Air Transport Services Group Inc (ATSG) 2017 Q1 法說會逐字稿

Welcome to the First Quarter 2017 Air Transport Services Group, Inc. Earnings Conference Call. My name is Cynthia, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Joe Hete. Joe, you may begin.

Thank you, Cynthia. Good morning, and welcome to our first quarter 2017 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Commercial Officer.

We issued our earnings release yesterday after the market closed. It's on our website, atsginc.com. We will file our Form 10-Q with the SEC next week.

In 2017, ATSG is continuing to deliver exceptional year-over-year revenue growth under the leasing focused business model we adopted in 2010, along with improved profitability. Revenues rose 34% or $60 million in the first quarter overall, but $37 million excluding reimbursables, which is principally fuel cost. The gains were based on more external lease revenues from our 767 freighter fleet and especially more of the incremental flying, maintenance and ground services we perform for our principal customers.

Our good start for 2017 stems mostly from our March 2016 agreements with Amazon Fulfillment Services, which formalized and expanded peak season air network we have launched for them 6 months earlier. To date, we have leased them 18 of the 20 767 freighters we committed, and our airlines are flying them in the primary network across the U.S. We will deliver the remaining 2 by mid-July.

For the first quarter, our $57 million in adjusted EBITDA represents an 11% gain from the prior period and a first quarter record. Our adjusted EPS of $0.17, which is GAAP EPS, net of warrant effects, was significantly above last year's $0.13 and even better than we had anticipated when we last spoke to you in March. As I said then, we're still early in the stages of our growth phase, which we believe can extend well into the next decade. I will have more to say on that shortly.

It's Quint's turn to summarize the results for the quarter. Quint?

Thanks, Joe, and good morning, everybody. As always, I'll start by saying that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we 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 are not limited to, our operating airline's ability to maintain on-time service and control costs; the number and timing of deployments and redeployments of our aircraft to customers; the cost and timing with respect to which we're able to purchase and modify aircraft to a cargo configuration; the successful implementation and operation of the new air network for Amazon; changes in market demand for our assets and services; and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q 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. Management believes these metrics 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.

As Joe indicated, the surge in new business that we have talked about since we signed the Amazon agreements nearly 14 months ago is still going strong and will continue. Revenues increased 34% to $238 million for the quarter and grew 23% minus revenues from directly reimbursed expenses, which is mainly fuel cost.

Consolidated net earnings from continuing operations on a GAAP basis in the quarter were $9.8 million or $0.13 per share diluted. As we have advised you, the warrants we issued to Amazon starting in March last year affect our GAAP earnings in 2 ways: through the amortization of the lease incentive we granted starting in April last year; and through quarterly revaluations of the warrants based in part on changes in our share price. Adjusted for those warrant effects, our earnings from continuing operations in the first quarter were $11.2 million or $0.17 per share diluted. Adjusted EPS still includes other noncash items that we remove from our adjusted EBITDA and adjusted pretax results.

In the first quarter this year, these adjustments included $177,000 in pension expense, down from $2.2 million a year ago. Additionally, we remove unrealized gains and losses on financial instruments, primarily related to the changing value of the warrants. We had a $1.9 million gain this year and $0.5 million loss last year. Excluding those noncash items from both periods, our adjusted pretax earnings increased 6% to $17 million. On the same basis, adjusted EBITDA was up 11% to $57 million, which as Joe said, is our best ever first quarter performance against that yardstick. But to be clear about the underlying growth trend in our earnings, our first quarter adjusted EBITDA and adjusted pretax results still include $4.1 million in pilot-related cash expenses for training and premium pay, driven by our ramp-up for Amazon. Those costs are subsiding in the second quarter and will normalize as we match our workforce with our base of business.

