Air Transport Services Group Inc (ATSG) 2018 Q4 法說會逐字稿

Welcome to the Q4 2018 Air Transport Services Group, Inc. Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

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

Thank you, Adrienne. Good morning, and welcome to our fourth quarter 2018 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Operating Officer.

We issued our earnings release yesterday after the market close. It's on our website, atsginc.com. We will file our Form 10-K tomorrow.

I'm very pleased to report that we ended 2018 with substantial increases in revenues and earnings on the strength of a solid fourth quarter. Our revenues increased 27% for the quarter and 15% for the year, excluding reimbursables. Our earnings on an adjusted basis were up 23% for the quarter and 42% for the year, largely due to the 10 additional aircraft we leased and improved results from our airlines. Our adjusted EBITDA for the quarter was $96 million or a record $312 million for the year. Those excellent results stem from very good growth in each of our segments, a better-than-expected contribution from Omni Air and solid peak season service levels for our customers.

2019 is off to a great start as well. We expect to dry lease eight to 10 newly converted 767 freighters this year, including the five we will deploy with Amazon in the second half under the expanded and extended agreements we signed with them in December. We also expect overall stronger results from our ACMI segment with the addition of Omni Air in November, which brought passenger ACMI and charter capability via its fleet of thirteen 767 and 777 aircraft.

Quint is standing by to summarize our overall financial results for the fourth quarter and year. Rich will add a few words on the business units, and I'll close with some perspective on our outlook. Quint?

Thanks, Joe, and thanks to all of you on the call for joining us this morning.

Once again, let me 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, changes in market demand for our assets and services; our operating airlines' ability to maintain on-time service and control costs; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; changes in general economic and/or industry-specific conditions; and other factors as contained from time to time in our filings with the SEC, including the Form 10-K we will file tomorrow.

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 consolidated results for the fourth quarter and full year 2018 were evidence of the power of our complementary family of businesses and the investments we are making to grow and broaden our capabilities. Our customer revenues were $280.8 million in the fourth quarter. We adopted Topic 606 on January 1, 2018, and now report certain revenues net of related expenses that are directly reimbursed by customers.

After eliminating reimbursement revenues from 2017, our 2018 fourth quarter revenues increased 27% from the prior period. Full year 2018 revenues increased 15% to $892 million on the same basis. Overall, our revenues increased due to additional aircraft leases, expanded CMI and logistics services for Amazon, higher aircraft maintenance and modification services, and passenger transportation services, primarily for the Defense Department, Omni Air's largest customer. We closed the Omni acquisition on November 9, so the fourth quarter and year included 52 days of their contribution to our results.

On a GAAP basis, our earnings from continuing operations for both 2018 and '17 were affected by several non-cash items. These include the full effect of changes in the fair market value of warrants we issued to Amazon and a $59.9 million noncash positive contribution in 2017 from the effect of the 2017 tax law on our deferred tax assets. Including those and other factors, GAAP earnings were a loss of $5.2 million or $0.09 per share for the quarter. That compares with earnings of $94.1 million or $1.11 per share diluted in fourth quarter 2017.

Our adjusted earnings exclude those non-cash tax benefits and the Amazon warrants, along with other items, such as deal fees related to our Omni acquisition and gains and losses from revaluations of our interest rate derivatives, all of which we referenced in the reconciliations to GAAP results in our earnings release.

In the fourth quarter, our adjusted earnings were $24.1 million or $0.36 diluted versus $19.6 million or $0.28 a year ago. For 2018, adjusted earnings increased to $1.25 per share from $0.89 in 2017.

Adjusted EBITDA from continuing operations in the fourth quarter was $96.2 million, up 19%. The improvement reflects contributions from additional 767 freighters CAM deployed during the quarter and nearly two months of contributions from Omni Air.

2018 capital spending was $293 million, down $4 million from 2017 but higher than the $280 million we projected on our third quarter earnings call. That 2018 total included $197 million to purchase eight 767s plus related mod and spare engine costs.

In December, we paid a deposit toward the purchase of twenty 767-300s from American Airlines, which will be delivered through 2021. We expect to acquire six of those 20 and begin to convert them this year, in addition to the five that were in conversion at the end of 2018. We converted and deployed 10 cargo aircraft, nine 767s and one 737 in both 2018 and 2017. Besides CapEx, uses of our capital included $855.1 million to purchase Omni Air and additional contributions to the joint venture with Precision that is developing a passenger-to-freighter conversion program for the Airbus A321.

