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Air Transport Services Group Inc  (NASDAQ:ATSG)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q4 2018 Air Transport Services Group, Incorporated Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session.

(Operator Instructions)

Please note this conference is being recorded.

I'll now turn the call over to Mr. Joe Hete, President and CEO. Mr. Hete, you may begin.

Joe Hete -- President & Chief Executive Officer

Thank you, Adrian. Good morning, and welcome to our fourth quarter 2018 earnings conference call. With me today are, Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Operating Officer. We issued our earnings release yesterday after the market closed. It's on our website, atsginc.com. We will file our Form 10-K tomorrow.

I am very pleased to report that we ended 2018 with substantial increases in revenues and earnings on the strength of a solid fourth quarter. Our revenues increased 27% for the quarter and 15% for the year, excluding reimbursables. Our earnings, on an adjusted basis, were up 23% for the quarter and 42% for the year, largely due to the 10 additional aircraft we leased and improved results from our airlines. Our adjusted EBITDA for the quarter was $96 million or a record $312 million for the year. Those excellent results stem from revenue growth in each of our segments, a better than expected contribution from Omni Air and solid peak season service levels for our customers.

2019 is off to a great start as well. We expect to dry-lease 8 to 10 newly converted 767 freighters this year, including the five we will deploy with Amazon in the second half under the expanded and extended agreements we signed with them in December. We also expect overall stronger results from our ACMI segment with the addition of Omni Air in November, which brought passenger ACMI and charter capability via its fleet of 13 767 and 777 aircraft.

Quint is standing by to summarize our overall financial results for the fourth quarter and year. Rich will add a few words on the business units. And I'll close with some perspective on our outlook. Quint?

Quint Turner -- Chief Financial Officer

Thanks, Joe, and thanks to all of you on the call for joining us this morning. Once again, let me start by saying that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These factors include, but are not limited to, changes in market demand for our assets and services; our operating airlines' ability to maintain on-time service and control costs; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's trade 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, changes in general economic and/or industry-specific conditions; and other factors as contained from time to time in our filings with the SEC, including the Form 10-K we will file tomorrow.

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 reconciliations to GAAP measures, which are included in our earnings release and on our website.

Our consolidated results for the fourth quarter and full-year 2018 were evidence to the power of our complementary family of businesses, and the investments we're making to grow and broaden their capabilities. Our customer revenues were $280.8 million in the fourth quarter. We adopted Topic 606 on January 1, 2018, and now report certain revenues net of related expenses that are directly reimbursed by customers. After eliminating reimbursement revenues from 2017, our 2018 fourth quarter revenues increased 27% from the prior period. Full-year 2018 revenues increased 15%, to $892 million on the same basis.

Overall, our revenues increased due to additional aircraft leases, expanded CMI and logistics services for Amazon, higher aircraft maintenance and modification services, and passenger transportation services, primarily for the Defense Department, Omni Air's largest customer. We closed the Omni acquisition on November 9. So, the fourth quarter and year included 52 days of their contribution to our results.

On a GAAP basis, our earnings from continuing operations for both 2018 and 2017 were affected by several non-cash items. These include the full effect of changes in the fair market value of warrants we issued to Amazon, and a $59.9 million non-cash positive contribution in 2017 from the effect of the 2017 tax law on our deferred tax assets. Including those and other factors, GAAP earnings were a loss of $5.2 million or $0.09 per share for the quarter. That compares with earnings of $94.1 million or $1.11 per share diluted in fourth quarter 2017.

Our adjusted earnings exclude those non-cash tax benefits and the Amazon warrants, along with other items such as deal fees related to our Omni acquisition, and gains and losses from revaluations of our interest rate derivatives, all of which we referenced in the reconciliations to GAAP results in our earnings release. In the fourth quarter, our adjusted earnings were $24.1 million or $0.36 diluted versus $19.6 million, or $0.28 cents a year ago. For 2018, adjusted earnings increased to $1.25 per share from $0.89 cents in 2017.

Adjusted EBITDA from continuing operations in the fourth quarter was $96.2 million, up 19%. The improvement reflects contributions from additional 767 freighters CAM deployed during the quarter and nearly two months of contributions from Omni Air. 2018 capital spending was $293 million, down $4 million from 2017, but higher than the $280 million we projected on our third quarter earnings call. That 2018 total included $197 million to purchase eight 767s, plus related mod and spare engine costs.

In December, we paid a deposit toward the purchase of 20 767-300s from American Airlines, which will be delivered through 2021. We expect to acquire six of those 20 and begin to (inaudible) this year in addition to the five that were in conversion at the end of 2018. We converted and deployed ten cargo aircraft, nine 767s and one 737 in both 2018 and 2017. Besides CapEx, uses of our capital included $855.1 million to purchase Omni Air, and additional contributions to the joint venture with Precision, that is developing a passenger to freighter conversion program for the Airbus A321. Funding for these transactions came from ATSG's operating cash flow, plus proceeds from our senior credit agreement with our banks.

Balances at year-end under that credit facility included two unsubordinated term loans with a combined outstanding principal balance of $731 million and a revolving credit facility with a $475 million balance. Together with our $259 million in convertible notes, total debt principal outstanding was a bit under $1.5 billion at year end. The revolver has a capacity of $545 million, but also a feature that allows us to borrow an additional $400 million subject to the lender's consent. We currently expect to seek authorization to tap a portion of that resource later this year, as we acquire and convert more 767s for 2019 and 2020 deployments.

