Air Transport Services Group Inc (ATSG) 2014 Q1 法說會逐字稿

Welcome to the First Quarter 2014 Air Transport Services Group, Inc. Earnings Conference Call. My name is [Hilda], and I will be your operator for today. (Operator Instructions).

Please note that this conference is being recorded. I will now turn the call over to Mr. Joe Hete. Mr. Hete, you may begin.

Thank you, Hilda.

Good morning, and welcome to our first-quarter 2014 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; Rich Corrado, our Chief Commercial Officer; and Joe Payne, our Senior Vice President and Corporate General Counsel. We issued our first-quarter earnings release and two other new-business announcements yesterday. You can find all of them on our website, atsginc.com. Our first-quarter 10-Q will be filed on Monday. Our stockholders' meeting will be held tomorrow at 11 a.m., here in our new hangar at the Air Park in Wilmington.

The leasing agreements we announced yesterday with Amerijet and Cargojet, covering four of our 767 freighters, are strong indications that the market for our type of lift has improved significantly since the start of the year.

As further evidence, we continue to talk with several carriers looking for incremental or replacement lift in the midsize freighter category. And like our agreements with Amerijet and Cargojet, some involve multiyear commitments for multiple aircraft.

Both of these new arrangements, but particularly the one with Amerijet, point to the scale we offer as the world's principal lessor of midsize freighters and the flexibility of our business model, which offers wet lease, dry lease, or wet-to-dry lease arrangements, along with other support services that adapt our offerings to each customer's requirements.

Both speak to success we have already shared over many years working with both Amerijet and Cargojet, and to the hard work of Rich Corrado and his team at CAM, pulling it all together.

Our first quarter is within range of the course we set for our EBITDA guidance for 2014, although slightly under our own expectation. While we ended the quarter with six freighters available for deployment, the new business we are announcing today will cut that number in half by the end of the third quarter.

I'm hopeful we will be announcing further deployments as the year progresses. The other good news we announced yesterday is our amended credit facility with our bank group, which Quint will cover in his remarks.

The new terms both acknowledge and improve on our already strong financial position. Based on the term and revolver debt we're carrying today under this facility, new lower rates will add to the much stronger cash flow we're anticipating in the second half, when the majority of the new dry leases will begin.

I'll be back to tell you more about our new business, and prospects for more, after Quint summarizes our first-quarter results and gives you the details on the credit agreement. Then with Rich Corrado's help, we will take your questions.

Quint?

Thanks, Joe, and good morning, everyone. Let me begin by advising you 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 describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These include, but aren't limited to, changes in the market demand for our assets and services, the number and timing of deployments of our aircraft and our operating airlines' ability to maintain on-time service and control costs, and other factors as contained from time to time in our filings with the SEC, including our first-quarter Form 10-Q.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted EBITDA and adjusted pretax earnings, which management believes are useful to investors in assessing ATSG's financial position and results.

These non-GAAP measures are not meant to 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 also on our website.

During the first quarter, we continued to deliver good cash flow and grow our EBITDA even as global market conditions in air cargo remained soft. Those results demonstrate that our business model has built-in resilience with a mix of revenue sources from long-term leasing, short-term ACMI and charter operations and a range of support services our customers rely on.

As we announced yesterday, we are booking new longer-term lease business that gives us even more revenue and EBITDA visibility, and bolsters our confidence about our results from the second half of this year and beyond.

Our first-quarter revenues were $143.6 million, an increase of $300,000 from the first quarter of 2013. Excluding directly reimbursed amounts, revenues decreased two percent, or $2.6 million, primarily reflecting a three-percent decline in block hours.

That shortfall stemmed largely from a reduction in our operations outside the U.S., and especially, from DHL's decision to deploy its own available aircraft over Mideast routes where they had been using 3 of our 767s.

Consolidated net earnings from continuing operations were $6.5 million or $0.10 a share diluted for the quarter, down $2 million from first quarter 2013. Earnings for the quarter were impacted by lower airline services revenues and a $4.1 million increase in depreciation expense, reflecting seven freighters added to the fleet since March of 2013.

Maintenance expense, especially for engine maintenance, increased as well. A majority of that increase, however, is reimbursed under our agreements with DHL and other customers.

