Air Transport Services Group Inc
NASDAQ:ATSG
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Air Transport Services Group Inc
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Thank you for standing by, and welcome to the Air Transport Services Group First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, There will be a question-and-answer session. [Operator Instructions] A reminder, today's program is being recorded.
And now, I'd like to introduce your host for today's program, Mr. Joe Payne, Chief Legal Officer. Please go ahead.
Good morning, and welcome to our first quarter 2023 earnings conference call. We issued our earnings release yesterday after the market closed. It's on our website, atsginc.com.
Let me begin by advising you that during the course of this call, we will make projections and other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here.
These forward-looking statements are based on information, plans, and estimates as of the date of this call. Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information, or other changes.
These factors include, but are not limited to unplanned changes in the market demand for our assets and services, our operating airline's ability to maintain on-time service and control costs. The cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; our ability to remain in compliance with key agreements with customers, lenders and government agencies; the impact of current supply chain constraints, both within and outside the US, which may be more severe or persists longer than we currently expect.
The impact of the current competitive labor market, changes in general economic and/or industry-specific conditions, including inflation, the impact of geographical events or health epidemics such as the COVID-19 pandemic, and other factors as contained from time-to-time in our filings with the SEC, including the Form 10-Q we will file next week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pre-tax earnings, adjusted EBITDA and adjusted free cash flow.
Management believes these metrics are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
And now I'll turn the call over to Rich Corrado, our President and CEO, for his opening remarks.
Thanks Joe and good morning everyone. On our last call, we talked about the headwinds facing us in 2023 and in our operating businesses, but mostly at our airlines.
Unfortunately, the results we issued yesterday and our guidance change for the year as a whole, show that reduced revenues at our passenger airline omni and inflation-driven cost at all of our airlines are having a bigger effect than we expected.
We are not alone in this regard. Inflation and a softening macro economy are squeezing profitability in many sectors and especially in transport. We have limited exposure to fuel costs, but our personnel costs are rising, including the line maintenance workers and travel for flight crews shuttling between assignments.
That said, we are fortunate that demand for our leased cargo aircraft remains strong. Our guidance changes were not related to CAM which deployed two of the record 20 phrases we will lease this year at rates that meet our return requirements.
I'll be back to share more of that perspective after Quint reviews our financial results for the first quarter. Quint?
Thanks Rich and welcome to everyone on the call this morning. As he just said, our first quarter results show that inflation remains a key concern and its specific impacts on our businesses were greater than they were when we talked to you in February. Inflation is affecting all businesses, but the principal impact is in our ACMI Services segment.
The next slide in our deck summarizes the results that Rich mentioned. Our revenues grew $15 million or 3% versus a year ago to a record $501 million for the first quarter. Both of our principal segments as well as our other businesses in total contributed to that increase. In fact, among all of our operating businesses, only Omni Air, our passenger airline, did not grow its revenues versus a very strong first quarter last year.
Our GAAP pre-tax earnings were down $39 million and basic earnings per share were $0.28 versus $0.67 in the first quarter of 2022. On an adjusted basis, pre-tax earnings fell $26 million to $38 million, and earnings per share was down $0.20 to $0.36.
Our aircraft leasing segment, CAM, delivered all of our segment earnings for the quarter. Its pre-tax earnings were roughly flat with a year ago at $34 million, mostly due to higher interest expense and freighter deployment delays.
Our ACMI Services segment, which includes all three of our operating airlines, had a $2 million pre-tax loss on $334 million in revenues for the quarter. That loss at ACMI Services is mostly attributable to Omni Air or passenger airline, which experienced sharply higher cost and $26 million fewer revenues than it did a year ago. Airline block hours were roughly flat versus the prior year quarter even with more aircraft in service as scheduled flight segments were shorter this year than before.
Passenger block hours were down 25%, cargo block hours were up 4% for the quarter. Block hours for our 757 combi operations for the military were up sharply as a Transpacific route was reinstated last fall.
On the next slide, you can see that versus the 12 months ended in December 2022, our adjusted EBITDA was down to $621 million for the 12 months ended in March. First quarter adjusted EBITDA was $138 million. Federal pandemic relief grants under the Payroll Support Programs have had no effect on our results since 2021.
On the next slide, you'll see that our capital spending continues to increase effectively from growth investments in our leased freighter fleet. Sustaining CapEx, mainly for airframe and engine maintenance, technology and other equipment grew at a slower pace and includes capitalized engine maintenance services for our 767-200 lease customers.
Total CapEx was $219 million for the first quarter. Growth CapEx was $165 million, up $93 million from the prior year, both to convert existing aircraft of freighters and to buy more feedstock. We deployed two newly converted 767-300 freighters during the first quarter.
The next slide updates our adjusted free cash flow as measured by our operating cash flow, net of our sustaining CapEx. Operating cash increased $91 million to $216 million in the first quarter or $563 million for the trailing 12 months, net of sustaining CapEx of $205 million over 12 months.
Adjusted free cash flow is up $73 million to $358 million on a 12-month basis. The cash flow gain reflects reimbursement of fuel cost from Omni's federal government customers, which had been slower when we talked to you in February.
On the next slide, you can see that available credit under our revolver facilities in the US and abroad was $388 million at the end of the first quarter with an option for additional capacity subject to bank approvals. That includes a $100 million credit facility in Ireland we established in March.
