Air Transport Services Group Inc (ATSG) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 Air Transport Services Group, Inc. Earnings Conference Call. My name is Christine, and I will be your operator for today's call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the call over to the Joe Hete, President and CEO of Air Transport Services Group. You may begin.

Thank you, Christine. Good morning, and welcome to our Second 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 later this week.

In the second quarter, ATSG delivered strong revenue, adjusted earnings and EBITDA growth including a pretax earnings contribution from our airline businesses. The gains were based on more airline, maintenance, logistics and conversion services for a wide range of customers.

This week, we are marking two significant achievements:

Our announcement yesterday morning of a new joint venture with Precision for passenger-to-freighter conversions of Airbus A321-200 aircraft,

and later this week, the delivery of the 20th leased 767 to Amazon, completing our commitment to them.

The Precision agreement marks our second investment in the conversion market and our first in the Airbus airframe. The A321-200 is a long-range narrow-body with cargo capacity like the Boeing 757 and operating efficiency like the 737. We have a long history of working with Precision on our 757 freighter and combi fleets and look forward to adding the A321 to our fleet when the joint ventures program is approved.

For the second quarter, our $64.2 million in adjusted EBITDA represented a 23% gain from the prior-year period. Our adjusted EPS of $0.21 from continuing operations for the quarter was $0.08 better than a year ago.

We remain confident about a good second half and continue to target $260 million in annual Adjusted EBITDA this year. 767 conversion delays by our contractor will shift some revenue growth into 2018, and recent changes in the air network routes for our principal customers have tempered our outlook for block-hour growth in the second half.

We are positioned for significant revenue growth and improving earnings in 2018 and beyond. I'll have more to say on that shortly after Quint summarizes our 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, timing and scheduled routes of our aircraft deployments to customers; the cost and timing with respect to which we're able to purchase and modify aircraft to a cargo configuration; 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 later this 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.

Our second quarter results were very strong on both the top and bottom line after excluding warrant-related and other non-cash adjustments from our GAAP totals. The warrant valuation adjustments were very large this quarter, but for a great reason. Our stock price increased 36% during the second quarter. That contributed to a large increase in the fair market value of the warrants issued to date, which in turn triggered a large GAAP loss for the quarter.

Revenues increased by 43% to $253.2 million for the second quarter and by 39% to $491.1 million for the first half, compared to the corresponding periods of 2016. Excluding payments for fuel and other directly reimbursed expenses, customer revenues increased 37% for the quarter. All of the company's principal businesses generated revenue growth, as aircraft leases, airline operations, aircraft maintenance and logistics services volumes all increased versus last year.

Revenues from Amazon were 42% of our consolidated revenues for the second quarter compared to 22% a year earlier. DHL revenues were 25%, down from 37% a year ago. U.S. Military revenues were 7% of the total versus 13% in the second quarter last year.

Our GAAP net earnings from continuing operations were negative for the quarter due to the warrant effects. Our GAAP loss was $53.9 million for the second quarter, or $0.91 a share. That compared to GAAP profit of $11.5 million, or $0.12 per share in the second quarter of 2016, which included a gain of $3.7 million related to warrant reevaluation.

On a pretax basis, second quarter earnings included losses of $67.6 million for the re-measurement of financial instruments, mainly the warrant obligations. This compares to pretax net gains for re-measurements of $5.6 million in the prior year. Other second-quarter pretax earnings adjustments included $3.3 million for amortization of lease incentives, also for the Amazon warrants.

Adjusted pretax earnings increased 39% to $22.6 million for the quarter, driven by improved financial results of airline operations and our support services businesses reflected in other activities.

Our adjusted EBITDA for the second quarter was $64.2 million, up 23% from $52.1 million in the prior-year quarter.

Depreciation and amortization expense increased $4.6 million from second quarter 2016, as eight 767-300s and additional engines were added to our fleet since June of last year. Depreciation expense is expected to increase consistent with our fleet growth.

