May 8, 2018
Executives
Joe Hete – President and Chief Executive Officer Quint Turner – Chief Financial Officer Rich Corrado – Chief Operating Officer
Analysts
Jack Atkins – Stephens David Ross – Stifel Helane Becker – Cowen and Company Adam Ritzer – Pressprich and Company Chris Stathoulopoulos – Susquehanna Jamie Yackow – Moab Partners
Joe Hete
Good morning. And welcome to our first-quarter 2018 earnings conference call.
With me today are Quint Turner, our Chief Financial Officer and Rich Corrado, our Chief Operating Officer. We issued our earnings release yesterday after the market closed.
It is on our website, atsginc.com. We will file our Form 10-Q later this week.
I’m very pleased to report that 2018 has begun with a substantial increase in our financial results during a very strong first quarter. Our revenues are up 11%, excluding reimbursables.
Both our GAAP and adjusted EPS doubled from a year ago and our adjusted EBITDA rose 26%. Our results stem from our continued success against our strategy to acquire, convert, lease and operate Boeing 767 freighters around the globe.
Two more have been leased and deployed so far in 2018 with a third due later this month. We intend to deploy seven others by the end of the year.
Quint is standing by to summarize our financial results for the first quarter. Rich will add a few words on our operations and I will close with some perspective on our outlook.
Quint?
Quint Turner
Thanks, Joe and thanks to all of you on the call for joining us this morning. 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 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 in underlying assumptions, factors, new information or other changes.
These factors include but are not limited to changes in market demand for our assets and services, our operating airline’s ability to maintain on-time service and control costs, the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration, fluctuations in ATSG’s traded share price, which may result in mark-to-market charges on certain financial instruments., the number, timing and scheduled routes of our aircraft deployments to customers and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q we will file this week. We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings 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 and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
As Joe said, our first-quarter earnings were very strong led by improved results from our airlines. Our ACMI services segment was profitable for the quarter and we saw a year-over-year improvement in all our business units.
On a consolidated basis, first-quarter revenues were $220 million, which is lower than the prior year only because of our adoption of new revenue recognition standards under Topic 606. Excluding reimbursement payments included in 2017 revenues, our first-quarter revenues increased 11%.
Revenues from each of our three reportable segments – CAM, ACMI Services and our new segment, MRO Services – increased compared to the same quarter last year. Revenues from Amazon were approximately 28% of the total for the quarter under the new revenue recognition rules.
DHL revenues were also 28% and the military contributed 11%. On a GAAP basis, we had first-quarter earnings from continuing operations of $15.7 million versus $9.8 million a year ago.
On a diluted basis, GAAP earnings per share for the quarter were $0.26, twice the $0.13 we earned a year ago. The quarterly mark-to-market reevaluation of our liability for warrants issued to Amazon resulted in a $3 million after-tax loss based on the first-quarter increase in our stock price.
The related lease amortization incentive also tied to the Amazon warrants was $3.3 million or $0.06 per share after-tax. Our share of joint venture cost to develop a new freighter version of the Airbus A321-200 launched last summer with Precision was a $2 million or $0.03 per share item after tax under the equity method of accounting for that venture.
Adjusted for those items, our adjusted EPS from continuing operations was $0.35 diluted for the first quarter, more than double the $0.17 we earned a year ago. Our adjusted EBITDA increased 26% to $71.9 million, a first-quarter record for us.
Just as in 2017, the principal factor in our earnings gains this year has been the improvement at our airlines. ACMI Services on a pretax basis earned $3.9 million in the first quarter, an improvement of $7.5 million from its pretax loss a year ago.
ACMI Services operated six more 767s during the first quarter than it did last year. This year, our expense associated with scheduled airframe inspections for the aircraft we operate and premium pay and training costs for pilots were lower.
CAM, our leasing business, had a good quarter with pretax earnings of $15.2 million, 16% better than a year ago. Additional earnings from a larger lease fleet were offset by increases in the lease incentives to Amazon, higher depreciation and increased interest expense as CAM’s aircraft portfolio expanded to meet stronger lease demand for its 767s.
As we mentioned before, our GAAP and adjusted earnings this year both include a non-cash charge to interest expense of about $2 million per quarter associated with the convertible feature of the notes we issued last September. We are not excluding it from the calculation off our adjusted EPS because the charge amortizes ratably over the seven-year term of the notes.
We also revised our reporting format for the first quarter by forming a new reportable segment, MRO Services, which includes the results of our aircraft maintenance and modification businesses. Gateway ground operations, postal center management services and material handling equipment support comprise our other activities line.
MRO Services' pretax earnings, including intercompany transactions, rose $1.3 million to $4.5 million on expanded demand for our maintenance operations. The other activities businesses also reported an earnings gain to $2.6 million for the quarter.
Volumes and contracted rates for our gateway and sorting services increased. We also had a gain from our minority investment in our European airline affiliate, West Atlantic.