Due to its deferred tax position, ATSG did not pay significant cash federal income tax, and we don't expect to do so until 2016 or later.

First quarter Adjusted EBITDA was $38.8 million, an increase of $1.5 million over 2013's first quarter. Because our results typically grow from the first quarter, we're not far off the path toward our targeted range of $165 million to $170 million in Adjusted EBITDA for the year from our baseline business.

Operating expenses increased two percent, primarily due to higher depreciation for more aircraft, higher engine maintenance expense and one additional heavy airframe check than we performed a year ago.

The increase was partially offset by lower fuel expense as we moved from the DC-8 combis to the more efficient 757s. We also experienced continued reductions in airline operating expenses due to the impact of streamlining ATI's operations.

Turning to our segments, pretax earnings from our leasing business, CAM, decreased $2.4 million to $14.4 million. Revenues grew $1.7 million to $40.6 million. Revenues grew primarily due to higher lease revenues from additional in-service aircraft, including newer aircraft leased to CAM's airline affiliates.

In turn, the added aircraft increased depreciation, which decreased CAM's pretax income. As of March 31, 2014, CAM had 51 freighter aircraft, 20 leased to external customers, 30 to our internal airlines and 1 aircraft that was unassigned.

During the quarter, we completed the airworthiness certification for the final 757 combi serving the U.S. Military. Our seventh 767-300 freighter, our last in conversion, became available for service in March.

ACMI Services had a pretax loss of $7 million for the quarter, $1.6 million more than last year's loss. First-quarter airline services revenues were down $7.4 million at $87.5 million, while block hours declined three percent.

Revenues and block hours were lower, largely because DHL ended our role in their Mideast network. Excluding DHL/Mideast, block hours increased five percent, as we've picked up additional DHL business in the US and South America last year under our CMI agreement.

Block hours flown for the U.S. Military in the first quarter were down five percent due to a reduction in the frequency of 767 military freighter flights, stemming from fewer expansion-flying opportunities.

Operating expenses for ACMI Services declined $4 million quarter-over-quarter on lower wage and benefit costs, fuel costs and other airline expenses.

But they were partially offset by higher expenses for aircraft depreciation, maintenance and carrying costs for under-utilized aircraft. Pretax earnings from our other business activities increased $800,000 to $3 million on $26.8 million of revenues, a two-percent increase year-over-year. Revenues grew from our US Postal Service sorting operations and from AMES, our aircraft maintenance operation.

Yesterday, we executed another amendment to our senior credit facility with our bank group. The amendment improves the facility, from our perspective, in 5 key ways: First, it extends the facility term to May 6, 2019, from July 2017 with annual one-year extension options. It also reduces our rate pricing schedule across a smaller set of debt-to-EBITDA ranges, such that our incremental rate over LIBOR would be approximately 25 basis points lower than they were under the prior pricing schedule. It has a new accordion feature that would allow us to expand our revolver capacity from $275 million to $325 million, if we want to seek that authority and our bank group consents. It reduces collateral requirements at certain debt levels. And finally, it increases our capital allocation flexibility by allowing stock buybacks and dividends when our debt-to-EBITDA ratio is below 2.5 times, after giving effect to those distributions.

As a reminder, we're still subject to restrictions on cash returns to our shareholders under our DHL note until it fully amortizes at the end of the first quarter next year. As of March 31, our term loan under that agreement was at $127.5 million and we had an outstanding balance on the revolver of $188 million.

In sum, I think the new facility amendment gives us more than enough capacity to step up to any reasonable investment opportunity that's likely to come our way over the next several years. We're also reducing our interest expense, excluding fees by approximately $1 million on an annual basis at current borrowing levels.

I want to thank our group of banks, many of which have been with us since 2007, for their continued strong support and their help in shaping this new amendment. Looking forward to a period of expanded cash flow and no current plans for any investments that would not be immediately accretive, this facility represents an attractive supplemental source of funds to the cash we already generate from our operations.

That first-quarter net cash flow provided by operating activities was $21.8 million, down $8.9 million. Lower cash flow in what is traditionally our weakest quarter, was a combination of reduced operating profits, lower payments from DHL and increased inventory and billable work-in-process amounts.

They were partially offset by lower pension contributions to date, which at $700,000 were about a quarter of what we contributed a year ago.

