Air Transport Services Group, Inc.'s (ATSG) CEO Joe Hete on Q4 2019 Results - Earnings Call Transcript

Air Transport Services Group, Inc. (NASDAQ:ATSG) Q4 2019 Results Earnings Conference Call March 3, 2020 10:00 AM ET

Company Participants

Joe Hete - Chief Executive Officer

Quint Turner - Chief Financial Officer

Rich Corrado - President

Conference Call Participants

Jack Atkins - Stephens

Kevin Sterling - The Benchmark Company

Chris Stathoulopoulos - Susquehanna

Steve O’Hara - Sidoti & Company

Travis Pascavis - HIMCO

Operator

Welcome to the Q4 2019 Air Transport Services Group Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]

Please note this conference is being recorded. I will now turn the call over to Joe Hete, CEO.

Joe Hete

Thank you, Vanessa. Good morning. And welcome to our fourth quarter 2019 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our President; and as we announced last week, our CEO-elect.

We issued our earnings release and our Form 10-K yesterday after the market closed. They are on our website, atsginc.com.

I am very happy to report to you that in 2019 we beat the annual adjusted EBITDA goal we set for ourselves, as well as the market's expectations for adjusted EPS. This is the third year in a row we have exceeded our adjusted EBITDA goal and the fourth quarter was the fifth in a row that our adjusted EPS has exceeded the consensus of the analysts who follow us.

In 2019, we substantially outperformed our 2018 results. Revenues rose 63% to $1.45 billion, a record since we became a public company in 2003, excluding the reimbursements we used to include in revenue.

Our adjusted earnings grew 32% to a record $105 million or $1.51 per share and our adjusted EBITDA rose 45% to $452 million, both a record and $2 million above our $450 million guidance. That was despite significant unbudgeted investments in pilot training costs during the year due to flying schedules that expanded when Amazon adopted one day delivery service.

We are growing and generating strong returns for two main reasons. Our leased aircraft fleet is growing and we acquired Omni Air in November 2018. We are leasing more 767 freighters because e-commerce is driving delivery speeds. We bought Omni because its principal customers, the Department of Defense and other government units, are largely immune from the business cycle like our aircraft lease investments.

Because we are confident that we can continue to grow and generate superior returns, we are setting a 2020 goal of $487 million to $492 million in adjusted EBITDA. That includes completing our current 767 freighter lease commitments to Amazon and UPS, leasing other 767s to new and existing customers, and growing our airline and other businesses.

I will say more about those goals shortly. First, Quint is ready to review our consolidated results for 2019 and Rich will cover our businesses. Quint?

Quint Turner

Thanks, Joe. Good morning to all of you on the call right now and to those who will listen later on replay.

As always, I will start by saying that during the course of this call, we will make projections or 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 the estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes and underlying assumptions, factors, new information or other changes.

These factors include but are not limited to changes in the market demand for our assets and services, including potential reduce flight operations arising from the outbreak of COVID-19, 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, the 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 our agreements with key customers and lenders, changes in general economic and our industry specific conditions and other factors that are contained from time to time and ATSG’s filings with the U.S. Securities and Exchange Commission, including the Form 10-K we filed yesterday.

We will also refer to non-GAAP financial measures from continuing operations including adjusted earnings, adjusted earnings per share, adjusted pretax earnings and adjusted EBITDA. 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 reconciliations to GAAP measures, which are included in our earnings release and on our website.

As Joe said, 2019 was another record year for ATSG, with both fourth quarter and annual results well above our results from a year ago. We also took several steps to secure continued access to grow capital at today’s very attractive long term rates. I will say more about that in a moment.

Our revenues again rose sharply this time by 44% for the quarter and by 63% to $1.45 billion for the year. Our work for the U.S. Department of Defense and other government units by all three of our airlines Omni, ABX and ATI was again the biggest source of our gains last year.

The U.S. DOD is ATSG’s largest customer and represented 34% of our revenues for the year, 23% of our 2019 revenues came from Amazon and 14% from DHL. That’s a lot different from just five years ago when DHL represented more than half of our 2014 revenues.

Our GAAP earnings from continuing operations were $60 million for the year and a loss of $41 million for the fourth quarter. For several years, our GAAP numbers have included large unrealized effects of quarterly revaluations of several financial instruments. These are mainly the effects of revaluing interest rate hedges on our bank debt and the non-cash effects of changes in the projected value and number of the warrants we have already issued to Amazon or those we anticipate issuing in the future.

Another significant item this quarter that favorably affected both our GAAP and non-GAAP earnings is a reduction in our projected state tax rate. A greater portion of our flight operations during 2019 including Omni’s were outside of state tax jurisdictions. That resulted in a one-time fourth quarter state tax benefit of $4.9 million or $0.07 per share.

The company expects its effective tax rate for this year to be 24% after excluding the impact of warrant re-measurements and related amortization of aircraft lease incentives. ATSG did not pay cash federal income taxes in 2019 and we don't expect to pay significant federal taxes until 2024 or later.

