ATSG - Air Transport Services Group Inc. (ATSG) CEO Rich Corrado on Q2 2022 Results - Earnings Call Transcript
Air Transport Services Group, Inc. (ATSG)
Q2 2022 Results Conference Call
August 05, 2022 10:00 AM ET
Company Participants
Joe Payne - Chief Legal Officer
Rich Corrado - President and CEO
Quint Turner - CFO
Mike Berger - Chief Commercial Officer
Conference Call Participants
Jack Atkins - Stephens
Helane Becker - Cowen
Chris Stathoulopoulos - SIG
Frank Galanti - Stifel
Eric Kulisch - FreightWaves
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Second Quarter 2022 Air Transport Services Group Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to Joe Payne, Chief Legal Officer. Please go ahead.
Joe Payne
Good morning, and welcome to our second quarter 2022 earnings conference call. We issued our earnings release yesterday after the market closed. It’s on our website, atsginc.com.
Let me begin by advising you that during the course of this call, we will make projections and 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. 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: the extent to which changes in market conditions impact the number, timing and scheduled routes of aircraft deployments to new and existing customers; the cost and timing with respect to which we were able to purchase and modify aircraft to a cargo configuration, which may be impacted by global supply chain disruptions; our operating airline’s ability to maintain on-time service and control costs; our ability to remain in compliance with key agreements with customers, lenders and government agencies; persistent elevated rates of inflation and changes in general economic and/or industry-specific conditions, such as higher labor costs, increases in interest rates, an economic recession and downturns in customer business cycles; the impact arising from COVID-19 outbreaks, including the emergence of COVID-19 variants; mark-to-market changes on certain financial instruments and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q we will file next week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings, adjusted EBITDA and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG’s financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
And now I’ll turn the call over to Rich Corrado, our President and CEO, for his opening comments.
Rich Corrado
Thanks, Joe, and good morning, everyone. I’m pleased to tell you that ATSG remains solidly in growth mode. The second quarter was our fourth in a row of double-digit quarterly increases in revenue and adjusted EBITDA over the prior year. Our growth directly reflects that of the principal markets we serve, dedicated midsize freighter aircraft that we lease and fly for major transport integrators and e-commerce merchandisers.
Our customers are eager to lease all of the cargo aircraft we can deliver. And the fleets of our cargo airlines are growing even faster than our lease portfolio as our 2 principal air cargo customers prefer that our airlines fly their own freighters and dedicated networks. Others are coming to us for the first time, seeking both wide- and narrow-body freighters for expanding express networks throughout the world.
E-commerce remains the principal driver of our growth. Consumers still prefer buying online and not just for convenience. They are also looking for the lower prices they often find online to stretch their own budgets to cover inflation. We remain direct beneficiaries of the rapid delivery that online shopping requires, and we’ll keep reinvesting the majority of our strong cash flow to meet this demand.
At the same time, we benefited from increased passenger flying. We fully expect to meet our $640 million adjusted EBITDA target for 2022. We’ll deploy 10 lease freighters in 2022, including 4 767s and 2 Airbus A321s in the second half. That’s 1 Boeing 767 fewer than our prior target, primarily due to the delays in our conversion vendor related to parts and supply chain challenges. Quint is ready to review the details of our second quarter results. I’ll be back to share more about our very bright long outlook after that.
Quint Turner
Thanks, Rich, and welcome to everyone on the call this morning. The next slide in our deck hits some of the second quarter operating highlights that Rich mentioned. Overall, our year-over-year growth in the second quarter was similar to the pace we were on in the first quarter. Our consolidated revenues for the second quarter grew $100 million to $510 million, totaling nearly $1 billion for the first half.
As they did in the first quarter, each of our principal businesses, freighter leasing and airline operations, delivered strong revenue growth exceeding 20%. Our adjusted pretax earnings again rose sharply, up 80% from the prior period to $67 million. Our adjusted EPS increased $0.24 to $0.59, and our adjusted EBITDA of $158 million beat the prior year quarter by 23%. Our segment earnings grew even faster than revenues after adjusting for government grants in 2021 intended to protect jobs from pandemic effects in the passenger airline business.
Our ACMI Services earnings in the second quarter rose to $22 million from $6 million minus $38 million in 2021 grants. CAM’s pretax earnings increased 76%. Inflation is impacting our airline costs, particularly in travel costs to transfer our passenger service crews to and from their assignments and in other employee-related expense. Travel, in particular, was up more than 50% in the second quarter versus the prior year period, and our salaries, wage and benefits line rose 15%. Most of the military passenger flights we operate involve longer overseas travel requiring augmented flight crews, which makes our costs more expensive compared to our shorter cargo flights, which are over mostly domestic 2-crew member routes.
On the next slide, you can see that our $30 million growth in second quarter adjusted EBITDA raised our trailing 12-months pace to $623 million. Our plan currently calls for more adjusted EBITDA in the second half versus the first, with a third quarter that is similar to our second quarter and a stronger fourth quarter. That assumes lease deployments in line with our revised outlook and fourth quarter gains from ACMI Services that include expanded combi operations and 6 additional customer-provided cargo aircraft.