But as we also noted in our release, the increases in depreciation from fleet growth will be offset in part by a new agreement we negotiated with Delta TechOps for engine maintenance of our GE-powered 767-300 freighters. Under the new power-by-the-cycle arrangement, we will record as maintenance expense payments to Delta for those services, which previously have been capitalized and depreciated. That new agreement is expected to increase maintenance expense by approximately $3 million to $4 million in the second half, with a corresponding decrease in second half Adjusted EBITDA.

We are pleased to report that our ACMI Services segment turned profitable for the second quarter, ahead of expectations. Net of reimbursables, revenues rose 14% fueled by continued growth in Amazon deployments. Flight crew costs were lower in the second quarter than in the first quarter as staffing reached targeted levels for CMI operations. As the 20th Amazon-leased 767 enters service, our businesses will be flexible and fully prepared to support them with flight crews, maintenance and gateway resources as their plans require.

CAM, our leasing business, continued to generate year-over-year revenue growth in the second quarter as its external 767 lease placements expand. It also signed agreements with Northern Aviation Services for three 767 freighters it will dry lease to them starting in October; the last two will be leased and deployed in early 2018.

Our other activities businesses continue to generate operating revenue and pretax earnings growth as our maintenance and logistic services businesses both expanded sharply year over year. Our most recent acquisition, PEMCO, is accumulating a significant backlog of business under its new agreements for aircraft conversion and MRO services.

Cash payments for capital expenditures were $144.3 million for the first half, mainly for the purchase of passenger aircraft and cost to modify them into freighters. Spending included $96.7 million to purchase three 767-300s and two 737-400s and modification costs for other aircraft, as well as $31.3 million for required capitalized heavy maintenance.

We now expect capital expenditures in 2017 to total about $335 million, of which $265 million will be aircraft purchases and modifications. A significant part of that reduction of $20 million since we last gave you guidance is due to delays in our contractor's passenger-to-freighter conversion process. As a result, two 767s we had previously planned to have ready by year-end won't be completed until early next year.

Share repurchases during the first half included $11.2 million to buy 530,637 shares of the Company's common stock through our continuing share repurchase plan. Most of these were purchased in June through an offering of shares by an affiliate of Red Mountain Capital Partners. We're pleased that Red Mountain is continuing as a major shareholder of ATSG, with representation on our Board, and also happy about the increased diversity in our shareholder base that the underwritten offering yielded.

That's the summary of our financial results for the quarter. Joe is ready to share some outlook comments. Joe?

Thanks, Quint. We're very pleased about our progress in 2017, both in terms of our financial performance and the market's response to what we have accomplished. Our share price grew another 36% in the second quarter. Today, I'm equally confident about our future, although it appears that some of the momentum we had hoped to carry over from the first half may be deferred into future periods.

Our own fleet of fifty-six 767s at June 30 is by far the largest lease portfolio of midsize wide-body freighters in the world, and the core asset around which we have built a very strong collection of services for customers seeking integrated cargo air network solutions. We have two airlines with good reputations and on-time performance records, and an expanding array of maintenance, conversion, technical and logistic services to back them up.

The agreement we announced yesterday with Precision adds another key piece to the range of capabilities we think the freighter market will be looking for in the years ahead. We know that the Airbus A321-200 airframe type has qualities that are especially attractive to customers running regional airfreight networks in Europe, Asia and North America.

It has cargo capacity similar to a 757 and the efficiency approaching that of a Next-Gen 737. We are pleased to partner with Precision in this venture given our long experience with them to add converted 757 freighters and combis to our fleet. We expect to be ready to purchase and deploy these Airbus freighters on behalf of our own customers as they become available, hopefully starting in 2019.

In a similar way, we worked out a new agreement in June with Northern Aviation Services, a longtime ACMI customer, for dry leases of three 767s from CAM starting this fall and completing in the first quarter of 2018. Northern Aviation has relied on ACMI arrangements with our ATSG airlines for proof-of-concept service between Hawaii, the West Coast and other points in the Caribbean and Continental U.S.

