Air Transport Services Group Inc (ATSG) 2015 Q3 法說會逐字稿

Welcome to the Q3 2015 Air Transport Services Group, Inc. Earnings Conference Call. My name is Richard and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I'll now turn the call over to Mr. Joe Hete, President and CEO. You may begin.

Thank you, Richard. Good morning, and welcome to our third quarter 2015 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Commercial Officer.

We issued our third quarter earnings release yesterday afternoon and it's on our website, atsginc.com. We will file our Form 10-Q with the SEC later today.

We had several important accomplishments during the quarter. The most important strategically was the formation of our new joint venture in China, with four other partners, including Okay Airways and VIPshop. That venture, called the United Star Express, will be launching next summer initially with 737 freighter service. In addition to return on our investment, we look forward to supplying many of the freighters it will need as it expands in step with China's rapidly growing e-commerce market.

We also booked enough business to keep our fleet fully deployed through the fourth quarter. Our maintenance and logistics businesses are also very busy. The first of more than 80 Boeing 717s arrived last week for heavy maintenance check under our new multiyear contract with Delta Airlines.

We devoted a lot of time this summer to prepping an unusual number of aircraft for new deployments. We interrupt our revenue stream and incur costs when aircraft are moving from one operator to another. As a result, our third quarter earnings and EBITDA were, as we forecast, down from a year ago and off the pace we were on in the first half.

We still expect to reach our guidance range of $190 million to $195 million for 2015 via strong fourth quarter. Quint is ready to cover the third quarter results in his update on our solid financial position as we close out 2015. Quint?

Thanks, Joe, and good morning, everybody.

Let me begin by saying that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we 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 factors include, but aren't limited to: changes in market demand for our assets and services, the number and timing of deployments of our aircraft, 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 the 2014 Form 10-K we filed in March and the Form 10-Q we will file later today.

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 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.

Our freighter leasing business remains our growth engine, but even in that business there are quarters when multiple aircraft are between assignments. That's essentially the story this time; lots of demand for our aircraft, but due to the timing of deployments and new contracts, a lot of quarter-to-quarter volatility.

Consolidated revenues for the quarter were up about $4 million, or 3% to $142.3 million. Reimbursement revenue was down $4 million from last year, so that net effect minus those revenues was a positive revenue swing of about $8 million, or 6% year-over-year.

On a consolidated basis, our pre-tax earnings from continuing operations for the quarter were $10.3 million, and net earnings from continuing operations were $6.3 million, or $0.10 per share. Both are ahead of last year's pace through nine months.

Adjusted EBITDA was down slightly from a year ago at $43.7 million, and up $12.7 million, or 10%, to $141.4 million through nine months. Our operating cash flow of $134 million increased $27 million for the nine-month period, as our depreciation and amortization line increased $13 million on our expanding fleet.

CAM continues to perform well and its aircraft are in high demand. CAM's revenues were up by about $2.3 million overall, including a $3.4 million increase to $23.7 million from external customers. It had 27 freighters under lease externally at the end of the quarter, up three from a year earlier.

We expect to add five additional 767 dry-leases during the fourth quarter, bringing the total to 32 by year-end. That includes two to West Atlantic, and three to DHL. Joe will have more to say about the improving size and quality of CAM's leasing portfolio in a moment.

Pre-tax earnings were flat at $13.5 million. Costs increased for preparing aircraft in transition, and CAM incurred additional depreciation from more 767-300s in its fleet.

Aircraft in transition was also the story at our ACMI Services segment. In both our press release and our comments last time, we said that the volume of maintenance C-checks was lighter in the second quarter, and would be heavier than normal in the third.

We had four more of those checks in the third quarter this year versus a year ago, including some that took longer and cost more due to additional FAA requirements. Our maintenance costs will be lower in the fourth quarter when our ACMI fleet is fully deployed.

Our military flying also was affected by an out-of-service runway at a combi destination in Greenland, with an impact of about $0.01 per share. But utilization of our ACMI fleet continues to improve. Even with fewer aircraft, our non-DHL block hours were up 10% over third quarter last year.