As a result of the increased debt level and higher interest rates, we do project 2019 interest expense to increase significantly from 2018 levels. We project full-year 2019 interest expense to increase by $48 million to $77 million, inclusive of approximately $12 million of non-cash amortization related to capitalized loan fees and the convertible note discount. Our year-end debt-to-EBITDA ratio was 3.4 times, as calculated under the terms of our secured credit agreement. The unsubordinated term loans and the revolving credit facility bear variable interest rates of approximately 4.7%. Our goal is to keep our debt ratio at or below 3.5 times this year.

As Joe mentioned earlier, we deepened our partnership with Amazon through extending and expanding our aircraft lease and operating agreements in December. We also agreed to issue them 14.8 million additional warrants, which, along with the warrant rights granted to them in 2016, could expand their potential ownership in ATSG to approximately 33%. These additional 14.8 million warrants are at a strike price of $21.53, and Amazon has, until January 2026, to exercise those warrants for cash or on a cashless net share basis.

We also agreed that should Amazon and ATSG agree on lease terms for up to 17 additional aircraft beyond the 10 already committed, we will issue them incremental warrants. Warrants for all of those additional aircraft would take their potential ownership stake to approximately 39.9%, if our Amazon lease fleet were to grow by 17 more to 47 aircraft. Any such future warrants after March would be priced at a 30 trading day average price based on the date of contractual commitment for leases. As a consequence of issuing Amazon additional warrant rights, ATSG will ask shareholders to authorize additional common shares at the Annual Meeting in May 2019.

Finally, I want to emphasize some points to consider as you think about ATSG's expenses and adjusted EPS in 2019. These include the elevated interest expense I mentioned earlier and higher depreciation and amortization expense after putting Omni on the balance sheet. We are projecting, for 2019, that our depreciation and amortization expense will be about $265 million, including a non-cash amortizing customer relationship intangible from the Omni deal of approximately $11 million.

Also, the $14.8 million of additional warrants I mentioned earlier will affect ATSG's adjusted share count. That share and impact will depend significantly on the movement in our traded share price throughout the year as we apply the treasury stock method to those additional warrants. For our internal planning purposes, we are currently assuming that we end 2019 with an adjusted share count of approximately 69 million.

Now, I'll turn it over to Rich Corrado for his operating review. Rich?

Rich Corrado -- Chief Operating Officer

Thanks, Quint. In 2018, the businesses of ATSG maintained a strong pace of freighter lease deployments, delivered continued strong service to our customers and expanded and extended our relationship with Amazon. As a result, we completed the year with strong growth in adjusted revenues and earnings, and our business segments reported good results overall. CAM's revenues grew by $19.4 million during 2018 as its base of externally leased aircraft increased by 8 to 59. Revenues from external customers rose $16.1 million to $156.5 million. Revenues from its airline affiliates, including Omni, rose $3.3 million to $72.4 million.

CAM added nine 767-300 freighter aircraft and one 737-400 freighter to its lease portfolio during the year. It also sold one 767-300 to a lease customer and retired one 767-200. The acquisition of Omni Air added 11 passenger aircraft to CAM's leased fleet, including two 767-200s, six 767-300s and three 777s. CAM earned $65.6 million in 2018, an increase of $4.1 million or 7%. Increased pre-tax earnings reflect nearly two months of lease revenue contribution from Omni's 11 passenger aircraft, as well as the 10 freighter aircraft placed into service in 2018, and were negatively impacted by $2.9 million of increased non-cash lease incentive amortization related to Amazon warrants.

CAM's fourth quarter earnings were down slightly from a year ago. Delayed freighter deployments and transitioning aircraft offset gains, plus higher interest and depreciation expense and lower maintenance revenues offset earnings gains from the 10 freighters added to the fleet during the year. The fourth quarter of 2018 also included $3.5 million of additional interest expense allocated to CAM, driven by the investment in Omni. CAM purchased eight 767-300 passenger aircraft for freighter conversion in 2018.

Turning to our ACMI Services segment. Total revenues increased 20% during 2018 to $548.8 million, net of revenues from reimbursable in 2017. Principal factors were additional aircraft operations for Amazon, a 5% annual increase in billable block hours, as well as Omni Air's contribution since we acquired it on November 9. Pre-tax earnings were $17.7 million during 2018, compared to $8.6 million for 2017. Those gains were offset in part by higher compensation for ATI's pilots, who ratified an amendment to their collective bargaining agreement with ATI in March 2018.

Fourth quarter revenues for ACMI Services increased by 52% to $193 million, net of 2017 revenues from reimbursed expenses. Pre-tax earnings were up 10% to $12.7 million. Billable block hours increased 4% for the fourth quarter. Fourth quarter hours were negatively affected by operating restrictions at airports near the California fires in November and December.

Our third segment, MRO Services, generated revenues of $207.5 million in 2018, up $2.1 million from 2017. External customer revenues increased to $11.1 million. Pre-tax earnings from MRO Services, before internal eliminations, decreased by $5.2 million to $14.5 million due mainly to a greater proportion of lower margin maintenance services with longer completion times. For the quarter, revenues from MRO Services increased 5%. Pre-tax earnings more than doubled to $6.4 million from $2.9 million for the same period a year ago. The increase reflects more support for ATSG airlines.