These items offset the loss of results from hub services operations in Wilmington for Amazon last May. We spent $79 million on capital expenditures in the first quarter, down from $84 million a year ago.
That included $64 million to purchase three 767 feedstock aircraft and to modify in-process aircraft. We spent $9 million for required capitalized heavy maintenance and $6 million for other equipment.
We still expect a 2018 CapEx spend of about $300 million, mostly to acquire and modify 767s for our growing customer dry lease portfolio. Assuming that target, and given our $310 million adjusted EBITDA outlook, we expect our CapEx program to be self-funded for the year as a whole.
About 80% of our debt principal is fixed rate with an average coupon rate under 3%. Our debt leverage remains near the 2 times trailing adjusted EBITDA mark.
As a result, we remain well-positioned to pursue new investment opportunities even if interest rates increase later this year. That’s a summary of our financial results for the quarter.
Rich is ready to share some operating highlights and our market perspective. Rich.
Rich Corrado
Thanks, Quint. From an operating perspective, we had an excellent first quarter as both of our airlines showed improved earnings resulting from higher utilization and good on-time performance even during the challenging winter months.
CAM, our leasing company, transitioned from completing the Amazon commitment of 20 767s in August to delivering more freighter conversions to other customers. CAM has delivered two 767 freighters to lease customers so far this year, one in the first quarter, the Northern Air Cargo and another in the second quarter to Air Incheon.
A third is slated to go to Amerijet later this month. We also began leasing one 737 to West Atlantic in April.
CAM is on pace to meet the 2018 target of 10 more 767s for lease customers this year and is negotiating for the purchase of additional feedstock 767s for deployment in 2019. All of the ATSG family of companies performed well in the first quarter.
Most air cargo operators wind down operations as volumes fall after peak, but that is less true of us. We cover express network routes that are less volume-sensitive, which means meeting strict on-time demands during winter months that stretch our ground and line maintenance crews.
I am pleased to say that we delivered great service throughout the quarter. We are especially pleased to report that the pilot group at ATI ratified a market competitive amendment to their collective-bargaining agreement in March 2018 that sets compensation levels for four years from that date.
While it will significantly raise our wage and benefit costs at ATI, it provides a stable platform for growth. We are eager to resolve our discussions with our ABX pilot group as well.
Any such deal, however, will have to keep ABX a competitive choice for our airline customers. Before turning it back to Joe, I would like to note the addition of Mike Berger to the ATSG team as Chief Commercial Officer.
Mike has a significant record of achievement for business development in the air express industry, offshore international experience and knows our customers well. I am confident Mike will further strengthen ATSG’s market leadership in providing flexible, innovative solutions to our customers' freighter aircraft and air cargo needs.
Joe.
Joe Hete
Thanks, Rich. We surprised some people last year when we announced a $300 million CapEx budget for 2017 just as we were nearing the finish line with the 20 767’s we promised Amazon.
During the Amazon dedicated fleet buildup, we said that other potential 767 lease customers should expect delays of at least a year. We were eager to serve that latent demand when the market opened up.
Under the CapEx plan last year, CAM delivered nine 767s and one 737, including the four 767s to customers other than Amazon. Under roughly the same size plan this year, we expect to deliver 10 767s, plus the 737 we leased to West Atlantic in April.
We have customer commitments for seven newly converted 767s this year, including one we delivered in January, all of which will be straight dry leases. An agreement for an eighth is being finalized.
We have both single and multi-aircraft interest for the remaining two. As we build our 767 lease base, we are pressing ahead with our partner, Precision, to gain FAA approval for a converted freighter variant of the A321.
Once our prototype earns its supplemental type certificate, we intend to make investments of our own to provide A321s to express network customers that need a narrowbody complement to the 767 with capacity similar to a Boeing 757-200 with operating costs more like the 737-400. As we announced in February, our Board has approved a $59 million increase in our authorized share repurchase limit to $150 million.
We purchased 157,000 shares during the first quarter for $3.6 million and will continue to monitor opportunities to purchase more consistent with our capital allocation strategy. We will remain focused on growth and generating cash flow that we can invest to maximize shareholder returns.
We hear from many investors about 2019 growth considering a tight market for 767 freighter feedstock. We are in negotiations for additional feedstock that would be available for customers in 2019.
It has always been our practice to forecast one year at a time; although we see no evidence that the rewards our business model can generate will diminish anytime soon. We hope you remember that we have been buying, converting and deploying 767s for decades starting when we, and the major integrators, were the only ones convinced of its value as a regional express network tool.
We are the very best at what we do and we are confident we can continue to grow at good margins for years to come. That concludes our prepared remarks, Vanessa.
We are ready for the first question.
Operator
And thank you. We will now take questions [Operator Instructions] And we have our first question from Jack Atkins with Stephens.
Jack Atkins
Good morning, guys and congratulations on a great first quarter.
Joe Hete
Thanks Jack. Good morning Jack.