Overall, our airlines are performing well and they are proving every day that they can be innovative and adaptable as well. Service levels remain high, and we are undertaking new ventures that leverage our decades of experience in air express networks. We still face higher pension expenses, and since April the loss of revenue from amortization of our DHL note. The ACMI business is very competitive, but we expect continued improvement in 2016.

On the other activities line, our pretax results were up slightly in the third quarter, with good contributions from our maintenance and postal businesses. As more volume from Delta's 717s and other external customers flows into our hangars, we expect that pattern to continue.

Our CapEx spend is running stronger than we projected at the start of the year, largely because our customers are eager for the advantages that our 767s can offer. Spending of $111 million through September included three 767-300s, one each in the first, second and third quarters.

We intend to exercise an option for a fourth before year-end, which along with a portion of the costs of the passenger to freighter modifications, will boost our 2015 CapEx to about $165 million. All of the new aircraft have dry-lease customers waiting to take them under multi-year arrangements.

We will continue to fund these purchases with a combination of operating cash and borrowed funds. Our revolver balance at the end of September was $165 million, unchanged from June. Our debt-to-EBITDA ratio remains at 1.6x, and that extends our sub-2% interest rate on a variable rate debt.

At this point, I'll turn it over to Joe for his review of our business developments, our outlook for the rest of the year and the status of the share repurchase program that we started last May. Joe?

Thanks, Quint.

We advised you in August that the third quarter would include $5 million to $7 million worth of headwinds from a combination of additional air freight checks and transitioning costs for several freighters that we're moving to new assignments.

We also said that we had a one-time $2 million benefit from an insurance settlement in Q2, which together would mean a shortfall of around $7 million to $9 million from our second quarter EBITDA levels.

In fact, that's pretty much how it worked out. Third quarter adjusted EBITDA was $43.7 million, down from $51.2 million in the second quarter. Maintenance and periodic contractual transitions reflect the nature of this business. That means results can vary from quarter-to-quarter because of the timing of events even when the overall trajectory is positive.

I also told you on our August call that CAM's aircraft leasing portfolio was improving not just in numbers, but also in customer mix with new agreements with carriers in Europe and Asia. What I didn't mention then is that the average term of the new leases that we sign is also growing, including eight-year terms for two fourth-quarter 767-300s, and a third we expect to deploy next spring. Two of them that are now in mod will enter DHL's U.S. network and be operated by ABX under terms of the amended CMI agreement.

The longer lease durations, new customers, and continued strong demand for our 767s are evidence that the market is turning strongly toward our regionally focused strategy, ideal for our midsized 767 freighter fleets. Our expertise in scaling the midsized niche led to our participation in the group now launching a new cargo airline in China. The groundwork that led to that agreement began several years ago, when we established the market presence in China and began reaching out to other airline operators there.

Contacts with the management of Okay Airways, a regional passenger operator with a small cargo operation, along with recent surge in e-commerce marketing in China, eventually led to the joint venture agreement we signed on September 24 in Tianjin.

Our principal partners in the joint venture that will run United Star Express represent a good mix of airline industry experience, e-commerce marketing savvy, and local market knowledge. One of them, VIPshop, is a major e-tailer in China, and initially a significant source of volume for the venture.

We will acquire a minority interest in United Star Express for an investment of about $16 million over the next nine months. As the venture grows with operating support from Okay Airways, our role will be to offer advice and technical support, and to source additional freighters to build out its fleet. That would likely include dry-leases of both small and midsize types that fit the market that United Star intends to service.

This venture is a big strategic opportunity for us to build an early presence in China's Air Express market. Since online shopping is a relatively new phenomenon there, those networks are small, and are currently served mainly by smaller narrow-body freighters. But with e-commerce growing, expected to reach more than 40% this year in step of China's expanding middle class, we think the opportunity to introduce larger airframes, including 757s and 767s, won't be far off.

Our role in this venture in China, and our partnership with West Atlantic in Europe stem directly from our decades of managing air express networks.

