ATSG swings to loss of US$4.8M in Q3 from year-ago period's profit of US$11.2M as revenues increase 17% year-over-year to US$195.5M; earnings impacted by US$27.1M impairment charge related to reductions in business with DB Schenker

WILMINGTON, Delaware , November 7, 2011 (press release) – Non-Cash Impairment Charges of $27.1 Million Related to DB Schenker Restructuring

Air Transport Services Group, Inc. (NASDAQ:ATSG) today reported sharply improved third quarter financial results after excluding non-cash impairment charges. Highlights of the quarter compared to the prior year period included:

* Pre-tax losses from continuing operations were $6.7 million while net losses from continuing operations totaled $4.8 million, or $0.08 per share diluted. Third-quarter 2011 earnings included $27.1 million in impairment charges related to reductions in business with DB Schenker that began in September, and $1.9 million in unrealized losses on derivative instruments related to the company's new credit facilities adopted in May.

* Excluding impairment and derivative charges, pre-tax and net earnings from continuing operations increased by 34 percent and 22 percent, respectively, versus the third quarter 2010 results. Adjusted pre-tax earnings were $22.4 million excluding the impairment and derivative charges, up from $16.7 million in the third quarter of 2010, principally because of increased earnings from ATSG's freighter leasing business. Net earnings from continuing operations excluding those charges and their related tax effects were $13.9 million, up from $11.4 million in the third quarter of 2010. Net interest expense under the new credit agreement reached in May 2011 decreased $1.3 million for the third quarter compared to a year ago. Pre-tax losses for the quarter generated an income tax benefit of $1.8 million.

* Third-quarter EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), adjusted for non-cash impairment and derivative losses, totaled $48.3 million, up 10 percent from $44.0 million in the third quarter of 2010. Adjusted EBITDA is a non-GAAP measure of financial performance. The definition and reconciliation of ATSG's third-quarter Adjusted EBITDA to GAAP net income is provided at the end of this release.

* Revenues increased 17 percent to $195.5 million, including customer-reimbursed costs, with increases evident from each of the company's reported segments and other business units. Excluding reimbursements, ATSG's revenues increased 19 percent to $151.4 million.

"Our business model, which emphasizes balanced, market-sensitive assignments of converted freighter aircraft between long-term dry leases and shorter-term wet lease or ACMI agreements, continues to generate strong cash flows even in uncertain economic conditions," Joe Hete, President and CEO of ATSG, said. “During the third quarter, our operating and cash flow returns remained strong despite the previously announced decision by our customer, DB Schenker, to phase out its dedicated air cargo network in favor of an outsourcing relationship with DHL. We are responding to those changes by reducing our costs, removing DC-8 and 727 freighter aircraft from service, and offering DHL access to additional 767 and 757 aircraft to meet their requirements related to their outsourcing relationship with DB Schenker.”

Operating Results

CAM Leasing

Cargo Aircraft Management (CAM) recorded pre-tax earnings of $16.2 million, excluding impairment charges, up 35 percent from $12.0 million in the third quarter of 2010. At the end of September, CAM had 58 freighter aircraft under lease, including 34 Boeing 767-200 and two 767-300 freighters. Of those thirty-six 767 freighters, 21 are under long-term lease to external parties, including two 767-200s leased to RIO Airlines of Brazil that entered service during the third quarter. CAM's second 767-300 freighter was deployed with an ATSG airline under an ACMI agreement in September, and another 767-200 was similarly deployed through an ATSG airline in October.

At this time, one Boeing 767-200 and one 767-300 are being converted to standard freighters. Another 767-300 passenger aircraft purchased in the second quarter, and a fifth 767-300 purchased in October will be converted to freighters and are expected to enter service in 2012.

CAM also purchased a 757-200 aircraft during the third quarter which is expected to complete its conversion to standard freighter by year-end. Another 757-200 aircraft purchased earlier this year entered prototype conversion into a combination passenger/freighter aircraft (combi) for intended deployment with the U.S. military in the second half of 2012. Additionally, in October, CAM purchased another Boeing 757-200 passenger aircraft for its second combi conversion.

Upon the completion of these aircraft conversions, CAM will own thirty-six 767-200 freighters, five 767-300 freighters, three 757-200 freighters and two 757-200 combi aircraft in its fleet. CAM continues to pursue selective opportunities for adding mid-size aircraft to its fleet.

ACMI Services

Third-quarter revenues from ACMI Services were $118.9 million, excluding fuel and other reimbursed expenses, up 16 percent from the third quarter of 2010. Third-quarter pre-tax earnings from ACMI Services were $2.8 million, excluding impairment charges, compared with $3.4 million in the third quarter of 2010. Third-quarter results were impacted by training costs to transition DC-8 crews into the Boeing 767 aircraft due to DB Schenker's restructuring and lower revenues from the U.S. military as a result of maintenance related cancellations and contractual rate reductions.

Revenue-generating block hours for this segment increased by 6 percent compared with the third quarter of 2010. Block hours increased due to additional CAM-owned and ATSG-operated 767 freighters added in the last 12 months, plus hours generated by four DHL-owned 767 freighters leased and operated by ABX Air under its Crew, Maintenance and Insurance (CMI) agreement with DHL, and one 767-300 freighter leased from a third party for ACMI service. These increases were offset in part by block hour reductions related to the DB Schenker restructuring.

Other Activities

Revenues from other businesses rose 14 percent to $26.3 million before elimination of inter-company results. These businesses had an aggregate pre-tax profit of $3.7 million in the third quarter of 2011, compared with $3.1 million a year earlier. Results reflect improved earnings from Airborne Maintenance and Engineering Services, ATSG's MRO business, compared with the prior year.