Our capital allocation strategy continues to include share repurchases. We bought back approximately $1 million of our common shares in the first quarter after $2 million in repurchases during the fourth quarter.
With that summary of our financial and operating results, I'll turn it back to Rich for some comments on our operations and outlook. Rich?
Thanks Quint. Please turn to the next slide. As I said earlier, we had hoped to begin 2023 on a path to deliver better results as measured by adjusted EBITDA than the $640 million we delivered last year, but that's clearly not where we stand today.
We have reduced our 2023 adjusted EBITDA guidance by approximately $40 million and our adjusted EPS guidance by about $0.30 to levels more consistent with the results that we believe our businesses can achieve in the current environment.
As Quint said, inflation is driving up costs throughout the company. Our peers are reporting the same pressures on their own margins. In our case, the most dramatic effects are on the operating cost of our airlines, and higher interest expense.
For airlines, line maintenance is the cost of keeping aircraft in shape during normal operating cycles. The cost of those services has been growing at double-digit rates over the past two years and above what we had budgeted at the start of the year.
We also pay passenger airlines to move our crews to the next assignments. For example, on these costs for flight crude transport reflecting fare increases that the traveling public is also facing are up more than 35% per cycle in the first quarter versus a year ago.
Throughout the company, our businesses are engaged in efforts to address inflation and cut costs, line maintenance, travel, and other procurement costs, as well as rightsizing personnel requirements to business volumes are areas of focus.
Within our ACMI Services segment, Omni's first quarter results were down, including lower revenues for both commercial and government customers. Those results were affected by the appetite of other passenger airlines to participate more fully in the Defense Department's craft program this year.
Many clinicians in the first quarter that Omni had flown in earlier periods. Even if Omni's total DoD block hours do not increase significantly this year, it expects to benefit from better pricing under its DoD contracts starting in October.
Omni's flying also consists of charter awards from other government and commercial customers that it bids based on real-time costs. We anticipate that those assignments will cover any shortfall in craft lying.
Our cargo airlines fly under long-term CMI agreements, which include annual price adjustments, some of which will occur this quarter. Controlling costs between CMI escalations has always been a focus of our airlines.
Ongoing inflationary trends have only magnified their imperative. That, along with their ability to win peak season and other limited term contracts throughout the year are essential to our margins in that business.
Please go to the next slide. We told you last time that our fleet investments will increase over the next two years based on strong demand for our freighters. Many airline customers, mainly overseas, have made commitments to lease our cargo aircraft as they complete conversion. We expect to deliver 14 767s and six A321s to customers this year.
The main constraint on our ability to do so are extended conversion turnaround times at our vendors and certification of our Airbus A321 freighters. Resolving the international regulatory issues for the A321 have taken longer than expected. The US FAA has already certified the A321 based on our design. We are working directly on final remaining issues with regulators elsewhere.
Pending a resolution of this issue, we intend to take a measured approach to our A321 freighter program, which could reduce our 2024 CapEx, that's a situation we will monitor throughout the year and make adjustments as appropriate if circumstances change.
We have heard from some investors who questioned whether the stepped up capital spending we will need to convert and deploy the number of freighters our customers want is the most prudent use of capital. We agree that our 2023 capital budget of $850 million, including $590 million for fleet growth is substantially more than we have spent before.
Despite the economic environment, we fully expect to earn double-digit returns on the growth capital we invest, which has long been our benchmark commitment. If freighter demand does not support our expected returns, we have the flexibility to significantly reduce our planned growth investments in 2024 and beyond and reallocate that capital in favor of debt reduction more share repurchases or other alternatives.
It's clear to us as well as many of you that under our current stock price multiple, we can create additional value through share repurchases. Our decisions about capital allocation will always be driven by what creates the most value for shareholders.
Please go to the next slide. Our new guidance for 2023 projects adjusted EBITDA of a range between $610 million to $620 million in 2023 and adjusted EPS of $1.55 to $1.70. While we face challenges in 2023, we expect our earnings and cash flow growth to resume in 2024 and beyond from fleet investments and higher lease rates.
We will continue to have a strong balance sheet, a leadership position in the midsized freighter leasing market with large express and e-commerce customers and the strong backing of investors in our credit facility and debt securities. Our employees are prepared to execute against all of our 2023 plans with a goal to generate long-term superior returns for our shareholders.
That concludes our prepared remarks. Quint and I, along with Mike Berger, our Chief Strategy Officer, are ready to answer questions. May we have the first question, operator?
Certainly. And our first question comes from the line Jack Atkins from Stephens. Your question please.
Okay. Great. Good morning guys and thanks for taking my questions. So, I guess if we could maybe start, Quint, just to make sure everybody is kind of positioned correctly, thinking about the cadence.
Within the framework of your guidance, I mean, how are you thinking about improvement in earnings or EBITDA sequentially? And how do you break down the EBITDA guide between sort of maybe first half, second half. Can you maybe give us some framework to think about that?
Sure Jack. Thanks. It is second half weighted, is the way -- the way we're projecting right now. And in terms of thinking about the segments, the second half improvement, a lot of that is driven in the ACMI Services segment. CAM is more of a sort of a steady -- fairly steady EBITDA contribution with growth as we move through the year.
