So we got into the deal with Air Canada, where we acquired their $2 767, three hundreds from them.
We're going to convert them and then we're going to lease them back.
And so that that is a unique program and we're we've talked to a few other operators of about the potential to do that too. So that is one area where they are.
Some availability, but it is the stickiness availability, where we could take advantage of those those types of things on the competition side.
Some of the things that we see.
Is that.
Some some.
Operators that are looking for feedstock only want really young airplanes.
Chinese operators is an example of SF Express.
They want and aircrafts at 15 years or younger and.
We'll take 15 years or older. So we don't we don't really butt heads with them and where when we're bidding on things so, but we've been able to we've got our order book full for this year. We've got all of the feedstock aircraft, we need to deliver all of the airplanes that we're delivering this year and we're working on 2022 right now we've got slots lined up for 2022 and we've got.
Probably about half of them flow with feedstock for 2022, So we are and where we sit right now and the at the end of February we're in really good shape for next year.
And that's what we're planning and looking forward to as we go forward I don't know, Mike If you have any and the only thing I would add rich is that we there is plenty of feedstock and regards to other other.
The other engine types and we're in the midst of evaluating Pratt powered.
767, three hundreds traditionally the majority of our fleet as you guys know as GE powered.
And we're now taking a hard look at the Pratt powered engines that we do fly three today and our AVX network today, So we're familiar with it and it's a.
Yes.
The slides just fine.
From a reliability standpoint so.
We're not concerned about feedstock specifically when we think about the broader piece of it and engine types and we'll go from there.
That's very helpful. Thank you.
And I just had two clarifying questions. If you don't mind on the Air Canada leases are you because there were they were leased aircraft before the.
The monthly lease rate or did they renegotiate debt.
Yeah.
Of the two the two aircrafts that were.
And we acquired from them they were owned.
They have they had some fleet that was the one and some of it was leased and.
So these two particular aircraft are owned and where those are the ones we bought.
Okay. So when they pay you every month the monthly rent rate is.
That negotiated how was that negotiated and I guess I'm trying to figure out.
No different helane the.
Any feedstock claim we would buy and convert and lease set of market rate, we purchased the airplane.
The convert the airplanes.
And the lease won't commence.
And so we redeliver the airplanes back to them and that's when they will start paying the monthly the monthly rent.
That's very helpful. Thank you and then just on the pilot pay increase is that all in January than that until seven or $8 million. You mentioned this at all and of course of water.
That's an annual.
Impact Helane.
Alright, so we should think about it as well.
Over $2 million of corridor kind of thing.
Exactly.
Perfect Alright, thanks, guys. Thanks.
Thanks for the excellent anybody.
Thank you and the next question comes from Steve O'hara from Sidoti and company.
Hi, good morning, Thanks for taking the questions.
Currency.
Good morning, just on the the.
The cares act benefit.
The exclude from earnings.
Is there some sort of is there a mismatch there in terms of the your kind of carrying extra salaries and things like that.
I guess I can understand excluding.
The benefit but you are also carrying the heavier expenses to him and he is the right way to think about.
And maybe what.
You know.
EBITDA would have been kind of on a apples to apples basis, if you kind of factor and the benefit from carriers and what that offset in terms of the the cost that you're carrying the extra costs of <unk> nine.
Thanks, Steve Good question the.
And the benefit is based on the Formula that's in the legislation and it tends to be based on a few more of the total payroll.
And when it comes to impacts of positions.
That might be furloughed due to reductions.
That's more free.
Predicated on the.
The those that are direct involved with loss of life.
So it's not a perfect its not as if you can equate the benefit with the.
The dollar for dollar or anything with the potential furloughs.
Okay, I guess I'm, just trying to figure out.
Maybe.
With the.
And the negative impact on the quarter was.
From carrying those extra salaries.
Yes.
It depends upon you know.
I guess, the timing and the level of.
Impact of specific operations com, and so forth and we haven't really.
We haven't.
Calculated exactly what that might of been it's just more of a okay and you want to make sure that you understand the relationship between whats in and whats out of our adjusted results and the rest of them.
Thanks.
Okay. Okay.
And then.
Just maybe on the debt.
Pandemic headwind that you're.
<unk> four.
2021.
And I had.
The user error here on the call early but is there.
And the way to think about what you're factoring in kind of and the first half of the year I think you said.
The 7% and the second half.
And.
How do you think about the what you are factoring in and without the pandemic.
What's the.
And the run rate earnings look like.
Or at least what are you factoring in for the pandemic and the first half of the year.
Yes.
Again, I guess the.
If you look at where the year over year changes are.
And what we've what we've got in there.
The biggest impact we've set our obviously the passenger portions of our operation, which is which is omni and which is also.
