Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, air cargo transportation and related services, today reported consolidated financial results for the quarter ended March 31, 2018:

Revenues: $203.0 million (after the adoption new revenue recognition standard)
Revenues up 11 percent in 1Q 2018 excluding $54.4 million in 1Q 2017 reimbursable expenses
GAAP Earnings from Continuing Operations $15.7 million, $0.26 per share diluted
Vs. $9.8 million, $0.13 per share GAAP diluted in 1Q 2017
Adjusted Earnings (non-GAAP) from Continuing Operations $23.9 million, $0.35 per share diluted
Vs. $11.2 million, or $0.17 per share diluted in 1Q 2017
Adjusted Earnings from Continuing Operations in 2018 exclude the net effects of warrants issued to Services, Inc. and a share of development costs for ATSG's Airbus A321 freighter conversion venture.
Adjusted EBITDA (non-GAAP) from Continuing Operations $71.9 million
Up 26 percent vs. $57.0 million in 1Q 2017
Adjusted Earnings and Adjusted EBITDA from continuing operations are non-GAAP measures. (See Revenue Recognition, Non-GAAP Financial Measures, also reconciliation tables at the end of this release)

Joe Hete, President and Chief Executive Officer of ATSG, said, "Continued earnings improvement from our airline businesses and the reduction in the federal tax rate drove a more than doubling of our first quarter adjusted earnings from continuing operations compared to last year. The outstanding efforts of our employees, and strong customer demand for our growing portfolio of freighter aircraft, point to further success during 2018.”

Significant Developments:

CAM's revenues increased $4.4 million, or 9 percent, to $52.4 million. Those revenues were reduced by $4.2 million of non-cash amortization of warrant-related lease incentives for Amazon, versus $2.6 million a year ago.
CAM’s pre-tax earnings increased 16 percent to $15.5 million, primarily due to the increase in leased freighters in service. CAM was leasing fifty-two cargo aircraft to external customers as of March 31, 2018, one more than at the end of 2017 and nine more than a year earlier. Of the externally leased freighters, one was a 737 and the rest were 767s. Higher earnings from additional leased aircraft in service were offset by the increase in warrant-related lease incentives, higher interest expense that included non-cash amortization related to ATSG's September 2017 convertible offering, and increased depreciation from its larger fleet.
CAM delivered one 767 to Northern Aviation Services in January under a seven-year dry lease. One 737 freighter was delivered in April and one other 767 is due to be delivered later this month on an eight-year lease. That leaves eight additional 767s to be delivered to customers in 2018.
Since we completed our 20-aircraft commitment to Amazon in August 2017, CAM will have delivered 13 additional 767 freighters to customers by year-end 2018.

Segment Results

Significant Developments:

ACMI Services revenues, excluding revenues from reimbursed expenses, increased 10 percent to $119.4 million in the first quarter. Pre-tax earnings improved by $7.5 million, to a $3.9 million profit for the quarter.
Principal factors contributing to the profitability gains versus the first quarter of 2017 were additional flying for CMI customers, lower depreciation expense, and reductions in premium pilot pay and training.
ATSG’s airlines were operating six more CAM-owned aircraft at March 31 versus a year earlier, five of which were for CMI customers. Billable block hours increased 10 percent for the quarter.
On March 21, ATI pilots represented by the Air Line Pilots Association ratified an amendment to the collective bargaining agreement with Air Transport International, which sets compensation levels for four years from that date. The ratification of the amendment will result in higher costs for pilot compensation at ATI beginning in the second quarter of 2018.

MRO Services

Effective January 1, 2018, ATSG segregated MRO Services, as a new reporting segment that includes the results of its aircraft maintenance services and modification services businesses.

Significant Developments:

Total revenues from MRO Services were $52.7 million, up 31 percent. External customer revenues increased by 22 percent.
Pre-tax earnings including inter-company business, increased $1.3 million driven by increased revenues.

Other Activities

Other Activities include arranging logistics services, providing postal center sorting services, equipment maintenance and other services.

Significant Developments:

Total revenues from other activities, excluding revenues from reimbursed expenses, decreased by 39 percent, reflecting the elimination of ground service at Amazon's former hub in Wilmington, Ohio.
Pre-tax earnings of $2.6 million were 5 percent higher than a year ago. Additional earnings were driven from ATSG’s minority investment in a European airline and increased mail and package volumes at the USPS and Amazon locations.
Beginning January 1, 2018, reimbursed revenues for ground services are reported net of the related expenses under new revenue recognition standards. Effective January 1, 2018, ground services operations are reported in Other Activities due to its size.


ATSG continues to expect that its Adjusted EBITDA from Continuing Operations for 2018 will be approximately $310 million, up 16 percent from 2017, after taking into account the ratification of the amended pilot collective bargaining agreement at ATI in late March.

"We are off to a very strong start and optimistic about our growth in revenues and cash flows for the rest of 2018," Hete said. "We continue to project delivery of ten 767-300 freighters to customers this year, one more than last year. Customer demand for additional 767s remains strong. We have customer commitments for seven of the 10 newly converted 767s this year, all of which will be straight dry leases. An agreement for an eighth dry lease is being finalized, and we have strong interest from customers for the remaining two."

ATSG continues to project 2018 capital expenditures of about $300 million, the majority of which is for purchases of 767 aircraft and related freighter modification costs for customer deployments in 2018/2019. Our 2018 capital expenditures also include investment in the design and certification of a new narrow body variant of the Next Gen Boeing 737-700. Additionally, we will continue to contribute, via a joint venture, in the development of a freighter modification supplemental type certificate ("STC") for the Airbus 321-200 which will continue to be reflected as a non-operating charge to our income statement during 2018. We expect FAA approval of the STC by the end of 2019.

Revenue Recognition

In accordance with new GAAP requirements, ATSG's 2018 revenues related to costs that are directly reimbursed to ATSG and controlled by the customer are reported net of the corresponding expenses. Corresponding 2017 revenues include such reimbursements. These are principally costs for aircraft fuel, certain contracted aviation services and airport related expenses. After application of the new GAAP revenue rules, Amazon, DHL and the U.S. Military accounted for 28 percent, 28 percent, and 11 percent, respectively, of ATSG's first quarter 2018 consolidated revenues.