Air Transport Services Group Inc
NASDAQ:ATSG
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Air Transport Services Group Inc
Earnings Call Analysis
Q4-2023 Analysis
Air Transport Services Group Inc
Air Transport Services Group's fourth quarter and full year 2023 earnings call reflected a period of significant headwinds affecting the company's financial performance. Notable challenges included a decrease in leasing demand and a reduction in airline operations block hours. The most pronounced impact came from an accelerated return of leased 767-200 freighters, which resulted in a roughly $33 million reduction in adjusted EBITDA for the leasing segment. Despite these obstacles, the company moved forward by leasing 13 aircraft, including the inaugural three Airbus A321-200 freighters. Looking ahead into 2024, management has chosen a conservative stance in providing adjusted EBITDA guidance, taking into account existing and signed leases without potential future contracts, resulting in a forecast of $506 million for the year.
The company's revenues fell by $16 million, a 3% decline from the previous year, to $517 million. This dip primarily stemmed from underperformance in the ACMI Services segment, partially counterbalanced by higher earnings in the leasing division. A notable loss of $16 million was reported on a GAAP pretax basis, contrasting with pretax earnings of $61 million in the same quarter of the previous year. In response to persistent market challenges projected through 2024, ATSG is proactively cutting capital expenditure to enhance its financial health, slashing the budget to $410 million—nearly half of what it was in 2023.
The reduction in adjusted EBITDA to $130 million for the fourth quarter, marking a 20% descent from the prior year, alongside a $79 million full-year fall to $562 million, is chiefly attributed to two segments. The Cargo Aircraft Management (CAM) division saw a $9 million drop, dominated by the loss associated with the phasing out of ten 767-200 aircraft leases. The remaining drop of $70 million came from ACMI Services and other combined segments, weighed down by diminished block hours and a less profitable revenue mix.
Despite unpredictable market conditions, ATSG demonstrated prudent capital management with total expenditures recorded at $212 million for the quarter. The breakdown included $151 million aimed at growth and $61 million dedicated to maintenance. The adjusted free cash flow portrayed a positive picture, with a significant 52% increase to $435 million. These financial maneuvers signal a strategy to navigate through the market volatility while securing a sound capital position.
As ATSG braces for continued market challenges, the forecast of $506 million in adjusted EBITDA and reduced capital expenditure reflects a cautiously optimistic outlook. With existing contracts and leases as the basis for their projections, the company remains vigilant in curbing costs while exploring avenues for growth. The reduced capital spend and commitment to generating a positive free cash flow underscore a steadfast approach to weathering economic adversity and capitalizing on potential market recoveries.
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Good day, and thank you for standing by. Welcome to the Q4 2023 Air Transport Services Group, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Joe Payne, Chief Legal Officer.
Good morning, and welcome to our fourth quarter and full year 2023 earnings conference call. We issued our earnings release yesterday after the market closed. It's on our website at 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, including the loss of customers or a reduction in the level of services we perform for customers; 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 U.S., which may be more severe or persist longer than we currently expect; the impact of the current competitive labor market; changes in general, economic and/or industry-specific conditions, including inflation and regulatory changes; the impact of geopolitical tensions or conflicts, human health crises; and other factors as contained from time to time in our filings with the SEC, including the Form 10-K for 2023 that we will file this week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax 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 Joe Hete, CEO, for his opening comments.
Thank you, Joe. Good morning, everyone. As you may recall from our third quarter call, we saw some significant changes to our market environment in the second half of the year, resulting in multiple headwinds that continue to impact our financial results in the fourth quarter. These include lower demand in our leasing segment and reduced block hours in our airline operations.
The most significant factor was an acceleration in lease returns of our 767-200 freighters, which reduced adjusted EBITDA by approximately $33 million in our CAM leasing segment in 2023. These aircraft were in high demand as Amazon built its own air express network starting in 2015, and even more so during the pandemic when customers kept the aircraft in service longer than originally planned. While we always envision the market transitioning to the 767-300s from the 200s, the market softness has accelerated that process.