With their homework done using our Wet2Dry concept, they're ready to take on at least three of our 767s and possibly more next year for long-term dry-lease commitments. We expect to continue to support them through our CMI capability until they complete the process of adding a 767 certification to their airline certificate.

These three leases, plus two more to Amerijet and CargoJet later this year, complete the external portion of the five incremental 767s freighters we said we would deploy after meeting our commitment to Amazon. One other freighter will be leased internally to ATI. It will provide maintenance back up and be available for charter service. PEMCO is converting two 737 aircraft into freighters, which we also expect to lease this year.

We had earlier hoped to complete our aircraft delivery commitments to Amazon in mid-July and the rest of our 2017 deployments by late in the year. The delays at our aircraft conversion contractors stretched out our delivery schedule and will have the effect of deferring approximately $2 million to $2.5 million of adjusted EBITDA into next year.

We expect to deliver eight more 767 freighters next year, mostly in the first half. We have customers targeted for each of them when they complete their conversions. With market data showing a strong surge in demand for freighter capacity moving into 2018, we expect to be beneficiaries of this upward trend.

Our airline operations have improved markedly with a $13.9 million year-over-year improvement in pretax results for the first half. ABX Air and ATI now have the pilots and support staff they require to support the scope of CMI and ACMI services our customers say they want.

As we mentioned in our earnings release, we received new schedules late in the second quarter for the aircraft we leased to and operate for our principal customers on a CMI basis. Those changes have reduced our block-hour run-rate per aircraft starting in the third quarter. Our new outlook for 2017 is based on current CMI route assignments. Those assignments however, could change again before or even during the fourth quarter peak season.

Quint also shared with you the change in how we pay for engine maintenance on our GE-powered 767-300 aircraft. Those payments will now be expensed as incurred and no longer capitalized and depreciated as before. Both we and our customers benefit from this new arrangement with lower operating expense and improved and more predictable cash outlays.

The scale of our growing CMI fleet, strong lease demand for our 767 freighters, and expanding volumes in our MRO and freighter conversion capabilities will continue to keep our business growing and strong. We remain optimistic about good overall growth in revenues and profitability in 2017 and beyond.

That concludes our prepared remarks. Christine, we're ready for the first question.

(Operator Instructions) And our first question is from Helane Becker of Cowen and Company.

Just a couple of questions. As you think about the business after this last or for now Amazon aircraft going into service, how should we think about the revenue growth rate? Because 43% is that -- I mean, obviously, 43% revenue growth rate is pretty substantial, and I don't know how sustainable that is. So how should we think about that going forward?

I think when you look at the revenue side of the equation, Helane, that the marked increase in the revenue is related to the ACMI operations. If, for example, that the only thing we did in the future would be to dry lease aircraft to third parties, you wouldn't see near that trajectory of revenue growth. So it really depends on where the ultimate aircraft ends up.

Okay. And then on the conversion delays, is that because of parts? Is it because there were issues with the manufacturer? I'm trying to figure out what happened that the timetable slipped.

Yes, I think there's a combination of factors, not the least of which is a significant number of aircraft being modified by IAI over in Israel. So it's a combination of their parts suppliers not necessarily meeting their timetables, as well as the availability of the labor pool over there to handle that many modifications at one point in time. But -- call it, on average, a 30 to 45-day slippage.

Okay. And then my last question is just on the A321 announcement this morning. So as I understand it then, those aircraft are going to be modified for you to go into service at CAM to be leased to other customers, is that what you're saying?

Well, basically, we would be -- just like any other person that develops an STC for modifying the aircraft, you'd be looking for multiple potential users. Certainly, we would be one of those, in terms of acquiring the assets and then leasing them out and potentially operating them on behalf of some of our customers. But it wouldn't preclude a third party from coming in saying, "Hey, I'd like to..." a leasing company, for example, that has some of them on their portfolio, they would want to have them modified to freighters and lease to other folks.

Okay. So that has to go on your operating certificate, too, right?