Our leasing company, CAM, ended the quarter with 5 additional 767 freighters in service versus a year ago. Revenues were down $3.7 million from a year ago, however, largely due to the $2.6 million lease amortization item we are booking each quarter as we deploy 767s for Amazon. Revenues from external customers increased $2 million to $30.8 million. CAM's pretax earnings fell $6.2 million to $13.3 million. Other factors in our CAM revenues and earnings were lower revenues from maintenance services, lower engine leasing and part sales and revenue interruptions from transitioning aircraft. We expect CAM's revenue growth to turn positive in the second quarter, however, and continue to grow through the rest of the year.

From a growth standpoint, our airlines are benefiting from scale efficiencies from additional CMI flying for Amazon. Even as less predictable and shorter contract duration, ACMI operations have declined. Airline service revenues, which exclude revenues from fuel and other expense reimbursements, increased 6% to $108.1 million. Billable block hours rose 29% as the airlines operated 5 more CAM-owned freighters than they did a year earlier. Pretax margins remained negative with a $3.7 million loss for the quarter, which includes the $4.1 million in pilot costs I mentioned earlier. However, that $3.7 million loss improved upon last year's first quarter performance by $6.7 million. As our Amazon flight operations approach peak levels in the second half of 2017, we anticipate continued improvement in our ACMI Services margins, resulting in a small pretax profit for this segment for the full year.

The businesses we report as other activities continue to contribute a majority of our revenue gains after excluding reimbursables. Their revenues were up $34.2 million to $89.2 million for the first quarter before elimination of intercompany transactions. First quarter revenues from external customers nearly doubled from $33.7 million to $62.2 million. Principal contributors were logistic services, our cargo handling and ground support business and our newly acquired PEMCO subsidiary, which provides aircraft maintenance and modification services. Pretax earnings from these businesses overall increased by 24% to $4.8 million.

We spent $84 million of our capital during the quarter mostly for growth. That included purchases of 3 767-300 aircraft and 1 737-400 aircraft, all awaiting freighter conversion. We drew $60 million from our revolving credit facility to help pay for those purchases and pay down $10.3 million of other debt. We ended the quarter with a debt-to-EBITDA ratio of 2.3x.

Our debt under our revolving credit facility will continue to increase this year to accommodate our projected CapEx spend of about $355 million. Accordingly, we added $120 million more in capacity under our credit facility in March and extended it another year into 2022 with no change in our rate structure. The current interest cost for the variable portion of our debt is 3%.

We currently have no aircraft purchase commitments beyond those slated for this year. 6 767-300s will be in the mod pipeline at year-end for first half 2018 deployments.

We continue to repurchase shares consistent with our goal to offset the effect of long-term equity incentives and other share issuances. Those repurchases totaled $1.5 million or 90,000 shares during the quarter. That's a quick summary of our first quarter results.

Now I'll turn it back to Joe for his operating and outlook comments. Joe?

Thanks, Quint. We're off to a great start in 2017, and that momentum is beginning to show up in our share price, which has been setting new 52-week highs.

Our first quarter revenue growth of $37 million minus reimbursables stems from our larger fleet and from excellent logistics work on the ground. As in the fourth quarter, all of our available freighters were deployed in accordance with our customers' requirements. Our growth also reflects the dedication of the more than 3,000 men and women of ATSG. That growth will remain strong for the foreseeable future.

In the first quarter, we acquired 3 more 767 feedstock aircraft and through April, our first 2 737s, which are among 6 aircraft we will convert and lease to our customers this year after our Amazon deployments are completed in July. We will buy even more 767s this year for deployment in 2018 based on solid demand from both new and existing customers.

Through our 2016 year-end acquisition of PEMCO World Air Services, we have extended our capabilities into the market for smaller freighters based on converted Boeing 737s, which are popular in China. PEMCO also completed an important 3-year agreement with Frontier Airlines for heavy maintenance on its expanding Airbus passenger fleet.