Funding for these transactions came from ATSG's operating cash flow plus proceeds from our senior credit agreement with our banks. Balances at year-end under that credit facility included two unsubordinated term loans with a combined outstanding principal balance of $731 million, and a revolving credit facility for the $475 million balance. Together with our $259 million in convertible notes, total debt principal outstanding was a bit under $1.5 billion at year-end.

The revolver has a capacity of $545 million but also a feature that allows us to borrow an additional $400 million, subject to the lender's consent. We currently expect to seek authorization to tap a portion of that resource later this year as we acquire and convert more 767s for 2019 and 2020 deployments.

As a result of the increased debt level and the higher interest rates, we do project 2019 interest expense to increase significantly from 2018 levels. We project full year 2019 interest expense to increase by $48 million to $77 million, inclusive of approximately $12 million of noncash amortization related to capitalized loan fees and the convertible note discount.

Our year-end debt-to-EBITDA ratio was 3.4 times, as calculated under the terms of our secured credit agreement. The unsubordinated term loans and the revolving credit facility bear variable interest rates of approximately 4.7%. Our goal is to keep our debt ratio at or below 3.5 times this year.

As Joe mentioned earlier, we deepened our partnership with Amazon through extending and expanding our aircraft lease and operating agreements in December. We also agreed to issue them 14.8 million additional warrants, which, along with the warrant rights granted them in 2016, could expand their potential ownership in ATSG to approximately 33%.

These additional 14.8 million warrants are at a strike price of $21.53, and Amazon has until January 2026 to exercise those warrants for cash or on a cashless net share basis. We also agreed that should Amazon and ATSG agree on lease terms for up to 17 additional aircraft beyond the 10 already committed, we will issue them incremental warrants.

Warrants for all of those additional aircraft would take their potential ownership stake to approximately 39.9% if our Amazon-leased fleet were to grow by 17 more to 47 aircraft. Any such future warrants after March would be priced at a 30-trading-day average price based on the date of contractual commitment for leases. As a consequence of issuing Amazon additional warrant rights, ATSG will ask shareholders to authorize additional common shares at the annual meeting in May 2019.

Finally, I want to emphasize some points to consider as you think about ATSG's expenses and adjusted EPS in 2019. These include the elevated interest expense I mentioned earlier, and higher depreciation and amortization expense after putting Omni on the balance sheet.

We are projecting for 2019 that our depreciation and amortization expense will be about $265 million, including a non-cash amortizing customer relationship intangible from the Omni deal of approximately $11 million.

Also, the 14.8 million of additional warrants I mentioned earlier will affect ATSG's adjusted share count. That share impact will depend significantly on the movement in our traded share price throughout the year, as we apply the Treasury stock method to those additional warrants. For our internal planning purposes, we are currently assuming that we end 2019 with an adjusted share count of approximately 69 million.

Now I'll turn it over to Rich Corrado for his operating review. Rich?

Thanks, Quint. In 2018, the businesses of ATSG maintained a strong pace of freighter-leased deployments, delivered continued strong service to our customers and expanded and extended our relationship with Amazon. As a result, we completed the year with strong growth in adjusted revenues and earnings, and our business segments reported good results overall.

CAM's revenues grew by $19.4 million during 2018 as its base of externally leased aircraft increased by eight to 59. Revenues from external customers rose $16.1 million to $156.5 million. Revenues from its airline affiliates, including Omni, rose $3.3 million to $72.4 million.

CAM added nine 767-300 freighter aircraft and one 737-400 freighter to its leased portfolio during the year. It also sold one 767-300 to a lease customer and retired one 767-200. The acquisition of Omni Air added 11 passenger aircraft to CAM's leased fleet, including two 767-200s, six 767-300s and three 777s. CAM earned $65.6 million in 2018, an increase of $4.1 million or 7%. Increased pretax earnings reflect nearly two months of lease revenue contribution from Omni's 11 passenger aircraft, as well as the 10 freighter aircraft placed into service in 2018, and were negatively impacted by $2.9 million of increased noncash lease incentive amortization related to Amazon warrants.

CAM's fourth-quarter earnings were down slightly from a year ago. Delayed freighter deployments and transitioning aircraft offset gains, plus higher interest and depreciation expense and lower maintenance revenues offset earnings gains from the 10 freighters added to the fleet during the year. The fourth quarter of 2018 also included $3.5 million of additional interest expense allocated to CAM driven by the investment in Omni.

CAM purchased eight 767-300 passenger aircraft for freighter conversion in 2018.