ATI, we havent really if you're talking about and earnings impact are you talking about and EBITDA impact or what was your question.
Either.
Yes, I mean, it's tough to.
Two.
Yes, calculate exactly what is related to that.
And.
And we haven't if we were going to and we're going to put something like that out I think we probably would've included and the materials, we published last night.
We can tell you that the biggest year over year drop is at omni.
And if you look at if you look at the portion of their business. For example that is commercial passenger driven.
It's probably about 20% of their of their revenue.
Which was about $100 million, a year and you configure and EBITDA margin on that revenue.
Yes.
Which.
You can see what the overall EBITDA margin is if you look at the Combi flying.
Its flight hours were down about 40%.
Youre talking about probably another.
EBITDA margin on about call it $40 million of revenue for the economy. So you've probably got about $140 million of revenue, that's impacted and and EBITDA margin.
And that's about that's about as good of gauges I could give you because to do a more refined estimate would we.
And involve a lot of a lot of the assumptions.
But if you apply that to that.
That might be one way to think about the EBITDA impacts related to the pandemic and.
And remember, we're expecting to improve and the second half.
We've made assumptions.
And our guidance about an improving picture and the second half.
The other the other headwind you have around the commercial omni business.
Is that just the competitive nature of it with all of the available capacity of to the marketplace.
As the as they go for opportunities.
And the first half of.
It will comment of lower lower profitability, but those headwinds will ease as we progress through the balance of the year.
Yes, no debt.
The.
Certainly the good news is if you look beyond if you believe the pandemic as we do we will see the lessening impact and the second half and you look.
Out very far at all into 2022.
Those arent.
Those arent impactful beyond the pandemic period and in the meantime, other other portions of our business, particularly the cargo.
Portion.
Well as Mike and Rich just described is performing extremely well and continuing to make gains.
Looking into 'twenty and 'twenty two.
Okay.
Helpful.
And then two last one just if you think about the the.
The run rate heading into.
2022, I mean, it should seem like you ship out.
I guess, if I take the second half and maybe.
<unk> that and hair cut it a little bit for maybe first half of the slower typically.
And it seems like you have a pretty good.
Runway for 2022, EBITDA I mean is there a way to think about the run rate heading into 2022.
Well I think we're going to.
And I don't think today, we necessarily want to want to give you a 2022 guidance Steve but.
Again, assuming that the pandemic impacts clear up.
Certainly with the onset of at least 15 additional leased aircraft.
And you kind of know what.
And what those contributions are like on the.
Per unit basis.
I think you are you can you can sort of make your own assumptions there.
We'll say more about and obviously as we move through the year and we get more visibility on exactly where.
The pandemic effects are going and at what rate but.
Think it's true that if you assume that things are resolved on that on that issue by the end of the year 2022.
Wood.
Certainly the accelerated because you would you wouldn't have these passenger flying impacts that we're talking about.
I mean, you're correct.
And you get back to the core of it.
And with fish with the with the number of airplanes that we're going to put into service and 20.
21, the number that we're.
Providing in terms of high single digits for 2022 of the feedstock 13 of airplanes.
All plays to the model that rich talked about and the beginning of.
Really turnkey solutions right because the more airplanes, we're putting out and the marketplace specifically the customers that not only of leasing airplanes from us.
But we're also doing the maintenance on air.
Through our MRO as well as our logistics company as well as flying and what our customers need them.
Really really pleased to how the model has performed and will perform even a higher level of levels with incremental numbers.
Okay.
And maybe just lastly on the <unk> hundred 21.
How long does that take two.
Get on your certificate or and is there.
In terms of the airlines, how long does it take them to get up the speed.
And by the aircraft Tomorrow, when could you start flying with per customers.
It generally takes about six to nine months to get and aircraft on our certificate with an airline and usually you need of you need a and <unk>.
And they were of lumber to do that.
So that's how long it takes us to get out of that and that includes training pilots and getting the getting your maintenance Youre flight your operations of ground and your cargo handling manuals, all straightened out and approved by the FAA.
Kind of what the what the.
View would look like.
Okay, Alright, thank you very much and Tom.
Thanks, Steve.
Thank you and if you have any questions you can press star one the.
The next question comes from Chris stop styled uplift from Susquehanna.
Good morning, Thanks for taking my question.
Hey, Chris So so quinto Richard of I understand the <unk>.
Conservatism around.
The guide for this year given the uncertainty.
With COVID-19, but assuming the vaccine rollout here continues to move forward.
Let's say, 50% of the U S population has at least one shot by mid July could you walk us through.
And what your utilization assumptions are for commercial passenger and U S military flying and that $5 25.
And.
Of the 15 dry leases this year.
And how many of those are CMI and for 2022, just I think you said you have nine plans in terms of the dry leases and of those what do you have.