A trial ACMI express network that we launched in September for a U.S. customer has been performing well. It started with two of our 767s in a sort operation here in Wilmington and will grow to five aircraft next week.

We're completing arrangements for even more 767s for customers in the U.S., Europe, and Asia. This will include eight 767s in the fourth quarter, including five long-term dry-leases. Several others are slated to go out early in 2016.

That mix of opportunities is why I'm optimistic about both our leasing and ACMI business in the short-term, including a fully deployed fourth quarter, and into next year. ACMI remains an effective entry point for operators of those new regional networks, and we are a leading source of the turn-key solutions they need.

I mentioned in my opening remarks that the first of the 80-plus Boeing 717s from Delta Airlines arrived in Wilmington last week for heavy maintenance service. The 717 is the functional equivalent of the DC-9, which was a core of our fleet for more than 20 years. Relying on that expertise, our AMES MRO was able to provide Delta with quality service over a multiyear commitment. That's in addition to a range of new customers AMES is attracting with its new capacity.

We're also able to extend our relationship with U.S. Postal Service for management of five of its regional sort centers for another 16 months, starting in December, plus an option for an 18-month extension.

Last quarter, we raised our adjusted EBITDA guidance for 2015 for a second time to a range of $190 million to $195 million. I'm confident we will get there if we meet our remaining deployment targets and continue our solid performance against service quality metrics.

Finally, let me give you an update on our share repurchase program. Since May, we have applied $8.4 million to this program, including $6.9 million through September.

Those share repurchases will continue as part of our strategy to maximize the value of your investment in ATSG through a combination of growth investments, debt repayment, and return of capital.

That concludes our prepared remarks. Richard, we're ready to take the first question.

(Operator Instructions) Our first question online comes from Mr. Kevin Sterling from BB&T. Please go ahead.

Hey, good morning, guys. This is Chip on for Kevin. First off, if you could just provide a few more details on the new China joint venture, just your initial role. I think you mentioned it's going to launch next summer with 737 service.

Chip, I'll let Rich Corrado answer that question.

Yes, if you can just talk about the initial role, the number of planes, where you see that opportunity going two, three, five years from now, and will you guys have the extra capacity to handle this new business? And are 737s something that you guys are considering getting into? Or when would 767s enter into the China joint venture?

It's a good question, Chip. Initially, our project is scheduled to run through the end of June 2016, and we hope to be flying the first aircraft in July of 2016. The quickest way to get the AOC in China, since our partner Okay Airways already flies 737s, was to go with the 737 initially because it will be an easier path to get the AOC started.

Our initial plan is to have three to four 737s flying by the end of 2016, and then look to 2017 to begin to push the market on the 767. If you look at the China market today, there are no medium wide-body freighters flying within China. When we looked at this market, and we're seeing the growth and looking at the strategies that the express carriers were taking in China, this looked like the prime time to get into the market in preparation to get medium wide-body aircraft put there.

If you look at S.F. Express, the market leader, they acquired five feedstock aircraft from Qantas last year, and they have an agreement with Boeing to convert those to freighters. And I believe they're taking delivery for the first one in December. We've had a number of conversations with S.F. Express about their strategy going forward. As it stands right now, we're already implementing our commercial strategy in China and we believe that we'll be flying -- that we'll have customers for the first three or four 737s moving into the second half of 2016. So the market looks good, and we think our strategy is sound and we look to be, to have those initial aircraft deployed right out of the gate.

Okay.

As far as us looking at 737s, Chip, yes, it's an aircraft that we would add to our lease portfolio if the right opportunity would come by and of course, this would be a good place to start. As far as 767s, they anticipate getting probably in '17 the first 767 placed into the JV.

Okay, great. And then looking at ACMI, it looks like we sort of took a step backwards in terms of profitability this quarter. How quickly do you guys think you can rebound and get back to profitability again in the segment?