If we want it operated at that point in time, yes. But we look at it from the standpoint of the vertical integration to where we could ultimately be ones that did the actual modification work. I mean, of course, there would be other people, say in China, for example, that could actually do modifications of the aircraft, but we would participate in both the sale of the STC to do that, then modification work, the leasing and, of course, the operating.

Okay, perfect. And then just one last question for Quint. Quint, you said something about $20 million this year is due to delays in the conversion process, is that a revenue number? Is that a CapEx number? I kind of -- you had so many numbers going by so fast, I missed it.

Yes. I have a tendency to do that, Helane. It was CapEx. And we had -- when we spoke to you last in May, we talked about $355 million as our estimated CapEx spend this year. And with the delays Joe spoke of in the conversion line, as well as the impact of what we mentioned about the engines for the 767-300 going to a sort of a power-by-cycle expenses incurred rather than capitalized, you're going to see a reduction in the capital spending guidance to $335 million from $355 million.

Our next question is from Kevin Sterling of Seaport Global.

So Joe, you talked about your customers changing their networks and impacting utilization. Could you give us a little more detail -- what do you mean by that? How are they changing their networks? Assume it's more maybe a little bit hub-and-spoke flying and kind of some of the just tremendous growth they're seeing may have impacted utilization. And then as we get into peak season in Q4 for a lot of your larger customers, is it -- could we see utilization kind of tick back up to where we were being at before May? So maybe just give us a little bit more color around how these networks are changing, if you don't mind.

Yes. No, Kevin, from the standpoint if you look at our total block hours, essentially if you think about the second quarter we added three 767-300s with our customers, and yet block hours on second quarter versus first quarter were essentially flat. So as you develop your network in terms of adding more aircraft into the network and changing route structures, you can see efficiencies. I mean, if you think about it a FedEx, or UPS or DHL, they all do a hub-and-spoke network for one reason, that it allows you to have more efficient operation of your aircraft overall. So as more aircraft come in and they develop that network and it evolves into something that's more efficient, then what was primarily a point-to-point before, you're going to see an ability to reduce your overall flying and it's just a matter of how much of that comes with -- to us versus the other provider for Amazon and DHL. Both of them have tweaked their networks over time. As you move into peak season, obviously, you anticipate there's going to be more flying just from pure volume standpoint. So kind of what the indication we gave is based on our current run rate and that's not to say that, that won't change come September-October timeframe.

Got you. Got you. Okay. And it sounds like maybe a little bit is getting pushed into '18. You've got the production delays you talked about it and then obviously, things like an accounting change essentially moving from capitalization of expenses to -- from capitalization to expensing that Delta maintenance work. But if I'm not mistaken, it sounds like demand is still kind of off the charts, indications are off the charts for you because you -- I think you talked about demand for your three remaining aircraft with multiple parties. So along those lines, Joe, are lease rates going up? Because I've been following you guys a long time, if I'm not mistaken, historically, you may discount slightly to extend the lease. But maybe in this environment, just given the strength we're seeing, are you maybe able to get a little more price this cycle than previous years?

Well, I think, Kevin, if you look at it overall I'll let Rich weigh in with his comments as well, but overall you think about it in terms of first and foremost, is how large is the volume of aircraft this particular customer is going to take. If it's a one-off that I want one airplane versus somebody like an Amazon or DHL is going to take multiple airplanes, good solid credit versus, in a way, little bit weaker credit is really going to be a key driver in terms of what the lease rates are that you charge them. Certainly, the market overall, I think, is -- has tightened up a bit from a lease-rate standpoint based on the fact that there isn't a whole lot of available aircraft out there today. So if some current non-customer approached us, they would probably end up at a higher rate than somebody who's been a continuing customer. Rich, you want to...