In addition to the lower lease revenue, we also lose power-by-cycle engine revenue as the 200s are removed from service and the aircraft remaining in service fly fewer cycles. Despite the macroeconomic and operating challenges weighing on our results in the second half of the year, we leased 13 aircraft, including our first 3 Airbus A321-200 freighters.
By now, I'm sure most of you have seen our earnings release and the guidance we've given for 2024. Quint will review our 2023 financial results in a moment. Many of the challenges he will describe are expected to continue in 2024. As a result, we are taking a more conservative approach to how we provide our adjusted EBITDA guidance this year. Traditionally, our guidance has included upside potential from the expected signings of future leases and additional ACMI flying. Today, we are providing a forecast of $506 million in adjusted EBITDA for this year, which only includes existing and signed future leases, net of expected lease returns. We believe this approach gives a better indicator of our expectations. We will also outline drivers we believe could provide upside to that.
Given our expectations for continued market challenges in 2024, we are aggressively reducing our capital spending outlook, and I'm committed to generating positive free cash flow this year. I'll discuss the specifics of our capital plan for 2024 after Mike gives you some details on our adjusted EBITDA outlook, but the key is that we are budgeting $410 million, down $380 million, nearly half of the 2023 levels.
With that, I will now turn the call over to Quint Turner to discuss our financial results for the fourth quarter. Quint?
Thanks, Joe, and welcome to everyone joining us this morning. I'll start on Slide 4, which summarizes our financial results for the quarter. Revenues were down $16 million or 3% versus a year ago to $517 million. This was driven by lower revenue in the ACMI Services segment, partially offset by higher revenue in our leasing segment. In the fourth quarter, we saw a GAAP pretax loss of $16 million, down from pretax earnings of $61 million in the prior year period.
The 2023 GAAP results include a noncash $24 million settlement expense associated with the partial termination of a previously frozen pension plan. This resulted in a diluted loss per share of $0.24 versus diluted earnings per share of $0.50 in the fourth quarter of 2022. On an adjusted basis, pretax earnings fell $45 million to $20 million, and EPS was down $0.35 to $0.18. In our aircraft leasing segment, revenues increased 18% for the fourth quarter and 6% for the full year, reflecting the benefit of a full year of revenues from six 767-300 freighters leased during 2022 as well as partial year revenues from 10 additional 300s and 3 Airbus 321s we leased in 2023.
CAM's pretax earnings were down 34% for the quarter and down 23% for the full year. Interest expense and depreciation were $6 million and $5 million higher in the fourth quarter of 2023, respectively. For the year, the reduction in CAM's pretax earnings was primarily due to $33 million less in aircraft and engine lease results related to 767-200 freighters. That was over 90% of the decline in CAM's annual pretax earnings versus the prior year. As of year-end, 90 CAM-owned aircraft were leased to external customers, 1 fewer than a year ago. Additionally, ten 767-200 freighters were removed from service during the year.
In our ACMI Services segment, pretax earnings were a loss of $2 million, down from $26 million in the fourth quarter of last year. This was driven by unfavorable revenue mix impacts and fewer block hours flown for the military. In the fourth quarter, block hours flown for the military were down 24%. This represents the lowest fourth quarter military hours since 2017. On a combined basis, the total block hours flown by our 3 airlines were down 4% versus the prior year quarter.
Turning to the next slide. Our fourth quarter adjusted EBITDA was $130 million, down 20% compared to the prior year. 2023 adjusted EBITDA was down $79 million to $562 million. Of the decline in adjusted EBITDA, CAM decreased by $9 million and ACMI Services and other declined by $70 million. CAM's decline was driven by $33 million less in adjusted EBITDA related to ten 767-200 lease returns and fewer block hours flown by the 200s remaining in service, resulting in lower power-by-cycle engine revenues. Again, the decline in ACMI Services and other was driven by lower block hours in our airline operations and a lower margin revenue mix.
Slide 6 details our capital spending for the quarter and past 12 months. Total CapEx for the quarter was $212 million, comprising $151 million in growth CapEx and $61 million in sustaining CapEx. As Joe mentioned, we are projecting substantially lower capital expenditures for 2024, which he will address in more detail in a moment. The next slide updates adjusted free cash flow as measured by our operating cash flow, net of our sustaining CapEx. Operating cash flows increased $54 million to $128 million for the quarter and were $654 million for the trailing 12 months. Adjusted free cash flow was $435 million, up 52% versus last year.
