AIR TRANSPORT SERVICES GROUP, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
The following Management's Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations ofAir Transport Services Group, Inc. , and its subsidiaries. It should be read in conjunction with the accompanying consolidated financial statements and related notes included in Item 8 of this report as well as Business Development described in Item 1 and Risk Factors in Item 1A of this report.
PREVIEW
We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services, and other support services to the air transportation and logistics industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. Our principal subsidiaries include our aircraft leasing company (CAM) and three independently certificated airlines, (ABX, ATI and OAI).
We have two declarable segments:
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the Company's airlines. CAM acquires passenger aircraft and manages the modification of the aircraft into freighters. The follow-on aircraft leases normally cover a term of five to ten years. CAM currently leases Boeing 767, 757 and 777 aircraft and aircraft engines. ACMI Services includes the cargo and passenger transportation operations of our three airlines. Our airlines operate under contracts to provide a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for theU.S. Department of Defense , usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services to customers, cargo load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments. AtDecember 31, 2021 , we owned 107 Boeing aircraft that were in revenue service. We also owned twelve Boeing 767-300 aircraft and one Airbus 321-200 aircraft either already undergoing or awaiting induction into the freighter conversion process atDecember 31, 2021 . In addition to these aircraft, we leased four passenger aircraft from third parties and operated six freighter aircraft provided by customers. Our highlights for 2021 include 1) taking redelivery of 12 CAM-owned Boeing 767-300 newly converted freighter aircraft and leasing all of them to external customers under long term leases; 2) adding four more customer-provided aircraft to the fleet that we operate for our customers under CMI agreements, bringing that total to 56 freighter aircraft; 3) inducting our initial Airbus 321 passenger aircraft into the freighter conversion process at our hangar facility inTampa, Florida ; 4) diversifying our ability to deliver converted Boeing 767-300 freighter aircraft by reserving aircraft conversion slots with Boeing; 5) offering our aircraft leasing customers additional solutions for aircraft engines; and 6) securing freighter modification slots with EFW for 20 Airbus A330 aircraft. Due to the strong demand for medium widebody and narrow body freighters and as part of our continued growth strategy to expand and diversify our fleet, we have secured aircraft conversion slots over the next few years. We continue to partner with IAI and have forged new conversion relationships with Boeing and EFW, as well as gained the ability to perform our own conversions of the Airbus A321 aircraft through our joint venture arrangement. 26 --------------------------------------------------------------------------------
COVID-19[female[feminine
Our passenger flight operations have been and will continue to be impacted by the COVID-19 pandemic primarily as a result of certain international airport closures, flight cancellations and increased expenses. Our airlines have received federal government funding pursuant to payroll support programs as described in Note H of the accompanying financial statements. Vendors that convert our aircraft into freighters have experienced supply chain disruptions resulting in the delay of aircraft conversions. While the pandemic has made network operations more difficult to maintain, it has not had a significant adverse financial impact on our airline operations for customers' freight networks. We have not experienced a wide-spread outbreak at any of our employee locations. A COVID-19 outbreak among our flight crews, at one of our maintenance facilities, at a critical vendor, at a customer sorting center, at an aircraft modification facility or at an airport could result in additional workforce shortages, facility closures, delayed aircraft deployments and additional flight cancellations. Additionally, the threat of COVID-19's continued spread, regulatory requirements and government restrictions could result in critical supply chain disruptions, a reduced workforce, reduced availability of contractors, scarcity of critical parts and delayed deliveries of parts and equipment. In such event, flight delays, additional revenue disruptions and additional costs would result.
Customers
Our biggest customers are ASI, which is a subsidiary of Amazon, the
Revenues from our commercial arrangements with ASI comprised approximately 35%, 30% and 23% of our consolidated revenues during the years endedDecember 31, 2021 , 2020 and 2019, respectively. As ofDecember 31, 2021 , we leased 42 Boeing 767 freighter aircraft to ASI with lease expirations between 2023 and 2031 and we operate those aircraft for ASI. The aircraft lease terms typically range from 5 to 10 years. We operate four other Boeing 767 aircraft provided by ASI. We also provide ground services and aircraft maintenance services to ASI. TheDoD comprised 26%, 31% and 34% of our consolidated revenues during the years endedDecember 31, 2021 , 2020 and 2019, respectively, derived from operating passenger and combi charter flights. As ofDecember 31, 2021 , we leased 12 Boeing 767 freighter aircraft to DHL comprised of four Boeing 767-200 aircraft and eight Boeing 767-300 aircraft, with expirations between 2022 and 2028. Eight of the 12 Boeing 767 aircraft were being operated by the Company's airlines for DHL. Additionally we operated two Boeing 767 aircraft that were provided by DHL. DHL comprised 12%, 12% and 14% of our consolidated revenues during the years endedDecember 31, 2021 , 2020 and 2019, respectively. InMay 2021 , CAM reached an agreement with DHL to lease four more Boeing 767-300 converted freighters to DHL, each for a term of seven years. One of these leases began in the third quarter of 2021 and the remaining three aircraft leases are expected to begin in 2022. InFebruary 2022 , ATSG and DHL agreed to a six-year extension of its dry leases for five Boeing 767 freighters as well as an extension of the CMI agreement for ABX to operate aircraft throughApril 2028 . The CMI agreement was expanded to include two additional 767 freighters. RESULTS OF OPERATIONS Revenue and Earnings Summary External customer revenues from continuing operations increased by$163.7 million , or 10%, to$1,734.3 million during 2021 compared to 2020. Customer revenues increased in 2021 for contracted airline services, charter flights, aircraft leasing and aviation fuel sales, compared to the previous year periods. Beginning in lateFebruary 2020 , our revenues were disrupted due to the COVID-19 pandemic. TheDoD and other customers began canceling scheduled passenger flights as a result of the pandemic. The decline in revenues from these cancellations was offset by an increase in flying for our customers' package delivery networks and charter flight operations during 2020. Revenues for 2019 were$1,452.2 million . 27
-------------------------------------------------------------------------------- The consolidated net earnings from continuing operations were$229.0 million for 2021 compared to$25.1 million for 2020 and$60.0 million for 2019. The pre-tax earnings from continuing operations were$301.2 million for 2021 compared to$41.4 million for 2020 and$71.6 million for 2019. Earnings were affected by the following specific events and certain adjustments that do not directly reflect our underlying operations among the years presented. •On a pre-tax basis, earnings included net gains of$30.0 million and net losses of$100.8 million and$12.3 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon. •Pre-tax earnings were also reduced by$23.1 million ,$20.7 million and$17.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, for the amortization of customer incentives given to Amazon in the form of warrants.