Diluted GAAP earnings per share from continuing operations were a positive $0.78 for the year and a negative $0.70 for the quarter. GAAP earnings exclude the per share effects of mark-to-market changes and warrant liabilities when they are accretive.

The adjusted earnings, adjusted EPS and adjusted EBITDA we reported this quarter excluded those warrant-related gains and losses. They also leave out the amortization of warrant lease incentives for Amazon from CAM, affiliate losses from Airbus A321 development costs and the non-service related costs of our retiree benefit plans.

You can see how each of those items affected our results in the tables included in our earnings release. Netting those effects, our adjusted earnings for the fourth quarter were $39 million or $0.56 per share, up from $23 million or $0.33 a year ago. Annual adjusted earnings were $105 million or $1.51 per share in 2019, up 32% versus $79 million or $1.16 per share in 2018. Fourth quarter adjusted EBITDA increased by 29% to $124 million, which pushed our total for the year 45% higher to $452 million or $140 million better than a year ago.

Operating income for 2019 rose 59% to $177 million. Our revenue growth offsets significant increases in fuel, depreciation and amortization, and salaries and benefit expenses. Almost all of the increases stem from aircraft and headcount additions, including those related to Omni and from expanded flight operations from Amazon.

Interest expense, including $9 million that was non-cash increased 18% to $66 million in 2019. Higher borrowings for the Omni acquisition and aircraft investments were the principal factors.

Cash flow from operations in 2019 increased nearly $100 million to $397 million and capital spending rose $161 million to $454 million. The bulk of that spending $328 million was to acquire 11 Boeing 767 300 passenger aircraft and for passenger to freighter modification costs. One of those acquired aircraft was deployed in passenger service for Omni’s customers.

When we announced our third quarter results in November, we also announced another amendment to our secured credit facility, which reduced our rate markups over LIBOR for our revolver and term debt, expanded our capacity and extended the use of the senior secured credit agreement until late 2024.

It also paved the way for our initial publicly rated debt offering in January, a $500 million private offering of eight-year unsecured notes. Response to the offering was so favorable that we were able to raise its size to $500 million from the anticipated $400 million and it priced at an attractive 4.75% fixed rate.

Proceeds were used to pay down the balances on our revolver debt, which will provide us great flexibility in accessing capital going forward. The addition of the unsecured bond and our debt capital structure lengthens our remaining debt duration and along with the favorable bank amendment in November also reduces our annual interest expense.

That completes our financial highlights for the quarter and year. Rich is ready to cover our operations. Rich?

Rich Corrado

Thanks, Quint, and good morning, everybody. Our ATSG business has stepped up to the challenge of integrating Omni and its people in assets into our operation as they continue to deliver superior service for all of their customers.

CAM, our foundational aircraft leasing business, grew revenues net of warrant related lease incentives by 18% for the quarter and 25% for the year. CAM had a full year of results from the 11 passenger aircraft that are acquired from Omni and leased back to them in 2018, plus revenues from seven more newly converted 767 freighters added during the year.

External customer revenues increased 8% for both the quarter and the year. CAM’s pre-tax earnings for the fourth quarter were $18 million, up 17%, and $69 million, up 5%for the year. CAM’s allocated interest and depreciation expense each increased by 16% for the fourth quarter.

Interest expense rose 76% and depreciation rose 25% for the year due to both organic and acquired fleet growth.

The 2019 highlight for CAM was lease commitments for five 767 freighters for UPS, two of which were delivered in 2019, a third was delivered in January and the remaining two will be ready later this year.

While we have a long history of peak season ACMI flying for UPS, this was the first time they leased aircraft from us. Our airlines had a strong quarter and year. Thanks to the addition of Omni and more CMI flying for Amazon.

Total block hours increased 47% for the fourth quarter and 40% for 2019, which included an expanded flight schedule for us in support of Amazon's one-day delivery commitment and stepped up ACMI operations for UPS.

ACMI services revenues increased 51% in the fourth quarter and nearly doubled for the year topping $1 billion for the first time. The fourth quarter included a full three months of Omni contributions, compared with less than two months work in 2018. Pre-tax earnings from ACMI services increased 83% for the quarter and nearly tripled for the year over 2018. Good margins on airline operations by Omni Air were the principal factor.

Our air and ground operations employees including mechanics, flight crews and ground and logistics employees did a great job during peak and that continues into this year. ABX Air management continues to negotiate with union representatives of its flight crews for an amended agreement and has made progress on some fronts. Their next meeting is scheduled for later this month.

Our overall 767 fleet expansion plan includes two leased in passenger 300s that Omni agreed to take before we acquire them. That will bring Omni's overall fleet to 16, including 10 passenger 767-300s, three 767-200s and three 777s. Omni is already lining up customers for its two additions.

This year, our airlines are scheduled to fly six 767 aircraft that CAM does not own, up from two at the end of 2018. That includes four Omni passenger 767s and two 767 freighters Amazon leases from another owner, but opted to shift ATI for CMI operations last fall.