On the next slide, you’ll see that our capital spending for aircraft purchases and conversions in 2022 so far is $5 million ahead of our 2021 pace. Most of that spending is for conversion costs, which are growing at a rate consistent with the slower pace of deliveries from our conversion vendor. Our 19 total aircraft in line for conversion at June 30 includes all of the 6 we expect to deliver in the second half this year, plus more than half of the 18 on our delivery schedule for next year.
We said last quarter that we would remain in the market for feedstock aircraft after acquiring several in the first half. We will purchase 2 more passenger aircraft and place more deposits on 2023 aircraft acquisitions than were in our original 2022 growth budget. We have increased our growth CapEx guidance for this year by $30 million to $420 million to cover those purchases and higher conversion costs.
The next slide updates you on our adjusted free cash flow, the metric we began providing last year. Represented by the bottom portion of each bar, it’s our operating cash flow, net of our sustaining CapEx shown on the top. Once again, the trailing 12-month totals for GAAP operating cash flow shown above the bars include $83 million in cash we received in Federal pandemic relief grants last year. Our adjusted free cash flow year-to-date is $161 million, down from $207 million a year ago. Operating cash flow declined principally due to an increase in receivables. The trailing 12 months total of $355 million was also down from first quarter’s $406 million. As I mentioned a moment ago, this year’s growth CapEx plan is now at $420 million, most of which will come from our adjusted free cash flow.
The next slide represents our value proposition over time. Our business model generates significant recurring cash flow, while at the same time, strong demand for our freighter aircraft provides us with very profitable ways to reinvest it. Our overall debt to adjusted EBITDA leverage ratio, as measured under our bank credit agreements, is below 2x. Our credit revolver balance increased to $515 million during the second quarter. In addition to draws for growth CapEx spending, we took advantage of an opportunity to repurchase $120 million in face value of the $700 million in 4.75% unsecured notes outstanding.
Note repurchases were at an average discount of 5.5% and funded from our variable rate credit revolver now at 2.7%. The repurchases, which were funded from the revolver, reduced our outstanding debt by nearly $7 million, with an ongoing interest expense benefit based on the difference between the bond coupon and our revolver rate. In June, Moody’s Investor Service recognized the quality of our balance sheet and growth prospects by upgrading our ratings on debt at the corporate level to Ba1, just below investment-grade. Moody’s cited our reduced debt-to-EBITDA leverage and strong earnings and cash flow as reasons for the upgrade.
With that summary of the quarter’s operating and financial developments, I’ll turn it back to Rich for some comments on our business drivers and outlook. Rich?
Rich Corrado
Thanks, Quint. Before I begin sharing some comments on our 2022 performance and outlook, I want to commend, as I always do, the efforts of our employees across all of our businesses that create the results that I get to share with investors each quarter. I appreciate their resourcefulness in working towards goals that I know seems challenging at first, knowing they usually find ways to meet or exceed them. They make ATSG a great, diverse place to work and make me proud to be one of them.
Last quarter, we reviewed some of last year’s accomplishments that are delivering benefits now. The 15 767 freighters we leased last year, 11 of which went to Amazon, are the largest source of our 2022 growth. Including 7 more freighters that Amazon has purchased or leased elsewhere but assigned to us to fly, our Amazon-dedicated fleet will soon total 49 767 freighters. We also noted that the map of our aircraft deployments is expanding rapidly. 8 of the 10 767 and Airbus A321 freighters we will place this year are going to non-U.S. customers in Asia, Europe and Canada. Those customers are pushing ahead with their own cargo networks designed to provide the same e-commerce fulfillment missions as the ones we support in the U.S. The majority of our 2023 lease deployments will be headed overseas as well.
And finally, as the next slide shows, we are beginning to add new aircraft types from the Airbus family. Our joint venture designed a narrow-body Airbus A321-200 freighter as a conversion from passenger aircraft. CAM’s first 2 of these smaller but highly efficient freighters will be leased later this year to its newest customer, ASL Aviation Holdings. Three other passenger A321s we own will be among at least 4 we convert and lease in 2023. ASL, based in Ireland and with operations throughout the world, has also ordered 2 of the larger wide-body Airbus A330 freighters we will start to lease in 2024. A330 freighters are somewhat larger than our Boeing 767-300s but serve essentially the same missions in express networks throughout the world.
We hold options to buy feedstock passenger A330s along with more 767-300s and A321s that we’ll begin to exercise as part of our 2023 growth CapEx program. We hear, as you do, forecasted worldwide reductions in capital investment and slower economic growth in the months ahead, but you won’t find any evidence of that in our leased freighter order book. We already hold deposits for most of the 18 freighters we expect to deploy in 2023, including 14 767-300s and at least 4 A321s and commitments from long-standing customers for the others.
