Nov 2, 2018
Operator
Welcome to the Air Transport Services Group, Inc. Conference Call.
My name is Nicole 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.
I will now turn the call over to Joe Hete, President and CEO of Air Transport Services Group. Mr.
Hete you may begin.
Joe Hete
Thank you, Nicole. Good morning, and welcome to our third 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 had another good quarter with more year-over-year revenue adjusted EPS and adjusted EBITDA growth than we had in the second quarter.
We also announced our agreement to acquire Omni Air International which will contribute substantial growth and significantly broaden our revenue base in 2019. Our revised fourth quarter guidance reflects modification delays resulting in some 767 freighters deploying later than we projected and lower margins in our MRO business in the second half than we had hope to achieve.
But we're still on track to place five more converted 767 freighters in service this quarter meeting our plan to deploy 10 of them during 2018 plus the one 737 we placed in April and deliver record adjusted EBITDA and earnings per share. Quint is standing by to summarize our overall financial results for the quarter.
Rich will add some color on our other businesses and I'll close with more on our outlook. Quint?
Quint Turner
Thanks Joe and thanks to all of you joining us this morning. During the course of this call, we will projections or other forward-looking statements that involve risk and uncertainties.
Our actual results and other future events may differ materially from those we described 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 airlines ability to maintain on time service and control cost. The cost and timing with respect to which we're able to purchase and modify aircraft to a cargo configuration, fluctuations and 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 that one or more closing conditions to the acquisition of Omni Air International LLC including certain regulatory approvals may not be satisfied over waived on a timely basis. The risk that the acquisition may not be completed on the terms or in the timeframe expected by ATSG or at all uncertainty of the expected financial performance of the combined company following completion of the acquisition.
And other factors as contained from time-to-time in our filings with the SEC including the Form 10-Q we will file today. We will also refer to non-GAAP financial measures from continuing operations including adjusted earnings, adjusted earnings per share, adjusted pre-tax 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 reconciliation to GAAP measures which are included in our earnings release and on our website.
We're pleased to report that our third quarter results were substantially better in the same period last year with double-digit growth in revenues and adjusted EPS and EBITDA. On a consolidated basis, third quarter revenues were $204.9 million under the new accounting rules we stopped recognizing revenue this year that is associated with reimbursed expenses.
Subtracting $72.1 million and reimbursements from last year's third quarter revenues our third quarter revenue growth was 13% more than doubled the comparable 6% growth in the second quarter. On a GAAP basis, we had third quarter earnings from continuing operations $32.9 million versus a loss of $28.2 million a year ago.
On a diluted basis, GAAP earnings per share for the quarter were $0.24 versus a loss of $0.48 per share a year ago. The quarterly mark-to-market revaluation of our liability for warrants issued to Amazon resulted in a $16.8 million after tax gain in the third quarter.
The comparable mark-to-market adjustment for the warranty liability in the third quarter last year was negative $33.2 million. The related lease amortization incentive also tied to the Amazon warrants this quarter was $3.3 million or $0.04 a share after tax.
Our third quarter share of cost to develop a freighter version of the Airbus A321-200 with precision was a $0.03 a share item after tax this quarter versus $0.01 a year ago. Adjusted for those items our EPS from continuing operations was $0.31 diluted for the third quarter, $0.09 higher than a year ago.
Third quarter adjusted EBITDA was $74.3 million up 13% from third quarter last year. Adjusted EBITDA grew 9% in the second quarter.
We ended the first nine months of 2018 with $214 million of capital spending slightly behind our 2017 pace. We have spent $149.2 million to buy five 767 300 feedstock aircraft and to fund freighter modifications of those and others in process.
We now expect to 2018 CapEx spend of about $280 million for the year. As Joe said, we're very eager to add great assets and capabilities of Omni Air to ATSG.
We expect the acquisition to be accretive to ATSG's adjusted EPS starting in 2019. The purchase will be funded through an expansion of our current senior credit facility primarily through a $675 million additional term loan, along with borrowing under our existing revolving credit facility.
At close we expect our total debt to annual adjusted EBITDA ratio to be approximately 3.4 times inclusive of Omni Air's EBITDA contribution. Joe had more to say shortly about these significant adjusted EBITDA our existing businesses and Omni are expected to produce next year.
The strong cash flows from those combined businesses and air fleets in 2019 will provide us with ample liquidity to continue to invest and attractive growth opportunities. 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. The third quarter was challenging on an operating basis, but we still delivered revenue growth across each of our segments and achieved $1.5 million gain in pretax earnings overall on an adjusted basis versus 2017.
Our airlines again achieved improved revenues in positive in earnings even with the same number of aircraft they operated last year. In the fourth quarter, ATI will be operating two more 767 300's on an ACMI basis during peak and continuing well into 2019.