Total revenues for other activities decreased for the fourth quarter and full-year 2018. External customer revenues from this group, excluding reimbursables, decreased $3.1 million in 2018. In September 2018, the US Postal Service ended contracts with logistics services for support of five sort centers. The reduced revenues were offset partially by additional customer ground support agreements.

Pre-tax earnings from other activities increased by $3.5 million to $9.1 million in 2018 and by $300,000 to $600,000 for the fourth quarter. Improved earnings were a result of additional ground support services and improved results from West Atlantic, an airline affiliate accounted for under the equity method. We look forward to improved operating and financial performance for all of our businesses in 2019, as they deliver even better service to their customers.

That's a summary of our business unit performance in 2018.

I'll hand off to Joe for his recap and outlook comments.

Joe Hete -- President & Chief Executive Officer

Thanks, Rich. 2018 continued our trend of strong year-over-year improvement in our operating results, somewhat masked by the accounting rule changes and warrant valuation adjustments that make our steady progress less evident. Our double-digit percentage gains in adjusted revenues, earnings and EBITDA last year demonstrate the strength of our business model and the cash flow we can leverage to make both organic and strategic growth investments as we did in 2018.

We're starting off 2019 with a significant new airline affiliate in Omni Air, a secured pipeline of additional feedstock aircraft and a strong commitment to our shared future from Amazon. In December, Amazon selected us to support the next phase of its air network growth with a 10 freighter order and multi-year extensions of leases and operating support for today's 20 aircraft dedicated fleet. The extension of those 20 aircraft will include a step down in lease rates during the extension period.

Although cash lease rates will not change until the start of the extension period, the lease revenue recognized for them will be lower by $3 million in 2019, due to averaging the rent over the remaining full lease term. In total, we invested more than $1 billion last year to grow and diversify our business. We expanded into the ACMI passenger market to diversify and supplement that growth, even while our future in cargo is still very bright.

Omni Air is a number one outsource provider of dedicated passenger air service to the Defense Department, other government agencies and commercial customers. Rob Coretz, who joined our Board of Directors last week, built Omni as a leader in a niche of its own, ACMI and charter passenger service for major government organizations.

We expect Omni to continue to profitably apply its flexible, go anywhere, anytime capabilities to commercial as well as government customers, while generating strong and steady cash flow for our shareholders. Along with their growth potential, we value the revenue diversification that their public sector concentration provides and the fleet synergy possible as their 767 passenger aircraft may become feedstock for cargo conversion at the appropriate time in their life cycle.

At the same time, we are reinforcing our commitment to the mid-size freighter market under an agreement with Jetran. We will be purchasing 20 passenger 767-300s for conversion and freighter deployment over a three-year period as American Airlines retires them from passenger service. We are able to make commitments like this purchase and the Omni acquisition because we have maintained a strong balance sheet and waited patiently for the right opportunity. This was also key in starting our relationship with Amazon, first with a request for five freighters, crews and maintenance support to run an express network trial in 2015, and again, last fall, when they needed 10 more 767s on top of the 20 we have provided to-date.

The first five of those freighters and the crews that will fly them will be ready to go later this year. We anticipate related 2019 crew training and deployment costs of about $1.5 million. We have used our financial capacity and management focus to acquire assets and extend relationships that answer most of the key questions you have been asking us for more than a year. That includes our recent plug-in acquisition of TriFactor, the engineering and design firm we acquired two weeks ago, that add those capabilities to our material handling service offerings. Many of the customers require material handling services from our logistics group for the same customers who utilize our aircraft leasing in their operating capabilities.

During 2019, the feedstock 767s we will acquire, convert and deploy, will again put us within the range of another 10 freighter year, including a five we will deploy with Amazon in the second half, and three or more we will lease to a major global network integrator. Many of you are aware that the agreement underlying our long-term relationship with DHL are due to expire at the end of March. Our discussions are pointing toward additional multi-year extensions for 14 of the 16 767s they currently lease and a similar extension of the related CMI operating agreement. We expect those talks to conclude before the end of March.

Our marketing team is working to redeploy the two 767-200s that DHL is returning. We're budgeting to spend another $400 million in 2019 CapEx principally to purchase and modify more Boeing 767s, but also to cover the increase in engines and capitalized airframe maintenance we will incur from our overall fleet growth, including the Omni fleet. It will be our responsibility, along with our leadership teams, to turn the assets we are acquiring into strong cash generators that exceed our targeted investment returns. To that end, we projected our adjusted EBITDA, this year, will exceed $445 million, which is a 43% increase from the $312 million we generated last year.

We are well-provisioned with the right resources and targeting the right opportunities, not just for 2019, but for 2020 and beyond. I'll be updating you on our progress at our Annual Meeting in May, and for some of you, as we go back on the road with our story of growth and financial strength this spring.

And now, Adrienne, we're ready for the first question.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

And our first question comes from Kevin Sterling from Seaport Global. Your line is open.

Kevin Sterling -- Seaport Global Securities -- Analyst

Thank you, operator. Good morning, Joe, Quint and Rich.

Joe Hete -- President & Chief Executive Officer

Good morning, Kevin.

Quint Turner -- Chief Financial Officer

Good morning, Kevin.

Kevin Sterling -- Seaport Global Securities -- Analyst

Congrats on another great quarter and 2019 outlook.

Joe Hete -- President & Chief Executive Officer

Thank you.