Impairment Charges

In late July, DB Schenker announced its plan to adopt a new business model in September leading to the phase-out of its North American dedicated air cargo network operated by ATSG. As a result, sixteen ATSG aircraft - eight DC-8 and eight Boeing 727 freighters - operated by Air Transport International (ATI) and Capital Cargo International Airlines (CCIA) in DB Schenker's North American network were reduced to five DC-8 and four Boeing 727 aircraft effective September 2. On October 23, DB Schenker canceled scheduled operations for the remaining DC-8 aircraft, but retained two DC-8s as spare aircraft and the four scheduled Boeing 727 aircraft.

ATSG's impairment testing during the third quarter examined the expected cash flows from its Boeing 727 and DC-8 aircraft, and the value of goodwill and customer relationships of its associated entities. With the support of independent advisers, ATSG determined that the carrying value of its 727 and DC-8 assets, recorded goodwill and customer relationship intangible assets was overstated, resulting in third quarter pre-tax charges totaling $27.1 million.

Outlook

DB Schenker Relationship

Since September, DHL has provided DB Schenker with a portion of its air-cargo services via DHL's hub at the Cincinnati/Northern Kentucky International Airport. It's ATSG's understanding that DHL and DB Schenker are discussing a potential long-term outsourced air cargo agreement beginning in 2012. We expect that ABX Air, as an operator of DHL's U.S. air cargo network, and potentially other ATSG airlines, would continue to provide airlift and route coverage that DHL requires to serve DB Schenker's customers. Regardless of the outcome of those discussions, however, ATSG is marketing for sale its DC-8 and 727 freighter fleets and associated parts, excluding four DC-8 combi aircraft serving the U.S. military, and is reducing its workforce and operating expenses as appropriate.

“We are managing ATSG for maximum cash flow even under uncertain economic conditions," Hete said, "emphasizing long-term leases of freighter aircraft as opportunities arise, but also capitalizing on our unique aircraft, crew, maintenance and insurance (ACMI) capabilities in the mid-sized freighter category, and our ability to offer related incremental heavy maintenance, cargo handling and logistics services to meet continuing and seasonal market requirements. We are managing expenses very carefully while pursuing our growth goals through continued investment in more modern, mid-sized aircraft. As we retire our DC-8 and Boeing 727 freighter fleets, we expect to reduce our annual capitalized maintenance expenditures by $15-20 million starting in 2012. Further, we continue to project annual Adjusted EBITDA to exceed $200 million in 2012."

                 
                 

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

                 
          Three Months Ended     Nine Months Ended
          September 30,     September 30,
          2011   2010     2011   2010
REVENUES         $ 195,480     $ 167,726       $ 563,668     $ 488,781  
                         
OPERATING EXPENSES                        
Salaries, wages and benefits         48,872     41,074       140,546     129,830  
Fuel         41,829     33,745       130,145     98,203  
Depreciation and amortization         22,616     22,758       68,865     65,310  
Maintenance, materials and repairs         23,740     22,446       67,426     57,355  
Landing and ramp         5,691     5,419       18,128     17,830  
Travel         7,575     5,667       20,803     16,383  
Rent         5,872     4,881       16,946     12,257  
Insurance         2,720     2,130       7,464     7,122  
Impairment of goodwill and acquired intangibles         5,079           5,079      
Impairment of aircraft and related equipment         22,065           22,065      
Other operating expenses         10,931     8,378       29,481     26,956  
          196,990     146,498       526,948     431,246  
                         
OPERATING INCOME         (1,510 )   21,228       36,720     57,535  
OTHER INCOME (EXPENSE)                        
Interest income         29     83       128     241  
Interest expense         (3,304 )   (4,641 )     (10,944 )   (14,424 )
Write off of unamortized debt issuance costs                   (2,886 )    
Unrealized gain/(loss) on derivative instruments         (1,881 )         (5,437 )    
          (5,156 )   (4,558 )     (19,139 )   (14,183 )
                         
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES         (6,666 )   16,670       17,581     43,352  
                         
INCOME TAX BENEFIT(EXPENSE)         1,840     (5,282 )     (7,246 )   (15,299 )
                         
EARNINGS (LOSS) FROM CONTINUING OPERATIONS         (4,826 )   11,388       10,335     28,053  
                         
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX         24     (230 )     (74 )   (58 )
                         
NET EARNINGS         $ (4,802 )   $ 11,158       $ 10,261     $ 27,995  
                         
EARNINGS (LOSS) PER SHARE - Basic                        
Continuing operations         $ (0.08 )   $ 0.18       $ 0.16     $ 0.45  
Discontinued operations                        
NET EARNINGS (LOSS) PER SHARE         $ (0.08 )   $ 0.18       $ 0.16     $ 0.45  
                         
EARNINGS (LOSS) PER SHARE - Diluted                        
Continuing operations         $ (0.08 )   $ 0.18       $ 0.16     $ 0.44  
Discontinued operations             (0.01 )          
NET EARNINGS (LOSS) PER SHARE         $ (0.08 )   $ 0.17       $ 0.16     $ 0.44  
                         
WEIGHTED AVERAGE SHARES                        
Basic         63,334     62,811       63,267     62,805  
Diluted         63,334     64,202       64,078     64,076  
                                 
 

                 
                 

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 largest owner and operator of converted Boeing 767 freighter aircraft in the World. Through its principal subsidiaries, including three airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, aircraft maintenance services, airport ground services, fuel management, specialized transportation management, and air charter brokerage services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Air Transport International, LLC; Cargo Aircraft Management, Inc.; Capital Cargo International Airlines, Inc.; and Airborne Maintenance and Engineering Services, Inc. For more information, please see www.atsginc.com.


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