Turning to our ACMI Services segment, total revenues increased 20% during 2018 to $548.8 million, net of revenues from reimbursables in 2017. Principal factors were additional aircraft operations for Amazon, a 5% annual increase in billable block hours as well as Omni Air's contributions since we acquired it on November 9.

Pretax earnings were $17.7 million during 2018 compared to $8.6 million for 2017. Those gains were offset, in part, by higher compensation for ATI's pilots who ratified an amendment to their collective bargaining agreement with ATI in March 2018.

Fourth quarter revenues for ACMI Services increased by 52% to $193.6 million, net of 2017 revenues from reimbursed expenses. Pretax earnings were up 10% to $12.7 million. Billable block hours increased 4% for the fourth quarter. Fourth-quarter hours were negatively affected by operating restrictions at airports near the California fires in November and December.

Our third segment, MRO Services, generated revenues of $207.5 million in 2018, up $2.1 million from 2017. External customer revenues increased $11.1 million. Pretax earnings from MRO Services before internal eliminations decreased by $5.2 million to $14.5 million, due mainly to a greater proportion of lower-margin maintenance services with longer completion times.

For the quarter, revenues from MRO Services increased 5%. Pretax earnings more than doubled to $6.4 million from $2.9 million for the same period a year ago. The increase reflects more support for ATSG airlines.

Total revenues for our other activities decreased for the fourth quarter and full year 2018. External customer revenues from this group, excluding reimbursables, decreased $3.1 million in 2018. In September 2018, U.S. Postal Service ended contracts with logistics services for support of five sort centers. The reduced revenues were offset partially by additional customer ground support agreements.

Pretax earnings from other activities increased by $3.5 million to $9.1 million in 2018, and by $300,000 to $600,000 for the fourth quarter. Improved earnings were a result of additional ground support services and improved results from West Atlantic, an airline affiliate accounted for under the equity method.

We look forward to improved operating and financial performance for all of our businesses in 2019 as they deliver even better service to their customers.

That's a summary of our business unit performance in 2018. I'll hand off to Joe for his recap and outlook comments.

Thanks, Rich.

2018 continued our trend of strong year-over-year improvement in our operating results, somewhat masked by the accounting rule changes and warrant valuation adjustments that make our steady progress less evident. Our double-digit percentage gains in adjusted revenues, earnings and EBITDA last year demonstrate the strength of our business model and the cash flow we can leverage to make both organic and strategic growth investments as we did in 2018.

We're starting off 2019 with a significant new airline affiliate in Omni Air, a secured pipeline of additional feedstock aircraft, and a strong commitment to our shared future from Amazon.

In December, Amazon selected us to support the next phase of its air network growth with a 10-freighter order and multi-year extensions of leases and operating support for today's 20 aircraft dedicated fleet. The extension on those 20 aircraft will include a step-down in lease rates during the extension period. Although their cash lease rates will not change until the start of the extension period, the lease revenue we recognize for them will be lower by $3 million in 2019 due to averaging the rent over the remaining full lease term.

In total, we invested more than $1 billion last year to grow and diversify our business. We expanded into the ACMI passenger market to diversify and supplement that growth, even while our future in cargo is still very bright.

Omni Air is the #1 outsource provider of dedicated passenger air service to the Defense Department, other government agencies, and commercial customers. Rob Coretz, who joined our Board of Directors last week, built Omni as a leader in a niche of its own, ACMI and charter passenger service for major government organizations.

We expect Omni to continue to properly apply its flexible, go anywhere, anytime capabilities to commercial as well as government customers while generating strong and steady cash flow for our shareholders. Along with their growth potential, we value the revenue diversification that their public sector concentration provides, and the fleet synergy possible as their 767 passenger aircraft may become feedstock for cargo conversion at the appropriate time in their life cycle.

At the same time, we're reinforcing our commitment to the midsize freighter market under an agreement with Jetran. We will be purchasing 20 passenger 767-300s for conversion and freighter deployment over a three-year period as American Airlines retires them from passenger service.

We are able to make commitments like this purchase and the Omni acquisition because we have maintained a strong balance sheet and waited patiently for the right opportunity. This was also key in starting our relationship with Amazon, first with a request for five freighters, crews and maintenance support to run an express network trial in 2015; and again, last fall, when they needed 10 more 767s on top of the 20 we have provided to date. The first five of those freighters and the crews that will fly them will be ready to go later this year. We anticipate related 2019 crew training and deployment costs of about $1.5 million.