• Pre-tax income from continuing operations included gains of
•Pre-tax earnings included losses of$2.6 million ,$13.6 million and$17.4 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, for the Company's share of development costs for a joint venture and the partial sale of an airline investment. •Pre-tax earnings for the year endedDecember 31, 2021 , included a charge of$6.5 million to write off debt issuance costs in conjunction with the repayment of term loans. •Pre-tax earnings for the year endedDecember 31, 2020 , were decreased by an impairment charge of$39.1 million for our four Boeing 757 freighter aircraft and related assets. •During the years endedDecember 31, 2021 and 2020, the Company recognized$111.7 million and$47.2 million of government grants from the CARES Act, PSP Extension Law and the American Rescue Plan.
• 2019 pre-tax profit also included a charge of
After removing the effects of these items, adjusted pretax profit from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pretax profit from continuing operations follows), was
Adjusted pre-tax earnings from continuing operations for 2021 improved by 11.3% and 21.8% for 2021 and 2020, respectively, driven by increased revenues primarily from CAM and the ACMI Services segments. While improved, our results in 2021 and 2020, particularly forDoD and commercial passenger flying, were detrimentally impacted by the COVID-19 pandemic. 28 --------------------------------------------------------------------------------
A summary of our revenue and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below (in thousands):
Years ending
2021 2020 2019 Revenues from Continuing Operations: CAM Aircraft leasing and related services$ 390,327 $ 327,170 $ 301,984 Lease incentive amortization (20,040) (18,509) (16,708) Total CAM 370,287 308,661 285,276 ACMI Services 1,185,128 1,147,279 1,078,288 Other Activities 375,571 334,300 314,014 Total Revenues 1,930,986 1,790,240 1,677,578 Eliminate internal revenues (196,704) (219,665) (225,395) Customer Revenues$ 1,734,282
Pre-Tax Earnings from Continuing Operations: CAM, inclusive of interest expense$ 106,161
ACMI services, including government grants and interest expense
158,733 114,128 32,055 Other Activities 112 (5,933) 13,422 Net unallocated interest expense (2,525) (2,825) (3,024) Impairment of aircraft and related assets - (39,075) - Net financial instrument re-measurement (loss) gain 29,979 (100,771) (12,302) Transaction fees - - (373)
Other non-service components of retiree benefit costs, net 17,827
12,032 (9,404) Write off of debt issuance costs (6,505) - - Loss from non-consolidated affiliate (2,577) (13,587) (17,445) Pre-Tax Earnings from Continuing Operations 301,205 41,393 71,572
Add other non-service components of retiree benefit costs, net
(17,827) (12,032) 9,404 Less government grants (111,673) (47,231) - Add impairment of aircraft and related assets - 39,075 - Add debt issuance costs 6,505 - - Add charges for non-consolidated affiliates 2,577 13,587 17,445 Add lease incentive amortization 23,094 20,671 17,178 Add transaction fees - - 373 Add net loss (gain) on financial instruments (29,979) 100,771 12,302
Adjusted pre-tax profit from continuing operations
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is
pre-tax earnings excluding the following: (i) settlement charges and other
non-service components of retiree benefit costs; (ii) gains and losses for the
fair value re-measurement of financial instruments including warrants issued to
Amazon; (iii) customer incentive amortization; (iv) the transaction fees related
to the acquisition of Omni; (v) the start-up costs of a non-consolidated joint
venture; (vi) the sale of an airline investment; and (vii) impairment charges
for aircraft and related assets. We exclude these items from adjusted pre-tax
earnings because they are distinctly different in their predictability or not
closely related to our on-going operating activities. We also excluded the
recognition of government grants from adjusted earnings to improve comparability
between periods. Management uses adjusted pre-tax earnings to compare the
performance of core operating results between periods. Presenting this measure
provides investors with a comparative metric of fundamental operations while
highlighting changes to certain items among periods.
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Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analyzing the Company’s results as reported under GAAP.
The Company's earnings were impacted by the fair value re-measurement of the Amazon warrants classified in liabilities at the end of each reporting period, customer incentive amortization and the related income tax effects. The fair value of the warrants issued or issuable to Amazon were recorded as a customer incentive asset and are amortized against revenues over the duration of the aircraft leases. Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. For additional information about the warrants issued to Amazon, see the accompanying notes to the financial statements included in this report.
Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table as ofDecember 31, 2021 , 2020 and 2019. Our CAM-owned operating aircraft fleet has increased by 13 aircraft since the end of 2019, driven by customer demand for the Boeing 767-300 converted freighter. Our freighters, converted from passenger aircraft, utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, newly built freighters or other competing alternatives. AtDecember 31, 2021 , the Company owned twelve Boeing 767-300 aircraft and one Airbus A321-200 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity in 2021 is summarized below:
•CAM completed the modification of eight Boeing 767-300 freighter aircraft purchased in the previous year and completed the modification of three Boeing 767-300 freighter aircraft purchased in 2021. CAM began to lease all eleven of these aircraft to external customers under multi-year leases. ATI operates eight of these aircraft for a customer. •OAI returned one Boeing 767-300 passenger aircraft to CAM. CAM converted this passenger aircraft into a standard freighter configuration. This aircraft was leased to an external customer under a multi-year lease. •ATI returned three Boeing 767-300 freighter aircraft to CAM. CAM leased all three of these aircraft to an external customer under a multi-year lease. ATI operates these aircraft for the customer. •External customers returned five Boeing 767-200 freighter aircraft to CAM. Three of these aircraft were leased to other external customers under multi-year leases. One of the aircraft is being prepped for lease to another external customer later in 2021. The fifth aircraft was retired. •CAM purchased fifteen Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. Three of these aircraft were leased to customers as noted above. The remainder of these aircraft are expected to be leased to external customers during 2022 and 2023.
•CAM purchased an Airbus A321-200 passenger aircraft with the aim of converting the passenger aircraft to a standard freighter configuration. This aircraft should be leased to an external customer in 2022.
• ATI returned the last Boeing 757-200 cargo aircraft to CAM and the aircraft was retired and sold.
• ATI began operating two customer-supplied Boeing 767-300 freighter aircraft and ABX began operating two customer-supplied Boeing 767-200 freighter aircraft.