Amazon and DHL, global companies that today use 40 of our cargo aircraft accounted for 41% and 26%, respectively, of our first quarter 2017 revenues. Along with our leased placements in Amerijet, West Atlantic and elsewhere, more than 80% of our 767 fleet was leased externally under long-term commitments at the end of the quarter, and that percentage will grow as we move forward.

CAM had a good first quarter despite lower revenues and earnings compared to an exceptional first quarter last year. CAM and its overseas leasing affiliate, ATSG West, will be solid cash generators with prospects in midsized and small freighter markets here and abroad.

Our other businesses are growing rapidly, too. Our aircraft maintenance business, AMES, is substantially larger and has broader capabilities, especially in the Airbus and 737 markets, with the addition of PEMCO as a division.

PEMCO's conversion resources are focused on the 737 freighters for airlines in China, where the 7 3 is the preferred solution for still-developing express networks. PEMCO is also broadening its 737 conversion capabilities beyond the 300 and 400 series classics and into the next generation series via the 737-700. PEMCO is converting 3 737s for YTO Cargo Airlines in China, and 2 more that our ATSG West Leasing unit acquired and released to Okay Airways, our joint venture partner in China.

Logistics Services, our material handling, sorting and ground support business continue to grow in the first quarter from cargo handling and refueling for Amazon. Effective Monday, however, Amazon shifted its hub operations to the Cincinnati regional airport in Kentucky. While logistics will continue to play a role in Amazon's ground support at other origin airports, we expect its revenues to decline significantly while it searches for new opportunities.

Our airline business continue to expand during the quarter as more CMI aircraft were deployed. The Amazon-related ramp-up cost we have mentioned in the past were lower in the first quarter by about $2 million versus the prior 2, and are diminishing rapidly in the second quarter this year.

Altogether, we grew our pilot rates by 110 during 2016 and added another 50 in the first quarter. The scale of our growing CMI fleet, our continuing ACMI customers for our 767 and 757 freighters and combi support for the U.S. Military will bring improved margins for an operating platform backed by key long-term commitments.

We remain cautiously optimistic about our profitable year for our ACMI Services segment. We are targeting an excess of $260 million in adjusted EBITDA for 2017, which will be more than a 20% increase from 2016, and our strongest ever annual growth in that measure. We will gain momentum as deployments continue, and we anticipate ending 2017 with adjusted EBITDA on an annualized run rate of $300 million.

We will, of course, update you on our progress as the year continues. As Quint mentioned earlier, we will have 6 more 767s to deploy next year if our delivery schedules and commitments remain on course.

We have identified strong prospects for all of them, and we expect to have commitments in hand later this year. These customers continue to approach us about future aircraft availability. Assuming extensions of our current leases and operating agreements, we will likely remain a premier growth story in the air cargo business for several years to come.

That concludes our prepared remarks, Cynthia. We are ready for the first question.

(Operator Instructions) And our first question comes from Jack Atkins with Stephens.

So I guess, just to start off, Joe, you mentioned something in the prepared comments about how you see a line of sight into ATSG having solid growth prospects into the next decade, and I'm just curious, just to kind of flesh that out for a minute because I think when people think about ATSG, a lot times they think about Amazon or DHL. But could you maybe just talk about the demand for your core 767 asset type and even your different asset types if you see demand there as well that could be attractive to you? And what's driving that? I mean, obviously, strong e-commerce, but what attracts people so much to that 767 platform?

Well, I think if you look, Jack, historically, and looking outwards as well is that everybody in the express and e-commerce businesses use the 767 as a primary platform, especially in the domestic side of the business. And so as we look at the demand from our specific customers today as well as other customers outside our 2 core, which are Amazon and DHL obviously, we continue to get request for additional aircraft lift. And of course, we're well positioned to be able to provide that going into 2018 with what we currently have under contract. As we mentioned, we got 6 aircraft that will be coming through the modification process in '18. And of course, we continue to look for assets above and beyond that of the 767 type. But right now, the key is to try and get them at a price that makes sense for us based on our targeted into service cost and our targeted returns. In addition to the 767s, as you noted, we've got 2 737s that we will be putting through the modification process to place in China, and we see a potential for growth in the narrow-body segment domestically as well as internationally as e-commerce networks continue to grow, so when you look at potential target opportunity of 737, obviously, we have STCs to modify the 300, 400, and are now starting on working on a 700 series, 737. And long term, if you look at it, we see opportunities for the 7 -- A321, excuse me, as a potential player in that space because it fits kind of nicely between the 737s and the 757s. So long term, that's where we see potential growth opportunities.