Jack Atkins
So I guess let me start off with a question for Joe or Rich. Just kind of going back to both of your prepared comments around CAM currently being in negotiations for additional 767 aircraft for deployment next year.
Is there a way for you to help us sort of think about – my guess is you are not going to want to say how many you are in negotiations for, but is there a way for us to think about your appetite for aircraft next year and how many aircraft you think you guys could place into service next year in terms of being able to get through the modification process? Sort of what is the right range to think about for potential aircraft deployment for 2019?
Joe Hete
Jack, in terms of feedstock that we would add, you can think about it in terms of probably on average at least six additional tails on an annual basis. So service costs considered roughly $150 million a year and of course, if the demand is there for more aircraft, we obviously will try and source those, but I think if you just want to assume a base run rate, that is probably a good number to target.
Rich, I don’t know if you want to add anything to that.
Rich Corrado
No, that would be our base plan and of course, if demand continues to be strong, we would look for alternatives. Keep in mind that when we look for feedstock, we look for a good run from a specific airline and a lot of times that comes out over time.
For example our 767-300 fleet is predominantly sourced from Qantas and American and we took those aircraft from Qantas over a 2.5 year period and from American over a two-year period. So a lot of times, Jack, we will get into an agreement with getting some feedstock where we will get a run and it will go over separate years.
If we can accelerate that, if demand picks up, we try to do that. Sometimes the source feedstock customer wants to slow it down because they may want to hang onto them a little bit longer.
But in looking for feedstock in that way, it represents the most efficient way to get feedstock and also when we are looking to lease them to customers that want more than one aircraft, they like the fact that they are going to get converted freighters that are similar in their heritage in other parts of the airplane.
Jack Atkins
Okay, okay, that’s helpful, Rich. I think that’s good to know sort of how you guys are thinking about the future deployment growth.
So Rich, if I could get you too just to expand on your comments for a minute. I always think it’s helpful to hear you talk about the types of customers that are inquiring about potential 767 freighters.
Have you seen any change there whether it’s with regard to sort of geographic interest or just types of customers? If you could just sort of help us think through sort of where geographies that want this plane and sort of what types of customers are looking for this plane.
Rich Corrado
Yes, it’s a great question, Jack. We’ve seen a significant change, in fact, in the demand profile pattern over the past three years.
We were predominantly a North American lessor up until about three years ago and then we got into Europe with West Atlantic. West Atlantic, by the end of this year, will have six aircraft from ATSG.
We will have six aircraft in the Middle East by the end of this year, so we are adding two to the portfolio there and we added a new lessee in Air Incheon to South Korea. They will take two aircraft this year.
We already have one lessee in the Far East with Rhya that’s out of Malaysia and we continue to expand our business with Cargojet in Canada and then we added another new lessee this year, Northern Air Cargo and we are expanding our business with Amerijet. One of the things that most of these customers have in common is they either have their own network or they are supporting the networks of an integrator or a global customer that is looking to penetrate a market.
You look at – Cargojet is a good example. They have got a significant network – they are the only significant network in Canada, but their growth has been so strong that they have actually been looking for more assets to branch out of Canada and do international routes.
So the demand profile, a lot of it is express and integrator-oriented, but even the integrators are looking to supplement their networks with other carriers and that is where a lot of our customers are coming from.
Jack Atkins
Okay, okay, Rich, thank you for that. Last question and I will turn it over, but just in terms of the improved profitability on a year-over-year basis in the ACMI segment, can you kind of walk us through what’s driving that specifically because obviously that’s a business that can I think over time it generate some improved profitability versus what you saw in 2017.
It’s probably happening a little bit quicker than we would have expected. Could you kind of talk us through that and sort of – I know you’ve got the ATI wage increase for your pilots there.
Just kind of help us think through how you are seeing the profitability of that business through the rest of the year as well.
Rich Corrado
Yes, sure, Jack, this is Quint. Well, we certainly have benefited from better utilization as we have reached the buildout of the Amazon network in August of last year.
So comparing first quarter to first quarter of 2017, you’ve got that fleet fully in place. You are no longer carrying any kind of ramp for that.
I think in the first quarter of last year, we had a bit of a leftover of the sort of the premium pay issues of 2016 that were still there. So year-over-year that was a tailwind.
The increase in labor costs associated with the ratification of the ATI amendment really didn’t kick in until very late March. So essentially there wasn’t any impact of that in the first quarter of this year.
That will start, of course, as we move forward through the balance of the year and be a bit of a headwind on that on a year-over-year basis given the higher cost of that contract. We also had maintenance in first quarter be a little bit better than last year’s first quarter, which was a tailwind, but certainly we have seen and began to see that last year improved profitability out of the segment.
We expect for the full year that the segment will again be a profitable segment for us. We have baked into our guidance the ATI ratification.
The guidance that we have given for EBITDA does not include anything associated with the other airline reaching an amendment to its contract. That could happen, but it was our best view at the time we gave our guidance and continues to be that it likely won’t happen until next year.