Capital expenditures for the quarter were $4.4 million. We also invested $15 million of our cash flow during the quarter to acquire a 25 percent interest in a subsidiary of West Atlantic AB of Sweden to expand our reach in the European market.

Our current debt-to-EBITDA ratio qualifies us for a low variable interest rate on our unhedged debt of 2.54% through the second quarter. During the quarter, payments to reduce the revolver lowered its outstanding amount by $2.5 million, and $1.6 million of the principal balance of our DHL promissory note was extinguished.

That's the summary of our position at the end of the first quarter. It's been a challenging quarter, but one where our strategy continued to work to strengthen our balance sheet as well as our business. Joe will now guide you through the events of the quarter and discuss our long-term business opportunities. Joe?

Thanks, Quint. On our last call in March, I said we were starting off the year with renewed optimism, in spite of the status of the volume-sensitive portion of our industry.

We had five under-utilized freighters and would soon have a sixth coming out of mod. I said that the upside potential if we could place most, if not all of those freighters, represented a lot of operating leverage in our 2014 outlook beyond the $165 million to $170 million in Adjusted EBITDA we expect to get from our base businesses.

Today, just two months later, I'm pleased to tell you that a big piece of that potential is now a reality.

By the time the third quarter ends next September, we will have delivered four 767 freighters to two long-time customers, and we may have deals with others to announce by then as well.

Even factoring in the possibility of a returned ACMI freighter, which happens periodically in this business, we now think we can achieve at least the top end of our guidance range of $165 million to $170 million, and perhaps climb a bit beyond that.

Starting in June, we will lease 2 more 767 freighters, in addition to the 2 that Cargojet already leases from CAM. Those leases stem Cargojet's large, new contract with Canada Post for air cargo service across the continent. Cargojet also knows and trusts that when they call us, we will respond with on-time, on-target solutions.

In this business, lease agreements signed in May are rarely written for delivery dates in June, mainly because of compliance issues. But because CAM and Cargojet worked together before and our aircraft are being operated in Canada, we are able to meet Cargojet's near-term requirements in a way no other company likely could.

Amerijet is an even more impressive example of how customer-focused we can be. Long before Amerijet announced its new operation based at Rickenbacker near Columbus, they began talking to us about how we could support them beyond the three 767-200s they were already leasing.

Those discussions led first to one more 767 freighter on a trial ACMI basis, and then to dry leases of two of our larger, longer-range 767-300s.

That same wet-to-dry proof of concept was the starting point of our relationship with Amerijet back in 2009 when we supported their launch of 767 freighter service with one aircraft on an ACMI basis, followed by pilot training, certification support and technical assistance. That level of support was key to Amerijet's acceptance of two dry lease 767s from CAM in 2010 and a third a year later.

We are confident that the decisions of these two airlines to expand their networks via leased-in aircraft represent a trend that will continue in the months to come. Apart from Open Skies agreements that limit where any one airline can operate, the economics of dry leasing a converted freighter is attractive for an industry reluctant to commit to fleet-building investments in new aircraft.

That makes ATSG, with a completed fleet of 47 mid-sized cargo aircraft, averaging less than five years post-conversion, and the ability to deploy them in multiple ways, a very well-positioned provider.

The new credit amendment that Quint covered serves as an ideal complement to our business model in the event some of those discussions we're having leads to requirement for aircraft we don't have today, or a potential entry into an attractive market we don't serve today.

A good example is our minority investment in West Atlantic, which we completed in January. It's a company that's well positioned within its own regional market in Europe, but faces changing fleet requirements.

Those companies appeal to us both as investments and potential lease customers. West Atlantic is scheduled to take delivery of their first 767 freighter from CAM later this quarter.

With no more aircraft in mod, the remainder of 2014 will be devoted to placing the ones we have and managing the resources that support them for optimal efficiency and productivity. We ended the first quarter with 10 percent fewer airline employees than we had the year before.

The new hangar we're opening next month here in Wilmington will require more than 200 additional technical personnel to drive the expanded volume we expect to serve. We also frequently adjust staffing levels at the postal service centers we manage to meet anticipated volume. But other than those employees, you can expect us to keep our aggregate employment levels and all other operating costs closely tied to business levels.