Yes. I think, the other side of that is if you look at the projected lessees that we have going into 2018, we're getting into some of the smaller airlines as opposed to our current large customers of DHL and Amazon. So they -- given that they're smaller and they're taking fewer aircraft and the risk may be higher to our credit standpoint, the lease rates will be a little bit higher. In terms of how high can you raise the lease rate, it's important to understand that when customers are evaluating the aircraft, they're evaluating the performance of the aircraft and its ability to handle freight and weight, and freight-ton kilometers. And so there is a number by which an aircraft won't make any more sense even though it's the right aircraft for the mission. In terms of leases coming due and turnover, most of our customers that have leases coming due have asked for extensions. And so we're working through some of those as well. And once -- and usually, you may see a slight drop depending on how long they're going to extend those leases. But as of right now, we really can't project what's that going to look like until we're done.

Got you. Let me touch on the A321 conversion opportunities that you talked about a little bit, but maybe ask it a different way. Because it seems like the ability to get feedstock, maybe particularly Boeing aircraft, is pretty tight right now and demand is strong. Have you had customers come to you just say, "Hey, look, I need aircraft." And is that part of the reason for the Airbus opportunity as a way to get additional feedstock? And I'd imagine you may have already had conversations with some of your customers about the Airbus expansion and that could be well received. So I'm just curious as we think about this Airbus opportunity, is it some -- is part of that opportunity customer-driven, with customers looking for a feedstock above and beyond just the Boeing family of aircraft?

Kevin, it's a good question. I think if you look at the market, on the narrow-body market today, you've got the aging 737 Classics, the 73-3s and the 73-4s and you've got the 757s, and feedstock for those particular aircraft are getting extremely tight. And regionally, they can be even more problems getting the airframe. And so when you look at that, it's what's the next best aircraft to fulfill the needs of the narrow-body and really, the A321 is the only large narrow-body that's going to be available in the market. And the cube that it has can compete very well with the 757 class of freighter, but the operating cost of that airframe is lower and can compete with 737-800 as an example but carry more cube. And so when you're looking a year to two years out, and these problems are only going to get worse for the older freighters and people are going to want -- customers they're going to want the newer generation aircraft, the A321 is best-in-class in that large narrow-body segment.

And then when you think about the operating cost associated with it, I think it's -- we operate the 757, for example, and the operating costs for a 321 with as Rich mentioned, the comparable cube, is significantly lower than the 757. So if you look at the whole evolution of e-commerce and express marketplace, it's not the weight-carrying capabilities adding more that drives the aircraft requirements, it's more about the cubic capacity. And the 321, in our view, is the hands-down winner from a cubic capacity versus cost perspective.

Okay. So it just sounds like you guys are kind of thinking a couple of years out looking to having options and feedstock availability for your customers and trying to get out in front of what is a pretty good robust environment, is that right?

That's it exactly.

Okay, awesome. Joe, could you just give us a maybe an update on the Chinese joint venture?

Rich?

Yes. Thanks, Kevin. As we had reported last quarter, the China JV remains challenged in a regulatory environment. In fact, all approvals on the CAC this year are challenged. There's the 19th party Congress that's occurring on October and November. In those elections, not a lot of political decisions or regulatory decisions get made prior to those decisions being made. So we've pretty much been told that there'll be little or no approvals going out through the end of the year. So all that said, the JV group is evaluating alternative opportunities while we work through next steps on the regulatory side. While challenging, we remain committed to our China JV strategy, and I think with our PEMCO acquisition, it's broadened an even significant amount more of opportunity. They've got established relationship with several of the operators within China as they maintain over 70% market share with the 737 classic market in China. So there's both short- and long-term promising opportunities across our portfolio of companies that we're currently looking at. So China strategy is actually growing for us, although the AOC portion of it remains a little bit mired at this point.

Got it. Joe, kind of last question. We talked about how strong the demand environment is and you guys are essentially sold out of aircraft and, obviously, expansion into the Airbus family later in a couple of years. But if a customer came to you today and said they need some additional lift, a new aircraft, like, what do you do? I mean, are there some one-off opportunities to go acquire some passenger aircraft for conversion or is just the market that tight that it might be pushed out? So I'm just curious, just given how strong demand is, if a new customer or existing customer needs some additional lift today above and beyond those 12 aircraft, what do you do today?