As we told you last quarter, ATI's pilot received pay increases last March that have increased expenses by $2.2 million per quarter. We continue to negotiate for an amended labor agreement with our ABX pilots as well.
Block hours increased to just 2% overall in the July to September period preceding peak. Service performance was strong and continues into the fourth quarter.
CAM, our leasing company have seven more aircraft in service at September 30 than the year ago. Pretax earnings were $19 million down marginally from a year ago.
Earnings from a larger lease fleet were again offset by increases in the lease incentives to Amazon and lower maintenance support revenues. We had expected to place two 767-300s in service during the third quarter and three in the fourth.
Conversion process delays instead push lease and certification arrangements for those two aircraft into the fourth quarter. We still expect to complete deployments of five 767 300's this quarter for total of 10 newly converted 767s.
We sold one for a net of nine 767's, but added one more 737 freighter. Two of the added 300s are already in services as dry leases.
We will dry lease one more and lease the other two to ATI for ACMI service during peak and beyond. CAM remains in the market for more 767 passenger feedstock to meet 2019 demand.
We have secured rights to five 300s for 2019 deployment and that number is likely to increase in the coming months. MRO Services which includes the results of our aircraft maintenance and conversion businesses had earnings of $2.3 million for the quarter down slightly from a year ago.
The results were not as strong as we had expected however due to a higher mix of maintenance services for CAM expanding portfolio of external dry leases versus work for outside customers and delays in completing some scheduled maintenance. Specifically two 767 200 were put into AIMs to transition from internal to external dry lease deployment in the fourth quarter.
These dry lease preparations took MRO slots that could have been utilized for external customer revenue and profit. The short-term impact of MRO performance creates a benefit for CAM and ATSG through the long-term external dry leases of these assets.
Pre-tax earnings from other activities increased through $3.1 million. The gain is attributable to better results from our minority interest in West Atlantic and improving in our postal and gateway operations.
As we noted in our release, our contracts to manage store operations at five regional US postal service centers expired in September. Pretax earnings for that business were $2 million in the third quarter.
From an operating margin perspective, I'm looking forward to bringing Omni Air's aircraft assets and capabilities into the ATSG family of businesses. We regard their strengths as very complementary to ours including a broader base of government and commercial customers along with the addition of the Boeing 777 platform.
We will have more to say about Omni Air and the opportunity it brings after we complete the purchase this month. And with that I'll turn it over to Joe.
Joe Hete
Thanks Rich. While the third quarter was a good one overall, we feel short in a few years that we were counting on to achieve our adjusted EBITDA target for the year.
The principal issues were delayed in getting newly converted and current 767s deployed or redeployed plus lower returns from our MRO segment stemming from a change in the mix of internal and external volume. Those factors plus the expirations in September of our sorting operations for the US Postal Service had a principal reasons we lowered our adjusted EBITDA for 2018.
We are now targeting adjusted EBITDA of $80 million to $85 million for the fourth quarter which will likely be a quarterly record for ATSG. Delays in aircraft replacements won't affect our momentum entering 2019 with 70 ATSG cargo aircraft in service plus 13 passenger aircraft that will come to us with Omni Air.
On a preliminary basis, we expect to deliver more than $440 million in adjusted EBITDA next year including from those 91 ATSG and Omni aircraft plus our existing businesses. And that does not include contributions from the eight to 10 more 767 300's we expect to deploy next year and we have identified less of these from most of those additional 300's.
We will issue a complete picture of our adjusted EBITDA outlook for 2019 when we release our fourth quarter results in late February. We feel fortunate to have been successful bidder last month for Omni Air, a leading provider of contracted passenger airlift services to Department of Defense and other federal agencies.
Our conversation with Omni Air's management since the deal was announced in early October give us even more confidence that we're making a right move for ATSG shareholder with this transaction. We hope to close within the next several weeks.
We are also pursuing opportunities with secure more ATSG growth and cash returns well beyond 2019. By the time we hold our fourth quarter call in late February I'm sure we'll have more to report about how the long-term shareholders of ATSG will be rewarded for their competence and our ability to deliver superior results over time.
That concludes our prepared remarks Nicole. We're ready for the first question.
Operator
[Operator Instructions] our first question comes from line of Kevin Sterling of Seaport Global Securities. Your line is now open.
Kevin Sterling
Just on the MRO work, you talked about how had a higher level of internal versus external. Was this, what drove this?
Was it just higher use of aircraft? Was it internal network?
Was it unscheduled maintenance? You may have touched on your prepared remarks.
If you did, I'm sorry but just kind of curious as to what drove that level of higher internal work?
Joe Hete
Kevin thanks for the question. The principal reason was the transition of aircraft from internal operation to external SC and there were four aircraft involved in that.
