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ATSG needs to capitalise on organic growth to meet new challenges: analysis

US-based Air Transport Services Group (ATSG), with a market cap of US$600 million, has to reinvent itself to thrive in today's difficult market conditions, according to an analysis in London's Loadstar.

In its early days, ABX Air - as ATSG was then known - provided most of DHL's US domestic express lift, and it was ABX's only customer.

But DHL's foray in the US domestic express arena was not successful, and after years of staggering losses, the German group pulled out in 2008, keeping only its international business.

This would have left ABX in a difficult position but the airline reacted by acquiring other airlines and air freight businesses, which now operate under the umbrella of ATSG.

However, DHL remains its largest customer. Relationships were strengthened in the second quarter, when the parties agreed that ATSG would support DHL's air cargo network in the US at least until March 2019.

In most recent years, key to value creation has been management's ability to preserve revenues, which are still below 2012 levels, while focusing on the opportunities offered to Cargo Aircraft Management (CAM), its leasing unit, which has become the most important earnings contributor.

At group level, pre-tax earnings from continuing operations rose 17 per cent to $17.2 million in the second quarter. CAM represents 25 per cent of revenues, but it is the unit behind that strong growth rate; its pre-tax earnings were up 35.4 per cent, driven by eight additional freighters leased to external customers, and amount to 80 per cent of the group's pre-tax income in the quarter.

Essentially, challenging conditions in the long-haul cargo market opened the door to more opportunities in the integrated and regional cargo networks, which now represents ATSG's focus. Although heavy investment is up, the group seems to be efficiently managed with regard to its capital deployment strategy.

ATSG president Joe Hete said the second-quarter trading update confirmed what management had predicted in May, and ?015 is shaping up to be a very good year for ATSG?

Said Chief financial officer Quint Turner: "Once again the driver of our second quarter gains is the growth in the freighter leasing business and the flexibility," noting that a differentiated business model "affords us to shift our aircraft between our leasing and airline businesses as demand warrants".

ATSG invested $15 million to acquire a minority interest last year in West Atlantic, "which led this year to West Atlantic's commitment to two 767 dry leases with CAM."

It also won an air freight maintenance service contract with Delta Airlines for its fleet of Boeing 717s, which runs for five years, and there "are definitely other opportunities out there and those would require expansion of our current facilities here in Wilmington."