But ACMI Services, I believe the second quarter will be some modest improvement but more of the improvement is in the second half. If you think about Omni, Omni, its busiest time sort of June through October, typically and that drives some of that. And of course, the cargo carriers as they head into peak season and as additional aircraft are added, we've got some customer aircraft coming on for example, in the ATI fleet, that's the drivers in that balance.
So, EBITDA-wise, we're looking at some improvement certainly in the second quarter and then in the third and fourth more of that as we finish off the year.
Got it. But I mean, if you did say, $138 million in the first quarter in EBITDA, the guide at the midpoint $615 million. As you sort of -- you said second have improvement, just kind of roughly speaking, like what percentage of the EBITDA -- full year EBITDA would you expect in the second half of the year just so we can kind of think about that.
I would say -- we'll run that for you here quickly.
Okay. I can move on and then we can come back to that, if that's if that's okay.
Sure.
So, I guess Rich or Mike, as you sort of think about the pipeline of demand for the core part of the business here, which is midsized freighter releasing, whether it's the 767, 300, A330.
Have you seen any sort of change in customer demand in the last few months with everything that's been going on in the economy? Anything that would make you think that folks are getting a little bit less confident in their forward expectations around demand?
Jack, we haven't seen any erosion to the order book at all in 2023, inclusive of 2024. And if you look out at our 330s that we've talked about now for several quarters, we still have over 20 commitments with deposits on those and we start inducting those later this year.
Our first couple will go into induction. So when we look at the 2024, 2025, and 2026 specifically, with those new aircraft coming in, we still see a very, very solid and bullish market.
And when we look at the industry forecast as a whole, the big Boeing forecast and the cargo FX forecast, when you look at even further in a much broader view, 10, 20 years or so, those continue to be very, very strong in regards to the medium wide-body needs for the industry, close to 900 over the next 20 years or so.
So, short-term, to answer your question specifically, still very solid, no erosion. And from an industry broader view, still very, very bullish.
Jack, this is Rich. Just a couple of other points to add on to Mike. Interesting data from serum involving freighters that during the pandemic -- during a normal course of a normal year, there's about 70 freighters that are retired each year. During the pandemic, that was only about 15. And so you're looking at 165 airplanes over that three-year period that may or would have been retired of different sizes, right?
And so there's been a pent-up demand for rightsizing aircraft and for replacing older airframes with new airframes going forward on top of the fact that e-commerce growth is better outside this country than certainly it's growing inside this country.
If you look at the order book, just quickly on the 767 side that as an example, for 2023, 11 of the 14 aircraft that will deliver this year, they're to existing customers that already lease airplanes from us. So, we've got a we've got ongoing regular dialogue with these folks, and we're really confident in the order book for 2023.
Jack, just circling back on your question on the cadence of EBITDA. The second half is about 54% of the total. So sort of a 46-54 split between the two halves.
Okay. Okay. I appreciate that, Quint. And I appreciate the sort of the thoughts on the outlook. So, I guess when you put it all together, I mean, the stock is down about 40%, 45% so far this year. And if you go back kind of benchmark the reduction in EBITDA, the bottom end of your guidance versus word at the Street was before for 2023, I think it's about a 13% reduction. So pretty aggressive move down your -- the stock is -- it's not about of confidence, I guess, in the CapEx plan as you sort of think about both this year and next year.
So I guess Rich, you don't want to make a knee-jerk reaction to sort of how the stock is trading, but you've got a $1.1 billion market cap and you're spending $600 million or so on growth CapEx. I mean at what point do you think about sort of other alternatives for your capital to sort of better align your cash flows with supporting the stock here, we haven't seen it this cheap since 2016.
Yes. Well, first off, we -- prior to this quarter, we thought just for the guidance that there was an overreaction to the stock. And that it should have been higher before we got to this quarter's results.
And look, we do have flexibility going forward. We -- in terms of dialing back on CapEx for 2024, we've got different scenarios and everything. We do have customer commitments for just about all the freighters that are coming out in 2024 as well.
And so in backing off on any of that, it would be a significant decision. We believe that if you look at the book of freighters that we're going to put on in 2023, they will deliver a little over $70 million in revenue in 2024, and we have a high conversion of adjusted EBITDA to revenue on the leasing business.
So, we feel that this is a good use of capital. The lease rates are something that we're focused on right now, particularly for 2024 to make sure that we have the right returns for those airplanes. And we think we're staying the course at this point in time. But again, we do have flexibility should we need to adjust.
Okay.
And Jack, the adjustment in the guide is strictly related to ACMI services. I mean the CAM investments are generating returns that we expect. And if that doesn't -- somehow that were to change.
As Rich said, we do have some flexibility to reduce our CapEx spending. And at the same time, we understand how attractive our own stock is as an investment at these prices and so that isn't lost on us.
So, the capital allocation is always going to be done with an eye towards what generates the best value. And we think there's value creation through directing capital to both share repurchase and growth.
The headwinds we've faced this quarter have been strictly limited to the ACMI Services segment, and at least on the revenue side this quarter, it's more related to our passenger flying, which we referenced in the release.
We do think that, that is going to improve as we move through the year. We also mentioned the inflation, which continues to be an issue for us. But there are adjustments in the contract that our airlines have that should help that as well as the cost control measures that all of our subsidiaries are undertaking right now.