Revenues from other activities increased by 10% for both the fourth quarter and full year, both maintenance and ground services for external customers increased. Our ground operations for Amazon continue to evolve as we added gateways for them in Charlotte, Tampa and our support services here in Wilmington, offsetting the loss of gateways we managed for them through mid-2019.

Pre-tax earnings from other businesses more than tripled during the fourth quarter and rose 20% for the year. Fourth quarter gains came mostly for more ground support for Amazon.

That's the summary of our operations for the quarter and 2019. I will turn it back to Joe for his outlook comments.

Joe Hete

Thanks, Rich. ATSG’s results for 2019 were remarkable for more than just the records we posted against our own prior results. They also speak to the sustained cash flow that our business strategy yields, and e-commerce and other growth drivers spurring demand for our aircraft and support services. Nearly five years into our Amazon relationship and after a year in the charter and ACMI passenger business via Omni, we are executing on all cylinders.

I usually begin any presentation about ATSG with the comment that our business starts with the lease. The nearly 100 aircraft we have in service today including 63 freighters, which are leased externally make us far different from most of our peers and others in the air cargo and passenger charter space.

Our contracted cash flow from our growing share of this aircraft extends to the end of this decade and soon more will extend beyond it. Also, that external lease cash flow continues regardless of changes in customer payload, fuel price volatility, health risks or other events beyond our control.

Even with Omni in the fold as an ACMI and charter operator, we are still freighter lease driven today. Eight to 10 additional 767s are due to emerge from mod this year. Seven of them have lease contract commitments from Amazon and UPS and we have LOIs for the others. Our order book as indicated by our CapEx appetite of $420 million for 2020 is nearly full for the next two years.

We continue to look forward to FAA approval later this year of our Airbus A321 freighter certificate. Once approved, we may acquire 321 feedstock aircraft later in 2021. The values indicate a good potential return. Our CapEx budget for 2020, however, does not assume any 321 feedstock purchases.

In the Leasing business, deployments are not the entire story. Lease terminations and returns are a noble part of it as well. This year, we expect returns of three currently leased 767-200s and all four of our 757 freighters as their wet lease ranges with DHL expire.

We had factored transitioning time with those aircraft into our 2020 plan and it’s reflected in our adjusted EBITDA goal for 2020 of $487 million to $492 million, what we know and can commit to today. As always, we will update you on our outlook as the year progresses.

At that level, our adjusted EBITDA would have increased nearly 60% in the last two years. The business we have built is a strong producer of sustainable cash flow. Our maintenance CapEx requirements are approximately $100 million per year. That means we have significant discretionary cash flow to produce shareholder value.

At today's share price, our discretionary cash flow yield, after maintenance CapEx and interest expense is more than 25%. We expect our debt-to-adjusted EBITDA leverage ratio to come down from 3.3 times today to around 3 times by the end of the year and to decline further in 2021 as our CapEx spend drops.

Like you, we are watching what appears to be an extreme response from Wall Street to Coronavirus threats. We are particularly concerned about what we see as investor’s inability to differentiate ATSG from other companies that are far more vulnerable to its near-term effects. Our operations are primarily domestic and mostly time definite express package-related.

Apart from that, however, our business model also has built-in flexibility. We can reallocate discretionary capital quickly towards opportunities that promise better returns than freighter investments. That could include subject to lender approval redeploying some of our cash toward a share repurchase program if our current stock price persists.

As always, our focus is on maximizing long-term returns from the businesses we operate in investments we select. Our track record for delivering on that commitment is hard to beat and much better than investments tied to the major market indexes. The job of this management team and those who execute their plans is to keep outperforming and show investors the value we are creating.

That concludes our prepared remarks, Vanessa. We are ready for the first question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we have our first question from Jack Atkins with Stephens.

Jack Atkins

Hey, guys. Good morning. Great quarter.

Joe Hete

Thanks, Jack.

Quint Turner

Thanks, Jack.

Jack Atkins

Joe, congratulations on your semi-retirement, I guess, and Rich, congratulations on your new role.

Joe Hete

Thank you, Jack.

Rich Corrado

Thanks, Jack.

Jack Atkins

So let me kind of start out with a question just around – when you look at the feedstock available to you guys this year and next year, could you kind of update us in terms of where you think you will be in terms of those 20 aircraft that you secure the rights for, I guess, that was at the end of 2018. How many of those will be through conversion or at least will be in service at the end of 2020? Is there a way to kind of think about that?

Rich Corrado

Yeah. I think, if you look at we have already started deploying some of those one. The first one went to Omni and passenger configuration. We have got some lined up this year to go and fulfill our Amazon commitment and some other commitments that we have got for this year.

At the end of the year we will have an additional three that will actually be converted for 2021 deployment and then about five airplanes that tranche left for conversion in 2021. So it's kind of the way the flow is going.

Jack Atkins

So that’s about eight Rich if I am hearing you right.