We also stay in touch with those looking forward to some of the freighters we’ll deploy after 2023. None has indicated anything but a strong interest in building their freighter networks with us. Of the more than 80 passenger-to-freighter conversion slots CAM holds for induction from 2022 through 2026, more than 50 are already spoken for by customers in our order book.
This year, CAM has already delivered 4 of the 8 767-300 freighters it expects to lease this year. Supply chain constraints affecting passenger-to-freighter conversion businesses have limited our number of additional freighters we can lease. Moving forward, our conversion vendor expansion, along with reduction in those bottlenecks, will increase the conversion pace next year.
One other thing that bears repeating from last quarter’s call is the breakdown of our 3 principal sources of adjusted EBITDA: long-term dry leases of freighters; long-term airline operating agreements with Amazon and DHL; and thirdly, passenger flying, mainly for the Department of Defense. Those 3 sources are more than 90% of our total adjusted EBITDA. Looking at the duration of those contracts, the size of the customers and our strong relationships with each one of them, our adjusted EBITDA stream looks to be very resilient to disruption from recession or trade imbalances.
We get lease revenue whether a freighter is fully or partially utilized. And the freighters we fly in the Amazon and DHL networks are scheduled generally every day, helping them meet time-definite overnight commitments to shoppers throughout the U.S. no matter how full an aircraft is on any particular day. For Omni, our flying depends on what the Department of Defense or other government agencies need, regardless of the economy. That includes moving people for military exercises, troop rotations, natural disasters, personnel moves and other things that project readiness and maintain a strong presence abroad. I don’t know of any other company in the transport business with more built-in protection from the risk factors most of you are focused on today.
As the next slide shows, we expect 2022 to be another record-setting year for ATSG with adjusted EPS of $2 per share and $640 million in adjusted EBITDA. All of you are reading or reporting this quarter about the impact of inflation on the passenger airlines and, in particular, about how it has pushed beyond their fuel costs and into their labor and other operating expenses. ATSG is largely insulated from higher fuel prices, which are passed on to our customers under our operating agreements.
But like the other airlines, inflation is affecting our employee costs and, to a lesser extent, other categories, more than we expected when we set our 2022 guidance last February. When we talked in May, we were already somewhat ahead of our projected pace to $640 million in adjusted EBITDA. Today, we expect to achieve it via on-schedule lease deployments, resumption of our full schedule of combi flying for the U.S. military, cost controls and price recovery where we can achieve them and a strong fourth quarter in both cargo and passenger flying. Net-net, we expect our third quarter adjusted EBITDA to look a lot like our second, with significant improvement in the fourth quarter.
But I’m also focused beyond 2022 on investments we will make to drive our earnings and adjusted free cash flow higher in 2023 and beyond. We see forecasts that still indicate freighter conversion and new freighter production capacity will remain tight. Those supply limitations plus uncertain cargo space availability on passenger aircraft will keep freighters in strong demand for several years. Investing our capital into that trend makes great sense to us.
Many of you have asked about our plans for cash returns to shareholders when restrictions expire at the end of September. The Board of Directors is very focused on this as well, and we look forward to having the ability to allocate cash between growth opportunities and share repurchases after the restrictions expire. As a reminder, the Board’s existing authorization for ATSG share repurchases is still in effect, with significant repurchase authority remaining. In the meantime, the people of ATSG will continue to execute against the aggressive goals we have set out for 2022 while searching for new ways to expand our cash flow in the years ahead.
That concludes our prepared remarks. Quint and I, along with Mike Berger, our Chief Commercial Officer, are ready to answer questions. May we have the first question, operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Jack Atkins with Stephens.
Jack Atkins
So I guess maybe if we could just start, Rich, going back to your comments on the outlook. I just wanted to kind of level set. If you go back to 3 months ago, the comment around running ahead of plan for EBITDA and for EPS for the full year through the first quarter. That language seems to have changed a bit. And I’m just sort of curious, is that the inflationary cost pressures that have kind of crept up here over the last few months? Or are you still -- do you still believe that you’re running ahead of your initial outlook? Just kind of wanted to make sure we’re on the same page on that.
Rich Corrado
Yes, Jack, thanks for the question. Yes, we were very positive in our prior comments in regard to being ahead of plan. But as we’ve seen through this quarter, there has been more cost pressure. This isn’t a demand-related issue at all. It’s really related to some cost pressure. But we still believe we’ll make our $640 million in adjusted EBITDA and -- but we did not feel comfortable expanding guidance at this time.
Jack Atkins
Okay, got it. And then I guess, as you sort of think about to your point on demand remaining very strong, we’ve certainly seen a little bit of a reset in terms of B2C activity when you look at sort of what’s been going on with the integrators and what we see out of Amazon and things like that in terms of their public comments.
As you sort of think forward over the course of the next couple of years, are you seeing sort of any change in tone in terms of what your customers are telling you, bigger picture about their longer-term plans for capacity needs? Any sort of maybe reassessment of that? Or yes, just would love to kind of get your thoughts on that as well.