Jack Atkins
Okay, great. Thank you again for the time.
Rich Corrado
Thanks Jack.
Operator
And our next question comes form David Ross with Stifel.
David Ross
Yes, good morning, gentlemen.
Rich Corrado
Good morning, David.
David Ross
Just following up on the ATI deal, why I guess just go for a three-year contract after being in negotiations for about four years? I noticed the deal becomes amendable again in 2021.
Joe Hete
Well, one of the things we want to look at, Dave, as we go through that is try and dovetail those more closely with our existing agreements with our customers for operating those aircraft. If you remember, the Amazon agreement runs through 2021.
The majority of their flying is done by the ATI guys. On the ABX side, the current ABX agreements run through March of 2019 and of course, as you know, we are still in negotiations at this point in time.
So when you think about where we are at today, there is a disconnect between what we bid when we did the Amazon work versus where our labor costs are today and so what we tried to do is get those more closely aligned. Obviously what we’d like to do is go out 8 or 10 years, but you are never going to get the labor side to agree to something that long of a duration.
David Ross
At least not anything that you are happy with.
Joe Hete
No.
David Ross
And keeping on the pilots, can you talk about any changes there to either recruiting or retention? Has it been more challenging, less challenging, stable?
Rich Corrado
We have not had a problem attracting crews and staffing classes. ATI has folks in training right now in different levels.
They have got some classes started and they have also got some folks in simulators, so we are anticipating having enough crews to support the demand, including the growth that we expect during peak from our larger customers.
Joe Hete
When you think about the ATI side, Dave, one of the things that – we have got guys that have been here two years that are in the left seat of a 767, so the upgrade potential there is pretty quick. The recent contract negotiations aside, the largest increase a pilot ever gets is moving from the right seat to the left seat.
David Ross
That’s helpful. And then I guess a follow-up to an earlier question around 2019, I guess putting it a different way, how early do you need to make decisions around planes that customers might want for next year in terms of timing to find the feedstock and get the conversion slot?
So if a customer says I want three planes next spring, by when do you need to have those planes and how early do you need to reserve those conversion slots?
Joe Hete
Yes, that’s a good question, Dave. Really kind of our 2019 view, and we are already working on that, so we’ve already done the groundwork with the conversion house in terms of laying out some option slots for our growth there and like I said, we’ve already – we are already in discussions for aircraft that we’ll fold into the portfolio for conversion and delivery and deployment in 2019.
If we started in 2019, we’d have to be looking at 2020. So you need to be well ahead of the curve in this business.
David Ross
That makes sense. And then lastly just a clarification question.
When you were talking about a base case or the potential for six additional tails and you mentioned something I think, Joe, about $150 million a year. I wasn’t sure the $150 million was tied to the six tails, if that was another CapEx number excluding the six tails.
Joe Hete
No, that would be for the six tails because, as you will recall, we always talk about that we try to get the aircraft into service for somewhere between $23 million and $25 million a copy. So if we just baseline it at six tails a year, that’s your $150 million.
David Ross
Okay, thank you.
Operator
And our next question comes from Helane Becker with Cowen and Company.
Helane Becker
Thanks very much and good afternoon. Hi, how are you?
Joe Hete
Good, how are you?
Helane Becker
Just a couple of questions. With respect to more aircraft for Amazon, as we think about the outlook for them, after this year, they have no growth aircraft.
So have they approached you? Are they concerned at all about the fact that you are placing aircraft with other customers that aren’t them because maybe they are slow to decide on aircraft or there is no – or do they just not have the demand for it that you see?
Because I would think they would want more aircraft pretty rapidly for 2019 to say 2022.
Joe Hete
Well, Helane, we can’t obviously talk about potential future business with our customers, but I think if you would just look at it from a logical perspective, they will have the 40th aircraft and the current commits in place by the end of this year if everything goes according to schedule and with their growth rate, is it reasonable to expect that they wouldn’t want to continue to expand the fleet and the answer is probably know if you apply logic to it. And then dovetail that with the fact that when they talked about their hub operation they are going to build in CVG, having parking for 100 aircraft, et cetera.
So I think there is growth in the future, but nothing that we are going to talk about today.
Helane Becker
Got you. And then my other question, I heard – I mean stock price has been really lagging the group over the last maybe year to date and I am not sure if I understand why because I think we had talked about and you guys have said that the 767-300 freighters are kind of coming into service more valuable, so to speak, at higher rates than the 200 freighters, and I would think that that would translate into higher earnings and they did in the first quarter and that would continue and then it would translate into a higher stock price and I am not sure I understand why that’s not happening.
And then the other thing, and as part of – that’s like – the question there is A. And then B, a little question is I have heard that Amazon is actually looking at having you not do some of the things like deicing at Cincinnati, which intuitively doesn’t make sense to me, but I’m wondering if you could set me straight on that.