On Slide 8, you can see that available credit under our bank revolver in the U.S. and abroad was $358 million at the end of the fourth quarter. We bought back approximately 7.4 million shares over the past year, all within the first 3 quarters. Our balance sheet net leverage ticked up to 3.2x.
Turning to the next slide. I'd like to spend some time discussing our outlook and assumptions for 2024. Then I'll turn the call over to Mike Berger, our President, to discuss the market environment. For 2024, we expect adjusted EBITDA of $506 million, down approximately 10% versus the prior year. We also project adjusted EPS in the range of $0.55 to $0.80 diluted for 2024, reflecting higher depreciation, interest expense and income taxes. This includes only the two 767-300 freighters we have already leased this year and two others for which we hold signed leases for delivery later this year. It also assumes the return of seven 767-200s from Amazon and three 767-300s when their leases expire later this year.
Please note that this adjusted EBITDA forecast excludes any contribution from additional aircraft leases or other new business not currently under contractual commitment. We believe upside exists from these opportunities, which our commercial teams are aggressively pursuing. On a combined basis, we believe these opportunities could provide $30 million in additional adjusted EBITDA should they materialize, driving our potential adjusted EBITDA to $536 million.
Now I'll turn the call over to Mike to discuss the outlook and the operating environment in more detail. Joe will follow up with the capital spending outlook. Mike?
Thanks, Quint. As you just mentioned, we see opportunity for upside in our 2024 forecast. Before I do that, let me set the table by walking through the key drivers of our expected results. The biggest drivers of the decrease in adjusted EBITDA forecast of $506 million versus the 2023 actual amount of $564 million are lease returns of 767-200s and the effect of higher cost and lower block hours in our airlines. The return of the 200 results in a $55 million decline in the leasing-related EBITDA forecasted versus 2023 due to lower 767 lease revenue, along with lower PBC-related engine revenues. Almost all of the remaining 200s have a number of years of useful life remaining.
When we spoke to you last quarter, we noted a commentary from some of our lessees experiencing lower customer demand, which was negatively impacting their financial results and outlook. As a reminder, that was primarily related to international demand. Since then, we've seen some improvement in the leasing demand in international markets, particularly as it relates to the midsize freighter market that CAM serves. In particular, we've seen some more A330 leased in recent months. Furthermore, we've seen more A321 deployments, especially in Europe and Asia.
With regard to the A321s, we recently received EASA approval for our freighter conversion design and are now able to release these aircraft into the European market. We continue to see the A321 as the logical replacement for older-generation narrow-body aircraft like the 757. We've also seen encouraging signs in the 767 market, as one of our customers recently extended two 767-200 leases into 2025. We will continue to stress the operational capabilities, cost efficiencies and reliability of all our aircraft types. As Quint said, our outlook assumes only those leases currently under customer commitment. As the market normalizes further, we are well positioned to take advantage of opportunities beyond these commitments.
Now I'll turn the call back to Joe Hete for our CapEx plan.
Thanks, Mike. As mentioned, we now expect total capital spend of $410 million, a reduction of $95 million from our 2024 expectations on the third quarter call, and that's down $195 million from the forecast we gave you at our Investor Day last September. Drilling down, we now expect $165 million for sustaining CapEx and $245 million for growth. The expected $330 million reduction in growth CapEx versus 2023 reflects fewer feedstock purchases and freighter conversions than our prior plan. The expected $50 million reduction in sustaining CapEx versus 2023 is driven by fewer expected engine overhauls in 2024.
The gross spending outlook includes the completion of 14 in-process freighter conversions and the acquisition of 9 additional feedstock aircraft. Those include 5 Airbus A330s that we committed to purchase several years ago. Looking ahead, we expect to see a further decrease in growth CapEx in 2025. Our reduced spending outlook for 2024 is expected to meaningfully improve our cash generation, and we are targeting positive free cash flow for the year.