Kevin Sterling -- Seaport Global Securities -- Analyst

And along those lines with 2019, thank you, guys, for all the additional guidance you've given us with share count, interest expense and D&A. And as we think about your EBITDA for 2019 to exceed $445 million, and it does seem like it's definitely back-end loaded as you take delivery of the planes and further ramp with Amazon. How should we think about EBITDA percentage for the back half of the year, say the last two quarters. Is it 60%, 70% of your EBITDA generation coming in the back half of the year? Just to help us think about as we model throughout the year, if you don't mind. Maybe, just give us a little bit of color.

Quint Turner -- Chief Financial Officer

Yeah. Kevin, this is Quint. You're right that it is backloaded, as we say, with the aircraft coming on predominantly in the second half. That's the big driver there. Perhaps not as backloaded as you might have -- as your were suggesting there. That has to do -- Omni has some impact on that as well in terms of when their -- how their distribution works. I would say that the second half will contain approximately 55% of our total EBITDA for the year. So, it's kind of a 45-55 split, perhaps not as backloaded as you might think.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. That's helpful. Thank you, Quint. And then, Joe, thank you for the update with DHL, and it sounds like those talks are progressing nicely. How should we think about -- I know you've done the ATI labor contract, and how should we think about -- how is it progressing with your other union partner, the Teamsters, and getting into a new labor agreement with them?

Joe Hete -- President & Chief Executive Officer

Obviously, Kevin, it's not progressing as well as we would like it to. We're still having discussions under the auspices of the National Mediation Board. Hopefully, we'll be able to get a deal sometime this year. I wouldn't project that is being in the first part of the year. I think we are next scheduled to meet sometime in May, I believe, is the next scheduled session. So, if we do come to an agreement, the impact would be in the latter half of the year, and we have not built any of that into our guidance at this point in time.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. Thank you. Is it possible to quantify the impact of the California wildfires on your operations? I know you said it impacted some of the flying you did with Amazon. Is it possible to quantify that?

Joe Hete -- President & Chief Executive Officer

Kevin, we -- I would say that we're talking probably -- it's certainly less than $1 million, sort of somewhere between $0.5 million and $1 million, call it.

Kevin Sterling -- Seaport Global Securities -- Analyst

In terms of EBITDA or is that revenue? Or...

Joe Hete -- President & Chief Executive Officer

Yeah, in terms of EBITDA. Obviously, most of the expenses are freighters and crews.

Quint Turner -- Chief Financial Officer

Pretty much -- pretty much both.

Joe Hete -- President & Chief Executive Officer

At that point, yeah.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. All right. And you guys did a great job at the end of 2018, getting those 20 planes from American. How should we think about potential feedstock availability this year or next year? New customers come to you and would like some aircraft. How does the -- how does the feedstock -- how does the feedstock situation look today?

Joe Hete -- President & Chief Executive Officer

Well, if you look, we've had five aircraft, I think, in conversion at the end of the year. They will come out. A couple of those are dedicated to Amazon at this point in time. The American fleet is mostly backloaded for the year. There's a couple in the first quarter, one in the second or third quarter, and then, the rest of them are in the fourth. So, they're pretty heavily backloaded from that standpoint. Outside of that, we're not doing a whole heck of a lot of looking at this point in time since we've got, call it, 20 in the queue. But we're always keeping our eye out for something may pop up that may make sense for us to acquire to fulfill a customer requirement.

Rich Corrado -- Chief Operating Officer

This is Rich. In terms -- I think Joe, more or less, addressed what we have and what our needs are at this point in time. But as far as what's out there today, there is nothing large like the American buy that we just made, which we strongly prefer to buy fleet. There are onesies, twosies out there that are coming available, and there is several bidders going after each lot that comes available.

Kevin Sterling -- Seaport Global Securities -- Analyst

Got you. Okay. Thanks a lot. And that's all I had today. And Richard, cannot get on the phone. Congrats to you. Patriots have won the Super Bowl. Hope Joe and Quint don't kill me for saying that. But...

Joe Hete -- President & Chief Executive Officer

You had to bring that up.

Kevin Sterling -- Seaport Global Securities -- Analyst

I'm sorry.

Joe Hete -- President & Chief Executive Officer

Yes, just following the red socks. So, that's -- that was a good year.

Kevin Sterling -- Seaport Global Securities -- Analyst

Well. Good. Well. Take care, guys. Thank you for your time today.

Joe Hete -- President & Chief Executive Officer

Yes, Kevin. Yep.

Operator

And our next question from Jack Atkins with Stephens. Your line is open.

Jack Atkins -- Stephens Insurance -- Analyst

Hey, guys. Good morning. Thanks for the time.

Joe Hete -- President & Chief Executive Officer

Good morning, Jack.

Quint Turner -- Chief Financial Officer

Good morning, Jack.

Rich Corrado -- Chief Operating Officer

Good morning, Jack.

Jack Atkins -- Stephens Insurance -- Analyst

So, Rich, if I could start with you, obviously, just with the data points we've been hearing over the last, call it, four, five months from folks in the international trade sort of arena, you're seeing some strains in terms of global growth out there, beginning to emerge in Europe and Asia. Also, the IATA statistics have begun to sort of moderate somewhat. I know you guys don't -- the freight that you guys move doesn't necessarily get captured in the IATA statistics generally. So, just sort of curious, if you could update us on what your customers are telling us about their outlook for growth over the next, call it, 12 to 24 months? And how would you sort of rate the demand for 767 assets? Because it sounds like there's still multiple bidders for every aircraft. There's still lot of demand for your assets.