Okay. Maybe one other final quick question, and I'll hand it over. I don't want to hog all the questions. But I guess as you sort of think about the valuation of the company today on an enterprise value basis, relative to your asset value and the value of the cash flow of the company.
At what point does it make sense to maybe think about private market valuations and what an infrastructure fund or somebody like that would be willing to value ATSG yet, if the public equity holders won't value the company appropriately?
Well, Jack, this is Quint. We certainly understand the question. And we have looked at our valuation, our public valuation. And when you look at what the company produces in terms of the cash flows, the adjusted EBITDA, kind of the way -- we believe that somebody from the outside to look at it is when you think about our leasing EBITDA, which is the majority of the company's EBITDA, it's over $400 million to $500 million of EBITDA and you put a multiple on that as PE firms often do.
Now, leasing multiples tend to be higher, 8 plus. But if you put something even lower than that on there, which to be very conservative and do the same with our ACMI Services EBITDA which last year was, I think, over $200 million. This year, obviously, is going to be down.
And ACMI Service has been -- airline multiples tend to be lower. And so again, put a conservative multiple on that as well as the other businesses, the MRO and logistics businesses.
And then, of course, reduce the debt. But I think what gets lost is we have 500-plus million of assets in process. The assets we have in conversion. Those 27 aircraft that, as Rich described, have customer contracts waiting on them.
And if you just simply assume that at cost at what our invested dollars are, again, take out the debt, take out something for Amazon warrants that's kind of how we think of it.
And when we look at that, we spread it over a per share value, we get a valuation that's conservatively closer to 30 than it is 20, and certainly, we're even below that as we speak here.
So, to us, it appears, your point is well taken that the public valuation doesn't seem to be getting credit for the assets that are in process, those 27 aircraft. And even at a conservative multiple on our EBITDA which for our leasing entity, we've got a lot of long-term leases and cash flows that we can look at as well as contracts for the assets in process. It seems to be a very attractive valuation at release at our current public valuation. And we have looked at it in that fashion.
Okay. All right. Well, thank you for going through that Quint. I appreciate it. Thanks guys.
Thanks Jack.
Thank you. And our next question comes from the line of Helane Becker from TD Cowen. Your question please.
Thanks very much. Hi guys. So, just a question on the ATI pilots. That contract is open. And they've been very aggressive and very vocal about wanting more money. They've talked about service issues and attrition rates. And I'm wondering if you could just give us an update on what's happening with that and how you're thinking about covering the cost of a potential increase?
Sure. Helane it's Rich. Thanks for the question. It's not unusual for labor unions to put out press releases in regard, particularly around benchmark earnings calls and play out labor relations in the media. We don't think that's fruitful on our part.
I can comment on the service quality of ATI, which is outstanding. And as an example, we get paid a bonus for making service with our customers, and they made the bonus two months out of this year so far. So we're in pretty good shape. We're in really good shape in May so far as far as service goes.
There has been crew attrition. We've talked about crew attrition on other earnings calls. It's prevalent in the industry. It's common between our 3 airlines. It's a situation that we're managing.
We're still able to attract crews with a good amount of experience and a good amount of flying hours, well over the minimum and train them and get them into the network to be productive. So we're in good shape as it relates to moving forward with crews.
But it has raised our cost and it's one of the inflationary cost pressures that we have. When you have -- when you're training pilots to replace pilots that are [indiscernible], you've got an unproductive resource while you're going through that training period, which is anywhere from 70 to 90 days. So it has impacted our cost situation.
As far as the union agreement goes and the cost going forward, the kind of negotiation is now in mediation and the mediation. Both parties agreed they have taken it in terms of Alpha in terms of ATI and taking the negotiation as far as they could take it by themselves, and it's now in mediation. So, they'll be going through and iterating contract issues, et cetera.
As it relates to the cost side of that, we have always maintained for -- in the past when we've negotiated union agreements and for this union agreement as well that we need pricing, our contract rates and benefits that allow us to attract the best pilots we possibly can while also focusing on the fact that we need to be competitive. And we need to be able to compete for business in the ACMI segment of flying.
Those two parameters still guide our decision processes in this fashion. I can't really comment on the amount of increase or that going forward. But like I said, it will play out a course of probably at least the rest of this year given that the contract is in mediation.
Okay. Is there -- are there any accruals in the guidance for any increases? I don't remember how you guys normally do that?
Yes. We don't -- I mean the contract or the amendment resolution are ways off Helane, and it's -- that's nothing we ever comment on or -- but typically, we're not expecting a compact resolution for a while, you just based on past industry, it usually takes longer to work through a mediated process. And so as we get closer and we see what's going -- how things are shaking out, we'll appropriately record whatever we need to. But--
No, I mean, Quint, that's pretty standard. Some airlines will not accrue until they have a better sense of what the contract is going to look like and some accrue a little amount. So, I just didn't remember how you guys did it.
I wanted to ask about the 12 767s that were due to come up for renewal this year. I know four were re-leased. Three were not going to be because you were going to use those aircraft because there's time on the engine, so you could use them for other customers. What's the status of the other five? Do we know that? Did I miss something there?