Despite these challenges, I am confident in the demand for our midsize freighter assets over the long term and the strength of our Lease Plus market strategy. Furthermore, our fleet investments position us to remain the leader in midsize freighter leasing and will allow us to deploy more freighters as market conditions improve.
That concludes our prepared remarks. Quint and I, along with Mike Berger, our President; and Paul Chase, our Chief Commercial Officer, are ready to answer questions. May we have the first question?
[Operator Instructions] Our first question comes from Christopher Stathoulopoulos with Susquehanna Financial Group.
This is Anthony on for Chris. Your full year '24 adjusted EPS or EBITDA guide implies a 10% year-over-year decline. I know you mentioned some of the puts and takes of that, but how should we think about the flying versus leasing EBITDA decline for this year? And how should we think about your [indiscernible] for this year?
Thanks, Anthony. It's Quint. In terms of the EBITDA decline year-over-year, you've got the CAM piece, which is as we mentioned, the big factor there was the 767-200 reduction. And we talked about versus '23, our '24 guide has an impact just on the 767-200s, roughly a $55 million decline just on the CAM piece. And so CAM is going to be down year-over-year in total in adjusted EBITDA. And at the sort of the top of the range, how we gave sort of the $506 million, and then we said there was upside, it's about a $20 million decline versus that top of that range for '24.
And of course, some of the upside is CAM that's in that $30 million that we cited between the $506 million and the $536 million. As far as the airlines segment, it's a -- again, the 767-200 removals. And year-over-year, one of our airlines, ABX Air was still operating some longer routes related to the pandemic, and those ended in the first quarter. And it's about -- the ABX piece is down, certainly again, at the top of that range, about a little shy of $20 million. It's a revenue decline, right, because the block hours are down year-over-year and the other 2 airlines are pretty flat.
Great. That's great color. And then in terms of the margin, can you speak a little bit on the expense side? So you have the 767-200 returns less revenue on the power-by-the-hour contracts. But how should we think about some of your expense buckets for this year? Are you expecting any notable increases? Anything moving kind of inflation plus?
Well, in some of the bigger buckets, on the salary and wage contract labor kind of expense, we're actually predicting a decline on that -- in those costs versus '23, as naturally with some lower flying volumes and so forth plus some measures we've taken to sort of increase the cost efficiencies, we're expecting headcount to be flat and down depending upon the subsidiary company. So there, you're looking at a decline, it's $20 million to $30 million, call it.
On the maintenance expense line, again, you've got a decline anticipated. Some airplanes, of course, coming out of service. And there, you're looking at roughly -- at least our forecast is for about a $24 million decline year-over-year on the maintenance expense line. Now keep in mind, that also includes some cost of goods sold that our MROs handle that the offset is in the revenue line.
And then another big one, of course, is depreciation and amortization. And there, we'll see some increase. Coincidentally, it's about the same as the decline in maintenance, so figure about a $25 million to $26 million increase on the D&A line.
Anthony, this is Joe Hete. Just to follow up on what Quint said. If you think about the way our contract is structured with Amazon, for example with the 200s versus the 300s, Amazon is responsible for a lot of the heavy maintenance on the 300 side. So the maintenance expense that we book relative to operating those aircraft is smaller than what you'd see with the 200s. So as the 200s come out of service, you'll see a corresponding drop in the maintenance expenses related to that on top of the loss of the -- or to offset partial loss of the cycles and lease payments on the aircraft in total.
As Quint mentioned, if you look at the 200s overall, which in our P&L which are flying for Amazon, the revenue piece of it is down about $60 million year-over-year just for that portion of the business.
Yes, in terms -- I was going to say, too, Anthony, in terms of the interest line, of course, that is up as well. Some of that's a function, of course, of the average interest rate change year-over-year, and of course, will depend upon what happens to some degree with interest rate going forward through '24. But we anticipate north of -- a little north of $20 million increase in total interest. The cash interest piece of that, though, is only up about $10 million or $11 million of that.
The last piece of that would be just some targeted cost cutting that will take place within the businesses, and we've already done that at one of our companies.
Great. Final question here. In terms of the SWB expense for this year, you mentioned the decline. I'm guessing you're not anticipating any labor agreements being signed this year. Can you speak to if you're expecting any for next year?