Well, I mean, first and foremost, is what we've always said, it's got to hit our price point because once you make that investment into that asset you're going to own it forever and a day. So we don't want to overpay just on the basis of the fact that we have a customer that says, I've got a crying need for it. In the meantime, as Rich noted earlier, there are other opportunities where an aircraft comes off of lease in 2018 or '19, one of our existing leases. And if we can place that under better terms and conditions, we would certainly go in that direction. But we always keep our eyes open for the -- something coming available at the right price. And we envision that by the time we get through the middle of next year, which is when the last of the current aircraft that we have either own or agreements to purchase, are finished with their modifications and we'll be able to come up with some additional assets.

Our next question is from Jack Atkins of Stephens.

This is actually Andrew on for Jack. Just want to start by following up on an earlier question about the CMI utilization on account of the change you've seen there. I understand, Quint, your point about efficiency gains and the block hours staying flat, but would you expect that, that change could have an impact on overall profitability?

Well, I think in the long term if the hours stay flat, the -- that portion of the revenue stream is going to stay flat, which is the variable part of our CMI operations. But remember the key element here is making sure that we have the aircraft placed, which would -- really is the key driver from a profitability and cash flow perspective in the long-term. So you're always going to have a flux in the deployment of the aircraft in terms of how much they fly based on route changes. But certainly, going into peak season, we would anticipate we'd see some increase in the overall level of flying.

Okay. Okay. And then, I guess, given the aircraft delays, or the production delays and the increased maintenance. As you look at the second half of this year, would you expect the year-over-year kind of growth rate in EBITDA to be roughly the same in both the third and fourth quarter and given the timing of aircraft deployments?

Let's see, Andrew. Year-over-year, I think third quarter, we're expecting something similar to what second quarter was. And so we've given you kind of the guidance for the full year, right? So you're -- that tells you where we view fourth quarter falling out at.

Is that third quarter similar in terms of EBITDA growth rate or actual, like, EBITDA contribution?

I'm talking about similar in terms of actual EBITDA contribution.

Got you, okay. That is helpful. I think the rest of mine have been asked.

Our next question is from David Ross of Stifel.

Just to follow up lastly on the changing network and the impact on block hours. The customers still flying above minimums with those planes, is that correct, just not as much above minimum?

Yes. I mean, the structure of our agreements of minimums really don't come into play, it's just more about what they scheduled. Remember, the construct of our two large customers is a fixed plus a variable component, the fixed covers stuff from basically you'd say, "I just got the airplane available for a minimal amount of flying," and then the variable piece drives additional earnings on top of that. So it's really not a matter of flying above minimum, it's just whatever they schedule in terms of overall utilization.

So if they don't use a plane. So say, if one plane sits for three months, there's no revenue associated with that plane outside of the CAM dry lease?

No, they would own the fixed piece of it. There's a minimum fixed piece in terms of -- that covers us having that airplane ready and available for the couple of crews associated with it.

Okay. So there's a minimum, at least.

On a fixed basis.

Yes. And then with respect to Northern Aviation and the moving to dry lease of the three 767s, the way I understand that, that means that there's some CMI business coming off? What can you say there on the timing? I guess, when should we expect the 767s to stay within CAM, but maybe lose the CMI component?

That's a good question, Dave. This -- it's kind of a sensitive planning proposition when we're switching from -- with a customer from wet to dry, because they have to get the aircraft on certificate, begin flying with it, get confident in it and meanwhile they have customers to serve. So we expect for each aircraft that gets put up for dry lease that there'll be an overlap of us continuing to fly that lane or some of that lane. Additionally, Northern has talked about putting up additional routes over and above what we currently have contracted in a wet environment. So it's hard for us to say when an asset would free up from that process given the number of aircraft going in and how that's going to unfold. So we anticipate that we'll continue to fly as they put on their aircraft. Eventually, we will have some aircraft becoming available. We anticipate given we have not been a participant in the charter market, nor have we had much free assets to propose additional ACMI opportunities, but -- and we've been turning away quite a bit of interest. So we anticipate being able to redeploy those aircraft into an ACMI environment going forward. But you're probably talking about the middle of 2018 before we probably see any significant availability out of that.

