November 18, 2012 - 8:41pm EST by
2012 2013
Price: 3.46 EPS $0.56 $0.75
Shares Out. (in M): 64 P/E 6.2x 4.6x
Market Cap (in $M): 222 P/FCF 3.6x 3.0x
Net Debt (in $M): 330 EBIT 75 95
TEV (in $M): 552 TEV/EBIT 7.3x 5.8x

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  • Transportation
  • Shipping
  • Insider Buying
  • NOLs
  • Rental & Leasing


ATSG is an airfreight capacity provider that flies intra-region freight with wide-body, medium range freighters.  Its current valuation presents the opportunity for 100+% upside with little downside (absent a global depression).

In simple terms, ATSG rents freighter aircraft the same way that Dollar, Avis and Hertz rent cars.   However, in a slight contrast to rental car terms some of ATSG’s rentals are long-term in nature (21 freighters on charters between 3-7 years) with the remainder on lease for one year or less.  Additionally, ATSG does not buy new freighters but rather buys used passenger airframes and extensively retrofits them for freight use.

It owns a fleet of 58 aircraft made up of 43 modern Boeing 767 and 757 freighter aircraft in active service, 5 additional 767s and 757s undergoing conversion to freighters and 10 older DC-8s and 727s that will be phased out this year.

ATSG’s target market differs from Atlas Air World Wide (AAWW), which flies long-haul intercontinental freight.

Their largest customer is DHL who accounts for 55% of their revenue and employs 28 of their aircraft. Their next biggest customer is the US military, which accounts for 15% of their revenue.  

Why is this opportunity available?

  • Recent global airfreight weakness reported by Boeing, FDX and UPS and seen at airport level stats.
  • Guidance for EBITDA in 2012 has come down from $200mm to $160mm (-20%) driven by weakness noted above.
  • Fear that guidance will continue to deteriorate despite management’s belief that it has bottomed.

Investment Thesis                                

  • Significant discretionary cash flows hidden by recent high levels of aircraft purchases:  ATSG’s mandatory maintenance capex keeps their fleet in flying condition while their growth (discretionary) capex is principally airframe purchase and conversion.  Over the last several years ATSG has spent a lot of their underlying cash flow to increase the size of their fleet and modernize the airframes employed.  With the slowdown in global airfreight volumes they presently have NO need to add any additional capacity.  So once the committed conversions are completed by the end of Q213, their capex run-rate will drop from $159m (LTM) to maintenance levels of $30-35m. The resulting FCF would range from $50mm in a bear case scenario to $90mm in a fully-utilized fleet scenario.  This would represent a FCF yield of 22% to 40%.  Note also that those FCF projections reflect a full cash tax payment as well as a contribution of $25m per year to their pension plan.  
  • Significant insider alignment:  Management has been buyers in the open market around $4.70, $4.00 and now again around $3.60. Red Mountain Capital, which has held a board seat since 2009, now owns ~17% of the company and was also buying stock during the summer at higher prices.
  • Necessary (though cyclical) business with long-term contracts and relationships:  While airfreight is presently experiencing a short-term slowdown, in the long-run, the entire airfreight industry is expected to continue growing approximately 5% per year over the next two decades as manufacturing and world trade globalize.  Boeing puts out an annual outlook that can be found here.  ATSG operates in an industry that cannot become obsolete, and they operate with limited substitution risk.  If a perishable or high value item needs to be shipped quickly, airfreight is the only option.
    • DHL and ATSG have a long history together.  DHL acquired ATSG’s predecessor parent company Airborne Express and spun ATSG off as an independent company in 2003, since a foreign entity cannot own a U.S. airline.  DHL has chartered 13 aircraft for a seven-year period ending in March 2017. Those aircraft are also crewed, maintained and insured by ATSG.  An additional 13 aircraft are chartered with crew, maintenance and insurance provided by ATSG by DHL for periods of one year or less and an additional 2 are on “multi-year” deals (somewhere between 1 and 7 year presumably).  ATSG also provides crews for an additional 6 aircraft that are owned by DHL.  
    • Regarding the US military, ATSG recently won the recompete of the airlift contract they have been servicing due to their commitment to upgrade the Combi (combination freight and passenger aircraft) fleet from DC-8s to more modern and efficient 757 Combis.  The length of the contract is 2 years and at present there are no other airlines that provide 757 Combis.  Realistically, no other competitor is going to emerge as they would have to buy and retrofit some 757s before even bidding on the contract.  It’s unlikely that a competitor would take the risk since they would be left with assets that could not be used anywhere else as Combi aircraft are used almost exclusively by the military.
  • Net operating losses shelter ATSG from taxes for at least two years:  ATSG does not expect to pay cash taxes for at least the next 2 years. The NPV of that is about $48mm or $0.75 per share
  • Resolution of DHL debt should lead to an eventual catalyst:  ~$16mm of ATSG debt is held by DHL.  That debt extinguishes at $1.6m/quarter without any payment to DHL.  DHL forgives the debt as long as ATSG continues to fly for DHL.  However, that debt inhibits and penalizes share repurchases or dividends: for every $1 expended in share repurchases or dividends, $0.20 of the DHL debt has to be repaid in cash.  For instance, if ATSG bought back $20m of stock, it would have to pay back $4mm of the DHL debt that would otherwise self-extinguish.  Management does not want to needlessly send money to DHL, so they are not buying back stock.  This bizarre structure is the result of a series of deals in 2008 when DHL pulled out of the U.S. domestic delivery market.  At the time, DHL wanted to ensure that ATSG, which had a shaky balance sheet, would not go bankrupt, denying DHL its access to shipments from the U.S.  Given that management and Red Mountain have been buying stock, it stands to reason that they may be interested in negotiating with DHL to allow ATSG to buy back stock for a nominal cash payment to DHL.  
  • No fuel price risk:  Despite some fears to the contrary, ATSG does not take fuel risk on its charters just as rental car companies do not take fuel risk on their leases. They do have a small net fuel cost for repositioning aircraft but it is not material.
  • Pension plan status is manageable:  Their pension plan is within the accounting guidelines for funded status such that they have no obligation to make contributions to it, yet they are planning on injecting $25m/yr until it is fully funded.  The free cash flow calculations reflect those payments.