Well, it will rebound in the fourth quarter with the -- as we've noted in the press release and in our remarks is that we expect to be fully deployed in the fourth quarter. In fact, there's probably more demand out there right now than we have available assets. And so, we'll see a nice rebound or should see a nice rebound in the fourth quarter in the ACMI segment and then clearly that rolls over into 2016.

So post-peak, do you expect to be fully deployed?

No, post peak, there'll be aircraft transitioning. Obviously, we put assets, we shut down our maintenance lines during the fourth quarter to absolute minimum so that you have full availability to the assets. And then after the first of the year, you get back to where you have to start doing some of your routine maintenance, but it won't be a full deployment at that point.

Okay. And then on maintenance, Quint, I think you said Q4 was going to be a little lower. Are we back in that $23 million range?

Yes, Chip. You're in the ballpark there. I think what's important to recognize is that line item includes sort of the engine costs, much of which is variable in our revenue contracts and reimbursed right away as we incur, fly additional block hours during the peak season. That will be picked up in the revenue line.

And so while the overall number may only drop a little, that the mix, the portion of it that's related to the airframe maintenance, which isn't reimbursed right away, because on our contracts, we kind of get that amortized in over the months. That's going to drop significantly in the fourth quarter because as Joe said, we have all our planes available during that peak season so the portion of that $23 million that you referenced that's related to the airframes will be lower, but the engine stuff that's reimbursed right away in revenue will be higher. So the net number may not change much, but in terms of the bottom line impact, improvement in the fourth quarter, because that airframe piece drops significantly.

And the top line revenue will jump quite a bit.

Okay, and then one more and then I'll jump off. I thought you said, maybe I heard it incorrectly, 2016 CapEx was $165 million, did I hear that correctly?

No. That was the update on the guidance for the full year '15. This 2016 guidance, we'll have when we talk to you guys next quarter. And we were at $150 million of guidance, I believe, when we spoke to you at the end of second quarter in August. The increase is due to an additional 767-300, which we're going to buy and begin to modify in fourth quarter for deployment early next spring under an eight-year lease with a customer.

Okay, sounds good. Thanks, guys.

Our next question online comes from Mr. Jack Atkins from Stephens. Please go ahead.

Hey, guys, good morning. Thanks for the time. So, just to go back to the joint venture for a moment, a couple of additional questions there following up on Chip's questions. So will this JV operate similar to your West Atlantic JV? Are you guys going to have any sort of responsibility for aircraft utilization? Or is this simply going to be leasing in the aircraft and then, whether they're utilized or not, doesn't necessarily impact you guys?

Well, Chip, it will be similar -- just like with West, we expect to account for it under the equity method, and we will pick up our ownership share of their operating results. So in that respect, we will be impacted by their utilization and the success and profitability of their operations. But just as with West and as Rich explained, our primary focus is on participating in the leasing side in terms of the assets that they require.

Okay, okay, that makes sense. And then in terms of the initial capital needed, I guess $16 million is what you guys put up for your minority interest stake. What portion of the JV will you own? And then, as far as the four 737s, how much additional capital will that require next year?

Our initial launch year percentage is 25%, and that's the limit of what we could own of the JV going forward based on Chinese regulations. The 737 converted freighter, depending on the 737-300 or 737-400, would be in the range between $6 million and $8 million apiece converted. So if you look at four aircraft, you're somewhere between $24 million and $32 million.

Okay, okay, that will make sense. And then, when we think about that additional aircraft that you guys are taking out the option on later in the fourth quarter, is that going to -- have you guys disclosed who that customer is? And is that going to be a non-DHL customer?

Yes, Jack, it's a non-DHL customer.

Okay, okay. In terms of the fourth quarter and thinking out into 2016, could you maybe give us an idea of sort of what type of EBITDA run rate you expect to be on as you exit 2016 just from a quarterly perspective? I'm not asking for full-year '16 guidance.

