Airline Services Group: Reaching New Heights (NASDAQ:ATSG)


From my previous article on Air Transport Services Group (NASDAQ:ATSG) – “Airline Services Group: A Cheaper Way to Invest in Amazon’s Growth” – the company’s shares rose 41%. Demand for freighters has increased and the business remains an opportunity for long-term value growth.


Air Transport Services Group is the largest cargo lessor in the world. The Company’s segments include manned and bareboat leasing of freighters, passenger aircraft service, passenger charter flights, external maintenance, as well as passenger-to-freighter conversions. COVID-19 has spurred the growth of e-commerce and, as a result, led to an expansion of ATSG’s business with Amazon (NASDAQ:AMZN). In addition, the decline of air travel has pushed major airlines such as American Airlines (NASDAQ: AAL) to retire some of their older aircraft (767), providing raw materials for the ATSG.

Image source: Investor Presentation

The passenger-to-cargo conversion is a significant amount of work, and the following video can provide more detail on the effort.

Passenger and Combi Services

A typical operating agreement requires our airline to provide, at a specific rate per block hour and/or per month, a combination of aircraft, crew, maintenance and insurance for specified transport operations – Form 10-K

As a result of the pandemic, the ATSG reported a drop in block hours for passenger flights and a drop in demand for external aircraft maintenance services. Still, revenue from ACMI and other segments increased 11% and 5.8%, respectively, in the nine months of fiscal 2020. Management reported an increase in combination flights and an increase in flights on the e-commerce network.

Data source: 10-Q and author’s calculations

Amazon air

It is very important to study the growth of Amazon Air to form an investment thesis on ATSG.

Amazon Air now operates around 70 aircraft and is expected to expand to more than 80 aircraft by 2021. Amazon Air has received five converted Boeings (NYSE:BA) 767-300 freighters from ATSG in 2020. Amazon has committed to lease another 11 from ATSG in 2021.

Image source: Investor Presentation

Image source: author’s calculation

With much of its ATSG fleet, Amazon seems to be serious about diversification. The e-commerce giant recently launched its expansion into Europe by operating a regional air hub at Leipzig/Halle Airport in Germany with two Boeing Co. 737-800 freighters leased from GECAS. (NYSE:GE) be operated by ASL Airlines.

ATSG investors might not be too happy to see Amazon’s revenue concentration. Similarly, Amazon is not very fond of placing all of its eggs in one basket. The e-commerce giant encountered problems with Atlas Air (NASDAQ: AAWW) and the pilots union last year, leading him to expand his relationship with the ATSG instead.

Amazon accounted for 23% of ATSG’s revenue in 2019 and was its second largest customer behind the Department of Defense.

Image source: Investor Presentation

Amazon diversifying its cargo leasing with multiple companies is also beneficial for ATSG investors, as it doesn’t create an even greater revenue concentration.

Business development with other clients

ATSG has seen successful growth in deliveries in 2020, a high volume of requests for conversions and deliveries in 2021, and easier access to 767 raw materials this year. These factors have allowed it to expand its business with customers other than Amazon:

Data Source: Author’s compilation from ATSG Investor News and Events

Image source: Getty Images

Airbus A321 fittings

ATSG’s PEMCO subsidiary is the market leader in conversions of passenger aircraft to narrow-body cargo aircraft. A joint venture between ATSG and Precision Aircraft Solutions has formed the 321 precision conversions which are currently focused on Airbus (OTCPK: EADSF) [XFRA:AIR] A321-PCF. Born in 1993, the A321s there are more than 25 years old, which prepares them for their second life as freighters.

The A321 is an attractive airframe for a converted freighter because it is 20% more fuel efficient, which can lead to lower operating costs among other benefits outlined in the diagram below. Additionally, as many A321s are retired from passenger operations, there will be a surplus of aircraft raw material.

It (the A321) beats the converted Boeing 737 freighter with 50% more capacity – 9 tonnes more – and is considered by all-cargo operators to be the best replacement for older Boeing 757s. –

Image source:

FAA approval for the ATSG to A321 conversion is expected by the end of this year. However, the pandemic caused an immediate shift in focus due to an increase in demand for 767s, pushing A321 PCF deliveries to 2022.

A number of A321 aircraft owners have already approached us about conversion windows in 2021. Our own A321 conversion investment plans have been pushed back to 2022 as we focus in the short term on meeting demand du 767 – Q3 Conference Call

Nevertheless, the A321-200PCF opportunity is huge and ATSG is well positioned to lead the space. As far as I know, ATSG’s closest competitor, Atlas Air Worldwide, the Titan Aviation segment is not performing A321 conversions at this time.

Comparison with the competition

Expansion of e-commerce

With Amazon aiming to become a pharmacy and roll out its service to more US states, faster shipping will become very important. I see the need for more freight fleet as the new segment grows. Due to its growing relationship with Amazon for North American operations, in my view, ATSG is well positioned to continue to receive PCF orders from Amazon.

Atlas Air recently expanded its e-commerce business through a deal with Alibaba Group (NYSE: BABA) logistics network, Cainiao.

Atlas will provide Cainiao with three full weekly charter flights from China to Brazil and Chile, starting next month –

The ATSG would also be part of this pursuit, and management said it sees business opportunities with Cainiao for regional-type freighters in China and around Southeast Asia. There may be opportunities with Alibaba in the future, but for now, this is a missed opportunity for e-commerce diversification and a win for Atlas Air.


Data source: Author’s calculations

Atlas Air has done a good job of improving its balance sheet over the past two quarters. Its debt to EBITDA is comparable to ATSG at present. Still, ATSG has lower debt as a percentage of its market capitalization.

Also, looking at the P/S and the forward P/E, both companies are significantly undervalued against market indices such as the S&P 500, but ATSG is priced higher than Atlas Air, naturally in because of its growing relationship with Amazon.

Also, ATSG has a better EBITDA margin compared to Atlas Air using TTM revenue and EBTIDA.

Source: author’s calculations


ATSG recorded an increase in orders of 767 PCF from new and existing customers. With the imminent FAA approval of the A321 PCF, the company is well positioned to benefit from the replacement of the older 737 PCF and 757 PCF. Despite the company’s strong stock performance in 2020, ATSG remains a value growth opportunity for long-term investors.

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