Joe Hete
Well, I will take the last one first because it’s the easiest. We don’t do any deicing at CVG today for Amazon.
DHL handles all of their ramp operations down there. We just fly the airplanes in and out and of course, we do the maintenance on our aircraft in CVG.
So that part has – and nothing has changed in that respect. As far as where the stock price is, we are a little bit perplexed ourselves as to why it has taken the dip that it has since the first of the year.
As you saw with the results, everything is humming on all cylinders at this point in time. We haven’t changed our guidance at this point.
We are still guiding to 310, but there are things like – if you go back to last year, for example, we saw block hours basically take a little bit of a dip after the first quarter and we are seeing the same in terms of a flat line schedule this year, but again we have got all 20 aircraft for them in place and the DHL network is a pretty stable one overall. But everything else, nothing has changed in our go-forward plan.
We think we have got continued opportunities in 2019. We obviously are working on the feedstock side.
We have got the slots available and there is still pent-up customer demand out there. So can’t tell you why the stock has dropped.
I thought maybe you could tell us.
Helane Becker
Yes, I am at a loss myself given everything that I know you guys have been doing and have said. Like I just said, it makes no sense either.
Okay, well, thanks. Those were my 2.5 or three questions.
Joe Hete
Thanks Helane.
Operator
Thank you. Our next question comes from Adam Ritzer with Pressprich and Company.
Adam Ritzer
Hi, good morning. Thanks for taking my call.
Just a few housekeeping things. I know you mentioned in your comments you are going to have a reduction in your federal tax rate, but I assume that’s just for accounting purposes since you are not paying any taxes.
Is that correct?
Quint Turner
Correct.
Adam Ritzer
Okay. Can you remind me – I know it has been a while now.
How many – what is the total amount of warrants Amazon has to get from you guys and what is this average strike price on it?
Quint Turner
Yes, currently, they have 14.4 million warrants. There was a tranche in March that was issued, about 1.59 million that brought them to that total and then in September of 2020, there is – under the terms that we executed with them in 2016, there’s sort of a true-up to 19.9% at that point.
We currently don’t expect that to result in many additional warrants, perhaps 300,000 or so warrants to get them to maybe a total of around 14.7 million or 14.8 million warrants.
Joe Hete
Or less if we do some buybacks in between.
Quint Turner
Right.
Adam Ritzer
Okay, and what’s the – and the average strike is what, $9, $10? Is that correct?
Quint Turner
$9.73 a warrant would be the exercise price if they exercise the warrants.
Adam Ritzer
Got it. So obviously, your share count would go up, but you would get in $150 million of cash, which you could immediately pay down debt, so your debt would go down as well.
Quint Turner
Right. On the cash piece, but on the share count, we currently – when we give an unadjusted share count with our earnings release, and you will see a table back there, there is an adjustment for the warrants and we assume the treasury stock method when we apply that against the additional warrants based upon the current share price.
In other words, if we get that cash that you are referring to for the exercise and apply that cash to buy back stock at the current price that would reduce the additional warrants in the denominator. So right now, we are showing about 69 million shares when actually the current number out there is only about 59 million.
So that factors in the additional warrants already in our adjusted EPS that we provide.
Adam Ritzer
Can you tell me what you think your maintenance CapEx would be now? I know the fleet keeps growing every year.
I just wanted to update my numbers on what you think the maintenance CapEx will be with 70 planes this year and what it would be with 80 planes next year.
Quint Turner
That’s a great question. And one of the things that is inherent with leases typically is the lessee is responsible for the heavy maintenance during the term of the lease.
And so actually as we grow CAM’s leasing portfolio with additional 767-300 leases, the typical lease arrangement won’t result in additional maintenance CapEx for us because the lessee will fund that during the life of the lease and then return the airplane in sort of a like-for-like maintenance condition at the end of the lease. So I don’t necessarily see that growing as we expand our portfolio, but the current level of CapEx maintenance spend, and it varies from year to year depending upon the timing of the visits, but it’s somewhere call it $60 million to $70 million annually.
Adam Ritzer
Got it, okay. And I know you give your guidance, you gave $300 million of guidance, but what would you think all in with 80, 81 planes your EBITDA would be?
Quint Turner
Are you referring to an exit run rate kind of –?
Adam Ritzer
Sure. An exit run rate, let’s say, and I’m just trying to say, okay, look, in Q4, you are going to do, based on your guidance, you are going to do at least $80 million.
But if you got to 80, 81 planes and added nothing, how much your exit run rate or however – I think you understand the question.
Quint Turner
We have said that on a per tail basis, and maybe that’s the right way to sort of frame this, a 767-300 generally is going to provide somewhere, call it, $3.6 million to $4 million annually of EBITDA and so again, it depends on how many additional services, the value- added services that we sell with the lease, maintenance for the airplane or full-on operating providing crews, etc., but just the asset piece will add that incrementally. So you sort of look at us this year, we are adding 10 767-300s throughout the year to CAM’s portfolio.