Yes, I mean what we said previously, I think still goes, Helane, we would look to re-lease or sell the other five.
Okay. Has anything happened with those yet?
Well, right now, there's still--
Right now, they're still in operation, but we've got commitments to sell four the returns as we progress through the end of the year.
Okay. Is the proceeds or the timing -- the proceeds included in the guidance? And is the timing -- do you -- I mean you must know the timing.
It would be in the second half, right would be in the -- what we were the third and fourth quarter sort of split between those quarters, and it is in the guidance.
Okay. That’s very helpful. Thank you.
Thank you. And our next question comes from the line of Frank Galanti from Stifel. Your question please.
Yes, great. Thanks for taking my questions. I wanted to follow up on thinking about the business as two separate entities. right? You've got CAM, the leasing long-term contracts, much more stable, right, your public peers, although not in the cargo, right, are trading at nine, 10 times Air Lease, air cap. And even if you look at the Atlas Air takeout, doing that kind of split, you had about eight, eight and a half times on the leasing side.
And then the question really gets down to two parts. One, is it reasonable to think about the company as two entities like that, right? It seems to me that they're inherently intertwined as -- the main reason the leasing business is so large is the value-added services through the ACMI business.
And then a second part of that is long-term ACMI margins. And so we saw in the pandemic, those margins jumped 4%, 5%, 6%. But if you look through the history, those were just breaking even and negative for a couple of years.
Can you sort of talk about those two components? What -- is it reasonable to think about the businesses separate and then ACMI margins on a long-term basis, what gives you confidence that those shouldn't go back to zero, but they should stay at the 4%, 5%, 6%? Or where do you envision that in the medium term?
Thanks Frank. I'll start here, and I think Rich will join in here. But historically, on the ACMI Services segment -- and first of all, we do bifurcate that's why we report them separately as segments, right?
So, we think of the businesses, the leasing business separate from the airline ACMI piece. And the ACMI services piece tends to be more asset-light. Obviously, the CapEx side of our business is the leasing business. buying feedstock, converting the aircraft, et cetera.
The margins that we had historically looked to achieve on the ACMI services piece as a whole, it varies between the sort of the passenger on Omnicare is a little different than the other -- but generally speaking, it has been in that 5% to 10% range.
And you're right that during the pandemic, there were some opportunities certainly that you were available due to shortage in capacity or in the case of Omni, sometimes world events, right, that drove some of the demand that allowed for improvement over those traditional margins.
But we do think that, that asset-light business over the long term can produce attractive contributions to our overall cash flows and margins, it doesn't drive a lot of CapEx. And you're right that our -- some of our large leasing customers, Amazon and DHL, also, we on the experience and the capabilities of our cargo airlines, and that does make our business model unique.
But I don't -- when you say intertwined, I think regardless, customers who need the midsized freighter to handle the e-commerce growth and express growth, they're going to need that converted midsize freighter capacity, and that would be required anyway, having the capability of those to also use our operating services and our MRO services, we think is a value add for them and it's a value add to our cash flows.
Now, there is more volatility with the ACMI Services segment. And I think the Omni piece is probably more -- less visible what the future demand is sometimes. For obvious reasons, their large customers are the largest customer is the government and the DoD, and that can be difficult sometimes to project. Now, that has been worked in -- worked well for us for several years, really since we bought them.
In this quarter, we did see some reduction in that flying. And you're right that cost pressures, inflation pressures can affect ACMI services more. But over time, we expect to see inflation worked into our revenue streams through our contracts.
And we do have long-term contracts, the Omni contract structure has escalation points built into it. But in the short run, there can be dislocation. When costs rise rapidly and you don't get adjustments until contract anniversaries and things like that, your margins suffer in that interim period.
But over the long haul, -- we expect those to adjust, and we should be able to achieve targeted margins on our ACMI Services segment over the long run, and it will contribute to our overall ATSG cash flows on top of those leasing streams.
Yes, I think the only thing I'd add to that, Frank, is that it is -- we're the largest dry lessor to Amazon, we're the largest dry lessor to DHL. We also fly a lot of the airplanes that we lease -- all the airplanes we leased to Amazon and most of the airplanes that we leased to DHL.
It's a unique strategic advantage that we have to be able to pair the flying with the leasing and augment the returns on top of the lease with the flying piece of it. And so that strategy has played out well for us over the -- in the past.
Now, what we've done in the last couple of years is really focused on the dry leasing business and a global growth plan. And so a lot of what's coming in 2023 and 2024 are leases of aircraft that are going outside the country where we won't have necessarily an operating role in those airplanes. And so it's like a diversification, if you will, of the strategy so that we're leasing these aircraft to other operators.
Now, a lot of these operators happen to fly for DHL, UPS or FedEx or Amazon, in other parts of the world. So they're still augmented and supported by strong customers that are paying for the airplane. So we think it's a good strategy, and it's allowed us to diversify into a situation.
At the same token, I will also say a big growth spurt for us during the pandemic was flying just in the CMI asset-light only basis, for airplanes that our customers have given to us. And I think the count is up over 15, now I think it's 17 between our two large network providers in the US.
So, that's an area where, obviously, we wouldn't be flying those airplanes if we weren't confident in our ability to be profitable with those -- with that business. And so we look at these -- the cost pressures that are going on right now is something that we will cycle through and address.