We recognize that cost-cutting alone won't restore the profitability of our airlines, ABX Air and ATI, which remain pressured by a tough ACMI market. But one of the key features of our business model is that we empower CAM to allocate our aircraft assets opportunistically between external dry lease customers and the needs of our airlines.

Aircraft we lease to third-parties this year will reduce the number that CAM leases to our airlines, or the 767 that recently completed mod. That includes at least three of the seven 767s that CAM has leased to ATI. Relieving ATI of those internal lease payments and the operating costs associated with them will improve ATI's profitability in the second half.

Still, we have more work to do in that portion of our business and you can expect us to pursue every available opportunity to both increase revenues and reduce costs.

The other big change in 2014 is a sharp reduction in the cash requirements of our pension funds and our capital spending program. We will only put about $6 million into our pension plans this year compared with $27 million last year.

With the completion of our hangar, our investment at West Atlantic, and the payment for our last 767 mod behind us, our remaining 2014 CapEx spend, as it stands today, is primarily to cover the capitalized portion of our maintenance activities. We project a full year CapEx spend, excluding our investment in West Atlantic, of approximately $45 million.

As we told you on our last call in March, allocating our cash flow remains a matter of great importance to the board. We are all well aware of the merits of each option for capital deployment.

In the near term, it's likely that a significant portion will go toward paying down our revolver balance, which not only reduces our interest expense, but restores capacity to pursue any other option.

We will also look for opportunities to invest for growth assuming appropriate long-term customer commitments for any aircraft we might acquire. When, and to what extent the Board considers options to return some of that cash to shareholders is still under active consideration.

Certainly, each new lease we sign gives us greater confidence that we will generate the strong cash flow we expect. More conversations with more customers are always encouraging, but actually winning competitive bids is what delivers the cash flow.

The first quarter has us off to a good start. We expect to make more progress strengthening our base business in the second quarter. The second half is shaping up to be a very good one for ATSG. I hope you're able to attend our stockholders' meeting tomorrow here in Wilmington to hear more about how we have positioned your company for a prosperous future.

If not, please be aware that we will be posting the results shortly afterward. If we don't hear from you again until our second quarter call, I want to thank you for your support, and remind you again to remember your mom on Mother's Day this Sunday.

That concludes our prepared remarks, Hilda. We are ready to take the first question.

(Operator Instructions)

The first question comes from Kevin Sterling from BB&T Capital Markets.

Joe, just so I'm clear, how many aircraft and what type are still under-utilized? Because a lot has obviously happened recently, and I think Amerijet returned a 200 to you. So if you could just remind me what you have left?

Yes, they did not return the 200 to us yet, Kevin. That's an option that's part of them taking the two 300s, so they could return that. And they may decide to keep it. We don't know at this point - sometime in the latter part of third quarter, beginning in the fourth quarter.

If you look at the assets we have that are underutilized today remaining, excluding getting one return from Amerijet, it would be two 300s and one 200.

Okay. And then so, Joe, that leads me into my next question. You seem hopeful that you'll place the remainder of these underutilized aircraft. So I imagine you're in constructive discussions with customers. Are you talking to existing customers, new customers, or both?

Basically both, Kevin. It was surprising, and I think when we did our year-end call as well, we talked about the fact that we are seeing more activity this year than what we've seen since two thousand -- first quarter of 2012. Good news here is that in 2012, all of a sudden the market dried up.

This year is exhibited by the announcements we put out yesterday, as we actually closed some deals, put some airplanes out there. So we still continue to see some demand out there. Rich, I don't know if you want to add anything else to that?

No, I think -- when we announce -- make an announcement of new business like that, those conversations have been going on for six to eight months, in some cases.

So we've got -- we've been talking with several airlines in different parts of the world. We've got some -- I don't know, prospects that are well down the road in discussion. So we're confident that we'll have some more new deployments by the end of the year.

Okay, great. And Joe, you talked about the market picking up since the beginning of the year. In less than 5 months, things have really changed. What, in your opinion, has happened?

I think it's just a little more confidence in people and the general nature, in terms of the business. As Rich said, we've been talking to some of these people six to eight months or longer, and they've just been really hesitant to pull the trigger until they felt more comfortable that once they did, they would be able to sustain that level of business. So I guess you -- got to point to call it consumer confidence at this point in time.