We have used our financial capacity and management focus to acquire assets and extend relationships that answer most of the key questions you have been asking us for more than a year. That includes our recent plug-in acquisition of TriFactor, the engineering and design firm we acquired two weeks ago, that adds those capabilities to our material handling service offerings.

Many of the customers requiring material handling services from our logistics group are the same customers who utilize our aircraft leasing in their operating capabilities. During 2019, the feedstock 767s we will acquire, convert and deploy will again put us within range of another 10-freighter year, including the five we will deploy with Amazon in the second half and three or more we will lease to a major global network integrator.

Many of you are aware that the agreements underlying our long-term relationship with DHL are due to expire at the end of March. Our discussions are pointing toward additional multiyear extensions for fourteen of the sixteen 767s they currently lease and a similar extension to the related CMI operating agreement. We expect those talks to conclude before the end of March. Our marketing team is working to redeploy the two 767-200s that DHL is returning.

We are budgeting to spend another $400 million in 2019 CapEx, principally to purchase and modify more Boeing 767s, but also to cover the increase in engines and capitalized airframe maintenance we will incur from our overall fleet growth, including the Omni fleet.

It will be our responsibility, along with our leadership teams, to turn the assets we are acquiring into strong cash generators that exceed our targeted investment returns.

To that end, we project that our adjusted EBITDA this year will exceed $445 million, which is a 43% increase from the $312 million we generated last year. We are well provisioned with the right resources and targeting the right opportunities, not just for 2019, but for 2020 and beyond.

I'll be updating you on our progress at our annual meeting in May, and for some of you as we go back on the road with our story of growth and financial strength this spring.

And now, Adrienne, we're ready for the first question.

(Operator Instructions) And our first question comes from Kevin Sterling from Seaport Global.

Congrats on another great quarter and 2019 outlook. And along those lines with 2019 -- thank you guys for all the additional guidance you've given us with share count, interest expense and D&A. And as we think about your EBITDA for 2019 to exceed $445 million, and it does seem like it's definitely back-end loaded as you take delivery of the planes and further ramp with Amazon. How should we think about EBITDA percentage for the back half of the year, say, the last two quarters? Is it 60%, 70% of your EBITDA generation coming in the back half of the year, just to help us think about as we model throughout the year, if you don't mind? Maybe just give us a little bit of color.

Yes. Kevin, this is Quint. You're right that it is back-loaded, as we say, with the aircraft coming on predominantly in the second half. That's the big driver there. Perhaps not as backloaded as you might have -- as you were suggesting there. And that has to do -- Omni has some impact on that as well in terms of when their -- how their distribution works. I would say that the second half will contain approximately 55% of our total EBITDA for the year, so it's kind of a 45-55 split, perhaps not as backloaded as you might think.

Okay. That's helpful. And then, Joe, thank you for the update with DHL. It sounds like those talks are progressing nicely. How should we think about -- I know you've done the ATI labor contract. And how should we think about -- how is it progressing with your other union partner, the Teamsters, and getting into a new labor agreement with them?

Obviously, Kevin, it's not progressing as well as we would like it to. We're still having discussions under the auspices of the National Mediation Board. Hopefully, we'll be able to get a deal sometime this year. I wouldn't project that as being in the first part of the year. I think we're next scheduled to meet sometime in May, I believe, is the next scheduled session. So if we do come to an agreement, the impact would be in the latter half of the year, and we have not built any of that into our guidance at this point in time.

Okay. Is it possible to quantify the impact of the California wildfires on your operations? I know you said it impacted some of the flying you did with Amazon. Is it possible to quantify that?

Kevin, we -- I would say that we're talking probably -- it's certainly less than $1 million, sort of somewhere between $0.5 million and $1 million, call it.

In terms of EBITDA or is that revenue? Or...

Yes. In terms of EBITDA. Obviously, most of the expenses were fixed in terms of crews.

It's pretty much both at that point, yes.

Okay. All right. And you guys did a great job at the end of 2018 getting those 20 planes from American. How should we think about potential feedstock availability this year or next year? New customers come to you and would like some aircraft. How does the feedstock look -- how does the feedstock situation look today?

Well, if you look, we've had five aircraft, I think, in conversion at the end of the year. They will come out. A couple of those are dedicated to Amazon at this point in time. The American fleet is mostly backloaded for the year. There's a couple in the first quarter, one in the second or third quarter, and then the rest of them are in the fourth. So they're pretty heavily backloaded from that standpoint. Outside of that, we're not doing a whole heck of a lot of looking at this point in time since we've got, call it, 20 in the queue, but we're always keeping our eye out for something that may pop up that may makes sense for us to acquire to fulfill a customer requirement.