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2021 2020 2019
ACMI ACMI ACMI
Services CAM Total Services CAM Total Services CAM Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter 5 26 31 5 28 33 7 26 33
Boeing 767-200 Passenger 2 - 2 2 - 2 2 - 2
Boeing 767-300 Freighter 2 59 61 5 45 50 5 35 40
Boeing 767-300 Passenger 6 - 6 7 - 7 7 - 7
Boeing 777-200 Passenger 3 - 3 3 - 3 3 - 3
Boeing 757-200 Freighter - - - 1 - 1 4 - 4
Boeing 757-200 Combi 4 - 4 4 - 4 4 - 4
Boeing 737-400 Freighter - - - - - - - 1 1
Total 22 85 107 27 73 100 32 62 94
Operating lease
Boeing 767-200 Passenger 1 - 1 1 - 1 1 - 1
Boeing 767-300 Passenger 3 - 3 3 - 3 1 - 1
Boeing 767-200 Freighter 2 - 2 - - - - - -
Boeing 767-300 Freighter 4 - 4 2 - 2 2 - 2
Total 10 - 10 6 - 6 4 - 4
Other aircraft
Owned Boeing 767-300 under
modification - 12 12 - 8 8 - 8 8
Owned Airbus A321-200 under
modification - 1 1 - - - - - -
Owned Boeing 767 available or - 1 1 - - - - 2 2
staging for hire
As ofDecember 31, 2021 , ABX, ATI and OAI were leasing 22 in-service aircraft internally from CAM for use in ACMI Services. Of CAM's 26 externally leased Boeing 767-200 freighter aircraft, 12 were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX, three were leased to DHL and were being operated by a DHL-affiliated airline and ten were leased to other external customers. Of the 59 externally leased Boeing 767-300 freighter aircraft, 30 were leased to ASI and operated by ABX or ATI, seven were leased to DHL and operated by ABX, one was leased to DHL and is being operated by a DHL-affiliated airline and 21 were leased to other external customers. The carrying values of the total in-service fleet as ofDecember 31, 2021 , 2020 and 2019 were$1,693.0 million ,$1,535.3 million and$1,387.6 million , respectively. 2021 and 2020 CAM As ofDecember 31, 2021 and 2020, CAM had 85 and 73 aircraft under lease to external customers, respectively. CAM's revenues grew by$61.6 million during 2021 compared to 2020, primarily as a result of additional aircraft leases. Revenues from external customers totaled$273.3 million and$205.0 million for 2021 and 2020, respectively. CAM's revenues from the Company's airlines totaled$97.0 million during 2021, compared to$103.6 million for 2020. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased$63.2 million in 2021 compared to 2020, as a result of new aircraft leases in 2021. During 2021, CAM added 12 Boeing 767-300 freighter aircraft to its portfolio and placed 15 Boeing 767-300 aircraft with external customers under long-term leases. 31 -------------------------------------------------------------------------------- In October of 2021, CAM began to offer engine power coverage to lessees ofCAM's General Electric powered Boeing 767-200 aircraft. Under this service, CAM is responsible for providing and maintaining engines for its lease customers as needed through a pool of engines. Revenues from external customers increased$6.5 million during 2021 for this service. This also resulted in additional depreciation expense of$2.1 million before the effects of income taxes during 2021. From these new commercial agreements, we expect CAM's revenues and earnings to continue to increase dependent upon multiple factors including the cycles operated, the number of maintenance overhauls and the severity of unscheduled maintenance events. CAM's pre-tax earnings, inclusive of internally allocated interest expense, were$106.2 million and$77.4 million during 2021 and 2020, respectively. Increased pre-tax earnings reflect the 15 aircraft placed into service in 2021 and a$1.1 million decrease in internally allocated interest expense due to lower company-wide interest expense, offset by a$31.7 million increase in depreciation expense driven by the addition of 12 Boeing aircraft in 2021 compared to 2020. In addition to the 12 Boeing 767-300 aircraft and one Airbus A321-200 aircraft which were in the modification process atDecember 31, 2021 , CAM has agreements to purchase eleven more Boeing 767-300 aircraft and two more Airbus A321-200 aircraft during 2022 and 2023. CAM's operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the time frames required by customers. We expect to lease to external customers at least nine newly modified Boeing 767-300 freighters, two newly modified Airbus A321-200 freighters and re-deploy one Boeing 767-200 freighter during 2022. CAM's future operating results will also depend on the timing and lease rates under which aircraft are redeployed when leases expire. During 2022, three Boeing 767-200 aircraft are expected to be returned from lease.
ACMI Services
Total revenues from ACMI Services increased$37.8 million during 2021 compared with 2020 to$1,185.1 million . Improved revenues for 2021 were driven by nine more freighter aircraft in operations and a 12% increase in customer block hours during 2021. Increased revenues for 2021 included additional aircraft operations for ASI and DHL, while block hours flown for theDoD declined compared to 2020. As ofDecember 31, 2021 and 2020, ACMI Services included 82 and 73 in-service aircraft, respectively. Revenues were negatively impacted by the COVID-19 pandemic. In lateFebruary 2020 , theDoD began canceling combi aircraft flights and in March of 2020, commercial customers began canceling scheduled passenger flights as a result of the pandemic. During 2020, theDoD and other governmental agencies contracted for flights to return people tothe United States who were stranded abroad as a result of the pandemic, which partially mitigated the impact of the pandemic during 2020. As a result, combined block hours flown for theDoD , contracted commercial passenger and combi flights declined 10% for the year endedDecember 31, 2021 , compared toDecember 31, 2020 . The decline in revenues from passenger and combi aircraft operations were offset by increased flying for customer cargo operations, particularly e-commerce networks. Customer block hours for freighter aircraft increased 19% in 2021 compared to 2020, driven primarily by the growth of e-commerce in theU.S. ACMI Services had pre-tax earnings of$158.7 million during 2021, compared to$114.1 million for 2020 inclusive of internally allocated interest expense and the recognition of pandemic-related government grants of$111.7 million and$47.2 million for the years endedDecember 31, 2021 and 2020, respectively. Earnings for 2021 were negatively impacted by less passenger flying and higher expenses for passenger operations during 2021 compared to 2020. Internally allocated interest expense decreased to$18.1 million for 2021 compared to$20.5 million for 2020. Maintaining profitability in ACMI Services will depend on a number of factors, including the impact of the COVID-19 pandemic, customer flight schedules, crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate. Recruiting, training and retaining employees and contractors is an important factor to our success. If we experience a distribution or shortage of qualified employees, ACMI Services' financial results could be detrimentally impacted. We expect our operating revenues from passenger and combi flights to rebound from pandemic low points. During 2022, we expect DHL to lease at least two additional Boeing 767-300 freighter aircraft from CAM and contract the operation of those aircraft through our existing DHL CMI agreement. During 2022, we anticipate operating up to five additional customer-provided aircraft under operating agreements. 32 --------------------------------------------------------------------------------
Other activities
We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. Through ourFAA certificated maintenance and repair subsidiaries, we sell aircraft parts and provide aircraft maintenance and modification services. We also provide mail sorting, parcel handling and logistical support toUSPS facilities and similar services to certain ASI hub and gateway locations in theU.S. We provide maintenance for ground equipment, facilities and material handling equipment and we resell aviation fuel inWilmington, Ohio . Additionally, we provide flight training services. External customer revenues from all other activities increased$57.6 million in 2021 compared to 2020, due to broad increases across most maintenance and ground services offerings. Additionally, the sale of aviation fuel to customers at theWilmington, Ohio air hub increased in 2021. Revenues from ground services increased due to the addition, since mid-2020, of a third operating contract forUSPS mail sorting. Pre-tax earnings from other activities increased by$6.0 million to a pretax gain of$0.1 million in 2021. The improved earnings comparison for 2021 reflects start-up costs for theUSPS facilities which we started to operate in 2020, as well as the increased revenues.