So you can sort of multiply that out and get an incremental addition to the run rate.
Adam Ritzer
Got it. So if I take the Q1, annualize that, add another $35 million, $40 million to your additional $10 million at the $3.6 million to $4 million that pretty much gets me to what I am asking.
Quint Turner
Pretty close.
Adam Ritzer
Okay. So my next question, I’m sorry to ask so many questions, but if you take your maintenance minus your interest expense, you have no taxes, you are generating somewhere around $240 million, $250 million of free cash, which you’ve just reinvested in your fleet.
There’s 10 planes this year, you are talking six next year. You are almost adding another Amazon every two to three years without Amazon.
So you are going to keep growing and I think the non-Amazon planes have better margins and you are diversifying, so that is all a good thing. But if you stopped, what would you do with all that cash?
Are you going to be under any leverage commitments, would you just take that and buy back stock? What would you do with all that cash if you weren’t to continue to grow?
Quint Turner
Well, the good news there, Adam, is that there are a lot of options to create value for the shareholder and certainly we have shown that we will use any or all of those based upon what we view as the relative benefit. We have done a significant share buyback.
We have, of course, as you say, invested in growth aggressively and at times we’ve even looked to grow inorganically if we found something that was a great synergistic thing to slide under our holding company structure. So M&A is also a potential use of cash to create value.
But good news is, as you say, there is – the model funds significant growth already. The balance sheet has a lot of liquidity in it and there is a lot of great options for us in this growth environment we are in right now.
Adam Ritzer
Yes, I agree. I mean just reiterating Helane’s question about the stock lagging, it seems to me the way I look at or on a free cash basis with no growth, you guys will generate well over $3 a share of free cash flow, which is a 15% yield seems pretty good.
So I think you guys are doing a great job and thanks for answering my questions.
Joe Hete
Hey, Adam, just one last thing is don’t forget the A321 program we are into as well that we will be looking to make investments in that aircraft type once we receive the certification for a passenger freighter. So as you look out beyond, in the latter part of 2019 and into 2021 and beyond, that is going to become a part of our lease portfolio as well.
Adam Ritzer
Right, you have that, you have your investment in West Atlantic, which that was a great deal for you guys. I appreciate all your comments.
Thanks a lot.
Joe Hete
Thanks Adam.
Operator
Our next question comes from Steve O’Hara with from Sidoti & Company.
Steve O’Hara
Yes, not to maybe rain on the parade a little bit, but just I mean in terms of the aircraft that you were acquiring, and I mean it sounds like you have good demand for the 10; you have two left to sign up I guess. One kind of sounds like it’s close.
I mean how many do you kind of want, need and maybe what’s the limit there in terms of how many you have or how many you acquire without firm customer commitment? I mean it seems like the economy is improving, airfreight seems to be pretty strong, but obviously things run in cycles and I’m just wondering how you think about that with purchasing aircraft.
Rich Corrado
Steve, I think Joe answered that earlier kind of from a planning standpoint from a base of six because you need to plan in advance, because you need to be a year to two years ahead of where the market is going to be and then depending on what we see as real-time demand, we can flex up or – I mean the only way to flex back is to not convert and just hang onto the feedstock. We haven’t had to do that, but it is an option if the market slows down and we have got feedstock in queue.
So that’s kind of the way we look at it. We have had very strong demand over the past – really over the past four years and it has been noted, but I think by the end of this year, we will deliver 14 aircraft post the Amazon 20.
So in about a year and a quarter. So I think that speaks for the strength of the market and the fact that although we were fulfilling an order from a great customer, we still had our eye on what was going to be after that and I think we planned on the fact that given they were getting 20 from another operator and that would have pulled a lot of feedstock and conversion space out of the market, at that time, we were still negotiating feedstock, we were still tying up slots because we knew we would have a pretty good run in the market when that opened up.
Steve O’Hara
Okay, so I mean it sounds like maybe the most you think you would kind of go over if the cycle did turn without warning maybe you’d go over by six and you would kind of fly those internally for a while or just not convert them or something like that and then when the cycle kind of turned around again, you would either convert those, then place those with customers and then start afresh. Is that kind of how you are thinking about it?
Rich Corrado
I mean that’s probably the worst case…
Steve O’Hara
Yeah, right…
Rich Corrado
Convert and fly all six that we were planning on, but we do have that option and that opportunity that if we don’t have an external lessor that we can fly them in charter, fly them in ACMI and it is one of the unique things about our value proposition is that we do have that flexibility and most of our lessees were actually ACMI customers under our wet to dry program. So that is usually a good solid use of the assets in the event that we aren’t able to execute.
Our first desire would be to dry lease the aircraft, but other than that, we certainly would be able to execute and drive revenue and returns off those assets.
