Aug 7, 2018
Executives
Joe Hete – President and Chief Executive Officer Quint Turner – Chief Financial Officer Rich Corrado – Chief Operating Officer
Analysts
Jack Atkins – Stephens Helane Becker – Cowen and Company David Ross – Stifel Kevin Sterling – Seaport Global Securities Steve O’Hara – Sidoti & Company Chris Stathoulopoulos – Susquehanna Harrison Wreschner – C.S. Capital Christopher Hillary – Roubaix Capital
Operator
Welcome to the Q2 2018 Air Transport Services Group, Inc. 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 that this conference is being recorded.
And I will now turn the call over to Joe Hete, President and CEO.
Joe Hete
Thank you, Vanessa. Good morning, and welcome to our second 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’s on our website, atsginc.com. We will file our Form 10-Q later this week.
In the second quarter and first half of 2018, we made steady progress toward our goals for the year. Our revenues for the quarter were up 6%, excluding reimbursables.
Earnings per share increased 38% on an adjusted basis, and adjusted EBITDA rose 9%. We’re halfway toward our target of an additional 10 767s modified and placed in service this year, and we’ve secured more feedstock aircraft that will bring us to five 767s for deployment in 2019.
Quint is standing by to summarize our financial results for the second quarter. Rich will add a few words on our operations, and I’ll 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’ll 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 second quarter earnings were on track with our targets, led by continued growth at CAM, our leasing business, and at ACMI Services, which was again profitable for the quarter. On a consolidated basis, second quarter revenues were $203 million, which is lower than the prior year only because of our adoption of new revenue recognition standards under Topic 606.
Excluding the revenue associated with reimbursed expenses in 2017, our second quarter revenues increased 6%. On a GAAP basis, we have second quarter earnings from continuing operations of $24.5 million versus a loss of $53.9 million a year ago.
On a diluted basis, GAAP earnings per share for the quarter were $0.21 versus a loss of $0.91 a year ago. The quarterly mark-to-market revaluation of our liability for warrants issued to Amazon resulted in a $10.4 million after-tax gain in the second quarter as our stock price dipped.
The comparable mark-to-market adjustment for the warrant liability in the second quarter of last year was negative $63.4 million, when our stock price increased for the quarter. The related lease amortization incentive, also tied to the Amazon warrants, this quarter was $3.3 million or a $0.05 a share after tax.
Our share of cost to develop a freighter version of the Airbus A321-200 with precision was a $1.9 million or $0.03 a share item after tax. We launched the venture a year ago, so there was no comparable item in our second quarter 2017 results.
Adjusted for those items, our adjusted EPS from continuing operations was $0.28 diluted for the second quarter, $0.07 higher than a year ago. Our adjusted EBITDA of $69.7 million increased $5.6 million or 9% from second quarter last year.
We have generated a $141.6 million in adjusted EBITDA for the first half, 46% of our full year target of $310 million. Joe will cover a few items in his comments about our second half outlook shortly.
As we have mentioned before, our GAAP and adjusted earnings this year now include a non-cash charge to interest expense of about $1.6 million, $0.02 per share each quarter. This is associated with the convertible feature of the notes we issued last September.
Our adjusted EPS do not excluded because the charge amortizes ratably over the seven-year term of those notes. You may have noted in our release that results for our MRO Services business were down for the quarter.
Rich will cover the operating factors, but as was the case in the first quarter, adoption of new revenue recognition rules also had a significant impact on MRO Services competitive results. Starting this year, we now record revenues for bigger projects like heavy maintenance and aircraft modification as tasks are completed.
Prior to this year, revenues and related earnings were typically recorded in large amounts when work was completed, and the aircraft was delivered back to the customer. We expect the new revenue recognition rules to lessen volatility in the reported results of our MRO businesses.
We ended the first half with $150 million of capital spending, up slightly from a year ago and right at the midpoint of our $300 million projected spend for the full year 2018. We spent $116.6 million to buy four 767-300 passenger aircraft and to fund freighter modification of those and other aircraft.
Capitalized heavy maintenance was $19.3 million, and we spent $14.9 million mostly for engines and rotable parts. We still expect the 2018 CapEx spend of about $300 million primarily to acquire and modify more 767s for our growing list of dry-lease customers.
Even with our strong fleet development program, we remain considerably leveraged with a high percentage of low cost fixed rate debt, thanks largely to our 108%, $259 million note offering we did last fall. About 80% of our debt principal is effectively at a fixed rate with an average coupon under 3%.
Our debt leverage remains near the 2 times trailing adjusted EBITDA mark. Our revolver balance at June 30 was $257 million with a capacity of up to $545 million.
That’s the summary of our overall financial results for the quarter. Rich is ready to discuss our segment results and market perspective.
Rich?
