Air Transport Services Group Announces Second-Quarter Results

Air Transport Services Group, Inc. (Nasdaq: ATSG), a leading provider of aircraft leasing, and air cargo transportation and related services, today reported consolidated financial results for the quarter ended June 30, 2013.

For the second quarter of 2013, compared with the second quarter of 2012:

• Revenues decreased 9.5 percent to $138.9 million.
• Net earnings from continuing operations decreased 38.4 percent to $6.9 million, or $0.11 per fully diluted share. Net earnings include a non-cash federal income tax provision. The company does not expect to pay significant federal income taxes until 2016.
• Adjusted EBITDA decreased 16.7 percent to $35.9 million. This non-GAAP financial measure is defined and reconciled to comparable GAAP results in a table at the end of this release. Second-quarter Adjusted EBITDA was negatively impacted by $4 million due to unanticipated regulatory certification and training requirements.

Joe Hete, President and Chief Executive Officer of ATSG, said, "Our second quarter results include substantial lost revenue and additional operating expenses in our ACMI Services operations, and in particular at Air Transport International (ATI). While our core business with DHL and other customers remains strong and profitable, we continue to face delays in achieving expense and revenue goals at ATI following its merger with its former affiliate airline in March. The losses were due in large part to unanticipated regulatory certification and training requirements that delayed the deployment of our Boeing 757 combi aircraft and reduced ATI's ability to provide flight crews for both contracted and ad-hoc operations.

“The effect of these issues has eased since early July, when the deployment of our first two 757 combis restored our combi fleet to full strength. We now have sufficient aircraft assets to meet our customer commitments, and anticipate achieving sequential improvement in our ACMI Services operations during the second half, while our aircraft leasing and other businesses continue to generate solid returns.”

First-half 2013 revenues decreased 5.6 percent to $282.2 million compared with the same 2012 period. Pre-tax earnings for the half decreased 14.7 percent to $24.7 million. Adjusted EBITDA, which excludes unrealized gains or losses on derivative instruments, decreased 5.1 percent to $73.3 million.

Segment Results

CAM (Aircraft Leasing)

Fleet Developments:

• On June 30, 2013, ATSG owned 48 aircraft in serviceable condition - 20 leased to external customers and 28 leased to ATSG affiliate airlines. A table reflecting aircraft in service is included at the end of this release.
  • The in-service fleet consisted of forty-one Boeing 767 freighters, four Boeing 757 freighters, two DC-8 combis (combined passenger and main-deck cargo aircraft) and one 757 combi.
  • One 757 freighter and one 757 combi aircraft entered service during the second quarter. One DC-8 combi aircraft was retired during the quarter.
  • Since the second quarter of 2012, CAM has retired six older freighters; four 727s and two DC-8s.
• Two Boeing 767-300s were in passenger-to-freighter conversion as of June 30, 2013.
• One other 757 combi entered service in July. Two more 757 combis will enter service in the second half, replacing the two remaining DC-8 combis.

ACMI Services

Significant Developments:

• Airline services revenues decreased $11.1 million as a result of fewer aircraft in revenue service, delayed aircraft certification, and flight crew shortages due primarily to additional regulatory requirements.
  • ATI operated during late May and most of June with only two combi aircraft due to delayed 757 combi certification. As a result, ATI missed some scheduled combi flights and forfeited approximately $3 million in associated revenue until late June, when the first 757 combi entered revenue service. A second 757 combi entered service in early July, bringing the combi fleet to full strength at four, including two DC-8s.
  • Unanticipated additional training was mandated for flight crews and other personnel of former airline CCIA as a condition of CCIA's merger with ATI, resulting in the forfeiture of another $3 million in additional revenue due to the lack of available crews, and increased training costs. Synergy-related expense reductions from the merger were minimal for the quarter, and will remain so through the balance of the year.
  • The net effect of these certification delays and crew shortages on second-quarter pretax income was approximately $4 million.
• During the second quarter, one 757 freighter entered service with ATI, and four 767 freighters remained underutilized.
• Block hours decreased 17 percent during the second quarter, compared to the prior-year period. The decline in block hours was greater than the 11 percent decline in airline services revenues primarily because of fewer longer-range international operations this year.

Other Activities

• Pre-tax earnings reflect a reduction in aircraft maintenance operations for third parties, but stronger results from management of U.S. Postal Service sorting facilities.

Outlook

ATSG's baseline outlook for Adjusted EBITDA for the second half of 2013 is a range of $82 to $87 million, which is consistent with a range of $155 to $160 million for the full year. This outlook includes approximately $10 million in reduced revenues and higher costs this year that will not recur in 2014, that are due to delays in ATI's combi transition program and regulatory delays affecting flight crew availability. The outlook does not include potential results from new business that may develop during the remainder of the year.

Hete said, "Our fundamental business strategy of acquiring and leasing out cargo aircraft remains sound, and our customer relationships are strong. We expect our aircraft leasing and other businesses to continue to generate good returns in the second half. We also anticipate restoring the profitability of our ACMI Services business in 2014 as we capture the full benefits of our 757 combi fleet investment and airline merger. We remain optimistic about the improving trends in the domestic and international markets we serve and will remain focused on rapidly completing all of the regulatory requirements we face, and deploying all of our available aircraft as markets improve."

Conference Call

ATSG will host a conference call on Friday, August 9, 2013, at 10:00 a.m. Eastern time to review its financial results for the second quarter of 2013. Participants should dial 888-895-5479 and international participants should dial 847-619-6250 ten minutes before the scheduled start of the call and ask for conference pass code 35347362. The call will also be webcast live (listen-only mode) via www.atsginc.com and www.earnings.com for individual investors, and via www.streetevents.com for institutional investors.

A replay of the conference call will be available by phone on Friday, August 9, 2013, beginning at 2:00 p.m. and continuing through noon on Friday, August 16, 2013, at 888-843-7419 (international callers 630-652-3042); use pass code 35347362#. The webcast replay will remain available via www.atsginc.com and www.earnings.com for 30 days.

About ATSG

ATSG is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft. Through its principal subsidiaries, including two airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Airborne Maintenance and Engineering Services, Inc. For more information, please see www.atsginc.com.

Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. There are a number of important factors that could cause Air Transport Services Group's ("ATSG's") actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, changes in market demand for our assets and services, the costs and timing associated with the modification and certification testing of Boeing 767 and Boeing 757 aircraft, the timing associated with the deployment of aircraft to customers, achievement of the benefits we anticipated from the merger of two of our airline businesses, our operating airlines' ability to maintain on-time service and control costs, and other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on ATSG's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. ATSG undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Adjusted Pre-tax Earnings is defined as Earnings from Continuing Operations Before Income Taxes less derivative gains. Management uses Adjusted Pre-tax Earnings from Continuing Operations to assess the performance of its operating results among periods. Adjusted Pre-tax earnings from Continuing Operations is a non-GAAP financial measure and should not be considered an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

EBITDA and Adjusted EBITDA from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

EBITDA from Continuing Operations is defined as Earnings from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA from Continuing Operations is defined as EBITDA from Continuing Operations less derivative gains.

Management uses EBITDA from Continuing Operations as an indicator of the cash-generating performance of the operations of the Company. Management uses Adjusted EBITDA and Adjusted Pre-tax Earnings from Continuing Operations to assess the performance of its operating results among periods. EBITDA and Adjusted EBITDA from Continuing Operations, and Adjusted Pre-tax Earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, or as an alternative measure of liquidity.