Two of them were actually on maybe certificate and leads the DHO in the US. And DHO made the decision to move those aircraft in the Middle East, so we had to take those out of service, put them in the hangar and generally what you do, is you have to upgrade the navigation equipment for that area of the world and you have to go through a number of things between the records and the repairs on the fuselage that have been done overtime and make sure that you've got clear picture what the records look like for the aviation authority in that region of the world, to review the aircraft and accept it on the certificate.
So we had those two aircraft and then we had two other [indiscernible] one in Poland and one then one for West Atlantic that will be delivered this month both aircraft. Those also went into AIMs and the same issue.
Those are going into EASA both in Europe and we had to upgrade the navigation equipment for the aircraft and we had to go through a thorough records review. The record review generally some of the things you find in that, if you don't have back to birth records for some of repairs.
You may actually have to remove the repair and put it back on the aircraft believe it or not. And so you generally don't know until you review the records how long or what the extent of the work that's going to be required on those aircraft.
So if you look at the four slots that were available, if you could have put sea checks in there as an example and you would have driven more revenue into AIMs on top line and you would have driven more profit that would not have been eliminated due to external agreement.
Quint Turner
A lot of that work Kevin goes on the balance sheet dense into P&L and then gets amortized over the portion of the lease until its heavy chap for example and that's why it doesn't hit the profitability line as well.
Rich Corrado
The good news on that, if you will is that we've now secured five-year lease on one 200 external lease, seven-year lease on another 200 the one's going into Europe and then we're getting. We're working right now with DHO and lease extensions for those aircrafts that are going into the Middle East.
So although we've got the short-term dip in the MRO performance it's good for CAM and it's good for ATSG to lock those assets up for long period of time.
Kevin Sterling
Yes, so Richard it sounds like kind of maybe some short-term pain if you will right now for kind of the long-term gain. Is that fair?
Rich Corrado
That's exactly right, Kevin.
Kevin Sterling
Okay, thanks. And I just want to make sure Rich and Joe to that I've got this right.
I think last quarter, you said you could place six to 10, 767 300s in 2019 and now you believe its eight to 10, so it looks like you up the bottom end of that range. Am I reading that right?
Or do you hear that right?
Joe Hete
No, you heard it right. As we said in our remarks the majority of those aircraft are pretty much identified as to where they're going.
Obviously we don't talk about who customers are until we've got final contracts inked. But we're pretty confident in terms of being able to place eight to 10 airplanes in 2019.
Kevin Sterling
Okay, thanks. And then let me piggyback on that Joe, if you don't mind because I think in your prepared remarks and Rich's, you talked about really strong demand and customer indications of some leased aircraft.
Is it a matter of just finding feedstock for you guys to satisfy this demand? Are you still turning away business how should we think about that?
Because it sounds like you got a lot of opportunity customer's knock on your door. Customers calling you looking for aircraft, so it's just a matter of getting your hands on additional feedstock.
Am I thinking about that right?
Joe Hete
Yes in terms of feedstock is still pretty tight again. You can always find an airplane it's just a matter of whether [indiscernible] if you're into service price point, that's always a key driver for us.
And as far as turning customers away it's not necessarily a function of turning them away as much as just scheduling out in the process in terms of when an aircraft would be available. So as I said, if we're talking eight to 10 airplanes we don't have them all placed at this point in time with identified customers per se, but so we do have a couple there potentially available.
It's just a matter of priorities.
Kevin Sterling
Okay and then last question from me. You guys kind of indicated as we think about EBITDA for 2019 with no growth of $440 million and let me ask a CapEx question if you don't mind for 2019 at least directionally.
I think you're going to - you talked about CapEx in 2018 of $280 million, can you give us a guide for how we should think about 2019 CapEx similar to 2018 up or down? I'm not asking anything specific but maybe just directionally how should we think about 2019 CapEx if you don't mind.
Quint Turner
Yes of course we'll have Omni, Kevin on board next year. So if you think about sort of maintenance CapEx, our business not without Omni historically we've kind of said hey, we're sort of in the $60 million to $70 million annual range for maintenance CapEx and I think Omni if you look at them, they're more like $20 million of maintenance CapEx.
They have a fleet an existing fleet which you know depending upon growth opportunities we would look at potentially adding to that and we do think there are some growth opportunities for it but their existing fleet has that maintenance CapEx level. So figure you know $80 million of maintenance CapEx and we talk about eight to 10 airplanes and you know at our sort of all-in cost that we target is sort of that $23 million to $25 million for the 300, so depending upon where land on that eight to 10, you get a pretty good sense of where the CapEx might go next year.
It could be up from this year a bit, but I think that reflects the growth opportunities we're seeing in the market.
Kevin Sterling
Quint that's very helpful. Thank you.
Gentlemen, thanks for your time this morning. Have a nice weekend.
Operator
Thank you. Our next question comes from the line of Jack Atkins of Stephens.
Your line is now open.
Jack Atkins
So just to piggyback a bit on some of the Kevin's questions there. Rich, I guess if I could direct this towards you for a minute.