Okay. The way I guess, I understand it is, it's going to take some time for them to get their act together and run their own operation and there will be a phased-in process, not a situation where you're flying three 767s for them one day and then they're flying them themselves the next?

Exactly. And, of course, I'd just to like add that, if they don't commit to keeping those assets employed as well, then that certainly resolves an issue in terms of people looking for additional aircraft that today, we tell them we don't have available. So we'll certainly supply future demand.

That's helpful. And then, yes, just an update on the pilot situation. Been in negotiation for a few years, had some struggles last year, got through that. Any closer to resolution? Any update on timetable or thoughts related to the pilot's union?

You never know with negotiations with pilot groups in terms of how long they're going to take to get resolved. Certainly, both groups are under mediation at this point in time, and we're not anywhere near, to our estimation of being to the point to where you'd be at loggerheads and then get to a disruption of the potential service based on starting the cooling-off period. So we're a long way from that point at this juncture. From a staffing standpoint, we're more than adequately staffed going into peak season, anticipating that if there's demand there that we'll be able to meet it without incurring any of the issues that we did last year in terms of premium pay. So I think we're pretty well positioned this year, especially in comparison to the prior year.

And our last question is from Steve O'Hara of Sidoti & Company.

Just two questions, I guess. Just on the maintenance change, did I hear you correctly that you're no longer going to be capitalizing the maintenance of the 767-300 engines? And does that qualify as an accounting change? I would assume that the -- maybe cash flow is the same, but maybe the way it's reported is a little bit different, is that it?

Yes. Steve, it's not considered to be an accounting change, it's simply a new contract that was executed that will change the -- versus how we handled those same type of engine events in the past -- will change the way that looks in the financial statements going forward. The new contract, as we said, is sort of a pay-as-you-operate, it's based upon the flight cycles. And so for that reason, it provides predictable rates. And so it's of great benefit in terms of planning out your cash requirements to maintain your engines, it's a benefit that we can pass through to CAM's lessees, which as you can imagine to a lessee who may have a few airplanes, not having to worry about a significant time and material engine overhaul, and instead only paying as you go is considered to be a great benefit. We also think that over the long pull, it provides a cash savings because, of course, we're able to leverage the scale of engines in our aircraft. And I would emphasize this treatment and this contract only pertains to the GE-powered engines on our 767-300 aircraft. But we're able to leverage the scale of engines to negotiate for very attractive rates, we believe, from a top-quality provider in Delta TechOps. So we're -- we think it's actually a benefit. But certainly, it does change the EBITDA dynamic because in the past, those events have been capitalized and they show up in depreciation that gets added back when we forecast and report our EBITDA.

Okay. All right, that's fine. And then just I don't want to necessarily beat a dead horse, but on the CM change -- the CMI flying, I mean, it sounds like it's a customer-driven based on maybe their desires for the network. I mean, this is nothing to do with your service or your ability to kind of meet their timetables or schedules or anything like that, is that correct?

That's correct, Steve. We've delivered all of the aircraft that we were expected to deliver. As I mentioned a few minutes ago, that from a crew standpoint, we are more than adequately staffed at this juncture to meet peak demand. It's just basically, the evolution of the different networks in terms of how they can meet their customer requirements and offer the most efficient way to do that.

I will now turn the call back over to Mr. Hete for closing remarks.

Thank you, Christine. Our investments in cargo aircraft have yielded significant rewards to ATSG shareholders this year as our leased aircraft portfolio continues to expand. Those long-term lease returns, which drive our support services volumes, are keeping us on course to deliver more growth this year and into 2018.

Thank you for your support and have a quality day.

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