This is Joe again. From the labor standpoint, no, we don't anticipate that we'll have an agreement with any of our open collective bargaining agreements, whether it's with pilots or flight attendants this year. As you would expect, there's a stark difference in terms of what the expectation may be on the parts of the union side of the equation versus what the company believes it can afford.
They're all being handled under the auspices of the National Mediation Board. We haven't had any negotiating sessions this year, for example, yet with the ATI side of the equation. We have had one with the Omni pilots and with the Omni flight attendants so far this year. But we don't anticipate that any one of those contracts will get settled out this year, so it will probably roll into 2025.
Our next question comes from Ian Zaffino with Oppenheimer.
Can you just let us know how much -- how many 200s are now in service and what your expected returns are throughout the year, either number of aircraft or dollar amount?
Yes. Thanks for the question. It's Paul Chase here. It's 14 aircrafts that will be in service...
By the end of the year.
Right, by the end of the year. And the budget already reflects the aircraft that we expect to come out this year.
Okay. You can provide the amount or just you're giving us the net amount?
Well, there's seven 200s that we anticipate would be removed, what, in April, I think, for Amazon.
Correct.
And the number Paul quoted, Ian, the 14 is what we anticipate having operating at the end of...
2024.
2024. And I think in terms of the anticipated future removals of 200s, that's -- we sort of had this lot of aircraft associated with Amazon and based on the cycle age of the aircraft that came out last year and, of course, the 7 early this year. But those 14, by and large, have...
Have plenty of life value.
Plenty of life in terms of their cycle age. We don't anticipate the rate of removal over the next few years to be more than...
2 or 3.
2 or 3 spread out during that time frame.
Okay. Great. And then just as a follow-up, maybe more of a philosophical question here, but stock's at below $13. Your book value is $21. I think if you do some depreciation adjustments on the 300s, you're probably at $28 or so. What are you kind of doing or how are you thinking about a way to maybe close that value gap? I've got to leave it as an open question.
It's a good question. Like I said, I'm not sure there's a silver bullet in terms of giving you an answer in that regard. Obviously, our performance over the last 12 to 15 months, call it, hasn't been what it should have been in terms of [ revising ] guidance downward a couple of times. Certainly, that's had an impact on the price of the stock.
If you look at the overall transportation sector, I don't care if you're talking about FedEx, UPS, trucking companies, shipping companies, everybody is down on their forecast, actuals for '23 and then down on forecast for 2024. So it's not a lot to point to in terms of the near term, in terms of the market starting to come back. But I think the key is that we're well positioned going forward with the assets that we have, the investments we've already made to be able to react quickly if and when the market finally turns around, whether that's '24 or '25 where we start to see a rebound in that respect.
So from our perspective, it's two things, obviously, market being key, but the other one is execution on our part in terms of better performance overall. That's been a focus of mine since I came back in November, to have better execution on the part of all the operating units and a more conservative approach in terms of the capital spending, as evidenced by the significant reduction we talked about earlier on the call from a CapEx standpoint.
So I think all those things combined, a more balanced capital allocation strategy going forward after generating some free cash flow puts us in a better position to start moving the stock back up where it should be.
Our next question comes from Helane Becker with TD Cowen.
So my one question, just a follow-up on the pilot negotiations. Are there any accruals that you're taking in anticipation of an agreement? Or will it all be reflected in 1 quarter after negotiations conclude and there's an agreement?
Helane, what I think I noted earlier, I think we're ways off from coming to a final agreement. In terms of where that will finally land is anybody's best guess in between. I can tell you, if you look at the ATI side, for example, it's about $70 million in pilot salaries for the year. So depending upon what you want to target is, what you think the expected settlement would be, you can calculate a number using that as a baseline from the negotiation standpoint. So it's going to have obviously a negative impact to the bottom line if and when we finally get an agreement. I'm just not prepared at this point to comment any further in that regard.
Okay. That's helpful base anyway. And then I think you said on Omni, you're doing fewer hours for the military. How should we think about that for fiscal '24?