Expenses from continuing operations
Salaries, wages and benefits expense increased$72.3 million or 14% during 2021 compared to 2020. While the number of total employees is similar among the two years, headcount for flight crews and flight operations personnel increased while the number of sorters decreased. Additionally, labor rates for aircraft maintenance technicians and freight sorters increased over 2020 and may continue to increase. Depreciation and amortization expense increased$30.4 million during 2021 compared to 2020. The increase reflects incremental depreciation for twelve Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since the beginning of 2021, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion, engine programs and capital spending plans. Maintenance, materials and repairs expense decreased by$6.0 million during 2021 compared to 2020. Decreased maintenance expense for 2021 was driven by lower costs for engine repairs at our airlines offset by increased flight operations for our customers' express cargo networks and increased heavy maintenance. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed. Maintenance expense for 2021 included$27.8 million for an engine power-by-the-cycle agreement that expired in September of 2021. We have negotiated time and material agreements with engine maintenance providers to replace the expired agreement. Fuel expense increased by$25.2 million during 2021 compared to 2020. Fuel expense includes the cost of fuel to operateDoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. Fuel expense increased during 2021 compared to 2020 due primarily to increases in the price per gallon of aviation fuel compared to the previous year. Aviation fuel rates increased over 40% per gallon for the comparative periods. Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services increased$12.2 million during 2021 compared to 2020. The increases were driven by additional ground equipment installation projects for customers and higher fees for airport services compared to the previous year.
Travel costs increased by
Landing and runway expenses, which include the cost of de-icing chemicals, increased by
Rent expense increased by$4.4 million during 2021 compared to 2020 due to an additional passenger aircraft and facility rents for the twoUSPS facilities started in mid-2020. 33 --------------------------------------------------------------------------------
Insurance costs increased by
Other operating expenses increased by
Operating results included a pre-tax expense credit of$111.7 million and$47.2 million during 2021 and 2020, respectively, to recognize grants received from theU.S. government under the CARES Act, PSP Extension Law and the American Rescue Plan. For additional information about these grants, see Note H of the unaudited condensed consolidated financial statements included in this report.
Non-operating income, adjustments and charges
Interest expense decreased by$4.1 million during 2021 compared to 2020. Interest expense during 2021 decreased compared to the previous year due to lower interest rates on our borrowings under the Senior Credit Agreement and lower average debt balances outstanding during the year. During the second quarter of 2021, the Company recorded a pre-tax charge of$6.5 million to write-off the unamortized debt issuance costs of the Company's term loans which were repaid in full duringApril 2021 . The Company recorded unrealized pre-tax gains on financial instrument re-measurements of$30.0 million during the year endedDecember 31, 2021 , compared to pre-tax losses of$100.8 million for 2020. The gains and losses include the results of re-valuing, as ofDecember 31, 2021 and 2020, the fair value of the stock warrants granted to Amazon. Generally, the warrant values increase or decrease with corresponding increases or decreases in the ATSG share price during the measurement period. Additionally, the value of certain warrants depends partially on the probability that warrants will vest upon the execution of aircraft leases. Increases in the probability of a warrants vesting results in higher liabilities and losses. Re-measurement gains for 2021 reflect a 6% decrease in the traded price of ATSG shares. Non service components of retiree benefits were a net loss of$17.8 million for 2021 compared to$12.0 million for 2020. The non service component gain and losses of retiree benefits are determined by actuaries and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans. Income tax expense from earnings from continuing operations increased$55.9 million for 2021 compared to 2020. Income taxes for 2020 included deferred income tax effects for the gains and losses from warrant re-measurements and the amortization of the customer incentive while 2021 did not. The income tax effects of the warrant re-measurements and the amortization of the customer incentive are different than the book tax expenses and benefits required by generally accepted accounting principles because for tax purposes, the warrants are valued at a different time and under a different valuation method. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items also have an impact on the effective rate during a period. The effective tax rate, before including the warrant revaluations and incentive amortization, was 24% for 2021 compared to 22% for the year endedDecember 31, 2020 . The higher effective income tax rate for 2021 reflects increases in the apportionment of taxable income in state jurisdictions with higher tax rates compared to 2020, and an increase in deferred tax valuation allowance for capital losses on a Company investment. The effective rate for 2022 will be impacted by a number of factors, including the apportionment of income among taxing jurisdictions and stock compensation limitations. We estimate that the Company's effective tax rate for 2022, before applying the deductibility of the stock warrant re-measurement and related incentive amortization and the benefit of the stock compensation, will be approximately 24%. As ofDecember 31, 2021 , the Company had operating loss carryforwards forU.S. federal income tax purposes of approximately$413.9 million which do not expire but the use of which is limited to 80% of taxable income in any given year. We expect to utilize the loss carryforwards to offset federal income tax liabilities in the future. As a result, we do not expect to pay federal income taxes until 2024 or later. The Company may, however, be required to pay certain federal minimum taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights is primarily sourced tothe United States under international aviation 34 --------------------------------------------------------------------------------
agreements and treaties. When we operate in countries that do not have such agreements, the Company may have to pay additional foreign income taxes.
