The shares of ATSG and Atlas Air have rallied hard since Donald Trump was elected the next president of the United States, based on perception rather than fundamentals.

These two businesses have many things in common, given the nature of the services they offer to shippers – but does that make them two peas in a pod?

Headline figures

With a $1.3bn market cap, Atlas Air is valued at a 30% premium against ATSG’s equity, although it is much bigger in terms of revenues and its enterprise value of $3bn is double its rival’s $1.5bn.

One critical element here is the firepower they can count on to support Amazon’s rapidly growing network and logistics needs. So, let’s look at their financial statements at the end of a pivotal year, during which the e-tailer decided to invest in both.

Flying high

To start with, ATSG recorded a solid performance in the first nine months of 2016.

Surging revenues – up 25% to $547.1m from $437.6m – did not prevent a 9.1% decline in operating profits to $45m, but once its bottom line is adjusted by certain non-cash items that weighed on net earnings, such as depreciation and amortisation as well as losses on financial instruments, operating cash flow rose to $143m from $134m, despite falling earnings per share year-on-year.

Core cash flows from operations didn’t cover, however, for capital expenditure (capex) requirements, with cash outflows outpacing cash inflows. Meanwhile cash inflows and outflows from financing and investing point to a more aggressive capital deployment strategy than in the past, yet it is the amount of investment in its core operations that is going to move the needle next year and beyond.

How sound, then, is its financial position?


Capital spending levels, ATSG said in its 10-Q, “were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification”.

Capex rose to $182.1m from $111m one year earlier, and included “$133.1m for the acquisition of nine Boeing 767-300 aircraft, freighter modification costs and next generation navigation modifications; $20.5m for required heavy maintenance; and $28.5m for other equipment, including purchases of aircraft engines and rotables”.

The amount of capex budgeted for 2016 totals $285 million, so a ramp-up in spending is due in the final part of this fiscal year – $70m for aircraft maintenance and other equipment, while $215m is associated with aircraft purchases and freighter modifications.

ATSG is pulling out all the stops to chase growth and please its customers.

By comparison, 2015 capex included the acquisition of “three Boeing 767-300 aircraft and next generation navigation and communication modifications; $38m for required heavy maintenance; and $24.1m for other equipment, including purchases of aircraft engines and rotables”.

Amazon & DHL

While the Amazon deal has drawn a lot of attention in recent months, its largest client remains DHL – although it is less dependent on the German behemoth, given the declining share of revenues it generated with such an important client.

Sales from DHL as a percentage of total revenue were stable at 34% and 35%, respectively, in the three and nine months of the year, compared to 47% and 49% one year earlier.

However, revenues associated with Amazon Fulfilment Services, which acts as a subsidiary of Amazon, “comprised approximately 31% and 24% of the company’s consolidated revenues (…) for the three and nine month periods ending September 30, 2016, respectively”, which unequivocally signals that ATSG is swiftly growing the share of the business it is engaged in with the e-tailer.

Meanwhile, it grew a stronger gross cash position at group level thanks to new borrowings ($155m), which helped it boost share repurchases, up to $62m from $6.9m year-on-year. Its gross cash position of $47m is better than at the turn of the year, and net leverage is manageable – although it has risen, most of its outstanding debts are due long term.


Source ATSG’s 10-Q

Unsurprisingly, the vast majority of group assets ($941m out of about $1.2bn) are owned by its leasing subsidiary, Cargo Aircraft Management; so where do all these elements leave ATSG at such a critical time of expansion?

Barring a meltdown scenario, it is my view that its financing strategy gives it plenty of options – but does the same also hold true for its rival ACMI operator Atlas?


Its revenue split, as well as unappealing trends for revenue and income, is shown in the table below.

Source: Atlas 10-Q

Source: Atlas 10-Q

Our sources recently argued that its cash reserves are staggeringly low, which could be one part of the problem; the other possibly being how it is managing its cash flows and debt pile.

At the end of September, Atlas had just over $100m of cash and $179m of short-term debt, which comes due – and has to be repaid or rolled over – within a year.

On top of that, its long-term debt position was $1.6bn at the end of the third quarter – essentially unchanged year-on-year in the first nine months of 2016. While ATSG is growing and coping relatively well with heavier investment, Atlas revenues were flat and operating earnings plummeted to $66.8m from $167.2m one year earlier.

In early November, my colleague Alex Lennane wrote that the group was “busy making good on its deal with Amazon, which requires significant investment in aircraft and pilots”.

She said: “While Atlas executives did not specify when exactly the remaining 19 aircraft would come into the fleet, it looks likely that the deal will not pay off until 2018. Only one Amazon aircraft will be operating during this peak season.”

Which begs the question: does Atlas have the time to deliver? Or should ATSG carefully monitor the situation and place an opportunistic bid if its competitor’s financial problems mount?


In early December, we reported that pilots working for the air cargo carrier were ready to protest outside Amazon’s headquarters in Seattle, mainly due to low investment in flight crew.

So just how bleak is the outlook, given the amount being spent on wages and benefits so far this year?

Consider that Atlas is in negative free cash flow; cash outflows from investment have risen massively year-on-year, leading to a daily cash-burn rate of $1m from core operations (operating cash flow minus capex).

Atlas cash flows Source: 10-Q

Atlas cash flows Source: 10-Q

Cash and cash equivalents sitting on the balance sheet, meanwhile, fell on average by $1.2m a day in the first 273 days of the year, once $50m of cash outflows from financing are also considered. By comparison, ATSG burned, on average, $142,000 daily from its core operating activities during the period, but financing cash flows gave it a fillip, which means it managed to get more cash in than it actually spent.

Another sign of how things are going at Atlas is that share buybacks continued at a very low level, with just $11m-worth in first nine months of the year fell from a very low level, which indicates it is saving precious US dollars while applying a more conservative capital deployment strategy.

After all, salaries and benefits were by far the biggest costs, at $321m (24.6% of total sales), in the first nine months of 2016. If you are wondering whether management’s action is in the best interests of all stakeholders, you may well speculate this is a win-win only for executives – although the recent share price rise suggests otherwise.


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