Okay, that's helpful, Joe. And then just kind of thinking about something you mentioned there a moment ago around feedstock availability and pricing. I know this is something that gets asked a lot, but as you sort of think about now that the other supplier at Amazon in terms of 767 lift, I think, has secured all its necessary feedstock for that contract. I know UPS has talked about, I think, it is converting, I think, 3 767 passenger aircraft into freighters. I'm just curious, as you look out over the next 12 months, do you think you're going to be able to find the feedstock for growth that -- at the returns that you guys are targeting?

I think it's going to be a bit of a challenge, Jack. But like I said, we're fortunate enough to have gone out ahead of the market in terms of having some available in 2018 already. And obviously, one of the things we don't want to do is overpay just for the sake of filling the slot because your low net cost for the rest of the time you own that asset, so it's really about being diligent in terms of overseeing what the market has available, and then making the right buys at the right time. You don't want to get too far out over your skis.

Got you. But would you think things would perhaps maybe loosen up here now that the other supplier to Amazon is complete with its purchases, maybe things will start shaking loose in the next 12 months?

Yes. I think it's probably going to be in the 9- to 12-month time frame before you start to see it.

Okay, great. Last question, and I'll turn it over. I noticed in the press release, you guys are not talking about EBITDA for this year in excess of $260 million. Before it's just on the $260 million number. Quint, maybe if you could just talk about what's driving that change in tone exactly so early in the year?

Well, I think as we said in Joe's remarks earlier, first quarter was a little stronger than we had anticipated certainly. And of course, we have more information about hitting target and into service dates that we had planned. This is a big year for us in terms of rolling out additional aircraft. And so I think that certainly what happened this quarter gives us greater confidence of achieving that and possibly exceeding that. And that's what we're trying to express. We want to get another, obviously, quarter under our belt, Jack, to really be a -- before we would relook at updating guidance that's why we stuck with the $260 million, but certainly, we're reflecting the confidence that this performance has given us. And you know, I think what's really exciting to us is where we're at, at the end of the year, as we hit that sort of exit EBITDA run rate of around $300 million, I think 2018 is really stacking up to be a very exciting year, another strong year for growth for us.

And our next question comes from David Ross with Stifel.

Just to talk a little bit about the maintenance side. PEMCO was a good acquisition for you all and made you think that a new deal with Frontier. They already had a deal with Frontier, so there is some maintenance related to them in the first quarter. What's the expectation for growth there under the new Frontier contract?

I think if you look at Frontier's fleet, I think they're around 60 aircraft today, so when you think about that over a 3-year time frame, it's quite a bit of volume going through. Certainly, the first quarter of 2017, the PEMCO hangars were pretty much full, and so that run rate will continue. And I think as we mentioned last year as where our year-end results, we talked about the fact that we would be losing the Amazon hub operation here, and our expectation was that the PEMCO book of business would continue to absorb about 50% of the loss that we would see on an annualized basis from the loss of the Amazon hub operation. So there's only a finite amount of hangar capacity that you have at any given point in time. But we're pretty excited about the prospects with PEMCO, especially with the number of conversions that seemed to have cropped up as of late. And as we noted in our press release, we have backlog of 10 freighter conversions, so that is an addition to what we expected to get from just the routine maintenance portion which was a primary driver for the acquisition to begin with.