Discontinued operations
The financial results of discontinued operations primarily reflect pension, workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. Pre-tax gains related to the former sorting operations were$3.2 million for 2021 compared to$9.1 million for 2020. Pre-tax earnings during 2021 and 2020 were a result of reductions in self-insurance reserves for former employee claims and pension credits.
2020 vs. 2019
CAM
As ofDecember 31, 2020 and 2019, CAM had 73 and 62 aircraft under lease to external customers, respectively. CAM's revenues grew by$23.4 million during 2020 compared to 2019, primarily as a result of additional aircraft leases. Revenues from external customers totaled$205.0 million and$168.1 million for 2020 and 2019, respectively. CAM's revenues from the Company's airlines totaled$103.6 million during 2020, compared to$117.2 million for 2019. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased$25.2 million in 2020 compared to 2019 as a result of new aircraft leases in 2020. During 2020, CAM added 11 Boeing 767-300 aircraft to its portfolio and placed 11 Boeing 767-300 aircraft with external customers under long-term leases. CAM's pre-tax earnings, inclusive of internally allocated interest expense, were$77.4 million and$68.6 million during 2020 and 2019, respectively. Increased pre-tax earnings reflect the eleven aircraft placed into service in 2020, offset by a$1.0 million increase in internally allocated interest expense due to higher debt levels and a$13.5 million increase in depreciation expense driven by the addition of eleven Boeing aircraft in 2020 compared to 2019.
ACMI Services
Total revenues from ACMI Services increased$69.0 million during 2020 compared with 2019 to$1,147.3 million . Improved revenues were driven by a 14% increase in customer block hours during 2020. Increased revenues for 2020 included additional aircraft operations for ASI and DHL, while block hours flown for theDoD declined. Revenues for the year endingDecember 31, 2020 , were impacted by the COVID-19 pandemic. In lateFebruary 2020 , theDoD began canceling combi aircraft flights and in March, commercial customers began canceling scheduled passenger flights as a result of the pandemic. Combined block hours flown for contracted commercial passenger and combi flights declined 39% for the year endedDecember 31, 2020 , compared toDecember 31, 2019 , due to the pandemic. The decline in revenues from these cancellations was mitigated by increased flying for customer e-commerce networks and passenger charter flights for theDoD and other governmental agencies, including flights to return people tothe United States who were stranded abroad as a result of the pandemic. Operations during the year endingDecember 31, 2020 also included additional transoceanic flights to replace cargo capacity normally serviced in the belly-hold of passenger aircraft. As ofDecember 31, 2020 , ACMI Services included 73 in-service aircraft, including 12 passenger aircraft, 4 combi aircraft and 11 freighter aircraft leased internally from CAM, 4 passenger aircraft leased from an external lessor, eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the DHL CMI agreement, 31 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ASI ATSA, two freighter aircraft from an external lessor under lease to ASI and operated by ATI under the ASI ATSA, and another CAM-owned freighter leased to a customer and operated by ATI. ACMI Services had pre-tax earnings of$66.9 million during 2020, compared to$32.1 million during 2019 inclusive of internally allocated interest expense. Improved pre-tax results in 2020 compared to 2019 were a result of expanded revenues from ASI and DHL and ad hoc passenger charters. During 2020, we began to operate five more CAM-owned Boeing 767-300 aircraft under the ASI ATSA. ACMI Services benefited from reduced travel costs including lower airfares during 2020 compared to 2019. Internally allocated interest expense decreased to$20.5 million for 2020 compared to$25.0 million for 2019. 35 --------------------------------------------------------------------------------
Other activities
External customer revenues from all other activities increased$12.3 million in 2020 compared to 2019 primarily due to more aviation fuel sales as customer operations at theWilmington, Ohio , air hub expanded. Revenues from ground services increased due to the addition, since mid-2020, of operating contracts for two newUSPS mail facilities as well as increased volumes at two ASI package gateways that we service. Ground services revenues during 2020 included reductions from equipment and facility maintenance revenues compared to 2019 as customers chose to in-source some of these services. Revenues from aircraft maintenance and part sales declined during 2020 as passenger airlines reduced their need for services during the pandemic. The pre-tax earnings from other activities decreased by$19.4 million to a pre-tax loss of$5.9 million in 2020. Reduced earnings for 2020 are a result of reductions in revenues from higher margin ground maintenance and aircraft maintenance services. Additionally, we incurred start-up costs for twoUSPS mail facility contracts we were awarded during 2020. These reductions were partially offset by additional aviation fuel sales which earn a lower margin.
Expenses from continuing operations
Salaries, wages and benefits expense increased$85.4 million , or 20% during 2020 compared to 2019, driven by higher employee headcounts for flight operations, maintenance operations and package sorting services. The total headcount increased 20% as ofDecember 31, 2020 , compared toDecember 31, 2019 . The increases during 2020 include additional flight crewmembers, aircraft maintenance technicians and other personnel to support increased block hours. Depreciation and amortization expense increased$20.5 million during 2020 compared to 2019. The increase reflects incremental depreciation for eleven Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since the beginning of 2020, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans. Maintenance, materials and repairs expense increased by$9.2 million during 2020 compared to 2019. Increased maintenance expense for 2020 was driven by increased flight hours and higher costs for unscheduled engine repairs at our airlines. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed. Fuel expense decreased by$6.7 million during 2020 compared to 2019. Fuel expense includes the cost of fuel to operateDoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. Fuel expense decreased during 2020 compared to 2019 due to lower prices for aviation fuel during the pandemic. Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services decreased$0.5 million during 2020 compared to 2019. Since mid-2019, certain customers chose to in-source some ground services that we had been performing on their behalf.