Rich Corrado

Yeah. So that’s about eight. There are some of that tranche is in conversion now and so those will be the help us fulfill the Amazon commitment for second part of this year.

Jack Atkins

Okay. Got you. Got you. That makes sense. And I guess, as you are looking out through this year you sort of have your 2020 plan fairly well committed from your customers at this point. You mentioned in the press release, you are seeing very strong customer demand for 2021 already. Could you talk about sort of the types of customers or the types that sort of mission that those planes will be going into service for, maybe geographic comment as well in terms of where the demand is coming from?

Rich Corrado

Sure. We – obviously, we specialized in the 767 freighters, that’s what we are talking about. If you look globally, about 90% of those 767 freighters on a global basis are deployed and express networks. You are talking FedEx, UPS, DHL, Amazon, the UPS network in Europe, some of the aircraft we have deployed with West Atlantic flying for multiple express carriers over there.

And so -- and that's pretty much where our aircraft are targeted. We lease our aircraft currently to either the express carriers or carriers that fly for them. Cargojet is a good example. We have four aircraft with them up in Canada and they fly for the Canada Post, for UPS, for Amazon. So that's where those aircraft are going.

If you look at the global demand for air freight right now, 2019 was a very poor year, the worst year in a decade for global air cargo and that’s your intercontinental moves, the ones that are impacted by trade and tariff disruption that we saw in 2019.

But if you look at the other side of the coin, which is the express business, it's growing very well. UPS had over 25% growth in 2019 in their overnight product. You saw Amazon still going through some great growth. DHL in several parts of the world was up between 6% and 8%. So the express business powered by the e-commerce is growing very well and that’s where the 767s are deployed in those types of networks.

Now for what we are looking at, the U.S., Far East, we have got a couple of opportunities in Far East. We have got a signed agreement for one airplane already and then we have got another deployment – we are looking at two more down in South America, or I should say, Mexico and South America.

So it's the Americas, the Far East. We don’t see much growth out of Europe right now on the express side, but keep in mind they have a very strong road network in Europe and so aircraft are not as prevalent as they are over here in – given the size of the U.S.

Jack Atkins

Okay. That’s very helpful. Thank you for that, Rich. And I guess, last question for me and I will turn it over. But, Rich, you have been in a senior leadership role in this company for a long time. So you have had a very clear role in the direction ATSG has taken for quite some time. But I guess, now as you assume the role of the CEO here in a few months. How are you thinking about your priorities for the organization as you look out over the next several years?

Rich Corrado

Yeah. Great question, Jack. We have built a great – Joe has built a great company. We have a great culture here. We have a great team. We have – one of the strengths of the company has been our conservative approach to our balance sheet to ensure that we have got capital to invest in the market when it's growing.

We look at ourselves as a very efficient user of capital. So if the market's growing like it has been for the past five years then we will take our cash flow and invest that in airplanes and growth, we would rather get the growth and advocate it to somebody else.

But if you look at the market slows then we will have that cash available to do other things and that equity includes returning some cash to shareholders. So, on one level, we are going to continue that conservative view of our balance sheet and continue investing to get the best returns for our shareholders.

I believe that the most important thing that this company can do is to maintain its service leadership. If you look at the way we both meet our commitments to customers from a leasing basis and the way that we deliver when we fly for them on an express basis. Our heritage is that of an express airline and so quality service I believe is going to win the day.

And so we are investing now in a lot of things internally to maintain that service leadership that includes updating a lot of our IT systems, our – developing a much more robust continuous improvement program. So we are going to maintain our quality service approach and that we feel will be our best ticket to maintain our growth on the flying side. So leasing and flying.

The other thing is we have got a real solid culture here in terms of the way we approach our customers. We strongly believe in the commitments that we make and that that will always be a hallmark of who ATSG is. So I hope that answered your question, Jack.

Jack Atkins

It does. Thanks, Rich. Really appreciate it.

Rich Corrado

Thanks, Jack.

Operator

And we have our next question from Kevin Sterling with The Benchmark Company.

Kevin Sterling

Thank you. Good morning, gentlemen.

Joe Hete

Good morning, Kevin.

Rich Corrado

Good morning, Kevin.

Kevin Sterling

First of all, Rich, let me say congratulations, and, Joe, I just want to tell you how much I have enjoyed working with you over the many years. I do hope you – I know you are not going to completely fully retire, but I do hope you enjoy some semi-retirement. I hope you don't drive your wife too crazy if you are home all the time.

Joe Hete A - Joe Hete

Might be the other way around, Kevin.

Kevin Sterling

Well, congratulations. I have certainly enjoyed working with you for many years.

Joe Hete

Same here.

Kevin Sterling

Yeah. So real quick, can you guys, I guess, talk a little bit about the Coronavirus and kind of maybe some customer conversations you are having? I know your business is regional. It does seem isolated. But maybe a little bit about some of the conversations you are having with some of your express customers and how they are viewing the world today?