And then just to kind of get some clarification on some of the numbers you gave, so I'm thinking about it correctly, and the release has said that CapEx were -- a lot of the CapEx this year is related to 11 modifications of the 767-300s. And I think 6 of those are going to Amazon and then 5 are going elsewhere? Or is it the other way around, 5 and 6?

There's 6 leases that will start for Amazon in 2017. One of them, Dave, started like January 4 or something, so substantially, that CapEx was last year. It's almost easier to think about it in terms of full equivalent on the investments for these 300s. We say we spend $23 million to $25 million a copy. And there's some in process at the beginning and the end of the year, so if you multiply it by 11, and then add the sort of maintenance CapEx level of $70 million to $80 million, you get pretty close to that $355 million CapEx number that we put out.

Okay. And then you said you don't have contracts for those, I guess, 9 Amazon conversions yet, but you're in the works and may announce something later this year?

We have terms that have been agreed, significant terms and we hold deposits. And it's very typical in our dealings that you wouldn't ink the actual final lease until the aircraft is pretty much through its cargo modification.

Okay, but there's an LOI or something where you're not going out and buying too much of those on spec.

As we look out in 2018, out of all the aircraft that we have right now, what is a rich 2, that we really don't have firm prospects, call it.

Right. That's correct.

With the pilot training cost, you're talking about the $4.1 million for pilot training and premium pay. Was the premium pay also part of the training? Or is that anything separate.

No. The premium pay was a carryover from the same things that we talked about last year for the third and fourth quarter. Last year, the number in the third and fourth quarter for the premium pay was about $4.5 million a quarter. The first quarter, that dropped to about $2.5 million, and we're basically out of the woods on that piece of it at this point in time. And then the balance of the $4 million is carrying pilots through training in anticipation of flying the line in a couple of months as the Amazon aircraft come online.

Okay. And those premiums...

If you think about second quarter, the premium pay goes away. There'll be a little bit of a tail on the training piece.

Yes, that makes sense. And then as far as the reduction in pension expense, that's something we haven't heard certainly in a while. Is that going to be a benefit the rest of the year as well?

From a GAAP standpoint, it absolutely will be, Dave. It's a -- as you know, we adjust that out on the adjusted non-GAAP reporting because it is sort of a noncash expense. And what drove the reduction is the strong asset returns in that pension portfolio last year. I think -- and of course, you're a hero one minute, and a bum the next, I guess, but last year, we just had really strong returns in that investment portfolio. And so that as we indicated it, it dropped from about $2.2 million down to just a couple of hundred thousand dollars a quarter.

And our next question comes from Helane Becker with Cowen and Co.

Just a couple of questions. On incremental aircraft that you're getting later this year or next year, do you already have customers signed up for those?

Helane, we've got LOI signed up and deposits on all the aircraft that are being deployed this year, and some into next year. We have a couple of airplanes, and then we have a significant interest in the remaining airplanes. So we're very confident that all the airplanes that will deploy through 2018 that we're acquiring will be deployed.

Okay. And then my other question was with respect to the -- I think, Joe, you said something -- you talked about the hub operation going away on Monday, so what line item does that come out off?

In terms of the segment reporting?

Yes.

It comes out of the other category. We still -- Helane, on an annualized basis, the impact of losing that hub is probably $7 million to $8 million of EBITDA. And we expect that the PEMCO acquisition will take care of at least 50% of that.

And they're both currently in that other businesses category, Helane.

Okay. And then my other question was, I think, that was it actually -- those might have been my -- I'm sorry, that might have been my only 2 questions. I might have had a third, but I can't think of what the third one might have been. So I think we're good.

And our next question comes from Kevin Sterling with Seaport Global.

Quint, did you say ACMI block hours were up 29% year-over-year, did I hear that right? Or am I hearing things in my head?

Yes. As we've said in the past, the Amazon network in particular has higher utilization. We've -- they're operating pretty much 7 days a week, and so that drives a lot of that, Kevin, but the block hours were about 22,552, I think, roughly for the quarter. The year ago quarter was like 17,500.