Rich Corrado
Thanks, Quint. From an operating perspective, the second quarter was another strong one, as we delivered more aircraft to more customers and both of our airlines showed improved revenues and earnings.
We experienced the anticipated decline in flying versus first quarter, as our largest customers again shifted out of peak season mode into the second quarter. CAM, our leasing company, stepped up its deployment pace by leasing four additional 767s and one 737 in the second quarter versus one 767 in the first quarter.
Significantly the five leases were with five different customers: Amerijet, Northern Air Cargo, Air Incheon, West Atlantic and CAM’s sister airline ATI. We have prospects in several key geographies around the world that could diversify our customer base even further in the future as well as the demand more aircraft from current customer such as Air Incheon.
As Joe said, CAM has commitments from customers eager to lease our 767-300 as they become ready. We will remain in the market for more 767 passenger feedstock to meet 2019 demand.
We have thus far secured rights to five 300s for 2019 deployment, but that number is likely to increase in the coming months. CAM had a good quarter with pretax earnings of $15.4 million, 20% better than a year ago.
Additional earnings from our larger leased fleet were again offset by increases in the lease incentives to Amazon. ACMI Services on a pretax basis earned $1 million in the second quarter, an improvement of $0.3 million from a year ago.
The earnings increase would have been greater apart from the labor agreement amendment ATI computed with its pilots in late March. It yielded pay increases for those pilots, which increased expense by $2.2 million for the quarter.
Our airlines operated two more 767s during the quarter than they did last year, and block hours for our ACMI and CMI operations increased 5%. Service performance was strong and continues into the third quarter.
We continue to get high marks for positive service performance from our customers across all of our businesses. In the second half, we expect aircraft block hour utilization to ramp up, especially during peak season.
MRO services, which includes the results of our aircraft maintenance and conversion businesses, had earnings of $1.3 million for the quarter, a decline from a year ago. Apart from the revenue recognition factors Quint mentioned, we were up against very strong results from our AIMs maintenance and PEMCO conversion businesses in the prior year quarter.
AEMS lined up a large contract with good margins from an airline customer a year ago, and PEMCO, our aircraft conversion business, completed three 737 modifications in the second quarter last year versus one this year. We expect better year-over-year performance from those businesses in the second half.
Results from other activities, which this year include Gateway ground operations, postal center management services and material handling equipment support, nearly doubled to $2.7 million on pretax earnings basis. Results from our minority investment in West Atlantic were stronger and volumes from our mail sorting and package handling operations were higher than a year ago.
As we said in our earnings release, our logistics even has begun serving Amazon’s Gateway needs in Tampa, and could add other locations if the opportunity arises. I’m confident we can accelerate our earnings in the second half and especially during what looks like to be a busy peak season for our air express operators.
With that, I will turn it back over to Joe.
Joe Hete
Thanks, Rich. I mentioned at the offset that the customers continue to have strong interest in the 767 converted freighters we are modifying this year, including the five we deployed in the first half plus one 737.
We now expect to deliver two more 767 this quarter and the rest in the four. In 2017, we spent about the same amount to acquire, convert and deliver nine 767s and one 737, including four that went to customers other than Amazon.
We own all the five remaining 767-300 in mod for deployment later this year. We have customer commitments for three of them and are finalizing agreements with the other two.
We told you in May that we are actively pursuing additional feedstock supply to meet 2019 demand, and during the second quarter, we secured three more. Most of you have seen the industry data from ACMG and Boeing that point to midsize freighters as the sweet spot of the industry going forward, as e-commerce market see them as keys to a balanced air network frequency incapacity.
More and more airlines here and overseas are interested in the efficiency and reliability the midsize wide-body, the narrow-body freighters offer. Their concerns as we are about the tight supply at a time when they want to provide e-commerce driven express market with service levels that 767s deliver.
For now, conversion source lessors and ACMI operators like us for the primary source of dedicated 767 freighters. And we are by far the world’s largest with 63 of them in service today and five more on the way.
Our knowledge of the market and our long relationships with the passenger airlines operating in the 767s today, will help us remain number one for some time to come. At the same time, we are pressing ahead with our JV partner precision toward FAA approval for a converted freighter variant of the A321.
We will invest to provide A321s to express networks customers that need a narrow-body complement to the 767 with capacity similar to a Boeing 757-200 with operating cost closer to the 737. We intend to stick to our practice of focusing our great service for customers today as we prepare for tomorrow.
We are reaffirming that our target remains $310 million in adjusted EBITDA for the year. In the first half of this year, we have delivered about the same percentage of adjusted EBITDA as we did in the same period last year.
With the robust air cargo market and stronger economy pointing toward a very busy peak season, we look forward to the challenge, and we will update you on our progress when we meet again in November. That concludes our prepared remarks, Venessa.