I mean I guess we're seeing some concern in the market overall around just the direction of [indiscernible] go into maybe 2019 obviously trade concerns are top of mindful folks. But your prepared comments would indicate that, your customers are pretty confident about the direction of their businesses.
So could you maybe comment just around in general terms obviously sort of what you're hearing from customers in terms of their outlook for their businesses going into next year. How do you think demand for your asset base trends over the next 12 months?
Rich Corrado
Thanks for the question Jack. We're just as bullish on demand for the assets in 2019 as we were in 2017 and 2018.
The market is very strong for this asset class and again, now the asset class lies network operations for integrated express carriers and for e-commerce service providers and that market, you look at some of the macro news in terms of China, US trade situation etc. I mean those are lanes that we don't compete in.
and the e-commerce business is still growing significantly and the conversion of the retail and the e-tail is still something that's a growing venture and if you look now, I think it's 9% of the global retail spend as an e-commerce so there's a lot of room for growth in that to continue. So when you look at the macro numbers relates to e-commerce which is driving both the integrators and folks like Amazon and the demand for assets that we're hearing across the board is very strong.
The deployments that we've done this year. If you look at them, one was in Asia we're moving some aircraft into the Middle East.
We're going to put three more into Europe and then we've put I think eight into the US and so the demand right across the board is very strong and the demand that we're seeing going into 2019 is again strong in all areas of the world.
Jack Atkins
Okay, that's really encouraging to hear. And then I guess along the same line just sort of thinking about it conceptually.
You've got quite a number of your assets that are under long-term lease and sounds like that mix is growing and then, with the addition of Omni that principally government driven business there. So I would think that would not be as macro sensitive.
So I was just being curios to hear you guys kind of talk about the level of cyclicality that you see in your business. I would think that the way you guys have structured things here.
If things were to soften up on a macro perspective you may not see it in your business.
Rich Corrado
That's a good point Jack. If you look, I mean we have - it's been our strategy to focus on the dry lease and portion of the business and look at the all the other things we do in terms of whether we're flying or whether we're maintaining aircraft as value added services on the top of lease to increase the returns we get.
So from that perspective, I think we'll have already 5% of our assets 767 assets dry lease and then the number of those of course just double lease back to us and we also fly. So that's been the strategy that we've gone through.
But even more than that, if you look at the customers that we dry lease to and also the aircrafts that we fly again it's for the integrators and for network operations. Those are the ones that are lot less sensitive to cyclical demand because when you're servicing a network you have to service all those points in the network you can't all of a sudden not service boise billings or buet [ph] you have to go those, you have to provide service to those areas as part of your network.
And so for express care is to downsize their network, it would have to be a significantly long-term impact to the economy that would impact the demand for those services.
Jack Atkins
Okay.
Joe Hete
Jack keep in mind, on those aircrafts like said over 80% of our 767 fleet will be on long-term dry leases by the time we close out the year. If you look at the Omni acquisition 79% of its DOD business and other 15% is government business and then 15% is in play from a commercial perspective.
So if you look across the board in terms of macroeconomic impact, we've immunized the lion share of our book of business.
Jack Atkins
Yes that's definitively the way it seems, that's great to hear. Last question and I'll turn it over, but would just be curious to get an update on the A321 conversion joint venture sort of, where does that stand?
We're still targeting the first plan into modification maybe late 2019 or I guess the certification of the modification process?
Joe Hete
Yes the first airplane we've already cut metal on the first aircraft and so now as you start the whole process of putting the pieces back together. It's a complex issue to deal with and of course one of the things you run into, as well as getting past the FAA.
And so what the FAA looks at as you're going through the certification process is, what new things are they looking down the road at and since you're opening the airplane up there, they want you to embody some of those things in there like, in the past we never had to deal with 16G seats in freighters for example, but since they're putting those in passenger aircraft. They want us to do that for the super [indiscernible] areas for example in the aircraft.
But all that said we're still targeting the end of 2019 for certification of the first aircraft and going into production in 2020.
Jack Atkins
Okay, that's great. Thank you again for the time.
Operator
Thank you. Our next question comes from the line of Helane Becker of Cowen.
Your line is now open.
Helane Becker
Question to follow-up on the last question. How many aircrafts will you be able to manufacture or convert once the whole process with precision is up and running?
Well say 2021, 2022 run rate.
Joe Hete
The basic matters, how many facilities we can make available for setting up production lines and of course big part of that's going to be driven by what the demand is, if you think about in terms of from a turn time perspective and we haven't nailed that down yet, but if you look at 767 for example a turn time on a conversion for one of those is, 120 days. So your worst case scenario you're going to do three or four aircraft with one line and probably better than that, at the end of the day because you don't have quite as much floor structure to replace on the 321 and then it's just a matter of how many different lines do you want to open up certainly from our perspective we're looking out to say okay what can we anything in our existing facilities.