And Joe more or less addressed what we have and what our needs are at this point in time. But as far as what's out there today, there's nothing large like the American buy that we just made which we strongly prefer to buy fleet. There are onesies, twosies out there that are coming available, and there's several bidders going after each lot that comes available.

And our next question comes from Jack Atkins with Stephens.

So, Rich, if I could start with you. Obviously, just with the datapoints we've been hearing over the last, call it, four, five months from the folks in the international trade sort of arena, you've seen some strains in terms of global growth out there beginning to emerge in Europe and Asia. Also, the IATA statistics have begun to sort of moderate somewhat. I know you guys don't -- the freight that you guys moved doesn't necessarily get captured in the IATA statistics generally. So just sort of curious if you could update us on what your customers are telling us about their outlook for growth over the next, call it, 12 to 24 months? And how would you sort of rate the demand for 767 assets? Because it sounds like there's still multiple bidders for every aircraft. There's still a lot of demand for your assets.

Yes, Jack, thanks for the question. I mean, the market that we play in really is the integrator space, e-commerce and regional flying. And those markets don't tend to be impacted as much by global trade and the efforts of large lanes, your Far East to the U.S. as an example. And so those markets today are very hot. I mean, we've got demand all over the globe right now. We've got demand in Europe. We've got demand in the Middle East. We've got demand in the Far East, in the U.S. We wouldn't have gone out and bought 20 airplanes if we didn't think we'd be able to deploy them as they became available. So we're very bullish on the growth and the segment that we're in. If you look at the e-commerce statistics at this point, going out through 2024, they're projecting about a 60% increase in e-commerce purchasing and a larger penetration of general retail into e-commerce. With the growth of mobile commerce -- phones, and tablets and those types of things -- it's really growing the purchasing of e-commerce exponentially compared to your general freight or even your integrator business. If you look at the IATA statistics, I think they're projecting about 3% growth in general cargo. But if you look at the integrator growth on the international sector, they probably averaged over 7% CAGR for the last five years, so they've outgrown general cargo and will continue to outgrow general cargo. So if you look at the segments where this aircraft deploys into, that market is very strong and projected to be very strong throughout the next five years.

Okay. That's great to hear. Thanks for that color, Rich. And then, Joe, just going back to your comments on the TriFactor acquisition. Could you just expand a little bit in terms of how TriFactor fits into your existing portfolio of logistics services? And what are the potential opportunities from a revenue synergy perspective as you leverage those capabilities over the next couple of years?

Yes, Jack, good question. TriFactor is a company we've worked with for a number of years now. They do small design -- MHE design work, and we've done some installation work of the things that they've designed. And that was one piece of our MHE group -- material handling equipment group -- that we lack, which was the ability to design systems. A relatively small company overall, but one of the constraints they've had over time is that they didn't have capital to be able to bid on larger jobs. And so we think the synergies between us and them is going to be we bring the capital to the table, and they bring the expertise in terms of the design work and then ultimately leverage that to grow that piece of the business from small jobs to much larger ones. The material handling piece of our business has grown quite bit. I mean, it's not a huge bottom line mover at this point in time. But when you look at our customer base, we basically do work primarily on the maintenance side and again small installations for UPS, FedEx, Amazon, Target and a whole host of others, in terms of being able to pick up one telephone and make a call and get your equipment serviced no matter where it is in the country.

Okay. That's great. And then, Quint, I guess a question for you. On the $400 million in CapEx for this year, can you help us break that down between growth and maintenance CapEx? And I was trying to think about how much of that relates to the bulk purchase of the aircraft from American. And I guess we're just trying to figure out how much of that $400 million in CapEx is tied to aircraft placements for this year, and if any of that's sort of pulling forward CapEx into this year for future growth in the out-years, if that question makes sense.

Sure. Yes. We, of course, as Joe said, we had five aircraft in process at the end of this year. We've said eight to 10 are going on during 2019, and we'll have five in conversion at the end of 2019. So you are acquiring tails that you won't see go into service until 2020. In terms of the American fleet, as it happens, I think we've said that we expect to take six of the 20, take delivery of those this year. If you think about the CapEx of $400 million and we're putting eight to 10 online as they move through the cycle, we say roughly, what, $25 million a copy, all-in. That may have ticked up somewhat, right, with the competition for feedstock out there. So if you figure, that's more like, call it, a $28-ish million kind of number, you're -- for 10 airplanes, you're roughly $280 million all in. You've got maintenance CapEx with Omni, right. In the past, we've said just ATSG is $60 million, $70 million of maintenance CapEx. So with Omni, you're more like $100 million all in. And so that gets you to kind of a $380-ish million kind of number, and then you've got another $20 million for some of your other business requirements in the group.