We are ready for the first question.
Operator
[Operator Instructions] And we have our first question from Jack Atkins with Stephens.
Jack Atkins
Hey, good morning guys, thanks for taking my questions here.
Joe Hete
Good morning, Jack.
Rich Corrado
Good morning.
Jack Atkins
So I guess first question for either Joe or Rich, listening to the prepared comments, reading the press release yesterday, Joe, I’ve picked up on something you said towards the end of your prepared comments. You sort of stay tuned for more feedstock purchases over the next couple of months.
I guess, as you guys are thinking about 2019 at this point. I mean, how should we be thinking about the number of planes that you think you can put into service next year, whether you want to think about in terms of feedstock availability and conversion availability or the customer appetite and demand?
Can you kind of help us think through the potential as you see it for 2019 deployment at this point?
Joe Hete
Yes, I think from 2019 perspective, Jack, is I’d say we’ve got five of them already in the queue so to speak. Conversion slots are available for more at this point in time.
We continue to pursue other available aircraft from a feedstock perspective to put through the conversion process. So it’s safe to say that somewhere between 6 and 10 airplanes at least into service next year with 767 type.
Jack Atkins
Okay.
Joe Hete
From a customer perspective, I’ll let Rich pickup that one.
Rich Corrado
The demand is very strong. We’ve got existing customers that have noted that they’re looking at adding increased aircraft next year.
We are talking to operators in Europe, South America, Africa, a couple in North America, so – and existing customers, new airlines. So we’ve got very strong demand for the remainder of the year into 2019.
Jack Atkins
So Rich, just to kind of sum it up, I mean, the demand is there to place to Joe’s point 6 to 10 at least aircraft in service next year. You don’t see any reason that that would that be a problem?
Rich Corrado
No. I mean, if you look at the feedstock question, that’s probably – as far as the market goes, the pacing item, we’ve got some good feedstock locked up early for next year.
We are talking to a couple of different airlines now. As we’ve said many times in these calls, we take a very different approach to feedstock and that were constantly in the market for it.
And we have relationships with the airlines that currently run 767 passenger fleets. And so we’ve got a good eye on aircraft coming available in 2019, 2020 and 2021.
And so we think that hitting a number – that 10 number is not going to be that much of a stretch.
Jack Atkins
Okay, that’s really encouraging to hear. Kind of shifting gears to here to another announcement in the press release, which was this Amazon logistic support services in Tampa.
Can you kind of walk us through how – what you’re going to be doing in Tampa is different than what you’re doing for Amazon or some of the other gateway airports across the country? And is that a potential incremental opportunity for you guys with Amazon kind of going forward whether if they are expanding their dots on the map or just opportunity for guys to take more of that business in-house?
Can you kind of walk us through that?
Rich Corrado
Yes. So Jack, when we ramped up the network, starting at the end of 2015 going in through today, we managed all of the initial gateways up to the first 12.
And the way we handle that as we contracted the ramp work and we contracted the warehouse sorting and breakdown and loading of the aircraft. So we would hire contracted airports, we would negotiate with the airport for ramp space.
We would secure the ground service equipment, the loading equipment, et cetera, et cetera. So we’re kind of like a general contractor, if you will, for these gateway operations.
Tampa was an opportunity that came up. That was the one that we were managing the contractors for and that was under our cost plus contract as the other gateways are.
And due to some quality improvements that Amazon wanted we propose to take that gateway over ourselves, and we had a history with Amazon of operating the hub here in Wilmington, and we – they view that as a high functioning operation. And so they gave us a short at the Tampa facility, which we’ve been implementing over June and July, and it’s going very well.
So that new contract, if you will, is a direct contract with logistics, our service provider. And so it’s no longer a cost plus.
We have to operate and hire and train and produce all the equipment, do all the things directly. And so it’s a good opportunity for us to grow the business.
As we’ve noted a couple of times with the 606 transition on the accounting basis this year, those cost plus gateways and the revenue was looked out as reimbursable and was netted out from the revenue perspective. And so this also in converting the Tampa from a contracted side to a direct employee and manage side, that full revenue now is growth for us this year.
Joe Hete
The other side of that Jack is part of our leasing portfolios is the ground-support equipment, so to speak, K loaders, dollies, things of that nature. So do we have a burgeoning business there in terms of being able to lease in the ground-support equipment, whether it’s directly or to one of these third-party providers that we manage today.
Jack Atkins
Okay, that’s great. That’s helpful color.
Last question, I’ll turn it over. With the A321 program, at what point should we be thinking about you guys looking to maybe sort of acquiring some feedstock for conversion?
I know the certification isn’t expected to be complete until later next year. But is that – should we be expecting – if we’re thinking about the CapEx requirements for 2019, should you guys to be looking to maybe acquire some of that feedstock in advance for certification?