Joe Hete

Hey, Kevin. The reality is – this is Joe. Since most of our operations are domestic, we haven't seen any impact per se, but I am sure you have seen some of the announcements where a customer like Amazon, for example, is restricting travel, et cetera, and some people are pulling back from conferences and things of that nature.

But where we have the greatest potential disruption from our revenue stream would be in the things we do for the military, because of the number of foreign countries that we fly through. Some you can come through but then you have got crews that would be quarantined on the other end.

So far we haven't had any disruptions in our service levels, but you just don't know how that thing is going to play out over time. So that's probably where we are most exposed would be on the international portion of our business which is the military side.

Kevin Sterling

I have got you. But on the flip side though the military starts moving troops around in and out of these affected countries that could help you as well, am I thinking about that right, possibly?

Joe Hete

Yeah. I mean, there is that potential but you – like you said, it’s a very fluid situation, there's calls almost on a daily basis with folks at DOD, so that everybody's up to speed on how things are changing.

Kevin Sterling

Okay. Also, you guys -- you talked about returning capital to shareholders. I know you mentioned a buyback and things like that. Would you consider possibly looking at buying back some of the converts there in the open market possibly? Is everything on the table as you think about return to capital shareholders?

Quint Turner

Hi, Kevin. It’s Quint. Yeah. I mean, we don't necessarily – nothing would be off the table per se. But I think at the – yeah, I think, our references were more with regard to the current share price being where it's at and we certainly think that the reaction to the Coronavirus has been extreme with respect to our stock. As Joe said, we really haven't seen disruption to this point and so, I think, that was more.

There’s about – I think we have about a little over $60 million left on the authorization the Board put in place. As we have mentioned on previous calls, we have a bank covenant that requires you to be under 3 times after giving it back and we are currently around 3.3 times.

But certainly, there's – based upon the allocation alternatives that are in front of us and if the stock price persists there, that's something we are going to take a very hard look at. It becomes a more attractive option to do that certainly when you are talking about a share price that’s been in our view unjustly punched.

Kevin Sterling

Yeah. No. I agree with you. I think sometimes we throw the baby out with the bathwater. Lastly, and I know this – I know we are just in 2020 and you guys have given 2020 guidance. As I look at your CapEx, I think, for 2020 is down roughly $30 million from 2019 and I believe briefly referenced 2021. You said it might be even a little bit lower in 2021. And I mean, are we talking significantly lower or kind in that $400 million-plus level possibly just to kind of maintain growth CapEx, maintenance CapEx for 2021. Is it – as we think about that as that $400 million range? I guess, my question is we don't think will materially lower but also is probably not going to go higher, but maybe that $400 million give or take for 2021 the right way to think about a combination of growth CapEx plus maintenance?

Quint Turner

Yeah. I mean, Kevin, as you think about, of course, we are down versus last year. I think we had guided to $460 million for 2019. So we came in, I think, $7 million below that. So part of what you are seeing in the $420 million we are projecting for 2020 is just a spillover of that. And then we talked about the 8 to 10 aircraft in service. We have said that maintenance CapEx for us is about $100 million. So that kind of gets you in that $420 million zip code.

But as Rich said, at the end of the year, we will have – projections are to have eight 767-300s in mod. About three of those, the investment is pretty much in as of the end of the year. So in some respects, we are prepaying on 21 deployments a little bit. That has to do with the timing of the mod slots and so that really has the effect of reducing the requirement we will have in 2021.

So I think that the $400 million you are referring to could be quite a bit less than $400 million and that’s what we mentioned when we talk about the improving picture for free cash flow. I mean we expect to delever this year, but most of that comes from the growth in our EBITDA.

And then as you look at 2021, certainly there's significant opportunity for free cash flow. I mean our maintenance CapEx is about $100 million. We have got cash interest of about $55 million. We probably could in $7 million in pension plans.

So, if you are thinking about EBITDA of $490 million. That's about roughly $328 million of discretionary cash flow call it that can go towards what we view as the best alternative to create value for the shareholders.

That's been growth of late, because as Rich said, you don't want to advocate growth when those good opportunities are there. But when we are looking at ‘21, I think, you could see a lot of that cash flow making it, being available as free cash flow. So, it could be significantly less from the $400 million.

Kevin Sterling

Okay. No. That's great. I mean, if I hear your goal right now is you are going to delever, maybe get down about 3 times by year-end and then 2021 could really be a massive, massive free cash flow year for you guys, giving you a lot of optionality, is that a fair statement?

Quint Turner

Yeah. I mean, the company – when you look it on a per share basis if you have got that much discretionary cash flow that's like $4 -- $4.5 per share to $5 per share of discretionary cash flow that you have got available. On our current share price, that's over a 25% yield.

So, I mean, we are going to have a lot of opportunities. Certainly, we don't want to disappoint our customers who are waiting on aircraft and when those opportunities look good, they generally are going to be the first option for us. But I think that very good chance ‘21 has a lot of CapEx reduction and cash flow.

Kevin Sterling

I got you. That's all I had. Thanks so much for your time and once again Joe best of luck to you.