Got you. Okay. And going back to the planes, you guys have a mod for '18, where you have LOIs, are those in your $300 million EBITDA guidance for '18?

The EBITDA guidance for '18, remember, that's the exit multiple going out from the fourth quarter of '17, so anything that we do additional in terms of additional books of business in '18 will be additive to that, Kevin. So they're not in there.

They're not in there? Okay. Wow, okay. And then -- I think -- did Rich say you guys had 2 where you, I guess, don't have LOIs for, is that the right number?

We have a couple that don't have obvious placements that we either are well down the path on or have LOIs on, Kevin. In other words, we're still kind of actively marketing a couple of airplanes.

One of the things we always like to do is well before we give up the last known asset that we have is to go back to our 2 core customers and make sure there's no requirement there because they always take first priority.

So I guess what I'm getting at, you guys got some planes in mod as we think about '18. You've only factored in that $300 million EBITDA number just based upon your current fleet configuration that if you're able to place 6 or 8 additional planes that you have, obviously, that could be potential upside. Did I summarize that right? Am I thinking about that right?

You're thinking about it exactly right.

Okay. And Quint, a little bit, you mentioned the $4.1 million in pilot training cost, and that's obviously coming down, so you're getting some real cost leverage there. What's a good run rate for that going forward? How should we think about that going forward?

Yes, I mean you're never going to see 0 there because the mechanics of the labor agreements with some of the pilot contracts require some of that to be put into open flying and be bid up and so forth. I'd say probably, what about...

Well, the number we talk about, Kevin, when we talk about the $1.5 million, that's for new hire trainee. The recurrent and everything else, the pilots that are already qualified is baked into our core numbers. So when we talk about the $1.5 million, that's just for guys sitting on the payroll, new to the company that really aren't being compensated by a customer until such time that they hit the line.

Okay, got you, it makes sense. And then you talked about, I think, ACMI -- your ACMI segment being slightly above breakeven by the end of the year. Can we expect it to be profitable in Q2? Is it more of a Q3, Q4 event?

3 and 4.

Yes.

Okay. Lastly, obviously, I can hear the excitement in your voices as you look at the opportunities through many channels, the Chinese joint venture, growing with DHL and other e-commerce customers. And so as these opportunities arise and Jack was asking the question about feedstock, if these opportunity arise, and Quint, it's probably more of a question for you, given where your balance sheet is today, do you think you have ample room to kind of fund these opportunities? And obviously, if you get a huge order, that's a good thing. You may need to find some other avenues, but as you look at your balance sheet today and your EBITDA generation, obviously, and your free cash flow, are you comfortable with maybe adding on another tick or 2 of leverage to really fund some growth opportunities as they arise? Or how should we think about maybe funding going forward when we look at your growth opportunities?

Well, I mean, I guess, the answer is yes, we certainly would be comfortable with that. And if you think about it, next year, I think we mentioned in the earlier remarks, we really don't have any committed airframe purchases in 2018. We have 6 that will be sort of in work, getting their cargo conversion going into 2018, but that leaves us a lot of -- there's a lot of cash flow as we exit the year with that $300 million-or-so clip of EBITDA. And so we'll delever, unless we find more opportunities, and we're probably going to end the year certainly under 3 terms, so we're -- the balance sheet has an awful lot of liquidity, there's a lot of cash flow ahead. And we have -- we can sort of select how we want to allocate that capital based on the growth opportunities.

And our next question comes from Steve O'Hara with Sidoti.

I just had a question, I guess, first on China. I'm just wondering where that is in terms of all the approvals necessary. Have we kind of crossed the finish line? Are we getting closer, but not really sure? If -- I mean, it seems like the regulatory environment over there is a little bit more tougher to discern than over here, but I'm just wondering where that stands?