That's super helpful. I really appreciate that. I wanted to dig in to the second question on maintenance costs. So, I think some of the negative reaction in the stock and the investors I talk to is around the large jump in sustaining cash flows. I know it's sort of not the focus of this call, was the last call.
But I wanted to think through that from a -- like, when I look at the -- I don't know, just sustaining CapEx on a trailing 12 basis relative to assets, it's -- and I know we've only had this for a year, so it's kind of hard to look back historically. But it's been about 8% in 2022 and on the $2.60 number on a go-forward basis, that's 10%.
Is that -- like is this an outsized year -- is the way to think about sustaining CapEx is basically all CapEx minus growth in CapEx, the sustaining CapEx. And so that it's sort of -- it's going to be lumpy. But if you looked at it, you'd say, 9% of assets is really the normalized number.
Yes, we're going to have bigger maintenance events because of engine right? We didn't do engine overhauls last year, but we're going to do engine overall this year. And then next year, there's going to be sort of a little bit of a brief is sort of 9% of assets, the normalized number, right?
Because there's a difference between sustaining CapEx the way you report it and a normalized maintenance CapEx number. Can you sort of talk about those -- that difference and what that number would be on a go-forward basis?
Yes, Frank, I'll take shot here. The spike in 2023 sustained CapEx is associated with the timing of some engine overhauls for the EADA engines that are part of the pool that we offer to lessors. And those came out of a power by cycle agreement with Delta a while back, and we established this pool. But there was a sort of a larger number of engines that were going to require overhaul and this is that timing.
So, I do not anticipate the $260 million to be the norm. We've talked about more like $200 million. And you can see over the longer -- you can see looking back, it's been under $200 million on a 12-month look back.
What really drives our sustaining CapEx to increase would be if we had more aircraft that we were responsible for the maintenance on. And in our business model, the growth is going to be leased to external lessees and they're responsible for that maintenance.
So, as CAM grows its fleet, we do not anticipate significant growth in sustained CapEx. The airlines do themselves have some spare capability for aircraft that they have for their CMI agreements, and they are responsible for the maintenance for those aircraft, but that doesn't increase significantly as does our lease -- externally leased fleet that we have no maintenance responsibility for.
And so we don't expect a sustained CapEx to really grow much over time. There may be some growth due to inflation, et cetera. But there's nothing really driving it fundamentally. And the growth CapEx that we report is strictly feedstock plus conversion cost.
So, you are right that everything else we're putting in that sustaining line. And that does include some smaller items that our subsidiaries, may have to do repairs and maintenance that they have to do large items, hanger, things like that, but that may fall into that category and some smaller pieces of equipment. But generally speaking, we don't expect that to go up significantly over time as we grow.
Perfect. Very helpful. Thank you very much.
Thank you. And our next question comes from the line of Chris Stathoulopoulos from Susquehanna Financial. Your question please.
Hey good morning everyone. Quint, I just want to understand here exactly what's included in this revised EBITDA guide for this year and trying to get a handle on what potential downside risk there could be to this guide. So, if you could kind of -- if you can walk us through how we should think about ACMI block hours through the balance of the year and particularly Omni?
And then remind us with Amazon, how much visibility do you have into their flight schedules? Is it sort of month by month? Or do you already know what you're going to be flying in the second half and by extension peak.
Two, what's the assumption in terms of CAM placements and renewals. Three, it sounds like there's some provision for there in asset sales and then it doesn't sound like there's anything in there for pilot accruals. So I just want to understand sort of the building blocks as we think about this revised EBITDA guide for this year?
Thanks Chris. Yes, obviously, there's a lot of detail in our projections. But just sort of in terms of a little bit like Jack asking question to start off in terms of sort of the cadence of what we anticipate the hours in the ACMI Services segment, more of the variability is associated probably with Omni in those just because they have more of a seasonal pattern with flying, with things like true rotations and so forth. A lot of those taking place starting in the summer months and then extending into the fall.
And so for their hours, we have assumed some growth through that period. And then their fourth quarter after sort of the latter part of the fourth quarter, it drops off again. And then on the cargo carriers, typically, they're hours are going to grow as we progress through the year based upon the normal sort of peak seasons that you have for shipping and the various customer days that the customers have.
But the number of aircraft that they're going to be operating, it's pretty stable year-over-year. We're going to get some customer aircraft, but there may be a few aircraft that come out. We talked about some of the retirements and so forth. So that part is pretty stable. As far as the CAM segment. We expect, I believe, eight. We put two aircraft -- we leased two aircraft in the first quarter. I think we expect six in the second quarter.
Two of those are already leased.
We had two of those we did in April. And then we have the other 12 aircraft that we project to lease external customers in the second half, a fairly evenly split. I think third quarter might have a little bit more than four. And so that's some of the some of the cadence, I guess, in terms of how we're looking at the drivers as we move through the year.
I'm sorry, with Helane's question on the 767s, the older 200s with Amazon, is there -- that's included in the guidance, whether those are renewed or sold?
Yes, I mean that's -- it's not -- I mean, that's in the second half. I mean, the aircraft will either be sold or re-leased those five as they come out, but it will be pretty late in the year. And the aircraft, it's not a huge number either way. It's not like it's a significant driver. And then Amazon added three aircraft that we believe that they will okay, Mike, go ahead.