And if you look -- Kevin, if you look at just the growth numbers in the air cargo over the past year, really, since the second part of 2013, it's been all positive growth.

Every month, it's been positive. Prior to that, really since the middle of 2011, there were a lot of negatives. And in fact, 2012 was a negative growth year, 2013 was flat.

But now year-to-date, air cargo, airfreight globally is up 4.4 percent. And that's against the last few years of negative 1.2 percent and 1.4 percent. So with that sustained period, call it four to six months, seven months of growth months, I think people are -- the people that have had some pent-up demand, where they felt a need to increase capacity, but the risk of that, given the inconsistency in the freight market, were not ready to pull the trigger.

Now we see people much more engaged in conversations, much more engaged in trying to solve some issues that they've had for some time.

Got you. Great. That's very useful. And the last question here, the new contracts you signed with Cargojet, Amerijet, could you talk about the duration of these contracts?

Well, the Cargojet contracts are for up to 3 years. There's some options in there for them to extend. And then the Amerijet, the dry leases for the 767-300s are each six years. And then we extended two of their 200s out to 2019, another 18 months, which is basically a C-check cycle for them. And then they have an option to give back one of the existing 200s later this year.

The next question comes from Jack Atkins from Stephens.

So I guess, just to sort of start out with Quint and Joe, when we think about the cash that you guys could have available for either debt reduction or returning cash to shareholders. Quint, could you maybe walk us through -- you talked about the cash pension payment, but what should we be thinking about in terms of cash taxes? And then, what's a good run rate to be using for maintenance CapEx going forward?

Well, in terms of our CapEx, inclusive of our investment in West Atlantic, which we said was $15 million, and that was done in January, we had an additional $45 million.

So $60 million all together for, say, growth type or CapEx. That $60 million includes maintenance CapEx of approximately $30 million. And of course, there's $15 million that's West Atlantic, and the rest of it is typical replacement of rotable parts and sparing and various tooling for AMES and so forth.

The pension -- now before I leave CapEx, I guess, I'd just say that $60 million compares to what was in 2013, a spend of just shy of $113 million. So you'd got about a $53 million improvement year-over-year in terms of that cash outlay for growth in CapEx and growth investments.

Then on the pension side, this year, we're expecting pension cash contributions of approximately $6 million. And we had, I think, a little over $27 million in 2013. So the -- I guess, improvement, shall we say, in terms of a lessening of that outlay is about $21 million.

So you add that to the $53 million improvement on the CapEx side. And just between those two items, you've got a $74 million improvement in the outlay.

On the tax side, as we say, and pretty much repeat every quarter just to remind folks, we're not a significant payer of federal cash income tax. We just pay a little bit of AMT due to our deferred tax position, and we don't expect to be a federal cash taxpayer of any significance until 2016 or later.

Okay. Okay, that's very helpful, Quint. And then when we think about the expansion that you just completed in your maintenance facilities there in Wilmington, now that that's all done, how should we think about that business line contributing both to the revenue side of things and also in terms of profits?

Well, Jack, I'd like to say the hangar was done. We are going to have our shareholder meeting in there tomorrow, but it's not going to be quite finished, and that's due to the weather impact.

The interesting thing about that, obviously, is at their first quarter call, the passenger airlines, et cetera, were impacted by weather and we said from our core business we weren't.

The one place it did impact us was in the construction side. It will probably be complete in June, and of course, we will ramp it up during the course of the year in terms of bringing in business. I mean, we could use the hangar today just because we have -- the current ones are all full.

As far as the level of business, I think you're going to see a pretty slow ramp-up this year. Hiring 200-plus technicians to get it to full steam is not happening until sometime next year.

And since we don't report on that as a separate segment, suffice it to say that today, in today's environment, it's not going to be a significant contributor -- the new hangar that is -- to the bottom line in '14. We'll have some impact in '15, obviously.

Okay, that's helpful detail. And then just to make sure -- I think everyone's on the same page as far as the way these ACMIs -- or excuse me, these new aircraft agreement -- leases will roll out here over the course of the next couple of quarters.

Can you maybe walk us through when these four aircraft will be deployed just to make sure everybody's on the same page there?