Or is that really more of an early 2020 event?
Joe Hete
We may grab a couple of aircraft in the latter part of 2019, Jack. Right now, it’s just a matter of what the higher priority.
If you got a customer looking for a 767 and that’s where we need to immediately to deploy our capital, we’ll do that point. But certainly, we’ll keep our eyes peeled for any potential what we would consider to be a good purchase price for A321 feedstock aircraft.
Jack Atkins
Okay. Thanks again for the time this morning, guys.
Joe Hete
Thanks, Jack.
Rich Corrado
Thanks, Jack.
Operator
Thank you. Our next question comes from Helane Becker with Cowen and Company.
Helane Becker
Hi. Thanks, operator.
Hi, gentlemen. Thank you for the time.
So just a couple of questions. As you think about – one point of clarification first is, when you talked about the multi-year placements in the press release, can you just talk about what you’re seeing in that market?
Is it multi years for many customers, multi-year for one customer? How should we think about that?
Joe Hete
Yes. So it’s multi-year for several customers.
And we’ve offered customers that are looking for multiple aircraft. In terms of lease rates; those smaller operators, if you will, generally come under higher lease rate, just doing the credit risk versus our largest customers.
But it’s really a split. And we’ve got existing customers that are also looking for additional aircraft.
Helane Becker
Okay. And then just with respect to your incentives that you have to pay for Amazon.
Are those numbers included in revenue as a net number? Or are they somewhere in the expense line?
How should I be thinking about that?
Quint Turner
They’re recorded as reduction to revenue, Helane. So you can see that in one of the attachments in the earnings release.
You can see where we show the revenue and then we show the reduction related to the incentive coming out of that to net.
Helane Becker
Right. Okay.
So, I mean, when you think about those incentives, are they significantly more than you would want to pay in contracts going forward? Or when that contract comes up for renewal, is it something you would want to renew?
Quint Turner
Well, those are related to the warrants we issued to Amazon. Those are valued based on the number of warrants and there’s a calculation that goes into that.
Since all of those are in there, you’ve noticed that it’s the same amount each quarter now $4.2 million. And they’re tied specifically to, as you know, the 20 aircraft deal that we did.
Helane Becker
Okay, thanks. And then just one last question on the pilot.
Any progress on the open contract?
Joe Hete
We’ve – the teams met last week, Helane, with the federal mediator. And I think they’re scheduled again to meet at latter part of September as well.
There was some progress made at the last session, which is a bit different than the prior sessions that we’ve had this year. So things are moving up a bit.
We’d like to see it move at a quicker pace, but the reality is you’ve got to do what makes good sense for everybody involved, not just what makes best sense for the crew members themselves, but also for the company and the shareholders.
Helane Becker
Okay. Those are all my questions.
Thank you.
Joe Hete
All right, thanks, Helane.
Quint Turner
Thanks, Helane.
Operator
Thank you. Our next question is from David Ross with Stifel.
David Ross
Yes. Good morning, gentlemen.
Joe Hete
Hi, David.
Rich Corrado
Hi, David.
David Ross
Can you talk a little bit about the 767s that were returned during the quarter? You got a couple back.
Where those coming off of lease? And if so, how much notice do you get at the end of the customers lease term, whether they’re going to keep it, renew, turn it back in?
Joe Hete
Yes. So we had two release returns for the quarter.
One is actually in the hangar now being prepped for another customer. So we’ll return that around.
Generally when we take aircraft back, depending on whether the operator had a return condition C check that they did or whether they’re relying on our MRO to do it. But we’re flipping that aircraft to another customer in the third quarter.
It’s a 767-200. We had another return from a customer that is sitting on the ramp right now, it’s waiting some space in the hangar that we can get it and prep it.
And we do have multiple customers interested in the 767. That’s a 767-200 as well.
Generally speaking, the customers that have aircraft are coming upon return. Within a year they generally, we get into discussions about whether they’re going to extend or keep.
We’ve just extended cargo jets that go 1,200 left. We just extended that through next year, and they’re talking about extending it for another C check cycle after that.
We are talking with another 200 customer today about extending their due for return in February, and they’re looking to extend that for another C check cycle, another 18 months. So generally, you – right about a year before, they’re about to return.
You get into some level of discussion. We like a minimum of six months to know we kind of cut it off at that point and figure we’re going to get it back because we can’t let these things hang out until couple of months before the lease deadline and not have a customer ready to go for the aircraft.
David Ross
So I guess, that’s why you’re able to redeploy it so quickly is because you know it was coming back once before it was turned in?
Joe Hete
Right. Most of the returns that we are seeing now that are on the schedule or 767-200s and there’s really a strong market for the 200.