Travel costs decreased by
Landing and runway expenses, which include the cost of de-icing chemicals, increased by
The rental charge increased by
Insurance costs increased by
Other operating expenses decreased by
Asset impairment charges were recorded during the second quarter of 2020 alongside management’s decision to retire four Boeing 757 freighter aircraft. Three of the 757 airframes were retired from service and
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are available for sale. One remains in service until the first quarter of 2021. Impairment charges totaling
Operating results included a pre-tax contra charge of
Non-operating income, adjustments and charges
Interest expense decreased by
The Company recorded unrealized pre-tax losses on financial instrument re-measurements of$100.8 million during the year endedDecember 31, 2020 , compared to$12.3 million for 2019. The gains and losses include the results of re-valuing, as ofDecember 31, 2020 and 2019, the fair value of the stock warrants granted to Amazon. Generally, the warrant value increases or decreases with corresponding increases or decreases in the ATSG share price during the measurement period. Warrant losses for 2020 reflect a 34% increase in the traded price of ATSG shares. Additionally, the value of certain warrants depend partially on the probability that warrants will vest upon the execution of aircraft leases. Increases in the traded value of ATSG shares and increases in the probability of vested warrants each result in an increase to the warrant value and resulted in warrant losses recorded to financial instruments for 2020. Non service components of retiree benefits were a net loss of$12.0 million for 2020 compared to a net gain of$9.4 million for 2019. The non service component gain and losses of retiree benefits are actuarially determined and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans. Income tax expense from earnings from continuing operations increased$4.7 million for 2020 compared to 2019. Income taxes included deferred income tax effects for the gains and losses from warrant re-measurements and the amortization of the customer incentive. The income tax effects of the warrant re-measurements and the amortization of the customer incentive are different than the book expenses and benefits required by generally accepted accounting principles because for tax purposes, the warrants are valued at a different time and under a different valuation method. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items have an impact on the effective rate during a period. The effective tax rate, before including the warrant revaluations and incentive amortization, was 22% for 2020 compared to 19% for the year endedDecember 31, 2019 . Income tax expense for 2019 reflects a tax benefit of$4.9 million to re-measure deferred state income taxes using lower blended state tax rates than previously estimated. Discontinued Operations The financial results of discontinued operations primarily reflect pension, workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. Pre-tax gains related to the former sorting operations were$9.1 million for 2020 compared to$1.6 million for 2019. Pre-tax earnings during 2020 and 2019 were a result of reductions in self-insurance reserves for former employee claims and pension credits.
CASH AND CAPITAL RESOURCES
Cash flow
Net cash generated from operating activities totaled$583.6 million ,$512.3 million and$396.9 million in 2021, 2020 and 2019, respectively. Improved cash flows generated from operating activities during 2021 and 2020 included additional aircraft leases to customers and increased operating levels of the ACMI Services segment. Operating cash flows for 2021 and 2020 include the receipt of$83.0 million and$75.8 million of grant funds from the CARES Act, PSP Extension Law and the American Rescue Plan, respectively. Cash outlays for pension contributions were$1.7 million ,$10.8 million and$5.4 million in 2021, 2020 and 2019, respectively. 37 -------------------------------------------------------------------------------- Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were$504.7 million ,$510.4 million and$453.5 million in 2021, 2020 and 2019, respectively. Capital expenditures in 2021 included$321.6 million for the acquisition of 15 Boeing 767-300 aircraft, one Airbus A321-200 aircraft and freighter modification costs;$171.6 million for required heavy maintenance; and$11.5 million for other equipment. Capital expenditures in 2020 included$353.4 million for the acquisition of eleven Boeing 767-300 aircraft and freighter modification costs;$76.0 million for required heavy maintenance; and$81.0 million for other equipment, including purchases of aircraft engines and rotables. Capital expenditures in 2019 included$328.0 million for the acquisition of eleven Boeing 767-300 aircraft and freighter modification costs;$76.1 million for required heavy maintenance; and$49.4 million for other equipment, including the purchases of aircraft engines and rotables.
cash proceeds from
During 2021, 2020 and 2019, we spent$2.2 million ,$13.3 million and$24.4 million , respectively, for acquisitions and investments in other businesses. During 2021, 2020 and 2019, we contributed$2.5 million ,$13.3 million and$12.3 million , respectively, for entry and subsequent contributions into a joint-venture withPrecision Aircraft Solutions, LLC , to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. In 2019, we acquired a group of companies that had been under common control referred to asTriFactor , a material handling systems integrator. Net cash used in financing activities was$66.3 million and$19.6 million in 2021 and 2020, respectively, and net cash provided by financing activities was$57.0 million in 2019. Financing activities in 2021 included$132 million remitted by Amazon onMay 7, 2021 , to exercise warrants for the Company's common stock, as described in Note C of the accompanying financial statements. During 2021, we made debt principal payments of$1,900.3 million which included payments of$619.1 million to repay the entire balance of all term loans and payments of$1,280.6 million to the revolving credit facility. Our financing activities during 2021 included a debt offering of a$200 million add-on to our senior unsecured notes (the "Senior Notes"). During 2021, we drew$1,500.6 million from the revolving credit facility. The proceeds from the senior notes add-on of$207.4 million , the funds received from Amazon and draws on the revolving credit facility resulted in the retirement of the term loans and a larger outstanding balance under the revolving credit agreement. During 2020, we drew$180.0 million from the revolving credit facility. Our financing activities during 2020 included a debt offering of$500 million in senior unsecured notes which included net proceeds of$500.0 million used to pay down the revolving credit facility in 2020. Our borrowing activities were necessary to purchase and modify aircraft for deployment into air cargo markets.
Commitments
The table below summarizes the Company’s contractual obligations and commercial commitments (in thousands) as of
Payments Due By Year
Contractual Obligations Total 2022 2023 and 2024 2025 and 2026 2027 and after
Debt obligations, including interest
payments $ 1,558,386 $ 40,950
Facility leases
26,977 8,964 12,584 5,387 42 Aircraft and modification obligations 391,832 223,322 168,510 - - Aircraft and other leases 38,955 11,060 18,678 9,217 -
Total cash contractual obligations
$ 540,055 $ 447,700 $ 744,099 Debt See Note F of the accompanying financial statements in this report for additional information about the Company's timing of expected and future principal payments. The Company also has future obligations for interest payments associated with its debt. As ofDecember 31, 2021 , future interest payments associated with its debt were$40.3 million in 2022,$40.3 million in 2023,$39.9 million in 2024,$37.4 million in 2025,$34.4 million in 2026, and$36.7 million thereafter. Additional debt or lower EBITDA may result in higher interest rates. 38 --------------------------------------------------------------------------------
Leases
The Company enters into leases for property, aircraft, engines and other types of equipment in the normal course of business. See Note H to the Consolidated Financial Statements for further detail.
Aircraft purchase and modifications
We expect to increase the size of CAM's fleet in 2022 and beyond through the purchase and modification of additional aircraft. The modification primarily consists of the installation of a standard cargo door and loading system. The Company outsources a significant portion of the aircraft freighter modification process to non-affiliated third parties. In addition to the purchase commitments, we are required to make cash deposits for conversion slots. As ofDecember 31, 2021 , the Company has 26 conversion slots for which we have identified aircraft.