Yes. We've talked about the extensions. We talked about what we're going to do with the 200s as a whole on the retirements and the sales piece of it. And as Quintin and Rich mentioned, those are in the forecast already.
Okay. So, my follow-up, in the prepared remarks, which you talked about growing earnings and free cash flow next year. I just want to understand the assumptions there because we have uncertainty around the approval of these new Airbus aircraft, growing a recession. We have two open pilot contracts. We have elevated attrition levels. Maybe if the way to think about it, if we have -- you've given us a lot of detail on your order book through mid-decade.
And so if anyone wants to think about building out an EBITDA bridge or discounted cash flow, is the way to think about this really just taking your pandemic peak EBITDA per aircraft discounting rate accordingly to where we see lease rates are and then adjusting at the margin for contracts and inflation.
I just want to better understand the assumptions in this kind of what sounds like growth for next year given all the pressures you're seeing in the business and macro uncertainty. Thank you.
Well, the biggest driver is what we talked about with the lease order book through 2024. Again, Chris, we don't want to get into the -- trying to go through the -- in great detail of the model on this call, but that is going to drive, as it always does with CAM being the biggest part of our EBITDA, that's going to drive the overall growth in EBITDA. We do believe on the ACMI Services front, as we said, that we will see some rate increases that will help offset some of the cost inflation that we've seen.
And there's other steps that we're taking at each of our subsidiaries, our airline subsidiaries, in particular, to adjust for cost. But there's always uncertainties in every business.
We have been through a period here where we've had more inflation, higher interest rates as a factor. We haven't talked about that, but certainly, that's been something that has escalated in the last 18 months pretty significantly, right? So, those are things you always have to take into account.
And just for clarity on the 321 side, just so we're all clear and aligned. The 321s that we have for delivery this year, are not facing any regulatory issues, they all be leased to customers that follow the FAA certification. So that's no issue for 2023.
And in fact, the ones that we have scheduled in 2024 are also aligned to the same. So we don't have any regulatory issues on the 321s that we had planned for delivery right now in 2023 and 2024.
And Chris, as we said in our release, just the annualized revenue from the 20 aircraft that we'll put on this year. Next year, it will generate in excess of $70 million. The EBITDA margin is quite high. It's probably 90-plus percent.
And the confidence level on that is really strong. I mean we see -- we've seen a lot of stability in our conversion houses. You've heard us talk about increasing the conversion sites with our Boeing locations as well. So, the throughput in order to deliver on those 20 aircraft is very solid, not only from a conversion standpoint, but as we've mentioned, from a customer standpoint as well.
Okay. If I could just squeeze in 1 more. Just remind us of the orders that you have out there through mid-decade. How many of those are spoken for? And do you have also the feedstock that you need because what we're hearing is airlines are holding on to older aircraft than longer than they typically would production issues with the OEMs.
So, curious how much of your book is spoken for through mid-decade? And do you have all the feedstock that you need to have to execute on the plans you have in place through that point? Thank you.
Yes, I think if we break this down by each aircraft type, so if you look at the 767-300, we -- Quint had mentioned earlier, the 27 airplanes that we've got as work in process. That includes A321s as well. We buy feedstock. The 767 was a feedstock airplane that was scarce and remains scarce.
And look, when you're looking for feedstock airplanes and you find a good airplane at the right price. We've been acquiring those because if you let that go, you don't know if you're going to get an airplane closer to when you're going to deduct it.
We always try to match as close as we can, the same year of induction to when we acquired the airframe were acquired through -- for most converters to have an MSN number, a serial number for an aircraft six months prior to induction. So there's a lag there. So out of those 767, I look out right now, 34 slots through the end of 2024. And we've got customers for all but three of those slots right now.
And then if I look at the A321, keep in mind, we own -- we're involved in a joint venture for the STC, but we also own a main conversion house for that, our PEMCO conversions, which is part of AMS and Tampa.
And so we've got 11 aircraft in queue right now, and we own the slots. And as we spoke earlier, we'll look to make decision about expanding or retracting further on the A321 depending on how these regulatory issues get worked out. What the issue is there is the EASA approval.
And so there's a lot of aviation authorities that follow EASA and there's a lot to follow the FAA. When Mike says that we're okay with the ones we've got, it's because of going into regulatory environments where the FAA is the common benchmark that they follow.
EASA, we're down to one issue, and it's an issue that in working with EASA, they've given us a pathway to get it approved. It's just about doing the work. And then what the unknown is how long it takes them to evaluate and approve that. So we'll wait to see how that goes before we articulate any more future slots and aircraft.
On the A330s, out through 2028, we've got 30 slots in the first 20, all of customer assignments. We've identified some feedstock. I think we're in the process of acquiring the first one, which is going to go into conversion in the fourth quarter. So, again, real strong demand for that, going out quite a ways in terms of the order book. I hope I answered your question.
Yes, just maybe a drop more on the 330 since it's going to be a huge part of our future. starting next year from a delivery standpoint. Based on the 30 slots on the timing that we have with them over the next few years, we estimate that we're going to have about 65% of all the A330s that are converted from a market standpoint will be our conversion slots I talked about just the breadth and depth of the industry as it looks out over the next several years in terms of the freighter demand.