Obviously, it’s lower in cost than the 300. And so we’re seeing a pretty strong market for the 200s at this point.
And it’s just a matter of finding the hangar space. Now when we’re releasing those aircraft into a foreign airline – foreign country aviation authority, you tend to have to do a little bit more to the airframe, make sure the records are correct.
And we spend a little bit more time on those. And so it – when we have a return, generally, we’re going to need a little bit more time than you would otherwise, if you’re going to redeploy it into to the United States.
David Ross
Any other is expected to come back this year?
Joe Hete
No. None this year, not till February next year.
David Ross
Okay. And then on the ACMI side, margins fell back closer to breakeven again in the second quarter after having a couple of good quarters.
We know there was a $3 million headwind from the ATI contract. How should we think about that margin going through the end of this year and into the next year?
Joe Hete
Well, a lot of it is driven by amount of hours flown. For example, and just as we saw last year, coming off of first quarter transitioning into the second quarter, our largest customer had a rejiggers or schedules, so it’s not – no longer called a peak season schedule, so we see a reduction in the block hours.
So if you look at first quarter to the second quarter, for example, there is about 5% decline in the overall block hours. That will probably tick up a little bit in the third quarter and then, of course, fourth quarter during peak season is going to come on pretty strong.
So if you see the results about the slightly better in the third quarter than the second and then the market improvement going into the fourth quarter.
David Ross
Okay. This sounds like aside from any maintenance cost issues.
4Q should be the strongest margin followed by 1Q due to the peak and then 2Q and 3Q are on the lower side.
Joe Hete
Yes.
David Ross
All right. And then the JV with Precision, the $1.9 million cost that you cited in the quarter; is that in any of the segments looking at the margins for ACMI or CAM?
Rich Corrado
Yes. It’s shown below the line, Dave, as a non-operating entity; and so, no.
David Ross
Okay. Excellent.
Thank you.
Joe Hete
Thanks, Dave.
Rich Corrado
Thanks, Dave.
Operator
And our next question comes from Kevin Sterling with Seaport Global Securities.
Kevin Sterling
Thank you. Good morning, gentlemen.
Joe Hete
Hi, Kevin.
Rich Corrado
Hi, Kevin.
Kevin Sterling
Rich, the five 767s you guys bought in the quarter, were those all bought at once or they separate kind of one-off purchases?
Rich Corrado
They were two separate purchases, so two different operators or three in a two.
Kevin Sterling
Okay. Are you seeing – you talked a little bit about feedstock and opportunity for 2019.
Are you seeing more, I guess, planes bundled together like that? Or is this just more kind of ones, twos, if you will?
Rich Corrado
Well, we always try to find a line of aircraft. The majority of our existing 767-300 fleet is an example is either ex-Qantas or ex-American.
And we’ve got a handful of other aircrafts that we have opportunistically acquired. And so we are going forward.
We are hoping to get significant lines secured over multiple years, if you will. That’s the most productive way to do it.
It’s also the highest quality way. If you look at the aircraft that we produced when we can get a consistent feedstock level than the conversion and the work that we do to the aircraft in terms of upgrading the avionics and some other things, we produce a very consistent quality conversion.
When you get aircrafts that are one-off aircraft from different airlines and you try to – when you put those up, you’re going to get some inconsistencies and you’re going to get some quality differences. So we feel that the way we approach the market, given it’s our core business, is the best way, not only from a cost perspective, but also from a quality perspective in the product that we produce.
Kevin Sterling
Got you. Got you.
Okay. And then you also touched on what you guys are doing for Amazon on the logistics side.
Did they put out an RFP for that to other potential competitors? Or did they just come to you guys and say, we want to convert from a contracted side to employee side?
How did – or did you guys approached them? Just curious how that went down.
Rich Corrado
Well, generally, I can’t comment what their policies are. But generally, every opportunity that we’ve gotten from them, we’ve had to go through some type of RFP bid.
So even when we’re the – we feel we are the best solution and we are positioned best for it, they still put you in a competitive position, it’s just the way that they approach the market.
Kevin Sterling
Yes, okay. And last question.
As you develop your logistics capabilities and your gateway service capabilities, thinking outside of Amazon, could there maybe some more opportunities with other customers potentially kind of to do that will perform those logistics services with other customers…
Rich Corrado
Yes, I mean, it’s a good question, Kevin. I mean, if you look – just look at our experience with the Postal Service, I mean, we’ve get five operations with them.
Three large postal centers we’ve had for over a decade. And so we are experts at this.
We’ve maintained that level of expertise from the old airborne days when we – and initial DHL days, when we were running the large hub here and running 19 regional sort centers. So from a logistic standpoint, we still got a core of very talented management and logistics folks to be able to do that.