Rich Corrado
Yes. Just in the short term -- I’ll turn this over to Mike in a minute. But in the short term, Jack, what I can tell you in regard to the U.S. networks, we’re slated to put 4 more airplanes into the DHL network this year and 2 more airplanes into the Amazon network this year, that they are providing to us and the 4 DHL is providing to us. So we’re seeing the demand for freighters as large as it’s been in the past. And then as it relates to the ongoing e-commerce demand around the globe, I’ll turn it over to Mike. He probably is the best person to comment on that.
Mike Berger
Yes. Thanks, Rich. Just to reiterate, we have not seen any weakness in demand really at all. We’ve talked at length about the order book not only for this year but the upcoming years. And we haven’t seen any indication from any of our existing customers that they’re -- any hesitancy at all. In fact, all have communicated quite clearly that if it’s possible to take the new aircraft, new deliveries early, they certainly would.
From a broader perspective, e-commerce is certainly still the engine and it remains very strong. And as we’ve said many times, ATSG is really an enabler to e-commerce. But when you think about some of the industry folks, the consultants and IATA and Boeing and Airbus, et cetera, the freight fleet, the 20-year freighter fleet activity is going to increase, Jack, by 2.5%, 2.4% over the next 20 years out to 2041. And 2/3 of those freighters are operated by the integrators or on behalf of 5 companies, the 5 major integrators when you think of Amazon, DHL, UPS, FedEx and SF.
So we feel real bullish and we’ve talked about it at length. Either those folks are our direct customers or they’re our customers’ customers, meaning that they’re flying in these guys’ regional networks. So we don’t see it at all. In fact, we’re extremely bullish about it and we’re certainly poised with feedstock to meet that demand.
Jack Atkins
Okay, all right. That’s really encouraging to hear. And I guess, for my last question before I turn it over, I’d love to hit on the capital allocation question. Rich, you talked about buybacks and the ability to kind of get back into the market with buybacks here in a couple of months once the CARES Act restrictions expire. I guess kind of bigger picture, any additional insight you can share about how senior management and the Board are thinking about capital allocation as we kind of move forward?
Obviously, there’s -- as Mike was just outlining, a lot of demand for your assets so the growth capital is needed. There are opportunities to pay down debt and then also pursue buybacks. I mean, how do you balance that? And should we think about you being opportunistic with the buyback moving forward? Or maybe more consistently in the market? I guess, just kind of trying to balance all those things.
Rich Corrado
Sure. I’ll start this off and then Quint may have some other comments. But in general, Jack, we believe that we’ll be able to do both. We’ll be able to allocate capital to the growth, which the demand, as Mike has talked about, is very high. We’ve got, I think, 50 commitments out of the 80 slots we have through 2026 with agreements and/or cash down. So the demand is very strong. But if you look, one of the slides showed that although we’re increasing our fleet, we’ve been delevering over the last 3 years. And so we’re lightly levered now under 2x. And we believe that we’ll be able to deal with the growth that we have coming up out through 2026 and still be able to return capital to shareholders.
Now we do -- we -- I believe October 1 is when we’re able to. We’re free of the CARES Act restrictions as it relates to buying back shares. And from that point forward, we’ll look to make smart decisions and be in the market opportunistic and potentially on a regular basis to buy back shares. I’ll let Quint maybe fill you in on some of the details.
Quint Turner
Yes. I mean, Rich covered it real well, Jack. Certainly, the balance sheet strength that we have and the sort of growing portfolio of laddered-out leases that CAM is so successfully marketing gives us a lot of visibility to future cash flows and gives us confidence as to where we’re heading with our projections long term. We all know quarter-to-quarter, sometimes, there’s a bump here or there. But long term, that gives us a lot of confidence and ability to use share repurchase to create additional value on top of our growth plan. We’re levered under 2x and that also positions us well. So we’re really excited about getting that tool back when CARES expires here in a couple of months to go along with our growth value that we’ve been creating.
Jack Atkins
Okay. Absolutely. I know it will be good to have that arrow back in the quiver.
Operator
Next question comes from Helane Becker with Cowen.
Helane Becker
I just wanted to follow up on Jack’s question. Is there a goal for leverage? Under 2x is pretty impressive. And I know the one slide talks about being able to grow without really adding significant leverage. Are you thinking 2x is the upside or are you willing to get up to 2.5x or 3x? I mean, you’ve been more levered than that in the past.
Quint Turner
Yes. I think for -- it’s Quint. I’ll lead off on this, I guess. But Helane, it’s really dependent on the opportunity that’s out there and how we evaluate that. We certainly, as you point out, for acquisitions that we’ve done, we’ve levered up above 3x. While we’ve managed the company pretty conservatively overall, we spent most of our -- the last 1.5 decades, probably more in the 2.5x range or less.