No, that's a good question. This is Rich. It's slow. We're -- we were hoping to get the AOC approved by the end of the year. There were no AOCs, no cargo AOCs approved in China in 2016 at all. And they -- the CAC had taken a step back to really evaluate where they wanted to grow airlines, what type of airlines they wanted to grow, et cetera. So -- and it has been slow and administratively thick, which is why Okay, our partner, made the decision to take those 2 737s that CAM will be, or I should say ATSG West, will be leasing to them because we didn't want to continue to see opportunities -- growth opportunities go by in China. And we'll continue to do that until we get the AOC approved. But we knew it was going to be a long road. One of the reasons we selected Okay is because they have started 2 AOCs prior and thought that them, as a partner, would help us maneuver that regulatory area quicker, but that has not helped at this point. So we're hoping for early 2018, and we're continuing to move through the process.

I think, Steve, to add to that. I think one of the key things is we look to China as a market for deploying capital by placing aircraft and one of the reasons we want to get into a joint venture was to get a priority in terms of being able to lease assets in. But the primary driver was about placing assets there, not so much about generating operating profits from a JV. So with the 2 737s we're placing there, we're still moving ahead strongly in that respect.

Okay, so it's -- for now, it's a dry leasing opportunity. And then there's potential upside from the JV with some ownership, and I guess operating profit on a business there after the approval.

Exactly. The other significant opportunity is the conversion business that PEMCO has generated. We've got a backlog currently of 10 aircraft, most of those are going into China and they have great relations. They have 70% market share of the 737 cargo conversions in China and great relationships with the airlines there. So that will continue to be an opportunity that we will leverage as we get into the leasing side of the business.

Okay. And just, I mean -- with the -- I'm not sure, I guess, there's a double -- maybe a double bottleneck on the 767 conversions, getting suitable aircraft and then getting a conversion slot. I mean would PEMCO look at converting 767s? I mean, what's the leap, engineering leap or whatever there is to kind of go from a 737 to a 767?

We would not do that at PEMCO unless it was just under contract to say IAI, who's our primary conversion house. But to develop our own STC, just doesn't make any sense at this point in time, and we'll focus on that 737 for the time being. As far as being tight on conversion slots, certainly through '17 and part of '18, things were a little tight, but if we come up with additional assets, we can secure the slots for the latter part of 2018.

Okay, okay. And so I guess the -- I thought you said that feedstock was, I guess, not plentiful, and maybe the prices are going up. Do you see that loosening up? Or do you see additional capital coming into possibly try and get some maybe additional Amazon business? How do you see that playing out? I mean is there a waterfall event that begins with the 767 as they start to age? Do you think there'd be more than enough supply?

Well, I think if you look, there's still quite a few of them out there, there's probably over 500 conversion candidates still flying in passenger configuration today. It's just a matter of when there would be current operators of those aircraft determine that their surplus to their fleet. We had expected when we've started expanding the 767-300 fleet 2 years ago that by now the 787 would have basically ended up dumping a lot of the aircraft on the marketplace. But talking to some of the current operators, they said their growth demands it. And they're -- apparently some of them run into issues with being able to keep the 787s flying because of some particular engine issues. And so it's delayed their ability to put them on the surplus market. But I think when you look out over the next 12 months, that we will start to see the market ease up a little bit.

Okay. And then maybe just one last follow-up. Can you just remind me in terms of your 3 large customers who they are, I assume it's DHL, Amazon and who the third one is. And then just with the facility, they're putting together in Northern Kentucky, I mean, I think there's 100 slots. I mean, it seems like their future demand for aircraft should be pretty decent and maybe just how you think about that going forward.

Yes, Steve, of course, the 3 largest customers are the same 3. Although, we've had some, I guess, flip with Amazon being the largest now; DHL, second; and then the military. Of course, with the growth in overall revenues and the fact the military is really a stable piece of revenue, it's going to become a lower percentage. I think it was a roughly 7% for the quarter, and it had been running last year around 12%, and that's just the growth in the other revenues that's driving that. But Amazon was in the 40s this time, and DHL, I think, was...