Yes. The schedule, as it looks today, is for one of the carriers it's June and July, and for the other one, it's July and August. So whether we get a full month of that really depends on how quick we can get through the regulatory and get the planes prepped.

So we're pretty confident we can meet that schedule, but there are some things that we don't control. So we're looking to have them all deployed by August.

Okay. Rich, that's helpful. And then last question for me. Joe, when you and your colleagues in the Board consider returning capital to shareholders, how do you weigh dividends versus potential buyback? Could you kind of walk us through how you all are thinking that through?

Well, I think when you look at the buyback piece, obviously, is you reduce the number shares outstanding, which has a positive impact on your EPS on an apples-to-apples basis. So there's a long-term, call it, benefit associated with the share buyback.

On the dividend side, that basically had a positive impact or should have a positive impact on the stock. On a go-forward basis, it has a contribution besides what appreciation you get in the share price itself. And it's always a struggle, because as you can imagine, there's differences of opinion about which ones make the most sense.

And of course, keep in mind that one of the focuses of the board is going to be looking at reinvesting some of the capital as well in the business to grow the business, as long as it hits our return thresholds.

The question comes from Helane Becker from Cowen.

Just a couple of questions. I think after this quarter, the DHL note actually goes current. Or Quint, can you remind us when the note is due or when it gets paid off, because I feel like it's 2015?

Well, technically, the note is -- still remains due way out there. It was originally, what, a 2025?

2028.

2028. It was a 25-year note originally back in 2003. And technically, that's the way it's written today. But of course, the CMI agreement, which we inked in April of 2010, it made arrangements for that note go away a lot faster.

In fact, that note is amortized, what was left of it, at April 2010. That $31 million has been amortized over 60 months, 5 years. So it'll be totally gone at the end of March of 2015.

At the end of March, this reporting quarter, at end of March there was $6.2 million, I believe, still remaining on the note and that will amortize in 12 months. Unless somehow we defaulted on the agreement, et cetera. That's the only thing that could happen that would cause that 2028 date to come back into place.

Okay. And then the other two questions I had were on revenue from West Atlantic. When I look at the revenue breakdown, on my handout it's actually page 8, where does that show up? In other activities, is that we're I'm going to see those revenues?

Yes, it's actually accountable under the equity method, Helane. And you can see -- basically, when you look at the investment, you'll see that we -- it was a pretty much an immaterial amount that we recognized. It was a positive amount. It was about a couple of hundred thousand dollars related to West Atlantic for the quarter.

As you know, we've just -- the GAAP rules give you some time basically to assimilate that in and they report their information to us a little bit on a lag basis. And so we're estimating based on their results that we -- the most current results we could get from them. It's an immaterial, but a positive contribution to the quarter.

Okay. So going forward, do you think we should -- do you think you're going to always make an estimate of when they'll be or do you think you'll just report it on a one-quarter-lag basis?

Yes, it'll be about a -- there'll be about a quarter lag in terms of the report. So it should be, it's an estimate, but it should be close because, of course, it's based upon recent actuals.

Got you. And then, Joe, my other question is I know you guys said a lot of the passenger airlines were starting to replace 767s and I'm kind of wondering what you're seeing in terms of purchase price and availability and if there are -- if you're -- I know you have three aircraft that are available, maybe a fourth, but as you look over the next five years and you look at all these aircraft coming available, what are the purchase prices looking like? Are there deals you can get that would make sense within your return parameters and so on? Could you just talk a little bit about that?

Yes, I think the pricing for the assets as more become available, as 787s get delivered to the passenger carriers and they retire the 767s, is going to ease the pricing somewhat.

Keep in mind that when you look at the assets that we put in the service, Helane, the cargo model alone is $14 million of the total and we've always talked about the fact that our target was to keep the in-service cost under $30 million.

So when you spend half of that amount almost just on the cargo mod, then we upgrade the avionics on the aircraft, put in the flat panels, et cetera, it doesn't leave you a whole heck of a lot in terms of the base asset, and most of that cost is tied into the engines themselves more so than the airframe. You can actually go out -- w e've had people offer up 767-300 airframes for $1.5 million. So the pricing on the actual fuselage itself has come down, but the engines are still a key driver plus the modification costs.

Okay. Are you seeing things that make sense, do you think?