Pemco does the 737 conversion process. They most recently flew the 737-700 for the first time.
It's in paint now will be heading over to the Bahrain Air Show and then come back for its final certification flights. So we've always got at least one or two base in Tampa that we can utilize whether it's on 737 basis or the 321.
If you remember when we did the Pemco acquisition one of the reasons we did that was because they were well versed in the Airbus product which we didn't have a whole lot of experience with here in Wilmington. If you think on a conservative basis, we could probably produce when we're up to full speed 10 to 15 airplanes a year.
Helane Becker
Okay, great thank you. And then just on the postal service contract.
I guess I missed that you I don't know if it's probably on last quarter's 10-Q and I just missed the contract. When it will be renewed?
So that's $2 million of pretax earnings per quarter that you're going to be not having is that's the way to understand that?
Quint Turner
Helane, it's Quint. The fourth quarter was probably the largest quarter in terms of the postal operations.
I mean if you look at it and I went back and looked because we've had these contracts for a number of years and I think in the last few 10-Qs we pointed out, these contracts terminate in September unless renewed we hadn't expected to get renewal and said they, I think they went to sort of a new operator in terms of managing this facilities. The EBITDA production that we've gotten out of the postal operations about the best year we had over the last several was about $5 million annually.
Now in the fourth quarter typically you saw in third quarter you saw a little better production from that most of that occurred in those quarters. So in terms of scoping this as far as our EBITDA impact probably about $5 million annually was associated with the postal.
Helane Becker
Okay and then Omni, so I thought I saw earlier this week you received clearance to regulatory approval to do the acquisition and what's left?
Rich Corrado
We did receive the Hart-Scott-Rodino approval which is the Antitrust piece, we have not received the Department of Transportation approval to go forward at this point in time.
Helane Becker
Okay.
Rich Corrado
We expect to get that within the coming week and right now targeting if everything goes according to schedule, closing this thing out by the end of next week.
Helane Becker
Okay, so the way we should think about it is what about eight weeks, what is that seven week-ish of revenue from.
Rich Corrado
Yes, six or seven weeks.
Helane Becker
Of revenue from right, of this for this year and follow on next year.
Rich Corrado
Yes, ma'am.
Helane Becker
Got it. Thank you.
Okay, well I think everybody else asked my questions. I don't need to re-ask them.
So thanks very much.
Operator
Thank you. Our next question comes from David Ross with Stifel.
Your line is now open.
David Ross
I guess with Omni real quick. You mentioned being maybe a little bit more encouraged or incrementally positive after conversations with management.
Can you elaborate on anything new that you've learned since announcing the deal and what made you positive after having those conversations?
Joe Hete
Well I think talking to folks at Omni obviously since they were in the sales process they were little hamstrong [ph] in terms of being able to add assets into the mix. Right now they're saying there's additional opportunities they've had to pass on from a commercial perspective just because of shortage of assets.
Now remember part of the rationale for buying them was synergies and one of the key synergies in there was related to the fact that they operate the 767 and it provides a natural feedstock pipeline potentially i.e. buying new aircraft that don't fit our price target for conversion running them through Omni and then at some point in time later, when the value is been depreciated somewhat putting them into the conversion process.
So it's really a function of, there's commercial opportunities that they believe are going unfilled. Obviously feedstock as I meant earlier in one of Kevin's question is, it's still little bit tight from our normal conversion price point, but it doesn't preclude us from looking at an asset that normally wouldn't fit that cost profile to be able to run it in through Omni and allow them to operate from a passenger perspective.
David Ross
And there's additional commercial opportunities to be on the passenger side not the cargo side.
Joe Hete
Yes, passenger side.
David Ross
And then can you talk about the delays in some of the conversions and the 767 schedule back half of this year? When you're doing a conversion with customer and it's getting delayed?
What do they do? If the plan was to put something in the service in October and it doesn't come till December, do they just have to wait.
Do they charter a plane for couple months? Do you guys do anything for them in terms of providing aircraft?
Rich Corrado
It's Rich. It's kind of a mixed bag.
So some of the customers that are waiting for aircraft they have other aircrafts that they have spares for maintenance coverage that they may be able to just use those to cover [indiscernible] routes or what have you. Sometimes folks are timing a new aircraft delivery because of their maintenance schedule.
And they can extend their maintenance schedule a little bit and wait for the aircraft we do some swapping around sometimes where if the delivery is late and the customers can move it to another quarter, we can get back on queue with the other customers and so we try to minimize the impact to customers. But it's really variable depending on what they need it to for.
Wet to dry scenario where we start and aircraft and we fly wet until the customer wants it to take a dry lease. Northern Air Cargos are great example of that.
They took three aircraft from us between the fourth quarter last year and this year. We're still flying a route for them today as they get their crew component up to speed and so that's another scenario where we would continue to fly and put up and asset to support a customer in the event that they're waiting for aircraft.