Joe Hete

Thanks, Kevin.

Operator

And we have our next question from Chris Stathoulopoulos with Susquehanna.

Chris Stathoulopoulos

Good morning, everyone.

Joe Hete

Good morning, Chris.

Rich Corrado

Good morning, Chris.

Chris Stathoulopoulos

So continuing along the line of the Coronavirus, so your stock has been trading like a payload sensitive airline stock, and let's say, that the virus accelerates and how are you thinking about the various risks to your businesses, perhaps, with a look towards these various subsidiaries? And I am guessing CAM, which is one of the largest contributors to your pre-tax earnings is fairly immune? But what about the other segments such as LGST, airborne or maintenance?

Rich Corrado

Well, Chris, a lot of it's going to be dependent upon how widespread the virus is in terms of their customers. I think the customers are still going to be there LGSTX for example is servicing the Amazon business, and of course, on the AMES piece or the MRO side people have to get their airplanes fixed.

So it's really a matter of is it going to be – is it going to get severe enough that you would end up with significant number of people being quarantined at home for lack of a better definition to where they can't come to work and produce the revenue side of the equation.

But as you pointed out, from a CAMs perspective, I mean, the leases – the lease payments come in regardless of whether the airplanes fly in one hour or hundred hours or whether it's carrying 1 pound or 1,000 pounds on board. So that cash flow stream still comes in over time.

But as I said earlier, the biggest exposure we have from a revenue perspective would be in the military side of the equation, but since most of the time we are flying into military bases, the bet is that the – they will still continue to have those troop movements. And I think, as Kevin even pointed out, there is the potential that you may even have an acceleration of the number of troop movements going on around the globe.

Chris Stathoulopoulos

Okay. So along those lines I know you have a relatively small commercial cargo charter business. So there's less opportunity to participate in any demand surges once China production is back online. But at the same time, I am guessing there's opportunity on the scheduled services side perhaps with the flying with DHL.

Joe Hete

We have got limited resources for extra flying and its 767 flying so it's regional based, right? So we are not going to fly a 767 from China into the U.S. It's not an efficient use of the aircraft. So there's a little bit of opportunity there but not a lot. It's not like we have four or five airplanes sitting around waiting for work.

It's not -- really we don't do much charter – pure charter work anymore. We have aircraft that are available -- some of our aircrafts are available like every other week because they fly military route one week and then they are available to back up the network.

So it's not a big part of our business today. If there are opportunities, it would probably be in the fourth quarter where we do have a lot of aircraft available and we tend to use those to fly during peak.

Chris Stathoulopoulos

Okay. And then with all the pressure on the passenger airlines particularly in China, and of course, their aircraft values are – are there any opportunities you are seeing in the market with perhaps opportunistic P-to-F, freight – passenger-to-freighter conversions? And then also are any concerns around credit profiles with any of your customers at this point? Thank you.

Rich Corrado

We haven't seen any kind of flood to the market of feedstock. We track the 767 fleet out there and there's still over 300 of them left in the world and there are some airlines that have large fleets of them and we keep a very good view of those and the ones that we know will come available in 2021 and 2022 as an example, they have not made any decisions to release those aircraft early.

The 737 MAX is still having an impact on the way airlines view their fleet and the way they view their – what they are going to be releasing and what they need to hang on to. So at this point in time, we haven't seen any impact as it relates to feedstock availability.

Chris Stathoulopoulos

Okay. Thanks for the time.

Rich Corrado

Thanks, Chris.

Operator

We have our next question comes from Steve O’Hara with Sidoti & Company.

Steve O’Hara

Hi. Good morning.

Joe Hete

Hey, Steve.

Rich Corrado

Hi, Steve.

Steve O’Hara

First – yeah, just I’d like to echo the comments regarding Joe and the new team. Congrats on everything and I am sure you guys seem to have a deep bench, so that’s a good thing.

Joe Hete

Thanks, Steve.

Rich Corrado

Thanks, Steve.

Steve O’Hara

You are welcome. And then, just, I guess, on looking at the 767-200s and I mean, you have, I think, or have 33 at the end of the year. You expect to go down at 32 by the year-end 2020. I mean, is there a potential for that to speed up in terms of these aircraft coming back or they – what's the possibility of those coming back sooner and as they come back, you expect those to be replaced by 767-300s?

Rich Corrado

So, a couple of things, one is the aircraft is – the 767-200 is still in demand. It’s still an efficient aircraft and still very reliable aircraft, as just as reliable as the 767-300s. And I am with DHL late last week on just a quarterly meeting and they commented we have 767-200s flying that they fly in their Middle East network and they commented on how great their reliability is for the airplane.

We are taking the aircraft out of service when there's several maintenance events that occur. There's a 50,000 cycle limit that requires you to significantly step up your maintenance program. There's an air pressure bulkhead that’s about $1.5 million to $1.75 million event. And there's a large S4C check that you have to do every four checks that – when those – when two or three of those things come together it doesn't make sense to invest that much money in the aircraft depending on how many cycles are left till 50,000. So that's why we have been taking aircraft out of service. They are still very much in demand and so, we are pretty bullish on the aircraft going forward.