On top of that, our logistics company, if you will, also has expertise in material handling equipment, in terms of designing sort centers, in terms of understanding how to design flow-through building, whether it’s a tight operation on an airport, or whether it’s a large facility for large sewer process. So we are always in the market for looking for those types of opportunities.
They’re not really prevalent. But both in terms of running those facilities, but also in terms of doing the MHE installation, management and maintenance support logistics or logistics company has a good business in that segment.
Kevin Sterling
Okay. Well, that’s all I had this morning.
Gentlemen, thanks so much for the free time.
Joe Hete
Yes. Thanks, Kevin.
Rich Corrado
Thanks, Kevin.
Operator
Thank you. Our next question is from Steve O’Hara with Sidoti & Company.
Steve O’Hara
Hi, good morning.
Joe Hete
Hi, Steve.
Rich Corrado
Good morning, Steve.
Steve O’Hara
Just on the 767-300’s projected for year-end, it looks like it dropped one from last quarter. And I thought last quarter, there were some – one that its slipped, the purchasing, it slipped a little bit in terms – because of the, I guess, the operator was still using it longer than expected.
Did another one slipped? Or is that just kind of the common – something else happened?
Joe Hete
No, we did have one, Steve. I think we’ve commented on last quarter that Cargojet had an option to purchase the aircraft after the three years through the lease terms and we ended up-selling it to them in the second quarter.
Steve O’Hara
Okay, okay. And was there gain or loss on that?
Or is that…
Rich Corrado
There were small, Steve. It was, I don’t know – that was not a…
Joe Hete
Not a driver.
Rich Corrado
Not a driver or anything.
Steve O’Hara
Okay, that’s fine. And then just on the ACMI charter aircraft, it looks like you’re winding that down a little bit, maybe a little bit more.
I guess, you had more in June 30 than you did at March 30 or March 31. What’s your sweet spot there?
I mean, how would you like to get that down to? And does that allow you to flex for customer who wants additional aircraft?
Or is that more set capacity used elsewhere?
Joe Hete
So Steve, we look at the ACMI charter business in a couple of ways. Obviously, we’ve got a large CMI business with our two key customers and we have other long-term ACMI customers that we like to get the longer term ACMI contracts.
The most important piece of what we do is our Wet2Dry program, and that’s where we initially put up a web lease for a customers, with an eye on and constant discussions towards that customer taking over their own aircraft, it’s starting to build their own fleet. We’ve been very successful for that model, just about all of our customers to date.
We were initially flying in an ACMI environment, and then they went to a either or dry lease or dry lease plus the CMI with us. And so we want to maintain a certain amount of aircraft that we have that flexibility to do so we can put up an aircraft and look towards building the leasing business on the back-end of that relationship.
Quint Turner
Keep in mind Steve, on the ACMI segment, we have the four combis that we fly for the U.S. Military in that number and then we have four 757 freighters that we fly for DHL.
But if you look at the 767s, essentially what we tried to focus on is a dry lease and then what additional services we can add to that, whether that includes the CMI flying or just doing maintenance for it. But as we continue to invest our capital, our strong preference is to stay away from the pure ACMI biz and focus more on the lease and then what services we can add to it.
Steve O’Hara
Okay. And then, if I recall in the past, it was kind of you had aircraft that were dry lease and then you had more ACMI.
And then now it’s used to be a much more, I guess, favorable mix of A-plus CMI or just dry lease? I mean, versus a few years ago, maybe excluding Amazon and DHL because those are maybe larger customers, but I mean, is more of your business under dry – more firm dry lease contracts than kind of the old ACMI that’s a little more flexible for the customer?
Joe Hete
We are projecting by the end of the year to have over 85% of our assets dry lease. And then we’re going to fly two-thirds of those I believe we are also flying.
And so we’re getting the dry lease revenue for the aircraft and then we’re getting the additional services as Joe mentioned, CMI services on top of that, and many of those customers also uses for their heavy checks and some also users for other types of maintenance. And so I mean, our business model, if you will, it’s a dry lease aircraft.
And then everything else we look at, including the CMI flying, is a supplemental service on top of that lease that drives incremental returns on top of the investment in the airframe.
Steve O’Hara
.
Joe Hete
Thank you, Steve.
Operator
[Operator Instructions] Our next question comes from Chris Stathoulopoulos with Susquehanna.
Chris Stathoulopoulos
Good morning everyone. I just want to make sure I understand the fleet plan here.
So last quarter you had said that for the 10 new 767s for 2018, seven were committed, eight was closed and two were still being actively marketed. And then on the new 767s for 2019, is this part of the base plan you referenced last quarter of six?
And then could you kind of give us some color on some of the carriers that you’re working with? I know you mentioned Qantas and American.
But there was an article in the press recently about United potentially retiring, I think 57 767s? And then also perhaps some color on feedstock availability by vintage?