Rich Corrado -- Chief Operating Officer

Yeah. Jack, thanks for the question. I mean the market that we play in, really, is the integrator space, e-commerce and regional flying. And those markets don't tend to be impacted as much by global trade and the efforts of large lanes, Far East to the US as an example. And so, those markets today are very hard. I mean we've got demand all over the globe right now. We've got demand in Europe. We've got demand in the Middle East. We've got demand in the Far East, in the US. We wouldn't have gone out and bought 20 airplanes that we didn't think we'd be able to deploy them as they became available. So, we're very bullish on the growth in the segment that we're in.

If you look at the e-commerce statistics at this point, going out through 2024, they're projecting about a 60% increase in e-commerce purchasing and a larger penetration of general retail into e-commerce. With the growth of mobile commerce, phones and tablets, and those types of things, it's really growing the purchasing of e-commerce exponentially compared to your general freight or even your integrator business. If you look at the IATA statistics, I think they're predicting about 3% growth in general cargo. But if you look at the integrator growth on the international sector, they probably averaged over 7% CAGR for the last five years. So, they've outgrown general cargo, and will continue to outgrow general cargo. So, if you look at the segments where this aircraft deployed into, that market is very strong and projected to be very strong throughout the next five years.

Jack Atkins -- Stephens Insurance -- Analyst

Okay. That's great. That's great to hear. Thank you for that color, Rich. And then, Joe, just going back to your comments on the TriFactor acquisition, could you just expand a little bit on the terms of how TriFactor fits into your existing portfolio of logistic services? And what are the potential opportunities from a revenue synergy perspective as you leverage those capabilities over the next couple of years?

Joe Hete -- President & Chief Executive Officer

Jack, good question. TriFactor is a company we work with for a number of years now. They do small design -- MAT design work, and we've done some installation work of the things that they've designed. And that was one piece of MHE Group, Material Handling Equipment Group, that we lacked, which was the ability to design systems.

Yeah, relatively small company overall, but one of the constraints they've had over time is that they didn't have capital to be able to bid on larger jobs. And so, we think the synergies between us and them is going to be, we bring the capital to the table, they bring the expertise in terms of the design work, and then, ultimately, the leverage that to grow that piece of the business from small jobs to much larger ones.

Material handling piece of our business has grown quite a bit. I mean it's not a huge bottom line mover at this point in time. But when you look at our customer base, we basically do work primarily on the maintenance side and against small installations for UPS, FedEx, Amazon, Target and a whole host of others in terms of being able to pick up one telephone and make a call and get your equipment serviced, no matter where it is in the country.

Jack Atkins -- Stephens Insurance -- Analyst

Okay, that's great. And then, Quint, I guess, a question for you. On the $400 million in CapEx for this year, can you help us break that down between growth and maintenance CapEx? I'm just trying to think about how much of that relates to the bulk purchase of the aircraft from American? And I guess, we're just trying to figure out how much of that $400 million in CapEx is tied to aircraft placements for this year? And if any of that sort of pulling forward CapEx into this year for future growth in the out-years, if that question makes sense?

Quint Turner -- Chief Financial Officer

Sure. Yeah, of course. As Joe said, we had five aircraft in process at the end of this year. We've said 8 to 10 are going on during 2019. And we'll have five in conversion at the end of 2019. So, you are acquiring tails that you won't see go into service until 2020.

Jack Atkins -- Stephens Insurance -- Analyst

Yeah.

Quint Turner -- Chief Financial Officer

In terms of the American fleet, as it happens, I think we've said that we expect to take six of the 20 take delivery of those this year. If you think about the CapEx of $400 million, and we're putting 8 to 10 online as they move through the cycle, we say roughly, what, $25 million, a copy all in, that may have ticked up somewhat, right, with the competition for feedstock out there. So, if you figure that's more like, call it a $28-ish million (ph) kind of number, you're at -- for 10 airplanes, you're at roughly $280 million. All-in, you've got maintenance CapEx with Omni, right? In the past, we've said just ATSG is $60 million, $70 million of maintenance CapEx. So, with Omni, you're more like $100 million all-in. And so, that gets you to kind of a $380-ish million (ph) kind of number. And then, you've got another $20 million for some of your other business requirements in the group.

Jack Atkins -- Stephens Insurance -- Analyst

Okay, that makes sense. Last question, also for you, Quint. I mean can you help us think about operating cash flow? And how that should trend in 2019? When you're talking about in excess of $445 million in EBITDA, can you kind of walk us down to the operating cash flow expectation that that would underpin?

Quint Turner -- Chief Financial Officer

Yeah, I think, Jack, in the discussion of debt leverage, we said we had a goal to stay under 3.5, but we're 3.4 roughly as measured under our credit agreement currently.

Kevin Sterling -- Seaport Global Securities -- Analyst

Right.

Quint Turner -- Chief Financial Officer

So, what we're saying is that we're in a growth mode. I think Rich talked about all the -- in terms of the market, what the demand profile looks like, still very strong. And as you can see, we're investing in that growth with the American fleet, etcetera. We don't anticipate our leverage to change much during the year. And at times, during the year, may slightly tick up, but again, we have that goal of kind of maintaining a steady 3.5 type leverage number.