We do – we don’t we are going to have a lot coming back. We are having some returns this year, but we are also having some deployments and so the softness is that time between the transitioning when you get the aircraft back, you have a C check and repaint it for the new customer, et cetera, et cetera, then you lose lease months. And so, although, we are getting some aircraft back, we are also redeploying some of those aircraft and just having to go through the transition, which is normal for a lesser oil aircraft.

Steve O’Hara

Right. Okay. Thank you. And then maybe just looking at the improvement within the other business segment, I mean, is that something that you think is sustainable going forward and is there a further improvement maybe to come, I mean, it looks like revenue in the fourth quarter was up very significantly. Just wondering about maybe the trajectory there, but it seemed like a pretty steep growth in 2019 for the most part, back-end loaded, but I am just curious maybe going forward? Thank you.

Joe Hete

Yeah. Steve, on the maintenance side, the AMES which is a big part of that, obviously we have a limited amount of hangar space. So the additional growth potential there is somewhat limited in light of the facilities space, as well as the continuing challenge of trying to find qualified maintenance technicians. So it's a very nominal growth rate that we would expect in the maintenance side of the equation.

On the logistics side of the business, if you recall last year, about mid-year we lost the management that we had over a number of locations for the Amazon gateways where we managed third-party providers.

We backfilled some of that with the opening of up two of our own managed gateways, one of them in Tampa, Florida and the other one in Charlotte. We continue to have both of those in place this year albeit the Tampa one will scale down about mid-year when Amazon opens up its own facility over in Lakeland, which is 20 miles or 30 miles away from Tampa. We still expect to have an operation in Tampa albeit be a lot less than what it was last year.

So when you look at the guidance that we gave, one of the things that was factored in there was a fact that part of the business would show lower returns than what we saw in 2019 and in 2020 at least based on what we know today.

We are chasing another – a number of other opportunities with Amazon, with DHL, with UPS on the logistics side of the business. So we are fortunate enough based on our track record of how we manage with our express heritage. How we can manage those facilities better than your normal third-party providers. We hope to be able to recoup some of that business as well.

Steve O’Hara

Okay. And then maybe finally on the, I guess, the loss from non-consolidated – consolidated affiliates. I assume that's all of kind of the A321 conversion process. Could you just talk about maybe what you expect the total investments to be there and if there’s any – if you have any customers lined up or how that process is going? Thank you.

Joe Hete

Yeah. From A321 perspective, Steve, that's really where those numbers are coming from. And essentially, we are still targeting having the STC approve, call it midyear of this year. The prototype aircraft already has an end user customer as well as the second aircraft, which will be inducted shortly for – to begin its modification process.

At the end of the day, we will have, probably, $25 million to $30 million invested on our piece of that for the development of that STC. But as you noticed in our remarks, one of the things we pointed to was that the DHL no longer wanted to utilize the 757s in their network.

And as we have said on previous calls, one of the reasons we jumped into the A321 is because it gives you essentially the same cubic capacity of 757 for a significantly lower operating costs, and I guess that probably bears it out more than anything else is that the DHL says they need to reduce the number of 757s in their network.

So that bodes well for the A321 as it's the most likely replacements, the only thing that comes through with an equivalent amount of cubic capacity and has significantly lower operating costs. So that's why we believe it's going to be in the long poles a significant portion of our fleet complement.

Steve O’Hara

Okay. And maybe just a follow-up for that, I know the 73 – Amazon has been taking 737s and I am just wondering is the A321 a decent comp to that or is it more for larger aircrafts like 757? Thanks for the questions.

Rich Corrado

Sure. This is Rich. The A321 is a larger aircraft. It's got about 95% of the cube of a 757. So if you look at the 757 today, it's got 15 upper deck positions, 737-800 has 11. So it's about 30% larger cube if you will.

But it flies with the same engines and so if you look at this – if you are carrying the same weight in A321 and the 737-800, it’s about 8% higher operating cost than A321. But you have got that much more cube capability to carry another three pallet – three to four pallets worth of cube.

So it can compete with the 737-800, a little bit higher cost, but it – but if you look at – if you are an express carrier, you can fly an A321 in place of a 737-800. But then during peak you get an automatic lift of 30% a cube to fill those lanes when you – when the seasonal market aren’t. It's a great airplane and obviously the investment we made were really high on it. But it is a – it isn't necessarily a direct replacement for the 737-800, it's a direct replacement for the 757-200.

Steve O’Hara

Okay. Thank you very much.

Operator

[Operator Instructions] We have our next question from Travis Pascavis with HIMCO.

Travis Pascavis

Hi, everyone. Thanks for taking my question, part of it was just answered, but maybe if you could just take a step back and describe the relationship with DHL and anything we should reach into in terms of the change? It doesn’t sound like you have given the context in the last question but just I would ask it direct?