Yes, Jack, I think, as you can tell, and of course, we can all interpolate the fourth quarter based on our range guidance. But we're somewhere -- we're hitting in the 45 to low 50 range consistently throughout as we close the last couple of quarters of 2015. As you know, we placed a lot of aircraft under dry-lease contracts late this year, which we'll get a full year impact from them next year. So we think there is certainly some leverage in our EBITDA when you compare '15 to '16 based upon the timing of these contracts. That said, we won't have the specific guidance, and certainly, we will have it when we talk to you guys in February for '16. But we feel very good about where we're going to be, position-wise, as we head into next year.

That makes sense, Quint. I guess, from looking at the implied fourth quarter guidance, it seems like it's in the mid-50s or so. But it seems like you're not going to have all those aircraft deployed until maybe later in the fourth quarter. I was trying to think about what a true sort of run-rate quarterly EBITDA is.

Yes, you're correct, Jack. Of course, as we also talked about, fourth quarter is a quarter where we don't do maintenance on the airframes. We try to arrange the schedule to avoid that for the greatest availability to our customers. And that is probably several million dollars a quarter compared to the run rate in a Q1 through Q3 type situation. So when you suspend that, those check lines, those heavy check lines, that fourth quarter always includes that tailwind. So you've also got to offset the timing of these additional leases with that as you think about an average quarterly EBITDA.

Jack, it won't too dissimilar, I wouldn't guess, at this point, from how we ended up or started off 2015, if you look at fourth quarter of '14, and then you see a drop off in the first quarter because you get the peaking-out and that disappears in the first quarter and then the additional maintenance expense.

Makes sense. Makes sense, guys. Okay, and then last question and I'll turn it over. When you look at the ACMI segment, that's still generating a pre-tax loss there. At what point do you guys expect that segment to be pre-tax profitable? Or can it become pre-tax profitable?

I think the answer is yes. As you know, on an EBITDA basis, in terms of the cash flow contribution, that segment continues to provide us a positive EBITDA. And as you know, with our business model, it really is all about the asset, but having that capability to do the wet leases and work with customers based upon what they require to facilitate the placement of assets is quite valuable to us. And so the segment itself generates a positive cash return and it helps us be more successful in placing assets with customers. And I think what you see there, as we've said in the past, you see a little more operational risk, because they bear the brunt of transitioning aircraft of, at times, aircraft that may be not as fully utilized as they will be later on when they get into a dry-lease situations. So there is some of that variability, but I think for the year, we're ahead of last year, and we expect continued progress in 2016. I think we'll have a good chance for that segment to be profitable in '16.

Okay. All right, guys. I appreciate the time.

Our next question online comes from Helane Becker from Cowen and Company. Please go ahead.

Please go ahead. Your line is now open.

Hello? Oh, thank you very much. I don't know really what happened there. I probably pushed the wrong button. Thanks for the time, guys. So I just had a couple of pretty easy questions since you've already built out my model for me. Just on the Chinese JV, you're agnostic as to customers on that, right? You're just providing the aircraft, and this is straight ACMI transaction, or is it just CMI?

No. The Chinese AOC would be the operator of the aircraft. Our primary interest is in leasing the assets into it, but as Quint mentioned earlier, we would collect a pro-rata share of our earnings related to those operations.

But similar to the ATSG model, the JV will not be taking, putting up scheduled flights and taking freight risk.

Okay.

We'll be contracting aircraft on an ACMI basis.

Right. Okay, okay. And then when should we take that into -- I know you've probably said this and I wasn't -- I didn't catch it or whatever, when should we start taking revenues from that into our model, middle of next year?

Yes. Right now, Helane, it's the second half, again, based upon the timing of the required regulatory approvals over there and so forth, it would be the second half and even -- I think next year, it will have a fairly small impact on us because they start with an owned airplane, I think. And then -- so that the opportunity to lease in airplanes wouldn't really be there in a significant way until 2017.

Right, okay. I just want to make sure I got that correct. And then, okay, and then with respect to EBITDA run rate for next year, we're thinking, this year is pretty good. You raised the guidance twice, so even though you're not raising it again in the current quarter, it's still pretty good going into fourth quarter. We're kind of thinking $200 million is the run rate that we should be thinking about - right?