Other commitments
SinceAugust 3, 2017 , the Company has been part of a joint-venture withPrecision Aircraft Solutions, LLC , to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. Approval of a supplemental type certificate from theFAA was granted in 2021 while European certificates are in process. We expect to make contributions equal to the Company's 49% ownership percentage to the joint-venture as may be needed for inventory and other working capital needs during 2022. The Company provides defined benefit pension plans to certain employee groups. The table above does not include cash contributions for pension funding, due to the absence of scheduled maturities. The timing of pension and post-retirement healthcare payments cannot be reasonably determined, except for$1.7 million expected to be funded in 2022. For additional information about the Company's pension obligations, see Note I of the accompanying financial statements in this report. Liquidity AtDecember 31, 2021 , the Company had$69.5 million of cash balances and$424.7 million available from the unused portion of the revolving credit facility under its Senior Credit Agreement as described in Note F of the accompanying financial statements. We expect our operations to continue to generate significant net cash in-flows after deducting required spending for heavy maintenance and other sustaining capital expenditures. To expand our fleet we estimate that capital expenditures for aircraft purchases and freighter modifications will total$390 million for 2022. We believe that the Company's current cash balance, forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund the expansion and maintenance of our fleet while meeting our contractual obligations, other commitments and working capital requirements for at least the next twelve months.
Continued global disruptions to supply chains and labor shortages could delay aircraft modification projects, push contractual obligations to later periods and could reduce the amount of expected capital expenditures.
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following significant and critical 39 --------------------------------------------------------------------------------
accounting policies involve the most significant judgments and estimates used in the preparation of the consolidated financial statements.
We assess in the fourth quarter of each year whether the Company's goodwill
acquired in acquisitions is impaired in accordance with the Financial Accounting
Standards Board Accounting Standards Codification ("FASB ASC") Topic 350-20
Intangibles-Goodwill and Other. Additional assessments may be performed on an
interim basis whenever events or changes in circumstances indicate an impairment
may have occurred. Indefinite-lived intangible assets are not amortized but are
assessed for impairment annually, or more frequently if impairment indicators
occur. Finite-lived intangible assets are amortized over their estimated useful
economic lives and are periodically reviewed for impairment.
The goodwill impairment test requires significant judgment, including the
determination of the fair value of each reporting unit that has goodwill. We
estimate the fair value using a market approach and an income approach utilizing
discounted cash flows applied to a market-derived rate of return. The market
approach utilizes market multiples from comparable publicly traded companies.
The market multiples include revenues and EBITDA (earnings before interest,
taxes, depreciation and amortization). We derive cash flow assumptions from many
factors including recent market trends, expected revenues, cost structure,
aircraft maintenance schedules and long-term strategic plans for the deployment
of aircraft. Key assumptions under the discounted cash flow models include
projections for the number of aircraft in service, capital expenditures, long
term growth rates, operating cash flows and market-derived discount rates.
The performance of the goodwill impairment test is the comparison of the fair
value of the reporting unit to its respective carrying value. If the carrying
value of a reporting unit is less than its fair value no impairment exists. If
the carrying value of a reporting unit is higher than its fair value an
impairment loss is recorded for the difference and charged to operations. See
additional information about the goodwill impairment tests in Note B of the
accompanying consolidated financial statements.
Based on our analysis, the individual fair values of each reporting unit having
goodwill exceeded their respective carrying values as of December 31, 2021 . We
have used the assistance of an independent business valuation firm in estimating
an expected market rate of return, and in the development of a market approach
for CAM and OAI separately, using multiples of EBITDA and revenues from
comparable publicly traded companies. Our key assumptions used for CAM's
goodwill testing include uncertainties, including the level of demand for cargo
aircraft by shippers, the DoD and freight forwarders and CAM's ability to lease
aircraft and the lease rates that will be realized. The demand for customer
airlift is projected based on input from customers, management's interface with
customer planning personnel and aircraft utilization trends. Our key assumptions
used for OAI's goodwill testing include the number of aircraft that OAI will
operate, the amount of revenues that the aircraft will generate, the number of
flight crews and the cost of needed flight crews. We are assuming that demand
for commercial passenger flying will resume to pre-pandemic levels in 2023. Our
key assumptions used for Pemco's and TriFactor's goodwill testing includes the
level of revenues that customers will seek and the cost of labor, parts and
contract resources expected to be utilized. Certain events or changes in
circumstances could negatively impact our key assumptions. Customer preferences
may be impacted by changes in aviation fuel prices. Key customers, including
ASI, DHL and the DoD may decide that they do not need as many aircraft as
projected or may find alternative providers.
We self-insure certain claims related to workers' compensation, aircraft, automobile, general liability and employee healthcare. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data and recent claims trends. Changes in claim severity and frequency could result in actual claims being materially different than the costs provided for in our results of operations. We maintain excess claims coverage with common insurance carriers to mitigate our exposure to large claim losses.
Contingencies
We are involved in legal matters that have a degree of uncertainty associated
with them. We continually assess the likely outcomes of these matters and the
adequacy of amounts, if any, provided for these matters. There can be no
assurance that the ultimate outcome of these matters will not differ materially
from our assessment of them. There also can be no assurance that we know all
matters that may be brought against us at any point in time.
40
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Income taxes
We account for income taxes under the provisions of FASB ASC Topic 740-10 Income
Taxes. The objectives of accounting for income taxes are to recognize the amount
of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Fluctuations in the actual
outcome of expected future tax consequences could materially impact the
Company's financial position or its results of operations.
The Company has significant deferred tax assets including net operating loss
carryforwards ("NOL CFs") for federal income tax purposes. Based upon
projections of taxable income, we determined that it was more likely than not
that the NOL CFs will be realized. Accordingly, we do not have an allowance
against these deferred tax assets at this time.
We recognize the impact of a tax position if that position is more likely than not to stand during an audit, based on the technical merits of the position.
Stock warrants
The Company's accounting for warrants issued to Amazon is determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The warrants issued to Amazon are recorded as a lease incentive asset using their fair value at the time that ASI has met its lease performance obligation. The lease incentive is amortized against revenues over the duration of related aircraft leases. The unexercised warrants are classified in liabilities and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.