You think about the EBITDA of $445 million, but we also have cash interest expense, and we talked about the elevated interest expense in our earlier remarks. Now, a portion of that interest cost that hits the P&L is non-cash. It's bank fees that have been paid and will be amortized over the life of the loan. But when you put the interest with the $400 million of cash CapEx. It's pretty much a push in terms of the net cash, and that's why our debt leverage is fairly steady.

Jack Atkins -- Stephens Insurance -- Analyst

Okay. That's great. Thanks again for the time.

Joe Hete -- President & Chief Executive Officer

Thanks, Jack.

Quint Turner -- Chief Financial Officer

Thanks, Jack.

Operator

Your next question comes from Helane Becker from Cowen Company. Your line is open.

Tyler Seidman -- Cowen and Company -- Analyst

Hey, guys. This is actually Tyler on for Helane. So, thanks for the color on the Amazon deal and the lower lease fronts. That was very helpful. But just to kind of dig a little deeper into the EBITDA guide for the year, it looks like Omni is about $130 million for 2019 from an EBITDA standpoint. So, that implies that each -- so, that implies that your organic EBITDA is growing kind of low-single digits. And I'm just wondering, is this all due to the structure of the Amazon deal? Or is there other factors kind of playing into that?

Quint Turner -- Chief Financial Officer

Yeah. Tyler, it's Quint. There is a factor, certainly is the extension of the Amazon deal, particularly the lease agreements for the 20 aircraft that we have. As you know, we've got multi-year extensions on those 12 for two years, and eight of the 300s were for three years. And as its customary, when you have customers that are giving you very long lease terms, it's not uncommon to see some rent reduction in the extension periods. And while that doesn't affect cash flow perhaps until you get to the extension period, under the revenue recognition rules, you average that over the remaining lease term. So, we're just a little north of $3 million would be the annual impact to our revenue from those extensions.

We also mentioned in there that, of course, we're currently working to renew and extend agreements with DHL. Their aircraft demand, which -- we had 16 aircraft, for example, at the end of the year with them. It's going to go down by two, it looks like, and those are domestic placements that we also do CMI flying for that will go from 10 airplanes in the domestic network. The other is being in the Middle East, down to eight. So, we'll have two aircraft that we've got to work to redeploy. So, they'll come out of revenue service for a period of time, and we'll have to place those aircraft with new customers. So, those are some, I guess, headwinds in terms of the base ATSG EBITDA piece.

Tyler Seidman -- Cowen and Company -- Analyst

Got you. And then, one more follow-up just on the DHL commentary. It sounds like you guys are pretty confident you could place these assets in 2019. Is that fair to assume that within -- in like 2H '19, you'll be able to place these two Boeing 767s with customers?

Quint Turner -- Chief Financial Officer

We do feel confident that we will be able to place those aircraft. One of the two, I believe, has -- it will require a little maintenance first. But otherwise, we're very confident that we can get those two redeployed.

Tyler Seidman -- Cowen and Company -- Analyst

Thank you, guys.

Operator

Your next question comes from David Ross from Stifel. Your line is open.

David Ross -- Stifel Financial Corporation -- Analyst

Yes. Good morning, gentlemen.

Joe Hete -- President & Chief Executive Officer

Good Morning, David.

David Ross -- Stifel Financial Corporation -- Analyst

I guess, first question is on the 8 to 10 planes or the five to five, really, that you're adding outside of Amazon this year. Are those expected to be CAM-only, or ACMI, or some other version?

Joe Hete -- President & Chief Executive Officer

No, they are expected to be dry-lease only.

David Ross -- Stifel Financial Corporation -- Analyst

Okay. And the margin profile at ACMI post the Omni deal, what should we be looking for there, Quint, as we move through this year? Certainly, it's taking a step up.

Quint Turner -- Chief Financial Officer

The margin profile with Omni -- you're saying the Omni impact on the margin profile?

David Ross -- Stifel Financial Corporation -- Analyst

Yeah.

Quint Turner -- Chief Financial Officer

Was that your question, Dave?

David Ross -- Stifel Financial Corporation -- Analyst

Correct.

Quint Turner -- Chief Financial Officer

Well. Certainly, yeah. Omni has -- will certainly improve the ACMI Services segment results, and I think you even saw some impact from that in the fourth quarter. So, you're right that that will have a very, very positive impact on their results. And that's where we're putting the segment. Now, we took a portion because the aircraft that Omni owns, the 11 they own, are owned by CAM now, and leased into Omni. A portion of their EBITDA and earnings impact will also go to CAM as we separated the assets based on our structure of putting the assets in CAM and have the operations be in the ACMI Services segment. We did bifurcate the assets from the operating piece.

David Ross -- Stifel Financial Corporation -- Analyst

Yeah. We're just trying to figure out if 4Q is just seasonally strong or if there was an impact of Omni that's going to take the margins permanently higher in that segment?

Quint Turner -- Chief Financial Officer

I think Omni's impact is going to be a recurring impact.

David Ross -- Stifel Financial Corporation -- Analyst

Okay. And then, on the unallocated interest expense piece, that was up significantly, I know debt was taken on for the Omni deal. Was some of that not allocated to the segments?

Quint Turner -- Chief Financial Officer

Again, CAM bears most of the allocation. I think Rich mentioned that CAM's interest cost was up $3.5 million, and that's the impact of that. There is some of that that is going to the ACMI piece, and then, the goodwill as well. But as you know, CAM gets the lion's share of the allocation.