Joe Hete
The other thing, Steve, is the 767-200 s, we have 36 of those today. Somewhere down the road, we will have to look to start replacing those aircraft and so the idea that we would get stuck with a couple of airplanes because we overbought so to speak, we can throw the 300s in place of 300 s, which actually generates revenue growth at the same time because the 300 leases for more than 200.
So we have got a lot of flexibility in that respect in terms of avoiding having just a bunch of idle assets sitting around. And of course, the last piece of it is the first tranche is finding the feedstock, which is very difficult to put your hands on these days because a lot of people that operate the 767, and we’re going to replace it with the 787 have run into issues with some engine problems that are keeping – that are forcing them to hold onto the tails.
But then the largest chunk of the spend on an aircraft is the actual conversion and placing it into service. So we have got flexibility in terms of once we make a commitment for a feedstock aircraft in terms of what we do with it once we have made that acquisition.
Steve O’Hara
Okay, okay, thank you. And then just on the – there was something about the 737; it sounded like it could be a new mod that you are working on and I am just wondering is that more of a hedge to the 321 program or is that something that’s kind of unrelated to that, the continuation of the 73 conversion that you have going on.
Rich Corrado
Steve, this is Rich. When we acquired Pemco, Pemco had a heritage and a very strong reputation in converting 737 classics, 737-300s and 400s.
The 700 FlexCombi program, which is a combi that can flex all the way up to a full freighter, is more or less a new generation for the 737-300. I think we mentioned on other calls that Pemco has over 70% marketshare in China and those classics are getting old so we could have a solid run of replacement opportunity with the 737-700.
We are also evaluating the potential for the 737-800, but we firmly believe that the A321 is going to be really the only choice in that large narrowbody space when the STC is approved and we start delivering aircraft.
Steve O’Hara
Okay, thank you very much.
Operator
[Operator Instructions] And we have our next question from Jack Atkins with Stephens.
Jack Atkins
Hey, guys. Thanks for the quick follow up here.
Quint, I guess I had a question on the seasonality of the MRO Services and the other segment in terms of how that revenue should flow just because those are sort of new breakouts. Could you kind of help us think through conceptually about the seasonality of those revenue lines?
Quint Turner
Yes, on the MRO side, most folks want the greatest availability of aircraft during the fourth quarter. So typically if there is I guess hangar space to market, it’s in the fourth quarter.
It doesn’t mean that we won’t of course be successful in fully selling that space, but that is typically for them the quarter in which if there is any additional capacity. Otherwise, for the most part, our hangar space is utilized.
We are booked both here in Wilmington and Tampa, as Rich was discussing with the -700 mods and so forth. It’s a combination of heavy checks and cargo modification work and various other mods that customers have.
We have talked about Pemco focusing a lot on the Airbus products and having – for example, Frontier is a large customer of theirs and Wilmington, a little bit more on the Boeing products, but really it should be fairly steady other than that fourth-quarter period for the MRO side. And when you mentioned the other segment, you might be talking about the other activities line.
Is that –?
Jack Atkins
Yes, exactly, that’s right. That’s where your Postal Service sortation work is, so that’s pretty seasonally strong in the fourth quarter, correct?
Quint Turner
Yes, you will see a nice uptick there in terms of – sometimes there is even an additional facility space that they will open temporarily for that.
Jack Atkins
That’s helpful, thank you very much.
Operator
Thank you. And our next questions from Chris Stathoulopoulos with Susquehanna.
Chris Stathoulopoulos
ood morning. So my question is around the additional feedstock opportunities for 2019.
The first question – are these with existing customers or new ones? And then what’s the sensitivity in terms of passenger demand?
Meaning are the partner airlines, and I think you mentioned Qantas, going to phase out these aircraft regardless of passenger demand due to the average age of the aircraft?
Rich Corrado
As far as Qantas goes, they are done; they are out of airplanes. And Joe had indicated that one of the drivers for 767 availability is 787 deliveries that will free up the 767 because it’s roughly in the same category in terms of seat size and range and markets to deploy.
And so there has been a little bit of a hiccup from combination carriers and from pure packs carriers that have 767s in terms of releasing them in that the 787 engine problem has forced them to maybe slow down their deployment or in some cases look for alternative lift to cover for a 787 that has been put down. Generally speaking, the newer 767s are not available so we talked to – particularly in Asia we talked to a lot of customers that want an aircraft that’s younger than 20 years because of their aviation authority.
And that is a unicorn right now. But aircraft that are in the early 1990s to mid 1990s are out there and like I said, there is always one or two that you can take a bid on.
We don’t normally look for those types of opportunities and we look for runs. So we have got open dialogue with a number of 767 operators and they know what our need is.
We also have a very good reputation because we have got a strong balance sheet and they know if we say we are going to take 10 airplanes over three years and we can afford it, which is different than some of the other people that are competing for these 767s, which may be second- tier PAX operators or small cargo operators that may not be as well-capitalized as we are and therefore, we go to the head of the line with a lot of these folks.
Chris Stathoulopoulos
Okay. And then a follow-up in regards to the U.S.