I don't think that's crazy at all, Helane, but as I say, hopefully we'll provide you an update on that in February that you'll be pleased with. But certainly, we're about that base level as we sit here now, yes.

Okay, that's perfect. And then my last question is with respect to the maintenance space - aircraft that you're doing for Delta - is there capacity there to be able to handle additional customers?

Yes, we can handle some additional work here and there, Helane, but the Delta program pretty much fills up the capacity on a regular basis. So it will be three continuous lines related to the Delta program. So we're not at 100% capacity, but you always want to have some flex in there for dropping work for your own aircraft, dropping work for other folks. But our ability to take on another program, similar to Delta, just isn't there today.

Perfect. All right, well, thanks very much for your help. Everybody else covered my other questions.

Our next question online comes from Steve O'Hara from Sidoti & Company. Please go ahead.

Hi, good morning. Yes, I was just curious, I mean, in terms of the run rate for 2015. I mean, maybe some of the, maybe the way the stock's reacting, I mean, it seems like there's a potential for EBITDA to be down in 4Q in terms of if you kind of come into the guidance, I think, I mean, that would be maybe surprising, I would think, right, if the EBITDA for the quarter will be down year-over-year in fourth quarter?

I think if you do the math, Stephen, look at where we're at through three quarters and we're still holding our guidance at $190 million to $195 million, fourth quarter will definitely be up.

Yes, I guess, you're saying, Steve, compared to the prior year, if we hit the bottom of the range, you're saying, it will be lower than the fourth quarter of last year. I guess, mathematically, yes, slightly, but again, we're giving you a range. I think we feel we're likely to beat last year's number.

Okay. And then just, I mean, in terms of the 3Q EBITDA, I mean, if you add back the $7.5 million, take out the $2 million maybe from the previous quarter, I mean, I'm sure some of the $7.5 million is one-time, but I mean you guys are almost at $200 million right now, it would seem, assuming you do something above last year. So I mean, I guess, it seems like the trajectory is good. And then if I look at the number of aircraft in dry-lease with and dry-lease without CMI, I mean, it's up 30% year-over-year or it's expected to be up 30% year-over-year at the end of the fourth quarter, and I assume that's long-term dry-leases, which, I think, are more stable and profitable, is that correct?

I think we agree with your comments, Steve. We agree.

Okay, and then just finally, I mean, in terms of the CapEx, I think part of the story has been free cash flow and free cash flow production. I mean what's the appetite maybe going into next year for CapEx? I mean, obviously, if you can place an aircraft on long-term dry-lease, I mean, that would seem like a no-brainer, assuming rates are similar. But I mean, I guess, the ACMI piece cause a little maybe angina for some, and I'm just wondering, maybe what the -- would you expect CapEx to be down next year? Or maybe flat? Or I mean is there any way you think about it maybe?

Yes, I think, based on what we have now, it's -- we would say, it would be certainly on par with this year. Our CapEx plans are driven by our dry-lease and long-term placement opportunities, just to be clear. We don't -- the CapEx budget spend is not driven by the ACMI services segment. Remember, the ACMI services segment is a great tool to facilitate the placement of long-term asset leases. But it is not what drives the decision to add CapEx. That's more about our long-term placement opportunities.

So to the extent that the demand remains good as it is now for long-term placements, and as Joe mentioned, the duration of leases are getting longer, our particular asset type seems in great demand in the market, our regional midsized freighters, then we will invest in those -- in that demand, if customers step up and want long-term leases. So -- but I think, just without our specific guidance, I think it's certainly fair to assume that it's on par with the $165 million we're guiding to this year.

Okay, and then maybe just finally on the kind of ACMI charter expectation for 4Q. I mean, if there's demand for dry leasing, why -- I mean, it would seem like you could move some of the aircraft that are in ACMI charter to a dry-lease and maybe pull some of the aircraft from there first, assuming there may be 300s versus 200s, I don't know if maybe that's the issue.