Well, we haven't kept -- delved into the market too great at this point in time, only because we had the idle assets, until such time that we get closer to that full deployment side of the equation, we're not going to go out and actively pursue.

Now one of the things that we do look at from time to time is an opportunity where someone has passenger aircraft that they want to divest themselves of, and we would buy those as a small fleet, so to speak, and then continue with the leases and then that gives us some potential feedstock down the road. But you're still going to probably see values in the service probably somewhere -- I'd say we're under $30 million today. So it's going to come down a couple of million, but not significantly.

Our next question comes from Steve O'Hara from Sidoti & Company.

I guess, just a follow-on with that. I mean, I guess, it sounds like you think you'll be at full utilization by year end. What's your comfort level in terms of not having assets as customers need them, do you need to have a certain number of in-modification, do you feel, or are you kind of comfortable continuing maybe a pause on speculative CapEx in favor of returning cash to shareholders. Just wondering where you stand on that?

Well, I think we will always want to have something available to lease the customers. I mean, that's one of the hallmarks. A good example of that is the Amerijet deal, where they needed an airplane in June.

Not too many -- if you didn't have one sitting on the shelf, so to speak, you wouldn't have been able to provide that. And even if you had targeted a particular asset, net price and everything else, it's still probably five to six months before it would be put into service if you didn't have it already modified.

So I think we'll -- once we get to the point where we are fully deployed, we'll look to start reinvesting again. And of course, the level of that reinvestment will be dependent upon what we see is the market demand at that point in time.

The other thing people have to remember is, at some point in time, even though the fleet is relatively young coming out of service, or out of the modification process, that some point in time, in the not-too-distant future, we'll have to start looking at replacement of some of the earlier 767-200s with a little bit younger airframes. But that's a few years away.

Okay. So -- okay, so that's good. And in terms of your -- how do you weigh share buybacks versus kind of a continued expansion of the fleet?

Well, again, I think from the board's standpoint, their view is going to be what is the best opportunity in terms of improving shareholder value overall? Now, whether that means it's investments or buybacks or dividends, these are all the factors we have to weigh.

And of course, the investment is going to be dependent upon, is it going to hit our return thresholds before we would do that. It's one of those things where once you bought back the shares or paid the dividends, the cash is gone and whereas if you have an investment that gives you your reference of return it continues to bring cash back into the business.

So it's not a decision that the board takes lightly, but it's one that we've debated quite regularly.

And not one that's mutually exclusive, right? I mean, both options have merit and one doesn't preclude the other necessarily.

I mean, the big relief we got is hopefully -- and hopefully it continues is the fact that we've not chunking $20 million plus worth of cash into pension funds at this point in time. We hope that we can look for a couple of years where we don't have to do that.

Yes. Okay, and then -- so I guess, some of the investment in the fleet probably depends on where you think you are in the cycle of the business, because if you think you're kind of -- I mean, it seems like you think that the cycle is kind of on the upswing, maybe too early to call, but it seems like you guys are a little more positive than you've been. So I mean, if you guys potentially make any aircraft acquisitions, I mean, does that necessitate that your view is that the market is improving?

Yes, I think -- like I said, as we said in our prepared remarks, et cetera, that we do see that the market is improving, I think Rich came up with some statistics in terms of what the general market overview is.

So we believe that it is improving and if you look at our largest customer, for example DHL, they continue to post very strong results, and from both in earnings and from the growth standpoint. And then -- so they are a bellwether since we market our assets internationally. And their core business is nothing but the international segment.

The next question comes from Adam Ritzer from R.W. Pressprich.

I just have a couple of things I just want to ask you. I think last quarter, we talked about the Canada Post deal and, I guess, Cargojet is part of that. And I think you had said they may need ultimately, again I don't want to put words in your mouth, but maybe four to five new aircraft to support that deal?

Is that still your belief and is it possible Cargojet could use two or three more planes?

Yes. It's possible they could utilize additional aircraft. Right now the need that they came to us for was for the two 200s based on how they were looking at logistically setting up their network to account for the additional freight. They handle the UPS business in Canada as well. And so they already go to all the major markets. They fly some 727s as part of that network and I believe they'll be retiring some of those as well. So there's a potential for additional deployments for Cargojet.