Helane, if you look at Omni over the last -- starting in 2022, 2023 was down about 11% year-over-year from the military hours perspective. Looking forward to 2024, because military doesn't give you a lot of advanced notice in terms of what the expectations are, we basically flatlined that from an hours perspective for our 2024 plan.
So if it rebounds to normal levels or what we've seen in the past as normal levels, obviously, that would be a significant upside potential for the business. But as Quint said, if you look at the fourth quarter numbers, for example, we haven't seen numbers that low since 2017. So it kind of tells you where things are with all the turmoil going on across the globe, that the military is kind of keeping everybody in position.
Right, got it. And then my final question, and you kind of answered this on lease expirations. So is this like a peak year for lease expirations and we should think about like '25, '26 and beyond being the 2 to 3 or 5 a year versus 10 or 12 a year? Because I feel like last year was also a big year for lease expirations.
Yes. Helane, it's Mike. As we mentioned on the 200s, we had the group that we mentioned, the Amazon on the 7. We'll have 14 remaining in service, as we stated, by the end of the year. Then we anticipate 2 or 3 over the next couple of years on the 200 side. We are expecting 3 lease returns, I should say expirations, not returns, on the 300s this year as well. Two will come very late in the year, the back half of the year, and we've already had one. So you're correct that we had an abundance of lease expired in the last year or so.
Okay. But then it returns to a more historic level?
Correct.
Our next question comes from Frank Galanti with Stifel.
So I wanted to follow up on the ACMI business, specifically flying for the DoD and sort of Omni's role in that. Is the number of block hours down because of pure demand from the government? Or is that an indication that there's other cargo operators taking those block hours, in other words, that would have went to ATSG? And from a strategic perspective, is that -- given there's been a couple of negative margin quarters, does it make sense to maybe fly 1 or 2 less planes to sort of protect the downside and obviously experience less on the upside? Can you sort of talk through strategically thinking through that decision?
Yes. Frank, this is Joe. From the military side, remember, the cargo piece of it is such a small piece of our overall business. We have 1 airplane that does 1 or 2 trips a month potentially over to Asia. It's really about the passenger side of the equation. From the standpoint of demand from the military of what we've seen, it's down overall. For everybody that participates in the craft program, we don't keep tabs on the cargo side of it since we're not a big player there. We don't have the large wide-body aircraft to participate on the cargo piece of the military business.
But in terms of putting aircraft down, obviously, from the standpoint of carrying an aircraft you don't need, there's a significant expense attached to just maintaining that aircraft. So we're looking at our fleet allocation overall on the Omni side of the business. As we said when we acquired Omni way back when in 2018, one of the things that we looked at was the fact that they did use the 767 for the bulk of their military business. And we view that as a feedstock opportunity for converting to cargo at some point in time.
But the key is that when the military calls, you need to be prepared to respond accordingly. We've always prided ourselves on being the #1 provider in our asset class types for the U.S. military. And so we feel it's our obligation to be able to have sufficient assets to be able to respond. But rest assured, we're constantly looking at the fleet composition to see if there's an opportunity to reduce the overall cost.
Yes. I just think it's important to also understand that Omni is flying, not only the entitlement it's provided but over its entitlement, which it traditionally has as well. But the overall demand is down.
Okay. And then I wanted to ask on sort of guidance and sort of what's changed from a messaging perspective. The press release now calls out some planes available for lease, I think it's 14. Are you assuming that those planes are not going to be leased? Like with historical guidance, would that have been -- you would have come out with $30 million to $40 million and you would assume most of those would have been on lease? Like what sort of changed from a conversation with customers' perspective on those planes available for lease and sort of a messaging from ATSG's perspective?
Sure. It's Paul here. I think in the past, the methodology would include the probability of certain leases in a stronger market. And as we saw in 2023, the market has been softer. So what we wanted to do is take a more conservative approach and use leases that were already locked up with customers and deposits and then have upside going forward, as Joe mentioned in his earlier comments.
Yes. So Frank, for example, the $506 million, as we said, assumes four 767-300 leases, two of which have already been put in place this first quarter, and I think maybe a third that could is likely probably in March. And so other than that, we haven't, in that $506 million number, included contribution from additional leases even though we -- as Paul says, we continue to pursue those, and we believe that there's a good chance, particularly if the market normalizes, to make good on some of those.