You're exactly correct, and we have done that this year. As we said in our release, the aircraft that are in the ACMI segment are down about five aircraft from a year ago, and we have added long-term customer commits. We pulled some aircraft out of ACMI services to place in those long-term opportunities, whether that's been to West Atlantic or DHL, et cetera.

And so, we will continue to do that where the opportunities present themselves rather than, obviously, we won't buy an airplane if we have one that it makes sense to move. And I think the flexibility we have in our business model to do that, is, we believe, a great advantage for us.

Yes, I mean, the primary demand these days, Steve, is in the 300 category, which we're basically fully deployed from a 300 perspective. And that's why, as we mentioned, we've got another aircraft that we'll be acquiring this month, and it will be entering the modification process in December to deliver on an eight-year lease to a customer next year.

Keep in mind, don't look at the third quarter as being representative of what the ACMI Services segment does overall. As we noted going into the quarter, we were going to have a lot of additional maintenance expenses. I think Quint mentioned in his remarks that we had three more heavy checks this year than we did last year. And then of course, we also had the issue with the Thule Greenland combi runway being shut down. There's only one runway up in Greenland, but I guess, and they had to do some maintenance work on it in which you have a very limited window. And we'll probably see the same thing occur in the third quarter next year based on a lot of the feedback we're getting from the military.

So there's $1 million impact right there in terms of unabsorbed fixed costs associated with that. So that drops the loss in the ACMI Services segment by $1 million, and then you start taking in the maintenance expenses that we talked about. It gets back to a pretty level set.

Okay. So I mean, in terms of the outlook, I mean, the dry-lease aircraft looked up 30%, give or take, and I would assume more of those are in the 300s, so those are going to be, I would think, more impactful to the bottom line. You should have improving ACMI pre-tax as that maybe normalizes as demand improves, and then you start to get maybe the same impact from the Delta/maintenance business expansion. And I don't know if you've quantified what you think the impact going forward might be from there? And I guess that's my last question.

Yes. Previously, we said that the revenue run rate there is, call it, $20 million to $25 million a year, and we expect to - call it a 10% margin on that business.

Great. Thank you.

(Operator Instructions) Our next question online comes from Vikas Tandon from Bastogne Capital. Please go ahead.

Hey, guys. I promise again, no balance sheet questions. And congrats on a solid quarter. I think if anybody was actually paying attention to what you said on the second-quarter call, it looks like you guys came in a little better than expected. Unfortunately, maybe people weren't paying attention. A couple of quick questions. On Greenland, the shutdown that you guys mentioned there, Quint, I think you said it cost you basically kind of $0.01 a share of earnings. Should we think about the EBITDA impact basically to the same number around $650,000?

Yes, I mean, it's actually -- yes, I think that's right, the cost that's pretty close.

Okay. And that's, obviously, that runway is up and running, no pun intended again?

Yes, it is.

Okay. And is that business, that's like just lost, or would you expect to get some of that business back in the fourth quarter, some flights which maybe the military pushed while the runway was down?

I mean you're not going to make up much of anything. I mean what the combi does, you know, is a rotation of both people and supplies into that location. So we don't see any requests from the military for an increased number of rotations. They just soldiered through that, call it, three-month period where the runway would shut down. It will just pick up normal operations for the fourth quarter.

Got you, okay. And then the other part that I'm just sort of looking at is, when I look at kind of the fleet deployment that you guys put at the end of the press releases for every quarter, it seems like, at this point, you're expecting to come out of the year with 32 planes on dry-leases and in total, 56 planes deployed kind of versus 52 deployed, on average, throughout the year. The first question, the step-down this quarter on dry-leases from 13 to 11, the ones without CMI, were those CargoJet planes?

The two that came back, yes, they're both CargoJet airplanes.

Okay. And do we have anything else that's from CargoJet that is expiring this year or next year?

There will be two in the first quarter. We're just talking to them now and the question is, whether they want to extend or not, we don't have anything definitive at this point in time.

Right, but we --

Got you.

Maybe Rich, I don't know, would chime in here, but we feel pretty, very good about our prospects to redeploy those aircraft either way.