Okay. That makes sense. Last question also for you, Quint. I mean, can you help us think about operating cash flow and how that should trend in 2019? Were you talking about in excess of $445 million in EBITDA? Can you kind of walk us down through the operating cash flow expectation that that would underpin?

Yes. I think, Jack, in the discussion of debt leverage, we said we had a goal, what, to stay under 3.5, but we're 3.4 roughly, as measured under our credit agreement currently. So what we're saying is that we're in a growth mode. I think Rich talked about all the -- in terms of the market, what the demand profile looks like, still very strong. And as you can see, we're investing in that growth with the American fleet, et cetera. We don't anticipate our leverage to change much during the year. And at times during the year, it may slightly tick up. But again, we have that goal of kind of maintaining a steady 3.5-type leverage number. You think about the EBITDA of $445 million, but we also have cash interest expense. And we talked about the elevated interest expense in our earlier remarks. Now a portion of that interest cost that hits the P&L is non-cash. It's bank fees that have been paid and will be amortized over the life of a loan. But when you put the interest with the $400 million of cash CapEx, it's pretty much a push in terms of the net cash. And that's why our debt leverage is fairly steady.

And our next question comes from Helane Becker from Cowen & Company.

This is actually Tyler on for Helane. Thanks for the color on the Amazon deal and the lower lease rents. That was very helpful. But just to kind of dig a little bit deeper into the EBITDA guide for the year, it looks like Omni is about $130 million for 2019 from an EBITDA standpoint. So that implies that each -- so that implies that your organic EBITDA is growing kind of low single digits. And I'm just wondering, is this all due to the structure of the Amazon deal? Or is there other factors kind of playing into that?

Yes. That's -- Tyler, it's is Quint. There is a factor, certainly is the extension of the Amazon deal, particularly the lease agreements for the 20 aircraft that we have. As you know, we've got multi-year extensions on those, 12 for two years and eight of the 300s were for three years. And as is customary, when you have customers that are giving you very long lease terms, it's not uncommon to see some rent reduction in the extension periods. Now while that doesn't affect cash flow perhaps until you get to the extension period, under the revenue recognition rules, you average that over the remaining lease term. So we're just a little north of $3 million would be the annual impact to our revenue from those extensions. We also mentioned in there that, of course, we're currently working to renew and extend agreements with DHL. Their aircraft demand, which we had 16 aircraft, for example, at the end of the year with them, is going to go down by two, it looks like. And those are domestic placements that we also do CMI flying for. That will go from 10 airplanes in the domestic network, the others being in the Middle East, down to eight. So we'll have two aircraft that we've got to work to redeploy. So they'll come out of revenue service for a period of time, and we'll have to place those aircraft with new customers. So those are some, I guess, headwinds in terms of the base ATSG EBITDA piece.

Got you. And then one more follow-up, just on the DHL commentary. It sounds like you guys are pretty confident you could place these assets in 2019. Is that fair to assume that within -- in like 2H '19, you'll be able to place these two Boeing 767s with customers?

We do feel confident that we will be able to place those aircraft. One of the two, I believe, has -- it will require a little maintenance first. But otherwise, we're very confident that we can get those two redeployed.

And your next question comes from David Ross from Stifel.

I guess first question is on the eight to 10 planes or the three to five, really, that you're adding outside of Amazon this year. Are those expected to be CAM-only, or ACMI or some other version?

No. They're expected to be dry-lease only.

Okay. And the margin profile at ACMI, post the Omni deal, what should we be looking for there, Quint, as we move through this year? It's certainly taken a step up.

The margin profile with Omni -- you're saying the Omni impact on the margin profile? Was that your question, Dave?

Yes, correct.

Yes. Well, certainly yes. Well, Omni has -- will certainly improve the ACMI Services segment results, and I think you even saw some impact from that in the fourth quarter. So you're right that, that will have a very positive impact on their results. And that's where we're putting the segment. Now we took a portion because the aircraft that Omni owns, the 11 they own, are owned by CAM now and leased into Omni. A portion of their EBITDA and earnings impact will also go to CAM. As we separated the assets based on our structure of putting the assets in CAM, and have the operations be in the ACMI Services segment, we did bifurcate the assets from the operating piece.