But we’ve certainly levered up when the opportunity set was attractive. And because of that visibility of the cash flow that I mentioned a minute ago, we would do that again if that was -- if that seemed to us to be the prudent and best accretive way to create value. But we don’t have a specific target to answer your question. We’re not -- it’s one of the things about where the rating agencies have us, which is right under investment-grade. I mean, we actually kind of like that because sometimes when you become investment-grade, which I believe this company could certainly do, if that were the wish to be investment-grade, it sometimes can hamper you a bit on taking on more leverage for opportunities. And I kind of like the sweet spot we’re in, where we get good pricing in the credit markets, but we maintain the flexibility to move forward and create value for our shareholders when the opportunity is attractive.
Helane Becker
That’s very helpful. You actually said something in your prepared remarks about the increase in receivables. Is that something we should worry about? I was sort of -- you rarely call things like that out when you talk, and so I was kind of surprised to hear that. So what are you not saying?
Quint Turner
Well, we called it out just because I think for the last several quarters, you’ve kind of seen that adjusted free cash flow stat, that new non-GAAP stat, that points to that capital that the business throws off, that we have the ability to grow with or return to shareholders. It’s kind of the first time in many quarters that, that number actually went down a little. And the reason is real identifiable.
It’s nothing of concern. It’s more timing related than anything else. You have receivables. As you know, we don’t take on any significant fuel price risk but we do buy fuel for customers. And in this particular quarter-end, there was just -- I think that’s a big piece of those receivables. It’s just the timing of settling the reimbursement of fuel with some of our CMI customers. So absolutely nothing to worry about in terms of collectability or anything like that.
Operator
Our next question comes from Chris Stathoulopoulos with SIG.
Chris Stathoulopoulos
So Rich, I appreciate the color and the sort of perspective on sort of managing the business here through a potential cyclical slowdown. But we haven’t really seen the model. I believe you reconfigured the business back in 2010 or so. So we haven’t really seen the model battle-tested, if you will, during a recession. And I just -- if you could -- there’s obviously a lot of concern here around what cargo and things like that might do into a cyclical slowdown.
So just want to dig in to hear around next year, you have 18 freighters out there. The assets that you have, lease rates appear to be holding up. Could you help us get a little bit more sort of confident about your ability to grow EBITDA through a downturn? And also with the placements of the aircraft with overseas customers, should we assume then that, that would put sort of sustained upward pressure on items such as travel and insurance expense?
And then the last part of that. Just remind us insofar as aircraft that have been locked in and then the aircraft with the LOIs, what are the sort of protection that you have in place? Or how do the sort of contracts work if a shipper, an airline today decides, "Okay, we want this capacity next year or 2024." Things turn and they, at some point, reach out and say, "You know what, we’re not going to be able to take that tail."
Rich Corrado
Okay, there’s a lot to unpack there, Chris. First off, as far as operating the company through a cyclical downturn, there have been, if you remember, 2013, 2014 was a pretty poor year for air cargo. And then we’d start to cycle out of it in 2015 and 2016. So we’ve been -- we’ve gone through some pressure points in the past. But I think the discussion that in the prepared remarks that I put forth about the resiliency of our business model of the existing business, which is all the leases that we have and the dry leases that are -- need to be paid, whether the aircraft are fully utilized or not, the networks that we provide service for in DHL and UPS -- sorry, DHL and Amazon, that they need -- they provide daily committed time-definite services on those networks.
And so it’s -- it would be very unusual for them to cut back on those networks and not service Billings, Boise, Butte and Buffalo on any given day. And then the last part is the military. The military really -- or the Department of Defense and other government agencies that we fly for really don’t -- their demand is not a function of the global economy or the business cycle.
So the existing business is very resilient when it comes to economic downturns. Now you look forward to the growth portion of our business and the leases and -- from the conversions that we’ll be doing over the next -- that we’ve got scheduled over the next 3 to 4 years, those customers, the majority of them fly in networks around the globe. So they’re flying for similar customers that are performing e-commerce-type deliveries and those types of things. And so again, there’ll be a more resilient demand.
Then you will see in like general cargo, general air cargo tends to have a much more alignment up and down with global trade and the global economy where the e-commerce business and the network business tends to be a little bit more resilient or a lot more resilient because of the network need that those assets provide.
When we look at the demand that we have currently for the assets that we have scheduled in 2023, it’s -- we’ve got backup. In other words, if ABC company doesn’t want the airplane, we can turn around and lease it to another company that’s farther down or later on the list. We’ve got that much demand out 2 to 3 years, in some cases, depending on the aircraft type. So we think we’ve got robust enough demand that should there be any type of softness on any individual airline’s part, then we’ve certainly got enough built-up demand that will be able to step in and take that.
I will also say that the way we’ve structured this model and the way that we deal with slots and conversion houses and deposits for slots and those types of things, at any point in time, if we believe that either the returns on a leasing basis or the demand of the market would change or shift, we can always put our foot on the brake and stop buying feedstock and stop converting airplanes, and then we’ll just be throwing off a lot of cash that we have -- that we could look to do other things with, return it to shareholders or invest in other things that may be in a more growth mode at that point in time.