Yes, we won't have a problem deploying the aircraft. Again, as you saw in the third quarter, there may be a one-month or two-month downtime in between prepping the planes for their future deployments. But the demand is strong enough and we've got cash in hand from some customers for implementations. So we're pretty confident we'll be able to re-deploy those.

Okay, perfect. That's good to know. And then, I'll take the latest attempt to talking about 2016 while not talking about 2016. But in thinking about, kind of the puts and takes versus 2015, is the easiest way to think about this? You've talked about Delta, which will have, I guess, a small impact on 2015, but not a lot, just a little bit in the fourth quarter, and you've talked about $20 million to $25 million at 10% there? And then kind of puts and takes versus kind of what you got back from CargoJet versus new deployments, we basically have four additional planes out working? Is that sort of the easiest way to think about and then kind of what is the right lease rate for those planes?

Yes, certainly, following the aircraft and the EBITDA that's generated from the assets is probably the most logical way to model the incremental improvements in our results. As you guys know, the ACMI Services, it's certainly a segment -- it's providing a positive EBITDA contribution, but the lion's share of that is generated by the assets.

And so last part of this, new dry-leases you're signing, I know they're longer term, which is great, somewhere in the $3.5 million a year, give or take. Is that kind of the right number to think about as kind of what you get from a 767 deployment?

Yes, it's in that ballpark. It can be a little better than that, certainly, when you factor in all the other stuff. But, yes, you're in the right ballpark.

Okay, perfect. Well, thank you very much, guys, and, again, congrats on a solid quarter.

Our final question comes from Mr. Adam Ritzer from Pressprich. Please go ahead.

Good morning. How are you, guys, doing? Hey, could you just run by on the $165 million CapEx you're guiding for, how much of that -- how much of a pension contribution you need, or how much of that is maintenance in terms of your cash flows?

In terms of the maintenance portion of the $165 million, it's probably in the neighborhood of $50 million of that. The pension isn't part of that number at all.

Right. I'm sorry, just on top of that, not --

Oh, the pension. This year, it's in the neighborhood of $6 million, and I think that's similar to what we had in 2014.

Okay, so that's pretty minimal. I guess, the majority of the questions, clearly, have already been asked and guidance looks pretty good as you're adding the new planes. I guess the one thing, in the past, you guys have talked about is stock buybacks not being mutually exclusive with adding new aircraft. And I'm just wondering, with the stock trading at 5x EBITDA, maybe a little under, and you guys putting new planes in service that looks like above 6x, and debt actually is down from year-end, I guess, it'll be up in Q4 a little bit. Why we're not being a little more aggressive on buybacks with the stock at these levels, that people -- it seems kind of silly where the stocks trades at.

Well, I mean, I think, we take -- we certainly agree that stock buyback is an accretive way -- yes, it's accretive in terms of value generation for the shareholders, and we intend to continue down that path. I mean in terms of -- there's a whole bunch that goes into, I guess, the pace which you can do this in terms -- including the limitations based upon the trading volume of the shares and the availability of block purchases under a 10b-18 and other things, that sometimes come into play, Adam. But rest assured, I mean, we certainly intend to continue down the path of having, of allocating capital towards share repurchase as one of the ways we generate value for shareholders, and certainly, possible that we get more aggressive depending upon what opportunities are there.

Okay, but -- okay, I don't want to belabor the point, but it seems like if you could borrow money at 2%, I guess, everything's accretive. You have new aircraft coming on, that's accretive. You could buy stock back, that's accretive. It seems like potentially a 2% borrowing cost we could do a lot of both, I guess, at this time.

Okay, that's it. I really appreciate your taking my call. Thanks a lot.

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

Thanks, Richard. I'd hope you leave this call with the impression that ATSG is continuing on a growth trajectory, with opportunities here and abroad for our 767s and for our other air cargo services. We're devoting a lot of time toward building new business, even as we manage for a good fourth quarter. We hope to see some of you as we head out to tell our growth story to more investors. Thank you for joining us today and have a quality day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.