David Ross -- Stifel Financial Corporation -- Analyst

Yeah, I guess our question was more why is there a much bigger portion that's not allocated? It went from $700,000 to about $4.2 million in unallocated interest expense year-over-year in the quarter.

Quint Turner -- Chief Financial Officer

That piece is related to -- because with the purchase of Omni, we leave that as unallocated. That's related more to the airline portion of our acquisition. The portion that's related to the assets that went into CAM are going into CAM. And so, what you're seeing there is the remaining impact which we're leaving down on the unallocated section.

David Ross -- Stifel Financial Corporation -- Analyst

Yeah. I just don't know why that wouldn't be in ACMI if it's the airline portion?

Quint Turner -- Chief Financial Officer

We just -- we have not historically burdened the ACMI Services segment with interest cost.

David Ross -- Stifel Financial Corporation -- Analyst

Okay. Thank you very much.

Joe Hete -- President & Chief Executive Officer

Thanks, Dave.

Operator

And your next question comes from Adam Ritzer from Pressprich. Your line is open.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Hey, guys. Thanks a lot for taking my call. I just had a couple of things. Most of my questions were answered. Can you give us the pro forma numbers for Q4, if you would have owned Omni for the full quarter instead of just the two months?

Quint Turner -- Chief Financial Officer

Adam, we are not -- we typically -- and there are reasons why we don't break out individual subsidiary results, subsidiary companies. We talk in terms of the segments.

Joe Hete -- President & Chief Executive Officer

If you want to dig a little deeper, Adam, you can go to the 8-K that we filed. That gives you a little bit of a view into what the Omni piece would generate.

Quint Turner -- Chief Financial Officer

Exactly. And the 10-K we intend to publish tomorrow will also have some stuff in it as well. But we don't separately talk to the individual subsidiaries.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Okay. Yeah. Maybe, just getting like a round number, if it would have been 100 something, but no big deal, I can wait to go through the filings. You went through all your free cash numbers, etcetera, so my other question is, for 2020, if -- does -- your current purchase deployment model you gave out for next year, does that get you to the 10 minimum for Amazon? Or do you need more new planes in 2020?

Joe Hete -- President & Chief Executive Officer

Are you talking about what the acquisition in American airplanes, Adam?

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Yeah.

Joe Hete -- President & Chief Executive Officer

Yeah. We've got the feedstock available for that piece of it. Remember, there's 20 in total. We'll take six this year. Five of them will be in modification at the end of the year. And then, whatever we take in -- that's a fluid schedule somewhat with American in terms of when we get airplanes from them. And then, the balance would be purchased in 2021.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Okay. Can you like -- but does that include any additional to get to the 17 more that they have an option on?

Joe Hete -- President & Chief Executive Officer

Again, the 17 are options, and they've got basically for the term of the entire agreement to do that. So, there's a lot of runway there for them to be able to exercise calling the options on the 17 to get the additional warrants. So, there's really no definitive time frame on that. As you know, we put in the agreement that if they exercise any of the options signed in definitive agreements, they can get the $21 warrant price, if they do that by the end of March. And then, thereafter, if they exercise any of those options for aircraft, then they would be at the 30-day VWAP at the time they execute a definitive agreement.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Okay. So, Amazon has flexibility, and you also have flexibility with the 20 purchased from American. Is that the best way to look at it?

Joe Hete -- President & Chief Executive Officer

Yeah. That's a fair statement.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Okay. So, they want more, you go to American, say, hey, we need 5 or 10 more in 2020 or 2021, you could kind of play both sides against the middle, so it kind of averages out where you're not sitting with a bunch of empty aircraft waiting for Amazon?

Joe Hete -- President & Chief Executive Officer

No, it doesn't work that way. The aircraft are committed to and whatever American's release date comes up, we have to buy the aircraft whether we have a customer forward or not.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Okay. So, you're committed to the 20, even if Amazon may not want 17 more?

Joe Hete -- President & Chief Executive Officer

That is correct.

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Got it. Okay. That's all I had. Thanks very much.

Joe Hete -- President & Chief Executive Officer

Yeah. Thanks, Adam.

Operator

And our next question comes from Chris Stathoulopoulos from SIG. Your line is open.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Morning. Thanks for taking my question. Your guidance for the operating fleet this year is a 100 aircraft. But given the jet trend deal, how should we think about the fleet size in 2020 and 2021?

Joe Hete -- President & Chief Executive Officer

Again, as we said, Chris, the number of aircraft that we would take delivery of from American next year is a little bit fluid because of their release schedule. But it could be anywhere from 6 to 10 that we would take from them next year. And then, whatever hasn't been delivered at that point, falls out into 2021.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Okay. Just moving to labor, if you do revise the deal with ABX this year, what are some of the things you can do to help offset the increase, whether it's passing some of it along to customers or productivity? And are you renegotiating deals with a related step-up in mind?

Joe Hete -- President & Chief Executive Officer

In terms of -- well, if you look at the Amazon deal, I mean basically, that's been for seven years going forward. We're currently working on the DHL piece, which is the other primary customer of ABX. And outside of that, the only other flying to do is for AeroMax, which is one aircraft which is renewed annually from a contract standpoint. And then, they do some for the military, which military contract comes up basically the new fiscal year will be October 1.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Okay. And then, final question, the three to five non-Amazon aircraft that you're expecting to place this year. Where are you in terms of placing these? And how many are close to securing deals versus still being actively marketing? Thank you.