So, if you think about that as the natural replacement in the future of the 767 and controlling that majority of the conversions loss, you could see that our order book is already filling up 20 plus.
So, the future in terms of the expansion into 2024, 2025, 2026, 2027 where these slots start producing converted freighters is the reason why we're so bullish and optimistic about the future in the coming years.
Okay. And the EASA approval is what I was referring to, but it sounds like that at this point, there's a good portion of that book through mid-decade that's spoken for has pretty solid plans.
Just for clarity, the EASA only relates to the A321, it has nothing to do with the 330. That has already had also EASA approval for clarity.
Okay, got it. All right. Thanks for the time.
Thinks Chris.
Thank you. And our final question for today comes from the line of Michael Ciarmoli from Truist. Your question please.
Hey good morning guys. Thanks for taking the question. I guess I'm still just trying to figure out here, a lot of these headwinds, rising maintenance costs, inflation, interest rates, I mean these aren't new. So the pressure on ACMI, I mean, you gave the guidance in late February.
I think you were talking about Omni being down less than 5% for the year in terms of hours. I think you called out down 25% in the first quarter. I guess what changed so rapidly to drive that erosion in profit that wasn't already known?
Yes. The -- I think in the first quarter, Michael, the bigger impact was on Omni block hours reductions, although the cost pressures have been more than what we had projected in terms of what we're seeing we've seen some of the costs like return maintenance on a per cycle basis, over 20% travel to position flight crews, flight attendants, et cetera, increased significantly. But for the guidance change, a big piece of it is on the revenue side and particularly Omni.
We knew and we said on the last call that we expected some of the other government flyers to fly more of their eligible entitlement than what we had seen previously because the macro environment wasn't presenting as attractive opportunities for them to take their pilots and fly them, for example, for cargo or commercial customers. And we've actually seen more of that even than we had anticipated, and that effects Omni quite significantly.
Omni is sort of the has been sort of the go-to carrier and flown a lot of the excess -- in excess of their entitlement additionally, taking some of the missions that others pass them. So, that is a very large driver of this. But the cost side is -- and the cost pressures are also I would say that they're higher than what we had projected.
There's a couple of other things, Michael, that were prevalent in the first quarter. for Omni. First one is the type of flying that they were -- that they got resulted in a drop in their hour-to-cycle ratio by about an hour.
So, to put that in other terms, they're -- versus their plan, their cycles were up 200, but their block hours were down. So, what that means is they've got 200 more stops involves maintenance and catering and all the things that go along with that -- when you have a cycle, it drives your maintenance costs.
And so it was just an unusual situation that the Omni believes that going forward, that the hour cycle will return back to a normal thing. They did handle a type of flying that is not going to be prevalent moving forward.
The other thing is, as a passenger charter ACMI airline, the way Omni had staffed, keep in mind, they had a very good year in 2022, and they were never at full staff. Well, they achieved full staffing at the end of 2022, where they had the right amount of pilots and the right amount of flight attendants for their fleet. And then when the flying dropped in the first quarter, and you're at full staff, it's where you see that erosion.
Now, part of their go-forward plan is to fix that. And they've already gotten pretty far along in doing that in terms of rightsizing the staff across the operating side to the type of flying that they're going to be doing and projecting going forward. So, that's one of the cost benefits we think we'll begin to see in the second quarter.
Got it. Okay. And then just the capital spending plans for the remainder of the year. You've got $89 million in cash on the balance sheet. I mean -- are you planning on exhausting the revolver by year-end? Or how should we think about the -- maybe the cap structure exiting this year?
So, we -- we're -- we have about, I think, on the current revolver, we have excess to about $390 million or so. And that and of itself, I think, would get us this year, which would take care of this us needs, but we also have access to additional should we need it through an accordion feature, et cetera. And so our leverage ratio is still expected to remain under three times as we finish the year. So, we're not highly levered. And so that isn't -- access to liquidity isn't a problem for us.
Okay. Okay. And then just Quint, can you remind us how much of the debt is floating, presumably the revolver? And I'm assuming drawing down or drawing on that line.
Yes, it's about 40% of it, Michael, 60% of the space.
Okay, perfect. All right. Thanks guys.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rich Corrado for any further remarks.
Thanks Jonathan. For more than a decade, fair leasing has been the foundation of our strategy. All of our other businesses serve to extend our core leasing relationships with services that add value and supplement our overall returns.
That strategy has been successful and will remain our strategy for the future. It's paid off over time and significant returns of this Boeing 767 freighters that remain the core of our fleet.
Because our airlines operate on an ACMI or CMI basis, their returns do not depend on ticket sales or stable fuel prices, but they are vulnerable to inflation in the short term and the customer decisions about how and when and how far they fly. Sometimes, as is happening in our passenger airline business, both factors converge in a way that affects our results.
Our leasing returns are both stable and growing. -- the 20 aircraft that we are scheduled to deliver in 2023 will contribute over $70 million in increased revenue next year with a high adjusted EBITDA conversion.
Our customers indicate that volumes will improve in the second half. We look forward to finishing the year strong, while continuing to keep our freighter investments consistent with the shareholders -- with the returns our shareholders have come to expect from their investment in ATSG. Thank you for your participation in today's call, and stay safe.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.