Okay. And I guess in the planes you have left, that still does not include the one that West Atlantic is going to take, right?

Yes, now keep in mind that was the West Atlantic piece in terms of the book of business. West Atlantic has not to-date signed up a customer -- a specific customer -- in terms of new business for that particular asset. So what may transpire there is a transition of existing business handled by one of the affiliate carriers to West Atlantic to get them the earning -- operating experience that they need to get the business on track.

Okay. And since everyone else has asked about buybacks, I guess, I should probably put my two cents' worth in.

We basically would be disappointed if you didn't.

I know. Right, I have to do it. But, I guess, really the way I'm looking at it or other investors may be looking at it is it seems like right now you guys have to set off, you increased your accordion feature, the debt's coming down and will be down another, by my math, $100 million, be it by the end of the first quarter of next year.

But you still have this $6 million or so DHL note that is kind of maybe holding us up because of that 20 percent feature they have. I know you want to save as much money as possible, but why not just go to DHL or just pay them off? I mean, it's -- or just use your -- part of your credit line to pay them off at a very low rate and start buybacks now, like why not do that and get this going?

Well, Adam, let me clarify one thing. We don't have to pay it off. It's a requirement that we would pay it off if we want to buy shares.

In other words, we don't need their approval to do a share buyback or pay a dividend. It's just that if we do, we have to give them 20 cents on every dollar we spend in that regard against that actual note. So there's nothing that handcuffs us per se other than the fact that you would be paying a 20% premium.

Okay. So let me clarify, the 20 percent is on the $6 million or so? Not on the amount of a dividend or buyback?

No, it's 20 percent on the amount of dividend. So in other words, if we bought back $20 million worth of shares, all right? We will have to pay them 20 percent of that against the note.

Of the $20 million, not 20 percent on the $6.2 million?

That's right.

20 percent of the $20 million. It's $4 million.

So effectively until the note is completely paid off or amortizes away, if you bought back a share of stock from a cash standpoint, you're spending an extra 20 percent above that share price you'd buy it back at.

Got it. I understand. So let me -- okay. So let me put it another way. There's a competitor of yours, Atlas Air, that by my math, trades at something like 8x to 9x EBITDA, and they were around 6x to 7x levered.

You guys are trading at under 5x. And again, by my math, a year from now you'll be about 1.5x levered. Now it's good to be unlevered, but isn't this DHL note, I mean, to save $6 million, holding us up on potentially having a much higher stock valuation, maybe somewhere between where we trade now and where Atlas trades? Have you thought about that at all?

Yes, Adam, from your standpoint, I'm not going to debate the merits here on the conference call. The discussions we have at the board level, and I don't want to speak on behalf of the board at this stage of the game. But rest assured that your comments will be relayed to them.

Okay. It just seems like maybe -- you're doing a great job and I know you're moving in the right direction. But it seems like for a minimal amount of money, maybe this is holding back the stock valuation versus one of your competitors. That might be something to take a look at. Anyway, I appreciate your taking my call.

The next question comes from Bob McAdoo from Imperial Capital.

Just, I'm a little confused about spare -- or the status of underutilized airplanes.

Somehow, I had in my head that there were six going into the quarter and now we've just announced four with possible of 1 coming back, so that would take it down 2, back up to 3, but if West Atlantic goes, you're back down to 2 and -- but -- yet you're saying there's something like there's three available, possibly a fourth. Is it -- am I just talking about a different time frame than you are or what am I missing here?

In terms of the West Atlantic, I mean, as I said, on West Atlantic, it may not be an additional aircraft going on lease in terms of what's deployed to their -- or under contract because it may be a transition from one of our affiliates. So it may be net sum of zero.

But we do have today the four we are leasing to Cargojet and Amerijet that we announced and we would right now planning to get one back from Amerijet, which will be a net of three additional deployments, which would leave us with three underutilized aircraft, two 300s and one 200.

We have no further questions at this time. I would like to turn the call over to Mr. Hete for final remarks.

Thank you, Hilda. The progress we made in the first quarter and the four additional aircraft we will place later this year put us on a positive trend for the rest of 2014.

I hope to talk to some of you at our stockholders' meeting tomorrow, others when we go out on the road and all of you once again on our second-quarter call. Thank you for your continued confidence in ATSG, and have a quality day.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.