And we also have returns that we mentioned. We have, what, three 76-300s, I think, coming just to the natural ends of their current leases. And there's potential to re-lease those aircraft. But in that starting point of $506 million, we haven't assumed that. So that's certainly part of that upside potential of that $30 million that we spoke of.
And there will be some depreciation in our EBITDA numbers already, but factored in on the assets. But obviously, if the revenue comes along, it will be nothing but improve the overall EBITDA of the company.
Got you. And then last question, if I could squeeze this one in. The -- so I think investors will appreciate the ability to generate free cash flow this year. But can you sort of talk about where you plan to spend that, use that free cash flow as it sounds like it doesn't want to be into incremental assets?
Yes. In terms of what we expect to generate this year, it will be a nominal amount. We're not talking about significant free cash flow generation. But the first priority is going to start delevering a bit. You saw in our release, we're about 3.2 turns at the end of the year in terms of our debt. So we want to pay that down, give us a little more flexibility, but then we'll be able to build on that significantly as we roll into 2025.
Preliminary look we have at 2025 is the CapEx spend will come down probably an additional 10% or so as we sit here today. As was mentioned earlier, we've already procured a lot of the feedstock. From a conversion standpoint, that's going to be the biggest driver looking into 2025. And of course, that will be driven in large part by what we see in terms of market conditions and demand for the assets.
Our next question comes from Adam Ritzer with [ LL Capital ].
A couple of questions for you. Omni, what was Omni's EBITDA in '23? I think you said it was down 11%. But how much did they actually generate?
Well, Adam, you've been around long enough to know that we don't talk about each particular airline individually. What I can tell you overall is, as you saw in the earnings release, is the overall EBITDA for the airline services side of the equation was down from 2022 going from $209 million roughly to $156 million from an overall. Omni still was significantly positive. We expect about the same level of contribution in 2024 from the Omni piece of the business.
Actually, the largest decline on a year-over-year basis going into 2024 will be with ABX because of the number of 767-200s they were operating on behalf of Amazon and say where they're the biggest -- they took the biggest hit in that regard. But Omni, we're anticipating is going to be about the same level of contribution as this year.
Okay. Understood. One of the slides in there, it mentioned you have 23 planes awaiting or in conversion. So I guess if you have 23 awaiting, if you guys leased all those up, how much upside is there beyond this $30 million you mentioned?
Well, again, not all of those are going to be available into service in 2024. And as Paul already answered, the expectation is that we will get some of those into service. I think there's 14 aircraft in total. They're going through the conversion process today. They're coming out at various points in time in the year. But if we were able to lease every one as it came out, it's probably in the order of magnitude of, call it, $10 million to $15 million of additional EBITDA because of the timing as to when they actually complete their conversion and are available for lease.
Okay. So...
Not on a full year basis, but...
Right. That's just for fiscal '24.
'24.
Right. Right, I get it. Of the '24 growth spend, can you -- I think you said some of that's for A330s that were already ordered. But can you break that down? Like how much of that do you actually need to spend with all of these planes sitting there?
Well, if you look at it from the pure growth perspective of the number I talked about earlier from that standpoint, it's about, call it, $250 million in terms of growth spending and then the balance of it is in sustaining CapEx for 2025.
No, I realize that. But of the $250 million, how many planes is that? I mean you have so many sitting there that are unleased. Why are we not putting that growth CapEx down to as little as possible?
Well, as I said mentioned earlier, Adam, we're going to play it by ear in that regard. I said we initially targeted a 10% reduction from where we're at this year. It could go lower, it could go higher, depending upon what the market demand is at this point in time. But there are certain fixed commitments that we have that we can't avoid in terms of whether it's a conversion or a feedstock purchase. There's a couple of aircraft that we have contracts to acquire in 2025. But again, it all goes back to what we think we can avoid if the market isn't there or what we can respond to if the market is.
Got it. Okay. So of the $250 million for this year, how much is contractually obligated of that $250 million?