Joe Hete -- President & Chief Executive Officer

As I noted in my remarks, right now, to release three of the aircraft are designated for a major global integrator out there, which we cannot name. So, we're pretty much well down the path for three of the aircraft on top of the five with Amazon, so that gives you eight. And then, there are two more in play, which we think we'll be able to secure contracts for in the not-too-distant future.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from Steve O'Hara for Sidoti. Your line is open.

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

Yeah. Hi. Good morning. How are you?

Joe Hete -- President & Chief Executive Officer

Good morning, Steve.

Quint Turner -- Chief Financial Officer

Morning, Steve.

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

Good morning. Just curious, if you could talk about your bandwidth to add aircraft yearly, I think it's around ten or has been around ten. I mean has that -- I am not saying you necessarily will, but I mean has that increased with the scale of the fleet or anything like that? And is there the ability to add much more than that at some point as you continue to grow? Thank you.

Joe Hete -- President & Chief Executive Officer

Thanks, Steve. The -- there's two constraints on adding aircraft. One is feedstock and the other one is capacity for conversion. And so, at ten aircraft, we're pretty comfortable that we can meet both those needs for the coming three years, call it. The 767 feedstock, there's probably about 200 of those left in the market, right now, that will come out over the next, call it, seven to ten years. So, we see that over that period, we will see the 767 get a little tighter to achieve. That's one of the reasons why we've invested in the A321 conversion, and to get the A321 out there. We're hoping to have it out by first quarter of 2020. And then, that will grow from there. So, we look at this as we'll be investing and growing in the A321 at the same time that we're growing the 767-300s. So, you're going to look at two situations of feedstock and two situations of conversion capacity, which will only enhance our ability to grow both lines.

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

Okay. And then, one more, just on the Omni deal, and maybe, the accounting there. And I apologize if you covered this, but in terms of the fuel expenses on the income statement now on the-in the fourth quarter, I assume the big jump was Omni. Is there a difference in the accounting there with, maybe, their ACMI flying or CMI flying, relative to what ATSG currently uses? Or is that the same across the Board and just they have higher fuel expense and it's not a passthrough? Thanks.

Quint Turner -- Chief Financial Officer

Yeah. Thanks, Steve. Good question. The rule change at 606 that we adopted in the beginning of 2018, that had rules in it that resulted in, for example, the fuel that we purchase as sort of an agent for Amazon being netted with the revenues, the expenses. But similar to our own combi flying, the structure of the contracts with the government, the military would not qualify for netting. And so, you're absolutely right that the fuel that's purchased by Omni is not netted out, and it will show up therefore, in the expenses and the revenue. So, it's going to be a bit of a difference, certainly, between how we treat, for example, the fuel we buy for Amazon.

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

Okay. And I believe there's a -- is there a margin on the fuel as well?

Quint Turner -- Chief Financial Officer

No. It's little to nothing probably. It's -- the margin is on the other operating costs.

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

Yeah. Okay. All right. Thank you very much.

Operator

And your next question comes from Chris Stathoulopoulos from SIG. Your line is open.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Thanks for taking my follow-up. With the Omni acquisition and the expanded Amazon agreement, could you give us a sense of what your revenue mix looks like? Back in October, you put up a slide deck with the Omni call, where you had some pro forma stats, I think Omni was around 33%. But could you just give us a sense of what that looks like now? Thank you.

Quint Turner -- Chief Financial Officer

Yeah, of course. Chris, when we put that out, we didn't have the Amazon additional growth baked in because we haven't finalized those agreements. But I don't know that it will change all that significantly because of the backloading of the additional five aircraft. And as you'll recall, we've said the largest customer is likely to be the DoD and other governmental flying, with Amazon certainly being second. I think we had the DoD at roughly a third of our revenues when we referred to that earlier last year.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Okay. And then, just last one on the new Amazon, the five for this year, five for next year. What's the average age of those aircraft? And then, when those are in play, what would be the overall average age for the entire fleet you're operating for them? Thanks.

Quint Turner -- Chief Financial Officer

Yeah. The aircraft that we're putting in are early to mid-'90s, and that's consistent with the existing fleet.

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Okay. Thank you.

Operator

And that concludes our question-and-answer session. I'll turn the call back over to Joe Hete for closing remarks.

Joe Hete -- President & Chief Executive Officer

Thank you, Adrienne. We tend to focus a lot of attention on these calls on aircraft, dollars and rates, and our plans to grow ATSG and make it stronger. Last Saturday, we all received a stark reminder that what really makes our business special are the everything happen and the kinship that develops from our shared experience with others throughout aviation. All of us at ATSG and our families send our deepest condolences to the families and coworkers of those aboard Flight 3591, and our appreciation to first responders in Houston and others working to understand how this event could have happened. For our part, we will honor their service by keeping people first in everything we do.

Thank you and have a quality day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 58 minutes

Call participants:

Joe Hete -- President & Chief Executive Officer

Quint Turner -- Chief Financial Officer

Rich Corrado -- Chief Operating Officer

Kevin Sterling -- Seaport Global Securities -- Analyst

Jack Atkins -- Stephens Insurance -- Analyst

Tyler Seidman -- Cowen and Company -- Analyst

David Ross -- Stifel Financial Corporation -- Analyst

Adam Ritzer -- R.W. Pressprich & Company -- Analyst

Christopher Stathoulopoulos -- Susquehanna International Group, LLP -- Analyst

Stephen O'Hara -- Sidoti & Company, LLC -- Analyst

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