26%.

Was around 26%. So those are the 3 largest. And together, they were, what, about 73%-or-so of the revenue for the quarter, and with the rest pretty diversely distributed between the maintenance businesses and our Logistics Services, et cetera. Additional dry lease customers and so forth.

An interesting note is we're on track right now in 2017 to lease as many or more planes to other customers other than Amazon and DHL this year. So we're building the customer base outside of them, but they are significantly large in themselves.

Okay, I mean, is there -- I guess what I'm getting at, I mean, is there anyone that's taking additional aircraft that -- or is it kind of a bunch of smaller competitors that your -- customers that you're dealing with or is there somebody emerging as kind of the number -- potential #3 down the road?

Well, I mean, certainly, Amerijet is a sizable customer of ours down in Miami. And they continue -- we've got some new customers that are not part of our past mix necessarily that are interested in dry leases, and I think you'll see some of those names emerge as we go forward.

The significance of both DHL and Amazon is they are customers of all of our subsidiaries, so they lease an airplane, they sublease it back and we fly it for them, they also take advantage of maintenance services and they take advantage of logistics as well. Logistics has the contract to do the MHE for DHL, we do all the handling for Amazon. The other customers like Amerijet, I mean, they're going to be growing their fleet really significantly, and -- but they only lease airplanes. So we don't do too much of anything else for them, and we're doing a little bit of maintenance for them, but they're not that customer that laces through all of our subsidiaries.

And our next question comes from Christopher Hillary with Roubaix Capital.

I just want to ask with all the discussion on the difficulty in getting incremental capacity to the market, is that something that shows up in rates?

As a general rule, it's not going to show up directly in rates. But if the market gets tight enough, people aren't going to have much of a choice if they truly need the asset. But as I said earlier in my remarks, one of the things, if you overpay initially to fill a slot today, you're going to own that cost for the rest of the time that you own that asset, so it's all about being disciplined in terms of the acquisitions you do. And now if a customer came and said, "Look, I don't care if I got to pay more." You'll take it for a long-term lease, remember it's got to be long enough to recoup that extra cost, and we certainly could go after it in that fashion. But we try to be more disciplined in our approach to the acquisitions.

Okay, great. And then just maybe one other one. A lot of focus on the impact of your e-commerce customers. But are there other areas that you can identify where growth is strong or perhaps where it's weak, just to sort of understand some different parts of the business?

Our assets are really targeted at regional markets, and regional markets tend to flow off that express-type business. We have the joint venture -- I'm sorry, the investment we made in West Atlantic, they're flying in Europe, a tight -- a nice tight market, regional market for the 767. The China joint venture, United States, we get 2 networks up there. One of our good leasing customers in Canada flies for UPS and the Canada Post, so we are heavily leveraged towards express markets going forward. Now with that said, they're going very strong all over the world. Southeast Asia, in particular, Europe's got a growth resurgence. U.S.A. is very strong growth. And so those markets are growing strong. There's other stable markets like perishables. We do a good business out of Miami down in the South America's ACMI business, that's just stable business. So there's other markets, obviously, that we don't compete in like pharma and some other things that are growing. But as far as our network to our interest in the assets that we deploy go, it's really those express markets and those are heavily influenced by both e-commerce and express fulfillment.

And we have no further questions at this time. I will now turn the call back over to Joe Hete for closing remarks.

Thank you, Cynthia. It's been almost a year since our ATSG shareholders approved the proposals to support our long-term operating agreements with Amazon. This year's annual meeting is tomorrow, here in Wilmington, where we will announce this year's votes, share more of our growth story and take your questions. Whether you attend or not, Quint, Rich and I appreciate your support and hope to continue to reward your confidence with even better results in the future. Thank you, and have a quality day.

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