Cash Flow Scenarios and Valuation

Four cash flow scenarios reflect 2013 earnings and cash flows without additional aircraft purchases.

Low:  The low scenario takes their worst quarter and annualizes it.  

Guidance:  2012 guidance is updated guidance provided on the Q3 conference call.  In this scenario, there are 7 aircraft converted and sitting idle.

Mild Freight Rebound:  Each aircraft can produce about $5m in EBITDA a year if utilized. The mild freight rebound assumes that 3-5 idle aircraft are put into service but present service levels are maintained.

Full Fleet Utilization:  All idle and to-be-converted planes are in service and flying at full utilization. This is what the management thinks they can do once freight patterns return to normal, maybe a year or two out.



Mild Freight

Full Fleet





















Tax (40%)





Net Inc





Shares outstanding










GAAP Multiple













- Pension










Maint Capex





Discretionary  FCF





Discretionary FCF Yield











NPV of Tax Shield





per share






10x mult of EPS





+ tax shield




        $ 0.75












ATSG is simply a valuation story with nothing exotic about it.  As mentioned above, if a perishable or high value item needs to be shipped quickly, airfreight is the only option.

 The only question is what earnings power and multiple should be assigned to the business. The scenarios above range from a low scenario that annualizes their worst quarter to a scenario that envisions all owned (active and in conversion) aircraft in service.

In the worst case scenario the stock trades at a GAAP multiple of 9.3x and a FCF yield of 22%, excluding the NPV of the tax shield.  Using a 10x multiple of GAAP EPS, which is where their nearest comp AAWW trades, upside ranges from 29% in the worst case scenario to 218% in the best.

Finally, a side note on AAWW vs ATSG:  AAWW is far more highly levered (4.0 total debt/EBITDA vs 2.1X for ATSG), has far greater capital commitments arising from its contracted purchases of brand new 747-F freighters, and is more exposed to the weakest freight lanes (long haul Asia to US and Asia to Europe).

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


  • Slowing of aircraft purchases/conversions lead to significant cash flows
  • Renegotiation of debt deal with DHL allows ATSG to repurchase shares
  • Acceleration of global economy
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