Joe Hete
Yes. We don’t generally comment on specific customers, unless we’re linking them into some type of announcement.
So I can’t really comment on that. In terms of the feedstock question, like I said, we’re talking to multiple airlines.
We know about these United Fleet. United Fleet happens to be predominant fly power, which is not the majority of our fleet is GE.
But we’re still talking to them, because at the end of the day the market will end up needing those aircraft as well. So – but I don’t know if I can answer all your questions.
Chris Stathoulopoulos
Well, first over the five for next year, you said that you secured the right. So are these – are you secured the rights?
And I guess, the slots are they are now being marketed? Or these locked in with customers?
Joe Hete
No. They’re being marketed right now.
And as I said, they – we got a lot of interest in them. And we – I don’t believe we’re going to have any problem getting them deployed when they come out of conversion.
Chris Stathoulopoulos
Okay. And then with the recent order, I think for the new builds from FedEx, just perhaps some color on lease rates for 767s, where they are today perhaps versus where we came in the year or last year?
Joe Hete
Yes. So that the lease rates depends upon what the investment was we made in the total buildup of the aircraft in terms of the feedstock price and the conversion cost.
And if the younger airplanes going to cost more, etcetera, etcetera, than your lease rates going to spin-off bad. And the only comment I can make about the lease rates is, they are firming up a bit.
But again, the aircraft has to be competitive with the type of freight that it’s going going to hold from a cost per kilo basis, because that’s what customers look at when they’re looking to make decisions about whether they’re investing in their own airplane and put it up and fly in. So they are – and you can’t just look at a scarcity and say, I can charge what I want for this airplane still need to be competitive with what has the.
Chris Stathoulopoulos
Okay. And then last question.
I know you guys are pretty much North American-based. But with respect to the U.S., China trade dispute, what are you hearing from your customers like operators, such as a Amerijet, Air Incheon, DHL and then, of course, your European partner, West Atlantic?
Rich Corrado
You see that the majority of our customers are focused on express business. And the express business is a lot less volatile around trade and tariffs, because obviously, they’re flying networks.
So when you’re in a network, you can’t really flex whether you’re going to fly to a certain markets and what the size of the aircraft would be. So it’s a little more stable than general cargo, where if a tap is impacting the flow goods from one country to another, then you may decrease your frequency or you may down-gauge your airframe.
But in an express environment, you generally don’t have that type of volatile move. As you well know, the express market is being bullied, if you will, by e-commerce business.
The e-commerce business is still growing significantly, particularly in the emerging markets in Asia, and that’s still maintaining a good flow of traffic going forward. We have – I guess, what – the only thing I can tell you is the airlines that we do business with that may have less express and we are keeping an eye on.
I mean, obviously, there’s a lot of news about tariffs and trade. But consumer confidence around the globe is still very high.
That speaks very well for the e-commerce business. And we think that we’re in pretty good shape going into 2019.
Joe Hete
So and keep in mind Chris too over 8% of our 767 fleet is going to be leased. So we’re going to have that steady d of income regardless what the volumes are in the particular aircraft.
There is some volatility based on the actual amount of flying we do within these networks. But as Rich said, the network is pretty finite in terms of point you have to touch.
And so that have pretty significant drop-off in volume, to say, I don’t need a 767 anymore. I am going to down-gauge my aircraft size.
So we’ve kind of immunized the business so to speak from the downside. Obviously, we don’t have the flexibility on the upside potential as you would if you were flying the Trans-Pacific type or else you get a – you can a real spike during the peak seasons and/or when your economy is really booming.
So the impact us from a tariff standpoint is negligible at best.
Chris Stathoulopoulos
Okay. Thanks for the time.
Joe Hete
Thank you.
Operator
Our next question comes from Harrison Wreschner with C.F. Capital.
Harrison Wreschner
Hi, gentlemen.
Joe Hete
Hi, Harrison, good morning.
Harrison Wreschner
The plan for 6 to 10 planes next year that should be – you should be able to fully fund that with cash from operations. Is that fair?
Joe Hete
Yes. I mean, pretty much.
Quint Turner
$310 million in EDITDA target.
Harrison Wreschner
Okay. So that makes sense.
And with leverage, kind of with the one handle on it in general and able to kind of self-fund the growth CapEx, what’s kind of the appropriate leverage for this business? And obviously, we get great ROICs on new plans.
Should we keep holding back firepower for more feedstock or with stock coming down here, does it makes sense to use some of that firepower in the little one time towards buybacks or dividends, etcetera?
Joe Hete
I mean, long-term Harrison, we don’t – we would not expect to be just likely levered. And so it’s not that we are holding necessarily for any reason.