So again, we’ve got a very flexible set of levers here to pull should the demand market change. But I want to be real clear on this. The market demand for leased freighters is as strong as it’s ever been. And when I look at all 3 aircraft types that we’re involved with now, the A321, the 767 and the A330, all 3 of them have very strong demand. And we -- and the ones that are out 2 years or 3 years, we check in with them regularly. A lot of them are the same ones that are taking airplanes next year or this year. And so -- and they’re all still -- if they could take more airplanes tomorrow, they would take them. So we’ve got a really strong demand outlook.
Mike Berger
I would also just add that we’ve either -- we’ve got our commitments to source aircraft in the market today, Chris, is extremely tight, meaning feedstock availability is -- has never been harder around the 767 specifically. We have secured or have the ability to secure it through deposits, enough aircraft to take us through 2024 in regards to our 767s, for example. And we’re fielding calls all the time from all those folks who are trying to purchase those aircraft from us.
So it just goes to the strength of the market in terms of what’s -- what we see across -- literally across the globe. And I think Rich made a great point. I’ll just reiterate it. The DHLs, the FedExes, the UPSs of the world, they’ve got global day and time commitments to make sure that their packages are being delivered. And to do that, they’ve got to fly confirmed schedules. And even if you look at their, meaning FedEx and UPS’s most recent results, you see strong double-digit growth, specifically in their international products, which means the cross-border aspect of e-commerce is still not only alive and well but growing really strong.
I made comments about the strength of e-commerce as it relates to growth. And there’s optimism specifically, when you look at economies like Brazil, which only has 5% e-commerce sales compared to total sales; India, under 10%; Vietnam, 6.5%; Mexico, 11%. So e-commerce as it relates to overall retail sales is still very much in the early days. And when you look at the growth estimates out to 2025, it’s still 24%, 25% of total retail. So the engine is still great as we look out over the next few years. And again, we’ve got everything in place with diversification in terms of conversion houses as well as feedstock to meet that demand from customers.
Quint Turner
Yes. Another metric comment, Chris, this is Quint. Just, for example, our cargo block hours that we -- our 2 primary airlines that serve the cargo customers, ABX and ATI flew -- were up about 13% for the first half compared to the first half last year, and for the quarter, up about 7%. And of course, the tax line and the combi flying, so we lump those together, Omni and ATI’s flying for their combi 75s, those are up 22% year-over-year in the first half and up about 13% in the second quarter over the prior year quarter.
So the big customers that fly these airplanes, you can see, are expanding. And that’s kind of the differentiator between some of the long-haul routes where you may be more sensitive, right, to recession and demand. The e-commerce-driven networks are still -- need the asset and have to serve those geographies in their network.
Rich Corrado
The last couple of comments because we’ve kind of made a lot of comments on this section is you asked about travel cost. And these aircraft that we’re leasing outside the country, which is the majority of the, if not all, the Airbus products going forward that we have in the order book, they’re just dry leases so we’re not operating them. We’re just tendering to the operator and the operator is going to fly them in the network that they fly.
The last comment I’ll make is there’s 2 sources of demand for freighters. There’s a growth demand and there’s a replacement demand, just like there are for all airplanes. And so when you look at the growth demand, we’ve kind of addressed that going forward. When you look at the replacement demand, it’s one of the key reasons we got involved with the A321 freighter. The A321 is a direct replacement for the 75. They stopped building 75s in, I think, 2005. And so there hasn’t been 1 built in 17 years.
And there’s -- I think it’s somewhere around a 15% to 20% fuel burn advantage in the A321 versus the 757. So when you look at all the ESG goals and all the ESG -- the carbon footprint and greenhouse gas emissions goals and -- that airlines are looking forward to in terms of reduction, that aircraft is going to play a great role in replacement and being a greener airplane for the segment of the business that it serves.
Chris Stathoulopoulos
Okay. Rich, I’ll throw one more your way. So Airfinance Journal just put out their annual report. It looks like CAM made it into the top 25 in terms of number of aircraft under management. Are you comfortable growing the fleet 10, 15 tails per year and kind of steady grinding up the ladder there? Would you consider potentially accelerating this as you look to grow that fleet number for 200 units and beyond?
Rich Corrado
Yes. No, it’s a great question. We’re -- I’ll tell you what, we’re really proud of the fact here that we’re the largest lessor of freighter aircraft in the world and we’re only adding to that leadership position. Prior, it was all 767s. Going forward, it’s going to be a blend of the 3 aircraft types. And if you look at our growth plan going forward, I mean, we’re going -- I think we did it in the mid-teens last year. We dropped down to 10 this year just in terms of the schedule of the conversions.
Next year, we’ve got 18 on the schedule. The year after that, in 2024, we got 25 on the schedule. And so we’re ramping up as we get into and we start to get into the A330, which we’ll start putting aircraft in, in September of 2023, and we’ve got 29 slots going out through 2026. And then you look at the 767 slots we have and the A321s, of course, we do our own conversions with our own MRO, PEMCO down in Tampa.