David Ross
And when you think about the fleet and the 767-200 that are left in there. How much life do you think they have and how closer do you get the scraping some of them altogether?
Rich Corrado
Well we took one aircraft out of service in mid-year of 2018 and we will begin the part out process at this point in time. Right now based on 50,000 cycle limit before you've got to go into a new maintenance program on the aircraft.
We have a second aircraft that's coming up against that 50,000 cycle limit and would be in the second quarter of 2019. So we would end up by the end of the second quarter of 2019 with two of the 200s that are out of service at that point.
David Ross
Excellent. Thank you very much.
I'll get back in queue.
Operator
Thank you. Our next question comes from the Steve O'Hara of Sidoti.
Your line is now open.
Steve O'Hara
Just curious, where there cost around the Omni acquisition in the quarter that weren't called out. I didn't, maybe I missed it.
But I don't know if it was anything in there.
Quint Turner
No, not significantly. I think in the fourth quarter certainly we'll have cost and we'll segregate those as we report, but we'll have some significant transaction fees in the fourth quarter that we'll spike out.
Steve O'Hara
Okay and then just if you look at CAM, I guess I'm just I know there's some delays and some I think maintenance within the quarter. But I guess with seven more aircraft and I guess I'm just a little surprised the pre-tax wasn't up a little more or maybe the revenue wasn't a little higher.
And I'm just wondering is that going, maybe the aircraft rate added late in the quarter. I mean you did note it, kind of operationally the tough quarter but I would think that will be on the ACMI side.
I guess when do you start to see maybe better pre-tax income growth and relative to aircraft additions. And then looking at ACMI, how far away from the typical range that you've given in the past are we now from that given the higher pilot with ATI and then is that just something that corrects over time, where new contracts are kind of including higher pilot cost, as those contracts come up for renewal.
The industry is going up, you guys are going up and that kind of corrects itself. Can you just go through that?
Thank you.
Joe Hete
Sure. Steve of course as we've mentioned in terms of the third quarter we had anticipated I think three leases starting during the quarter and those push into the fourth quarter.
So as far as CAM and growth in the CAM results, revenues and margins. Those will occur as we add aircraft into the mix which we'll have five online new ones by the end of the fourth quarter and then of course we've given some guidance about eight to 10 additional tails next year.
CAM is also impacted by these lease transitions that Rich mentioned where you have to enter up CAM's revenue flow to pull an aircraft out and ready it for a delivery to a SE, external SE under a long-term lease. He mentioned I think that we've got a couple aircraft that are going to be placed.
I think one for five years another for seven years with external SEs, but to do that we pull those out, we have to send those through the MRO and as that short-term pain and long-term gain. I mean we get very, we get attractive returns and we get certain [indiscernible] multi-year deployments by doing that and that can, in a given quarter that can impact how CAM's results look but again it's a long-term, a better scenario.
We're still targeting the same kind of returns on our deployments that we always have and I think you're familiar with that in terms of our ROIC that we target for those on a levered basis and so I would continue to expect that as we go forward.
Quint Turner
ACMI front, obviously as we noted after we got an agreement with the ATI pilots it's about $2.2 million quarter impact this year. The contracts under which the ATI guys fly today and essentially didn't have escalators in there that would allow us to recouped those costs.
And so until such time that you get to where you can rebid the contract to cover those additional cost. It's something it's going to come off of our bottom-line that we're going to have to deal with.
So when you look at the ACMI results obviously on a year-to-year comparison much better this year than they were last year in spite of the fact that we do have that additional cost and our cost structure for the ATI pilots at this point in time. And of course as we go forward we'll be looking to try to recouped those costs from our customers we'll only go through a rebid process.
Steve O'Hara
Okay and then maybe just on the pilot situation and then kind of I guess indexing contract. I mean is there more if it is to do that on your side today than maybe it was - there was maybe five to 10 years ago given concerns about pilot shortages and things like that.
It seems like the pilot shortages is likely a real thing and eventually it comes home and I think attracting pilots obviously important you guys I think do a good job attracting them and keeping them. But it would seem like part of the cost are bound to go up overtime and I'm wondering if there's more pressure on you guys, where you guys are putting more pressure on customers to kind of create a contract where you don't have this lag between rising cost on the pilot side and then getting the benefit back in the contract.
Joe Hete
Yes in an ideal world, you would certainly like to see something like that Steve, but from a customer perspective obviously a pushback is going to be something, one something that's more well defined and known going forward because they have to price their business and their customers in the end. So from the standpoint of at least on the ATI side, we know where our cost structure needs to be as we go through rebid processes for the next four years.
The AVX contract is still in negotiations, where that falls out when we finally get a contract. Certainly it's not going to be before the end of 2018 and so we'll look for 2019 to get there.