Yes. We're just trying to figure out if 4Q was just seasonally strong or if there was an impact of Omni that's going to take the margins permanently higher in that segment.

I mean, I think Omni's impact is going to be a recurring impact.

Okay. And then on the unallocated interest expense piece, that was up significantly. I know that was taken on for the Omni deal. Was some of that not allocated to the segment?

Again, CAM bears most of the allocation. I think Rich mentioned that CAM's interest cost was up $3.5 million, and that's the impact of that. There is some of that, that is going to the ACMI piece and then the goodwill as well. So -- but as you know, CAM gets the lion's share of the allocation.

Yes. I guess our question was more why is there a much more bigger portion that's not allocated. It went from $700,000 to about $4.2 million in unallocated interest expense year-over-year in the quarter.

That piece is related to -- because with the purchase of Omni, we leave that as unallocated. That's related more to the airline portion of our acquisition. The portion that's related to the assets that went into CAM are going into CAM, and so what you're seeing there is the remaining impact which we're leaving down in the unallocated section.

Yes. I just don't know why that wouldn't be in ACMI if it's the airline portion.

We just -- we have not historically burdened the ACMI Services segment with interest cost.

And our next question from Adam Ritzer from Pressprich.

I just had a couple of things. Most of my questions were answered. Can you give us the pro-forma numbers for Q4 if you would have owned Omni for the full quarter instead of just the two months?

Adam, we are not -- we typically -- and there are reasons where we don't break out individual subsidiary results, subsidiary companies. We talk in terms of the segments, so...

If you want to dig a little deeper, Adam, you can go to the 8-K that we filed.

Right.

There's -- gives you a little bit of a view into what the Omni piece will generate.

Exactly. And the 10-K we intend to publish tomorrow will also have some stuff in it as well, but we don't separately talk to the individual subsidiaries.

Okay. Yes. Just maybe just getting like a round number. If it would have been $100 something, but no big deal. I can wait to go through the filings. You went through all your free cash numbers, et cetera. So my other question is, for 2020, if -- does your current purchase deployment model you gave out for next year, does that get you to the 10 minimum for Amazon? Or do you need more new planes in 2020?

Are you talking about what the acquisition in American airplanes, Adam?

Yes.

Yes. No. We're -- we've got the feedstock available for that piece of it. Remember, there's 20 in total. We'll take six this year. Five of them will be in modification at the end of the year. And then whatever we take in -- that's a fluid schedule somewhat with American in terms of when we get airplanes from them, and then the balance will be purchased in 2021.

Okay. Can you -- like does that include any additional to get to the 17 more that they have an option on?

Well, again, the 17 are options, and they've got basically for the term of the entire agreement to do that. So there's a lot of runway there for them to be able to exercise calling the options on the 17 to get the additional warrants, so there's really no definitive time frame on that. As you know, we put in the agreement that if they exercise any of the options signed in definitive agreements, they can get the $21 warrant price if they do that by the end of March. And then thereafter, if they exercise any of those options for aircraft, then they would be at the 30-day VWAP at the time they execute a definitive agreement.

Okay. So Amazon has flexibility, and you also have flexibility with the 20 purchased from American. Is that the best way to look at it?

Yes. That's a fair statement.

Okay. So they want more, you go to American, say, "Hey, we need five or 10 more in 2020 or '21." You could kind of play both sides against the middle, so it kind of averages out where you're not sitting with a bunch of empty aircraft waiting for Amazon.

No. It doesn't work that way. The aircraft, we're committed to. And whenever American's release date comes up, we have to buy the aircraft, whether we have a customer for it or not.

Okay. So you're committed to the 20 even if Amazon may not want 17 more?

That is correct.

And our next question comes from Chris Stathoulopoulos from SIG.

Your guidance for the operating fleet this year is 100 aircraft. But given the Jetran deal, how should we think about the fleet size in 2020 and 2021?

Again, as we said, Chris, the number of aircraft that we would take delivery of from American next year is a little bit fluid because of their release schedule, but it could be anywhere from six to 10 that we would take from them next year. And then whatever hasn't been delivered at that point falls out into 2021.

Okay, okay. Just moving to labor. If you do revise the deal with ABX this year, what are some of the things you can do to help offset the increase, whether it's passing some of it along to customers or productivity? Are you renegotiating deals with a related step-up in mind?