Rich Corrado

Yeah. Thanks for the question, Travis. No. We have a very good relationship with DHL. We – like I said, we had our quarterly meeting with them. It was a great meeting. The service we provide to them is best-in-class in terms of the flying that we do for them in the U.S. and again we lease other aircraft to them in other parts of the world and they are very happy with that as well.

757 decision by them was more directed at kind of optimizing and right-sizing their fleet. As they grow, the 757, as an example, we have some lanes that hop through a couple of markets, so they will take some 737-800 that they are taking and put them on direct route to some of those markets just as an example.

And so it's not reflective at all of the relationship that we have with them. We are looking for more opportunities going forward both on leasing and flying basis. This happened to be ATI our airline that flies 757 is the only 757 airline – cargo airline in the country other than UPS and FedEx.

And there's a reason for that. It’s not an efficient aircraft. It works okay in express environment, if you have only got enough freight to fly the planes that it flies, but it really is a higher cost aircraft and that's why you haven't seen us grow the airframe.

We always tried to push our customers towards the 767 to 200 rather than the 757. And I think DHL, as you know has looked at the 757 and looked at the alternatives that they have and they recognize as much as anybody that aircraft is. There are other opportunities to right size your network and be more efficient.

Travis Pascavis

Do you expect things to be relived in or will those be retiring, I missed that part?

Rich Corrado

So we are looking for different opportunities for those aircraft. The one thing about the aircraft that powered 2037 engines and those are very much in demand right now. And so we may make more money leasing the engines than we did leasing – haven’t getting the lease revenue on the airplane through the ACMI operation.

But we are looking for other opportunities. We have got a company interested in taking two of them right now, of course, we have still got – we are still flying one of them right now, two of them right now for DHL and we will fly one into April, but – and two of them are on the deck here.

But we believe we will be able to get more revenue out of those aircraft by the end of the year and we will be able to deploy at least two of them and then maybe some of the engines. But we believe we will get some more value out of those aircraft.

Travis Pascavis

Great. Thanks a lot for taking my questions.

Joe Hete

Thanks, Travis.

Operator

And we have a follow-up question from Chris Stathoulopoulos with Susquehanna.

Chris Stathoulopoulos

Hey. Thanks for the follow-up. I was wondering if you could give us an update on labor and where you are with the CBA on ABX and whether this year’s EBITDA guide includes any new labor deals?

Rich Corrado

Yeah. Chris, right now I think the last we mentioned to the number of investors when we were at the Stifel Conference, for example, is that we met in February at the National Mediation Board headquarters in Washington, D.C.

We are scheduled to go back to the table the week of the 23rd for three days I believe it is of negotiations. We actually have one of the Board members involved in the negotiations at this point in time to try to move them along in a more rapid pace than what we have seen in the past. We have not factored any of those costs and potential cost increases into our guidance for 2020. So anything that we would commit to would be a reduction of our overall guidance for labor settlement.

But as I have said on a number of occasions, we feel cautiously optimistic that we will get a deal done this year. It’s just a matter of what the end amount looks like from our perspective. As I have said on many occasions, we already have one airline hauling cargo for Amazon at ATI and we know what the cost is for that particular agreement and there is no rational reason for us to have any higher cost structure with the ABX folks assuming we get a deal done. So that's kind of our guideline going through the negotiation process, but cautiously optimistic we will get something done this year.

Chris Stathoulopoulos

Okay. And then as a follow-up to that, how should we think about headcount growth for this year’s mid-teens or similar to the 12%, 14% we saw in 2019, a good place to start?

Rich Corrado

Now, the headcount will probably be less in terms of the number of flight crews we had to add last year with the combination of the additional aircraft for Amazon plus the fact they went to the one-day service. We added on the ATI side, for example, like 118 pilots overall with the – just the additional five aircraft, four aircraft that we owe them this year. That number will come down significantly.

Another driver in the overall headcount was the two gateways, I mentioned earlier, in Charlotte and Tampa. As Tampa has pulled down from the current volume of freight going through there to something less by the end of the year, that headcount will come down as well. So, I wouldn’t anticipate anywhere near as many – as much of a headcount increase in 2020 as we saw on 2019.

Chris Stathoulopoulos

Okay. All right. Thanks for the time.

Joe Hete

Thanks, Chris.

Operator

Thank you. And we have no further questions at this time. I would now like to turn the call back over to Joe Hete for closing remarks.

Joe Hete

Thanks, Vanessa. As it’s been mentioned by a couple of people here and I am sure most people are aware by now that I announced that I will be retiring after the conclusion of the shareholder meeting on May 7th. I do have to say that it was an honor and privilege and most times pleasurable working with you folks over the years. I think I am leaving you in very capable hands with Rich and Joe Payne, our General Counsel, and Quint, of course, as most of you know, and the newest addition to our senior team here, Ed Koharik, and of course, Mike Berger, our Chief Commercial Officer. So, I think, you are in good hands. I appreciate all the support over the years and have a quality day.

Operator

And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.