But it's just one of those things that you have to deal with in the business and we're not alone in that respect. There are competitors out there either have contracts and had to swallow some of the same cost as we do and or they haven't got us collected bargaining agreement yet and we'll have to deal with that increased cost when it comes.
Steve O'Hara
Okay, thank you very much.
Operator
Thank you. Our next question comes from [indiscernible].
Your line is now open.
Unidentified Analyst
Just a sort of question, sort of bigger picture question. In terms of your business and I guess that what I would perceive and I'm curios how you perceive the connect between the market and your business and prospects.
Your stock as you're probably aware is hovering at a new 52-week low yet the market was little sloppy in October, but it seems to me you guys sort of get grouped into a very cyclical sort of business number one and number two possibly painted with some trade concerns as you generally trade what is viewed to be a comparable that list and I just want to know sort of generally how you feel about that. But putting it in a little bigger context with $455 million in EBITDA if we include the eight to 10 plane that you're incorporating into the incremental mix next year, it looks to me like you've got possibly $300 million in free cash flow I guess before the add of those planes sort of just utilizing maintenance CapEx so it's four and change $5 per share in free cash flow.
Do you envision redirect or is it - do you think at some point you get aggressive and you reposition yourself to more so focused on the stock? The shareholder return that would provide and I have one follow-up, after you fill that.
Thank you.
Quint Turner
Thanks Howard. It's Quint.
Certainly we're excited about with the addition of Omni, what the cash flow production looks like for next year. And I think recently Joe talked about not only the five aircraft coming out in the fourth quarter but that the eight to 10 next year other than I think Joe mentioned there's a couple they're still available as we always try to have a couple that we can fill customer's quick need for.
We have very high confidence level about where those placements are going next year. And so we think that the things look very bright in terms of what we can produce and I think Omni acquisition has been discussed is something that in terms of adding us a nice stable cash flow contributor into the mix and diversifying the revenue stream is also seen as a really good thing.
In terms of how we think about capital allocation. You mentioned we get lumped in with other things and certainly the tariff discussion we do get that question a lot and I think you and I have talked about that before, we don't feel that there's an impact with where our assets go that is significant at all for the tariff piece or the trade talks.
As you know our mid-sized assets go into the e-commerce driven regional network structure and now many are deployed or will be deployed with VOD. So we feel really good about that and don't feel that will be a real problem for us.
As far as capital allocation towards looking at our stock. We're going to first close the transaction with Omni here shortly and for a time as one of our bank provisions there will be some limitation.
Our leverage ratio at close is estimated to be around 3.4 times inclusive of Omni's EBITDA contribution and I think we have to be under three times after giving effect to any stock buyback or dividend type capital distribution before we would be free to do that under our current bank deal. So it probably be sometime later in 2019 before that would be an available option, but certainly as we always do we look at what brings most value to our shareholders and depending upon where our stock was trading absolutely that's a viable option for us in the mix, along with our growth opportunities.
Unidentified Analyst
Great. I appreciate that.
I hope you'll look at the more aggressively. But the follow-on question I had concerns the to your smaller businesses you and I have spoken offline about sort of the ACMI not being part of the CAM business.
I always feel like it's a semi-loss leader and you'll suggest no it's really a standalone, but I'd like to discuss the potential briefly just if could provide some color on both the ACMI and I didn't hear the answer to Helane questions or maybe that was leading but could you give us some color on what sort of potential is for MRO when you get the approval for start dealing with the Airbus fleet and where that can go? Thank you.
Joe Hete
From a margin perspective both the businesses ACMI and MRO are probably single-digit type margins, but the businesses themselves complement the leasing piece very strong. I mean our two largest lease customers DHL and Amazon also avail themselves of the operating capabilities of our airlines.
And of course our airlines are very really have grown up serving the very business that those guys concentrate on which at expedited delivery piece and so that is something that has been worked really well for us. It also gives us the capability most pure leasing companies don't have and that's to take an asset that would otherwise be idle and generate cash flow through having our own affiliate airline operated on an ACMI basis.
So from a cash flow perspective they've certainly been contributors and on a margin basis you're looking at a single-digit type margin that we look for in the ACMI piece. On the MRO piece it's very similar, lease transitions that Rich mentioned earlier can be handled seamlessly and both of our largest customers also use our MRO to take care of the assets they lease in terms of their heavy maintenance.
So it's really a value added service that just fits well with our leasing business.
Unidentified Analyst
I'm not asking you to quantify and I'm just trying to get any sort of sense as to what your investment is, what your return can be, where are in particular the MRO can go when you get Airbus approval? I'd like to think that there could be I understand there's single-digit margins, but I don't understand the associated top line that one could get with let's just the say the MRO in particular when you have Airbus, reap benefits 2021 or something.
Joe Hete
Howard as far as the Airbus goes, we don't have a finished product yet. So I mean first and foremost is going to be what does the finished product look like?