In terms of -- well, if you look at the Amazon deal, I mean, basically that's been inked for seven years going forward. We're currently working on the DHL piece, which is the other primary customer of ABX. And outside of that, the only other flying they do is for Aeromex, which is one aircraft, which is renewed annually from a contract standpoint. And then they do some for the military, which is military contract comes up, basically the new fiscal year will be October 1.

Okay. And then final question. The three to five non-Amazon aircraft that you're expecting to place this year, where are you in terms of placing these? And how many are close to securing deals versus still being actively marketed?

As I noted in my remarks, right now, at least three of the aircraft are designated for a major global integrator out there which we cannot name. So we pretty much -- we're well down the path for three of the aircraft on top of the five with Amazon, so that gives you eight. And then there are two more in play which we think we'll be able to secure contracts for in the not-too-distant future.

(Operator Instructions) Our next question comes from Steve O'Hara from Sidoti.

Just curious if you could talk about your bandwidth to add aircraft yearly. I think it's around 10 or has been around 10. I mean, has that -- I'm not saying you necessarily will. But I mean, has that increased with the scale of the fleet or anything like that? And is there ability to add much more than that at some point as you continue to grow?

So thanks, Steve. The -- there's two constraints on adding aircraft. One is feedstock, and the other one is capacity for conversion. And so at 10 aircraft, we're pretty comfortable that we can meet both those needs for the coming three years, call it. The 767 feedstock, there's probably about 200 of those left in the market right now that will come out over the next, call it, seven to 10 years. So we see that -- over that period, we'll see the 767 get a little tighter to achieve. That's one of the reasons why we've invested in the A321 conversion and take the A321 out there. We're hoping to have it out by first quarter of 2020, and then that will grow from there. So we look at this as we'll be investing and growing in the A321 at the same time that we're growing the 767-300s. So you're going to look at two situations of feedstock and two situations of conversion capacity which will only enhance our ability to grow both lines.

Okay. And then one more, just on the Omni deal and maybe the accounting there. And I apologize if you covered this. But in terms of the fuel expenses on the income statement now on the -- in the fourth quarter. I assume the big jump was Omni. Is there a difference in the accounting there with maybe their ACMI flying or CMI flying relative to what ATSG currently uses? Or is that the same across the board and just they have higher fuel expense and it's not a pass-through?

Yes. Thanks, Steve. It's a good question. The rule change, that 606 that we adopted at the beginning of 2018, that had rules in it that resulted in, for example, the fuel that we've purchased as sort of an agent for Amazon being netted with the revenues, the expenses. But similar to our own combi flying, the structure of the contracts with the government, the military would not qualify for netting. And so you're absolutely right that the fuel that's purchased by Omni is not netted out, and it will show up, therefore, in the expenses and the revenue. So that's -- it's going to be a bit of a difference certainly between how we treat, for example, the fuel we buy for Amazon.

Okay. And I believe there's a -- is there a margin on the fuel as well?

No. It's little to nothing probably. The margin is on the other operating cost.

And your next question comes from Chris Stathoulopoulos from SIG.

With the Omni acquisition and the expanded Amazon agreement, could you give us a sense of what your revenue mix looks like back in October? You put up a slide deck with the Omni call where you had some pro forma stats. I think Omni was around 33%. But could you just give us a sense of what that looks like now?

Yes, of course. Chris, when we put that out, we didn't have the Amazon additional growth baked in because we haven't finalized those agreements. But I don't know that it will change all that significantly because of the backloading of the additional five aircraft. And as you'll recall, we've said the largest customer is likely to be the DoD and other governmental flying, with Amazon and certainly being second. I think we had the DoD at roughly a third of our revenues when we referred to that earlier last year.

Okay. And then just last one on the new Amazon, the five for this year, five for next year. What's the average age of those aircraft? And when those are in play, what would be the overall average age for the entire fleet you're operating for them?

Yes. The aircraft that we're putting in are early to mid-'90s, and that's consistent with the existing fleet.

And that concludes our question-and-answer session. I'll turn the call back over to Joe Hete for closing remarks.

Thank you, Adrienne. We tend to focus a lot of attention on these calls on aircraft, dollars and rates and our plans to grow ATSG and make it stronger. Last Saturday, we all received a stark reminder that what really makes our business special are the people that make everything happen and the kinship that develops from our shared experience with others throughout aviation.

All of us at ATSG and our families send our deepest condolences to the families and coworkers of those aboard Flight 3591 and our appreciation to first responders in Houston and others working to understand how this event could have happened. For our part, we will honor their service by keeping people first in everything we do. 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.