Locked in for CMI. Thanks, Yes, the rich you want to take the lease part and ill kick out of the.
15 leases this year of 11 will be.
At this point CMI operations of offer Amazon.
And then and right now and the nine.
Going into next year.
We are.
There is no nothing firm on the CMI.
And I should also say on the remainder of this year there may be additional CMI for other customers as well. So we may have and upside on the CMI of both in 2021 and 2022.
Yeah.
Okay.
And then.
And we give utilization assumptions.
Richard You mentioned, but we do we do anticipate we might have a shot to fly.
Some of the a couple of the Amazon one clients correct, yes, right alright, Okay. So <unk> I think we had assumed about that wasn't maybe as many as 13 would be added to the CMI. This year right, so maybe and upside there as well.
On the on the utilization piece.
Not just U S.
And part of the part of the disruption of service and activity.
It has been particularly on the Combi side, and even with omni when the flying for the military it's not that the.
And the coffee side of the state that first it's not that the military doesn't want to fly except the venues that the flying into have.
The significant restrictions, Singapore, Bahrain Ascension Island.
And where.
For us to fly and the pilots, we get quarantined for in excess of amount of time.
Those types of things and so it's the situation, where it's not that the customer doesn't want to.
Fly into these venues is there they are unable.
To effectively and productively do that on the same goes for some of the omni flying some of the the airports that they normally would service.
Not allowing foreign operators to fly through.
And so that's disrupted on the military side.
Some of their opportunity going forward. So it's not just the vaccine rollout and the U S. It's the.
The success of the vaccine and other countries.
And in the military.
For which we would for those areas.
Which we fly too so that that's what's impacted and the kind of the utilization and how we feel will rollout of this we have some commercial customers such as vacations Hawaii.
That.
Is it the regular charter business.
And for many years for on the <unk>.
Flying between Honolulu, and Las Vegas.
And they are projecting mid year.
B back and service, but depending on how the pandemic goes that may get disrupted and.
So we don't have that in the first half, but we do have some of that revenue and our second half is a good example, and where and Reg.
The regular dialogue with that customer about their opportunity. So it's just a matter of.
And how the how the markets are.
In terms of and.
And how the how the public.
And as by buying going.
Utilizing that vacation type of option. So those of the kind of some examples of how we're thinking about.
Getting utilization improved and the second half of the year.
Okay and of the.
116 aircraft and since you have any release for this year and that's nine additional for next year should we.
Think about the fleet around 125 124 ish for 2022.
I think we will add to the nine Chris that's sort of what.
We currently.
Okay.
And are working specifically on but I think that.
It will probably will add a few aircraft to that.
Okay, and then quint cash flow from operations for this year ex PSP too and the aircraft's.
The aircraft impairment.
Well of course of the lobby.
And our cash flow statement here that will publish on Monday with the with the K, but.
Hang on here.
And you're talking for 'twenty or 'twenty one.
For 2021, I've started from last year of 2020 last year.
Cash flow from operations is about $512 million for the full year.
And now that includes about $76 million of cares proceeds.
Okay.
Alright, and then I can just take out the.
The aircraft impairment.
Last question, just how should we think about.
DNA.
For 2021 thanks.
Interest and interest expense.
And.
And as rough roughly in terms of cash interest.
We do have some non cash components.
In terms of 'twenty, one youre looking at around.
And just over $50 million call it $53 million cash interest expense.
And as far as what was your other question on DNA.
Maintenance and.
The DNA.
Youre not youre talking about Capex are you talking about youre talking about the on the expense side.
And on the expenses just for modeling here.
On the income statement I am guessing that there's there's going to be sort of maintenance associated with the new.
Are you ready to do 760 Sevens.
Yes.
And I really I don't know, if we want to get into the specific modeling stuff Youre obviously.
And.
You can.
And we can talk about debt later, I guess criticized I don't have and will have.
And I'm sitting here in front of me for the.
2021 budget the breaks it down that way.
Okay. Thanks for the time everyone.
Thank you.
And.
Thank you we have no further questions at this time I will turn the call to Mr. Rich Corrado for final remarks.
Thank you.
I'd like to again, thank all of the employees of ATSG and all of our companies that had been operating at full speed during the pandemic delivering essential transportation maintenance and logistics services to the economy.
We have delivered for our customers and for our shareholders.
I know of speak for everyone at ATSG when I say, we're proud of the results achieved in 2020, and we're confident that we'll do better this year.
Our strategy has always been about long term cash flow and that's not going to change simply because of the pandemic.
We hope to see many of you online via zoom or other investor conferences. This spring and we thank you for your support of ATSG.
Thank you ladies and gentlemen, this concludes today's conference.
Thank you for participating you may now disconnect.
Okay.
Okay.
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