It’s that we, of course, looking for in this growth environment the right opportunities to deploy the capital. But I do expect that, whether it’s a continued investment on the growth side or whether we look at share buyback as another option that we won’t be at this leverage long term.
Rich Corrado
You keep in mind, Harrison, as mentioned earlier on the call, the 321 is in our future. I mean, that’s not to say that there’s going to be any fall back in terms of the demand for the 767.
So I think our capital requirements long-term based on what we think the success rates going to be for the 321, is going to have increasing demand for reinvesting our capital back into the business.
Harrison Wreschner
Okay. And the extra one turn of leverage, let’s just call whatever the number is called, mid 300-plus million.
Do you think you could put that to work in that program? Or if you were to use it for growth, it’s more of an acquisition opportunity of another…
Rich Corrado
Well, we don’t really talk a lot about the acquisition side. As you know, we’ve done it, and we certainly tried to stay up to speed on opportunities that may come up.
But in terms of our being able to digest another turn of leverage without any discernible impact to the financial performance, we absolutely could.
Harrison Wreschner
Thank you very much.
Rich Corrado
Thank you.
Operator
We have our next question from Christopher Hillary with Roubaix Capital.
Christopher Hillary
Hi, good morning.
Joe Hete
Good morning.
Quint Turner
Good morning.
Christopher Hillary
I just wanted to ask if all the growth you’ve been experiencing, the logistics business, the change in accounting, can you give us some color on how you expect your margins to evolve in 2019 and beyond if it’s appropriate to comment on it that way?
Joe Hete
Well, a lot of our margin movement, all else being equal depends upon how we deploy the asset. If we deploy them with the CMI, if you are talking – as opposed to straight dry leases.
As you know, the dry lease margin is quite high as you’re not requiring all the resources you do and revenues associated with those resources that you do in the CMI environment. So it depends on the mix.
As Rich said, we have customers that avail themselves as the full suite of services we can provide like our two largest customers do, for example. And then we have others who look to operate aircraft themselves under a dry-leased model.
So we’ll depend on the mix. I mean, this year certainly we had the aircraft deployments are almost completely dry lease only.
We finished our 20th airplane with Amazon last August. And so that was the other option, which was the full game at CMI Service.
So from a margin standpoint, we are getting this year’s deployments being dry-lease only. And of course, the accounting changes, where we netted what something near $300 million annualized between fuel and the Amazon gateway services that we were managing, assisting them with how to our margin as a percentage of revenue to go up on all fronts significantly.
Hopefully, the accounting changes to the top line have the big ones have pretty much hit. So I don’t expect that to be a significant factor as we look forward.
Christopher Hillary
Okay. And then is there a way that you kind of anticipate your mix evolving as we move to 2019 and beyond?
Joe Hete
I think there will be opportunities on all fronts. So this year was a bit unusual and that it was almost completely dry lease.
So we are not surprised to see more opportunities that also involve the operation of the aircraft.
Rich Corrado
Keep in mind, we do things like logistics businesses and maintain something in that nature. You’re talking high-single and low-teen returns there versus what we see on a leased aircraft.
So as the revenue – if the top line gets driven in a big way by the services side of the equation, it’s going to have a negative impact on a margin percentage on the bottom line.
Christopher Hillary
Okay. Thanks very much.
Joe Hete
Thank you.
Operator
And it seems that we have a follow-up question from Chris Stathoulopoulos with Susquehanna.
Chris Stathoulopoulos
Hey guys, thanks for taking my follow-up. So with respect to Amazon, you’ve been fully deployed now, I think this August 4 year.
Could you give us some color on how utilization levels have been trending? Is the network running a hub-and-spoke configuration out of CVG or perhaps hybrid hub-and-spoke point-to-point?
And then also, are we at a point where there is some visibility utilization where it might make sense to add additional freighters? And then last, has Amazon exercised any other warrants?
Joe Hete
So we don’t comment on Amazon’s network. It’s their proprietary network.
I mean, all we really said is that, their business does ramp up and in peak periods, it ramps down, the second and third quarter. So from an Amazon perspective, it’s – all the aircraft are flying in the network unless they are maintenance and they haven’t exercised any other warrants today.
Rich Corrado
The other interesting thing about the network is they fly seven days a week, which is different than what our other experiences with express operators.
Operator
I see we have no further questions at this time. I will turn the call over to our speakers for closing remarks.
Joe Hete
Thanks, Venessa. ATSG remains a purest way to play the e-commerce forces driving growth in the air cargo industry.
We have more dedicated midsize freighters of the workforces of air express networks and unique set of services to support them. We will keep investing as niche growth market expands and knows to support will be well rewarded over time.
Thanks for joining us on the call, and have a quality day.
Operator
And thank you, ladies and gentlemen. This concludes our conference for today.
We thank you for participating. You may now disconnect.