Well, that, almost all of that, Adam, because in '24, there's actually 9 aircraft that -- feedstock airplanes that we -- some of the commitments to buy those were made as much as 2 years ago. So we've got four 76s and five A330 feedstock aircraft that will be purchased in 2024. And then you've got to complete conversion of the aircraft that are in process because as we told you last quarter, that just -- that makes sense to not interrupt those conversions midway through. But to the extent that we can pause that production, we have baked that into the budget that we're giving you already.
Got it. And last question, for '25, how much do you have obligated contractually for growth CapEx? I think Joe said earlier, it would be down about 10%. But of that, let's say, $200 million, how much of that is contractual that you can not get out of?
I don't have a good answer for you right now, Adam. Like I said, part of it is as we pegged this number, part of it is obviously the obligations that we can't avoid, and some of them are related to what we think the market will respond to. But overall, it's a reduction from where we're at in 2024.
Our next question comes from Christopher Stathoulopoulos with Susquehanna Financial Group.
This is Anthony again for Chris. Could you expand on what the opportunities for additional EASA flying entails? Is that kind of peak season related or opportunistic short-term flying? And what types of airlines or shippers would this involve?
Yes, sure. Thanks for the question, Anthony. Most of the opportunities still exist in the passenger charter flying. So what typically happens in the summer for different parts, say, in the EU or in Asia, carriers will be looking for additional lift, and that's where Omni could come in and help. In fact, they have done that many times in the past. So predominantly, that exists on the passenger side for short-term opportunities. By short term, I define those anywhere from 1 month to 3 months. Sometimes those get extended, but that's primarily where the opportunities exist.
Additionally to that, we see around peak flying around the holidays, college bowl seasons, that type of stuff. We had -- Omni tend to do very well in that space as well on the charter side.
Yes. And on the cargo side, you'll see some shorter versions of that for Mother's Day. And then, of course, during peak season in December, some of the larger integrated customers ask us for additional lift.
Great. And I guess final question. In the -- in your guidance for this year, how much, if at all, are you kind of anticipating a macro slowdown, either in the United States or more globally? Kind of can you give us a magnitude or a ballpark that you're kind of thinking about?
We hope we've already seen it. We talked about how the rate of passenger flying for our, I guess, second largest customer, the DoD has trended compared to like 2017, you have to go back to 2017. So we haven't -- as Joe said, we've assumed a pretty flattish outlook on that piece of the ACMI flying. And we talked about the leasing side where we've only assumed already executed contracts in effect for those four 767-300s in terms of growth.
So I think we've been pretty -- tried to be conservative certainly in that respect. So beyond that, we haven't assumed a further significant degradation on the macro side.
If you think about on the airline operations side, which is going to be the primary area where there might be some upside or downside, most of the assets or most of the flying we do, I should say, is relegated to the Amazon network and the DHL network, which basically those are time-definite networks, so to speak. So we don't anticipate there's a lot of volatility there other than what we've already baked in, which is the removal of the 767-200s from the Amazon network.
At the same time, we will be adding back one additional Amazon-owned tail sometime, I guess, maybe later this quarter, beginning of the second quarter, that we will add into the ATI fleet. So it should be pretty stable from the cargo side of our operations.
I would now like to turn the call back over to Joe Hete for final comments.
Thank you. I have spent my entire business career with this company, including the 2 decades since we became an independent public company in 2003. Except for 2008, when DHL's decision to shift from direct competition in the U.S. express market nearly left us without a customer for our entire air cargo fleet, ATSG has never faced such a rapid shift in customer demand that's occurred during 2023.
Since returning as CEO last November, I've taken steps we have discussed today to reduce spending on fleet expansion and rightsize our airlines to their own changes in demand. If that isn't enough, we'll do more to match the scale of our business to the growth environment and drives us back to being the free cash flow generator that we used to be.
But I'm also an optimist. During my career, long-term demand for cargo aircraft has only increased. I know that appeal of shopping online will require more aircraft lift to fulfill their orders around the world, and I intend to work with the great people of ATSG every day to put us back on track as quickly as possible. Thank you, and have a quality day.
Thank you for your participation. You may now disconnect.