We will be ramping up, and we will be delivering more freighters to meet the goals of the customers that we serve. So we’re the leader now and we’re proud of that. And we’re looking forward to maintaining that leadership position and adding more value to our customers and more returns to our shareholders.
Operator
Our next question is from Mr. Galanti with Stifel.
Frank Galanti
I wanted to start off with pilot availability. And so you sort of called out a little bit just higher cost pressures in general. And given sort of headlines around a lack of pilots, more so on the passenger side, if you could talk about sort of any changes in pilot availability for ATSG? And if there’s sort of any concerns, given the desire to -- the growth mode that you’re currently in, are there any concerns over having that being a limiting factor going forward?
Rich Corrado
No, it’s a great question, Frank. Thank you. Yes, we’re not immune from the attrition that’s going on in the pilot force these days. It’s one of the things we refer to when we talk about cost pressures on the employee side. We planned on some attrition this year in the pilot ranks for all 3 airlines, so there was some in the plan. And so what that means is you plan on training people and bringing them in, and so the training cost is factored into your cost.
We have seen it be a little higher than the plan. For example, ATI planned on training 5 pilots per month and I think last month, they trained 8. And so what that means is we’re having to run larger training classes. We’re not having any problem attracting pilots. You read -- you probably read in some segments of the market, there is a problem attracting pilots. We haven’t seen that yet.
Based on where we are, we’re -- we’ve got midsized airlines. It’s a good career to come to ATI, ABX or Omni and be able to grow and go from a first officer to a captain quicker than if you went to a major. And so you can fly your own very large jet and be making higher income as a captain. So we’ve got a good opportunity for people.
So it has raised our cost a little bit. We are keeping up with the training and putting the -- a good example, we’re growing the aircraft we talked about at ATI for Amazon and in ABX for DHL. And we’ll have no problem getting the pilots in place for those growth assets that we’re going to see at the end of the third quarter and into the fourth quarter. So it has affected us. We are keeping up with it, and we’re -- it’s factored into our cost and our guidance for the rest of the year.
Frank Galanti
That’s helpful. And I sort of want to go back to the growth question, maybe from a little bit of a different angle. So looking sort of at the current growth that ATSG is experiencing, I guess, broader industry, the question is, is that -- what you’re experiencing, is that through the kind of just industry increased demand for airfreight? Or is there a component of sort of taking share from other lessors? Or even within businesses, is there more of a desire to lease rather than own on the margins?
Rich Corrado
Yes. I think it’s a good question. A couple of things. One is that the e-commerce growth engine started pre-pandemic. And so the pandemic did accelerate that growth over the 2.5-year period. And so -- and what it did is it brought a lot of new adopters to that buying platform that probably never would have gotten involved in that buying platform and juiced the demand up. And I’ve got people who buy online that never would have bought online. So there’s that demand that’s kind of been accelerated, but it was already in a much higher growth mode than your general air cargo mode.
And then you look at the growth for freighters. Why has the growth of freighter picked up? And I talked about before. Both on the replacement side, if you look at what occurred through that kind of accelerated demand, anybody would have -- anybody that -- people were pulling freighters out of the desert, C checking them, getting them ready and putting them up to fly, right? They were taking passenger seats out of larger jets and loading them up with cargo to fly to make up for the dearth in freighters that was out there.
So what you see now is part of the demand is kind of a rightsizing or a right allocation of what asset do I need on that lane. And is it a narrow-body? Is it a medium wide-body? Is it a larger aircraft? So there’s that level of demand that I think is kind of going on. You’ve got your 733 and your 734s that are now being replaced by 738s and A321s as an example. So you’ve got those -- that type of demand profile picking up.
But I think one of the other trends that we’ve seen and we’ve actually been the beneficiary of is passenger carriers that are now getting -- that are becoming combination carriers, that are getting into the cargo business. We announced last year an opportunity with Air Canada, where we acquired 2 767s from Air Canada. We converted them and we leased them back to Air Canada. And then we’re doing the same exact deal on the A321 basis with Vietnam Airways. We are acquiring 2 A321s from them. We’re converting them to freighters and we’re leasing them back to them.
So I think that’s kind of an interesting opportunity where some of these passenger carriers have seen the situation when they faced the pandemic where they had to pull down a number of resources but they could have stayed engaged on the cargo side more efficiently if they had freighters. And so they want to now get into the freighter market. And we’ve been the beneficiary of that, and we hope to be -- continue to be the beneficiary of that kind of new demand segment that we’ve seen in the market. I don’t know, Mike, if you’ve got any other comment.
Mike Berger
No, I’d just add a couple of things. And those Vietnam aircraft will be 2023 deliveries for us or in our 2023 order book. I just -- part of your question was around taking market share. And I think the one thing that I would just reiterate is that we’re really prideful in the due diligence that we do, who are our customers, to ensure that our customer base, number one, is credible and most importantly, as we’re deploying $30-plus million assets, that we’re going to -- we feel confident that we’re getting -- our customers can afford these things to make sure we’re going to be -- we’re going to receive our receivables, which are in great shape. Our receivables have never been better from a CAM perspective.