Right? How much of that is going to be installation labor which is where the MRO would come in versus the material that it takes to completed the modification carve the cargo door and things of that nature.
We're not far enough along the track to be able to give you any kind of number in that regard. And keep in mind at the same time we're limited by the capacity in our hangars.
So it's not like you can just stuff a whole bunch of airplanes in there and generate more bottom line dollar because the floor space is limited to a degree. So the MRO piece unless you go out and start investing or leasing new facilities, you're not going to see there's a growth vehicle but certainly it is critical to support of our leasing business as Quint mentioned and there are opportunities in the future both from a conversion standpoint which is nice to have because it's cookie cutter, roll an airplane in, it's a same work, you don't run into any unexpected things.
But at the end of the day, you know it's not that the MRO business is not capitalize intensive. It's basically a people oriented business just like anything from a logistic perspective.
So when you talk about returns anything you get is a good return because the initial investment is pretty de minimis.
Unidentified Analyst
Thank you so much and good luck with the Omni and it sounds like you have a bright future. Thank you.
Operator
Thank you. Our next question comes from the line of Chris S of Susquehanna Financial.
Chris Stathoulopoulos
So just if you could walk us through the procurement process here for the plane? So you've secured the rights for that was in eight to 10 now what you've taken up the low end there.
So does this mean that - there's an economic liability for ATSG attached to these or do you wait to put a deposit if you will once you had a formal contract in place with customers.
Joe Hete
Chris I think we've guide in our release with that fleet summary five aircraft so that will be in process in our waiting conversion at the end of 2018. So let's think about as five of the eight to 10.
So that would say, there would be three to five others that we would need to find to round out next year's what we've talked about as fleet additions. Typically until you accept the airplane, there's isn't whole lot of capital that's expended.
You may put down a small deposit just to secure the airplane, but any liability or significant outlet of cash doesn't occur until such time as you actually accept physical airplane.
Chris Stathoulopoulos
Okay and of the five, you mentioned here you have formal agreements with customers or you're close.
Joe Hete
We're close.
Chris Stathoulopoulos
You're close. Okay.
And then on the Omni call, was it few weeks back you spoke about the sort of the shift in revenue where DHL and Amazon were around 57% of revenue or about 29% each and now there are 18%, 10% and you said for now. And then in your opening remarks you spoke about additional color on ways to enhance shareholder value back in 2019.
In January so, given where we are with the higher leverage constraints which Quint alluded to before, how should we think about capital allocation going forward. Is it - are you suggesting that we could go back kind of looking at more e-commerce leveraged opportunity or you considering a step up in buybacks.
Thanks.
Joe Hete
Well I think Chris we spoke to buybacks earlier. I think what we said was first the board has approved buyback program and while that can be temporarily effected by our covenants in the bank agreement after the Omni acquisition, that's always a viable option for us depending on what the full range of growth opportunities look like.
If growth opportunities are out there I we typically do lean that way because if we don't move on them then you lose that opportunity perhaps forever because someone else will take that. You spoke about the Omni impact on a revenue mix as you pointed out.
It does and I think when we announced the deal in early October. We had a slide that went with that announcement where we gave first half 2018 revenue mix and a proforma first half revenue mix and it does have significant diversification impact on us.
For example, I think in the first half of the year Amazon was 29% of the revenue. DHL was 28%.
On a proforma basis, those numbers would go to 19% for Amazon and 18% for DHL with the DOD becoming the largest single piece along with our current 757 Combi's to be about a third of our overall revenue. SO it does do a nice job of diversifying the revenue stream.
Chris Stathoulopoulos
Okay and follow-up [indiscernible] and apologies if you mentioned this before but could you give an update on labor with ABX and if that's any type of markup is included in the preliminary 2019 guidance. Thanks.
Quint Turner
As far as ABX goes we're still under the auspice of the National Mediation Board. There were meetings held Wednesday and Thursday of this week with the union to discuss further moving the ball down the [indiscernible] field as far as the contract goes no we have not, in terms of talk about the 440, yes we have not put in factored in anything from specifically really to the pilot side of the equation.
Obviously there will be a lot of fine tuning in terms of what our guidance will be for 2019 which will elaborate fully on come of the year end results announcements which will be at the end of February.
Chris Stathoulopoulos
Okay, thank you.
Operator
Thank you. Our next question comes from the line of David Ross with Stifel.
Your line is now open.
David Ross
I'm all good, questions asked. Thanks.
Operator
Thank you. I'm showing no further questions we have for today.
I will hand the call back over to Joe Hete for any closing remarks.
Joe Hete
Thanks Nicole. This year's third quarter was our best ever, even if it feel short of our goals.
We've redoubled our efforts to make the fourth quarter a strong one as we complete our Omni Air acquisition and meet our 767 deployment targets. Thanks to everyone for joining us on the call.
Have a quality day and don't forget to vote next Tuesday.
Operator
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating.