ATSG confirms Amazon freighter network deal

Air Transport Services Group (ATSG) has announced agreements with Amazon Fulfillment Services, an affiliate of Amazon.com, to operate an air cargo network of 20 Boeing freighters to serve Amazon customers in the US.“Since last summer, we have been working closely with Amazon to demonstrate that a dedicated, fully customised air cargo network can be a strong supplement to existing transportation and distribution resources,” said Joe Hete, President and chief executive of ATSG.“We are excited to serve Amazon customers by providing additional air cargo capacity and logistics support to ensure great shipping speeds for customers.”The commercial agreements will include the leasing of a minimum of 20 Boeing 767 freighter aircraft to Amazon Fulfillment Services, Inc. by ATSG’s Cargo Aircraft Management (CAM), the operation of the aircraft by ATSG’s airlines, ABX Air and Air Transport International, and gateway and logistics services provided by ATSG’s LGSTX Services."If the network is successful, we hope there will be additional expansion opportunities there," ATSG said.Amazon senior vice president of worldwide operations and customer service Dave Clark said: “We offer Earth’s largest selection, great prices and ultra-fast delivery promises to a growing group of Prime members and we’re excited to supplement our existing delivery network with a great new provider, ATSG, by adding 20 planes to ensure air cargo capacity to support one and two-day delivery for customers."The duration of the 20 leases will be five to seven years; the agreement covering operation of the aircraft will be for five years.In a conference call shortly after the announcement, ATSG said that by the end of this year, Amazon will have leased 15 B767 freighters. This includes 12 767-200s and three 767-300s.In 2017, Amazon will lease five more 767-300s.Five 200s are deployed in the existing Amazon network, four of the aircraft will be returns from existing dry leases and three from other ACMI operations. For the remainder, CAM already owns or has contracts to purchase eight 767-300s.The 200s are leased under a five-year contract and the 300s are under seven year contracts.The 767-300 aircraft that need to be purchased will be funded through liquidity on the balance sheet and through available cash flow.The crew, maintenance and insurance (CMI) agreement includes a pre-defined monthly fee per aircraft plus a variable component tied to block hours and aircraft cycles operated. Pricing is subject to annual escalations.When asked if current customer DHL, which would be a potential service provider to Amazon, had been informed of the deal with Amazon, ATSG said: "We advised them what opportunities are there and our position is that there are potentially some synergy opportunities between the two companies with us in the middle."This is another opportunity for us to provide better service and more competitive costs for all of our customers."In conjunction with the commercial agreements, ATSG also has agreed to grant Amazon warrants to acquire over a five-year period up to 19.9% of ATSG’s common shares at $9.73 per share, based on the closing price of ATSG common shares on February 9, 2016.The aircraft lessor said it wasn't unusual for Amazon to invest in long-term partners.It said: "The other party [Amazon] views this as an important relationship and that interest is not a-typical of how they have approached other partnerships that they also felt made sense for them on a more long-term basis."All that had to be factored into our view of whether this is a real positive deal for our shareholders and we believe it is accretive from a cash flow standpoint to our existing shareholder base and certainly changes the dynamic of our revenue structure in terms of diversification - Amazon is of course a fast-growing company."The warrants will be issued in three tranches; the first on the contract effective date will cover 12.8m warrants, some to be vested immediately with the remainder over the course of the placement of 767-300s.The second tranche will be issued in around two years and the final tranche will occur in around four and a half years.When Amazon's shareholding reaches 10% it will have the option to nominate a non-voting board member.

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