So it’s really important to us. We get calls all the time, inquiries, so to speak, about leasing folks freighters. So we’re very careful. If we get into younger airlines or start-up situations, we really flesh them out. We ask them to present us not only their financials but their business cases that they go to market. And when you’re in a leadership position that we are and as Rich mentioned, the world’s largest lessor of cargo freighters, we get a lot of inquiries from folks, and we want to make sure we’re doing business with the right folks around the world. So it’s really important to us.
Operator
Our next question comes from Eric Kulisch with FreightWaves.
Eric Kulisch
First time on one of these calls. I had a couple of questions. You talked a little bit about e-commerce being very strong for you. But I think e-commerce sales have dipped globally and in the U.S. this year, naturally. Are you seeing any change in the mix of your freight for your e-commerce freight?
Rich Corrado
Yes. So we don’t -- Eric, we don’t get visibility to necessarily what’s in the boxes and the mix of the freight. The only thing I could tell you is during the pandemic, the packages got and the airplanes got a lot heavier because there was hand sanitizer and cleaners and everything else, fluids going on the airplanes in as much as iPhones and stuff, package and styrofoam. So we don’t get visibility really to the mix of freight that goes on there.
But part of, I think, our discussion here has really been the distinction of demand for packages and the demand for freighters, right? So -- and one is derived certainly from the other. But there are other -- there are certainly other factors involved in the demand for freighters. One is replacement versus growth and the other one may be a rightsizing of the network.
I mean, one of the questions Frank asked in regard to -- about leasing versus buying freighters, one of the things that’s inherent in what we do is availability. So if you have the availability of a freighter when someone wants it or when they’re looking out in their fleet plan for 2 or 3 years, they can’t get a manufactured freighter from Boeing as an example. There are no available in that line.
And then we’ve always been proactive about getting slots for airplanes because for us, that’s something that’s a lower-risk proposition and we exercise our acquisition of feedstock around demand. So from that standpoint, I think one of the things that we’ve been able to do is have availability of assets ongoing.
Eric Kulisch
Let me ask you briefly. The Atlas Air yesterday, they had a big acquisition. They were taking -- going to be taken private and bought by investors. Wondering how you see that impacting any competition for you guys. And do you have any interest in expanding through any acquisitions?
Quint Turner
Yes. I mean, we -- Eric, this is Quint. We typically don’t comment on things like that. I mean, obviously, we’re a public company and it’s easy to see where we trade and so forth. We saw the news on Atlas and understand their shareholders will consider the merits of that and they’ll be looking at closing that deal. We have, on many calls, pointed out that there -- while there are some areas where we’ve competed with Atlas, the companies are quite different and there are differences in equipment type and where the focus is.
We’ve been, of course, heavily focused on the leasing angle, probably more -- a little more so than they have as a portion of our overall book of business. And they operate, of course, the long-haul big equipment, where we focus on the midsized freighters that serve the integrated network. So competition, they’re really -- while there’s some overlap, it’s not a lot.
Eric Kulisch
Got you. Okay, that’s good color. And then last question. Can you go into a little more detail on some of these supply chain issues that are impacting conversions? Is it labor shortages at either the suppliers or the assembly lines? Or is it products or actually materials and so forth that are being impacted? Or is it the shipping congestion?
Mike Berger
It’s a combination of really of everything. We’re seeing a shortage of demand in terms of parts and kits, materials, precious metals, et cetera. A lot of these kits are from China. So as China has gone through some of the COVID lockdowns, that’s caused delay from that perspective, which obviously is labor-related, et cetera. But I will tell you that some of the things that we’ve worked on to mitigate that is, for example, to have additional conversion slots with Boeing, which will start soon later this year and well into the next few years. So we’re diversifying ourselves in terms of where we’ll do our 767 conversions. We’ve got multiple MROs where we’re doing the 321 conversions as well, as well as the 330s will be done at multiple locations.
So we’re mitigating that by having multiple locations for the conversions in the upcoming year. And we’re already seeing some easing in regards to parts, supplies, materials, et cetera, like conversions. And like I said, it’s like we’ve said all along, it’s not demand that’s driving that, it’s really just the timing of it.
Operator
Thank you. And with that, I’ll turn the call back to Rich Corrado for any final remarks.
Rich Corrado
Thank you, Carmen. Thank you again to all of our employees who work hard every day to take care of our customers. Their efforts make it possible for us to deliver excellent returns for our shareholders. I hope you have a better understanding of what makes ATSG a unique investment in the transport space.
Midsized freighter aircraft will remain in strong demand over the next several years because e-commerce customers expect fulfillment that only a dedicated transport network can provide. Our leased aircraft assets order book and airlines will generate plenty of cash flow to fund our growth and share with our investors. Thank you all for your interest in ATSG.
Operator
And with that, we conclude today’s conference call. Thank you for participating, and you may now disconnect.
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Air Transport Services Group, Inc. (ATSG) CEO Rich Corrado on Q2 2022 Results - Earnings Call Transcript