Obligations after retirement
The Company sponsors qualified defined benefit pension plans for ABX's flight crewmembers and other eligible employees. The Company also sponsors non-qualified, unfunded excess plans that provide benefits to executive management and crewmembers that are in addition to amounts permitted to be paid through our qualified plans under provisions of the tax laws. Employees are no longer accruing benefits under any of the defined benefit pension plans. The Company also sponsors unfunded post-retirement healthcare plans for ABX's flight crewmembers. The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates on our post-retirement costs. In actuarially valuing our pension obligations and determining related expense amounts, key assumptions include discount rates, expected long term investment returns, retirement ages and mortality. Actual results and future changes in these assumptions could result in future costs that are materially different than those recorded in our annual results of operations. Our actuarial valuation includes an assumed long term rate of return on pension plan assets of 5.65%. Our assumed rate of return is based on a targeted long term investment allocation of 30% equity securities, 65% fixed income securities and 5% cash. The actual asset allocation atDecember 31, 2021 , was 28% equities, 69% fixed income and 3% cash. The pension trust includes less than$0.1 million of investments (less than 1% of the plans' assets) whose fair values have been estimated in the absence of readily determinable fair values. Such investments include private equity, hedge fund investments and real estate funds. Management's estimates are based on information provided by the fund managers or general partners of those funds. In evaluating our assumptions regarding expected long term investment returns on plan assets, we consider a number of factors, including our historical plan returns in connection with our asset allocation policies, assistance from investment consultants hired to provide oversight over our actively managed investment portfolio, and long term inflation assumptions. The selection of the expected return rate materially affects our pension costs. Our expected long term rate of return was 5.65% after analyzing expected returns on investment vehicles and considering our long term asset allocation expectations. Fluctuations in long-term interest rates can have an impact on the actual rate of return. If we were to lower our long term rate of return assumption by a hypothetical 100 basis points, expense in 2021 would be increased by approximately$8.3 million . We use a market value of assets as of the measurement date for determining pension expense. 41 -------------------------------------------------------------------------------- In selecting the interest rate to discount estimated future benefit payments that have been earned to date to their net present value (defined as the projected benefit obligation), we match the plan's benefit payment streams to high-quality bonds of similar maturities. The selection of the discount rate not only affects the reported funded status information as ofDecember 31 (as shown in Note I to the accompanying consolidated financial statements in this report), but also affects the succeeding year's pension and post-retirement healthcare expense. The discount rates selected forDecember 31, 2021 , based on the method described above, were 2.9% for crewmembers and 3.0% for non-crewmembers. If we were to lower our discount rates by a hypothetical 50 basis points, pension expense in 2021 would be increased by approximately$13.2 million . Our mortality assumptions atDecember 31, 2021 , reflect the most recent projections released by the Actuaries Retirement Plans Experience Committee, a committee within theSociety of Actuaries , a professional association inNorth America . The assumed future increase in salaries and wages is not a significant estimate in determining pension costs because each defined benefit pension plan was frozen during 2009 with respect to additional benefit accruals.
The following table illustrates the sensitivity of the above assumptions on our pension costs, pension obligations and accumulated other comprehensive income (in thousands):
Effect of change
December 31, 2021
Accumulated
2021 other
Pension Pension comprehensive
Change in assumption expense obligation income (pre-tax)
100 basis point drop in yield
- $ - 50 basis point decrease in discount rate 13,175 (51,249) 51,249 Aggregate effect of all the above changes 21,487 (51,249) 51,249 New Accounting Pronouncements For information regarding recently issued accounting pronouncements and the expected impact on our annual statements, see Note A "SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" in the accompanying notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
SECTION 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ON MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
The Company has entered into interest rate swap instruments. As a result, future fluctuations in LIBOR interest rates will result in the recording of unrealized gains and losses on interest rate derivatives held by the Company. The combined notional values were$258.1 million as ofDecember 31, 2021 . See Note G in the accompanying consolidated financial statements in this report for a discussion of our accounting treatment for these hedging transactions. As ofDecember 31, 2021 , the Company has$928.8 million of fixed interest rate debt and$360.0 million of variable interest rate debt outstanding. Variable interest rate debt exposes us to differences in future cash flows resulting from changes in market interest rates. Variable interest rate risk can be quantified by estimating the change in annual cash flows resulting from a hypothetical 20% increase in interest rates. A hypothetical 20% increase or decrease in interest rates would have resulted in a change in interest expense of approximately$1.0 million for the year endedDecember 31, 2021 . The convertible debt and Senior Notes issued at fixed interest rates are exposed to fluctuations in fair value resulting from changes in market interest rates. Fixed interest rate risk can be quantified by estimating the change in fair value of our long term convertible debt and Senior Note through a hypothetical 20% increase in interest rates. As ofDecember 31, 2021 , a 20% increase in interest rates would have decreased the book value of our fixed interest rate convertible debt and Senior Notes by approximately$35.0 million . 42 -------------------------------------------------------------------------------- The Company is exposed to concentration of credit risk primarily through cash deposits, cash equivalents, marketable securities and derivatives. As part of its risk management process, the Company monitors and evaluates the credit standing of the financial institutions with which it does business. The financial institutions with which it does business are generally highly rated. The Company is exposed to counterparty risk, which is the loss it could incur if a counterparty to a derivative contract defaulted. As ofDecember 31, 2021 , the Company's liabilities reflected stock warrants issued to Amazon. The fair value of the stock warrants obligation is re-measured at the end of each reporting period and marked to market. The fair value of the stock warrants is dependent on a number of factors which change, including the Company's common stock price, the volatility of the Company's common stock and the risk-free interest rate. See Note D in the accompanying consolidated financial statements in this report for further information about the fair value of the stock warrants. The Company sponsors defined benefit pension plans and post-retirement healthcare plans for certain eligible employees. The Company's related pension expense, plans' funded status, and funding requirements are sensitive to changes in interest rates. The funded status of the plans and the annual pension expense is recalculated at the beginning of each calendar year using the fair value of plan assets, market-based interest rates at that point in time, as well as assumptions for asset returns and other actuarial assumptions. Higher interest rates could result in a lower fair value of plan assets and increased pension expense in the following years. AtDecember 31, 2021 , ABX's defined benefit pension plans had total investment assets of$850.2 million under investment management. See Note I in the accompanying consolidated financial statements in this report for further discussion of these assets. The Company is exposed to market risk for changes in the price of jet fuel. The risk associated with jet fuel, however, is largely mitigated by reimbursement through the agreements with the Company's customers. 43
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