China trade dispute. Could you help put some perspective on what percent of your fleet could be potentially impacted and then also if the dispute does escalate, are you concerned that it might impact certain conversion costs such as materials?
Thanks.
Rich Corrado
Yes, so in terms of existing customers operating in and out of China, we don’t have any. The 767 from a TransPac operational standpoint is not the best alternative.
Larger aircraft have better economics for customers choosing to move aircraft between those points. And so we don’t really support customers that compete in those markets.
We are very happy to have Air Incheon as a customer in that region. The flying they have talked about initially with the first two aircraft they are putting on does not include China; although I am sure in the future they will probably include that in an expanding network version.
So right now as far as the leasing and the flying standpoint, we don’t think it is going to have an impact that we can see on our business. In terms of materials and things like that, our cargo conversion supplier is in Israel, IAI, and so I don’t think a dispute between the U.S.
and China as an example is going to impact their ability to get their supply chain executed out of China.
Chris Stathoulopoulos
Okay. And then one more if I could.
The update on the JV in China, I don’t think you have given us some color here with regards to Okay Airways for some time. Thanks.
Rich Corrado
I think we have talked about it a few times. We had some strong regulatory delays over the course of late 2016 and into 2017 and during that time, the JV partners looked at some alternatives in terms of doing some different things while we were delayed, but since that time, we’ve taken a step back and we are looking at our entire China strategy right now.
So we’ve suspended the joint venture as it relates to forming a new AOC, a new airline within China to fly cargo. There hasn’t been a lot of cargo airlines started in China.
There is one or two. I think there is an HNA subsidiary that started last year.
And so – and it doesn’t – one of the reasons we have taken a step back on it is from a leasing standpoint into China, you have got – you mentioned the tariff situation and there is some play in that environment. And then when you look at our strategy as it relates to Pemco and the Chinese conversions, it’s really provided us with some new relationships with some existing airlines within China that are opening up some strategic opportunities on a number of different fronts across our portfolio of companies that we are looking to hopefully build on from there.
So it didn’t seem to be wise, if you will, to continue starting a brand-new airline in China given some of the headwinds that we were facing and some of the significant opportunities that are already existing with existing potential partners.
Joe Hete
And remember, Chris, the focus for getting into the JV to begin with was just to give us a more preferred seat at the table for leasing aircraft in if we were partnered to an actual airline. But at the end of the day, it was really more about deploying capital through leasing of aircraft into the Chinese market, which you don’t have to have a JV structure to do that.
Chris Stathoulopoulos
Okay, all right, thanks for the time.
Operator
And our next question comes from Jamie Yackow with Moab Partners.
Jamie Yackow
Hey, guys. Good morning, good quarter.
So just a couple quick ones from me. There has been some rumblings that West Atlantic has been involved flying some aircraft for Amazon out in Europe.
And I know you guys don’t comment on customers specifically, but if there is any truth to this, would there be meaningful upside to lease more aircraft over to them?
Joe Hete
We are not aware of West Atlantic flying for Amazon at this point. So that is the extent of what we can comment on it.
Jamie Yackow
Do you see opportunities to lease more aircraft over to them at this point in time?
Joe Hete
Yes, we do. In fact, we’ve just delivered our second 737-400 to them and we are in the process of prepping or will be in the process of prepping a lease return we are getting and we are turning that around and going to be leasing it to them.
So they will have four 767-200s and two 737-400 s from us by the end of the year. So they will have added one in the fourth quarter of 2017 and two during 2018.
So their growth is looking very good. They were the launch customer for the 737-800, Boeing converted 737-800 and they have a contract, a significant contract for three additional aircraft on top of that 737-800s with one of the larger integrators.
So West Atlantic’s well-positioned in the market on a number of different fronts. They have some great customers and we have been fortunate enough that that investment has allowed us to execute on our strategy, which is to lease airplanes into Europe.
Jamie Yackow
Got it. That’s helpful.
Just a comment from me, just to kind of echo what some of the other callers have been saying. I mean we kind of in our analysis if you just run rate kind of a replacement CapEx for your existing fleet, you guys are still generating, and add in your regular maintenance, you guys are still generating a double-digit free cash flow yield and given the stability of cash flows and the growth outlook, I think we would be strong advocates for you guys to consider expediting some of the share buybacks at this point.
Quint Turner
Duly noted.
Jamie Yackow
All right. Well, keep up the good work, guys.
Operator
And we have no further questions at this time. I will now turn the call over to our speakers for closing remarks.
Joe Hete
Thanks, Vanessa. I want to say thanks in advance to all shareholders who will be present in person or by proxy at our 2018 annual meeting tomorrow at the Roberts Centre here in Wilmington.
We have plenty of room there, so come join us if you can. And last but not least make sure you remember your mother this Sunday on Mother’s Day.
Thanks and have a quality day.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference.
We thank you for participating. You may now disconnect.