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Air Transport Services Group Inc (NASDAQ:ATSG)
Q2 2019 Earnings Call
Aug 6, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Second Quarter 2019 Air Transport Services Group, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. [Operator Instructions]. Please note this conference is being recorded.

And I will now turn it over to Joe Hete, President and CEO. Mr. Hete, you may begin.

Joseph C. Hete -- President and Chief Executive Officer

Thank you, Brandon. Good morning, and welcome to our second quarter 2019 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Operating Officer. We issued our earnings release yesterday, after the market closed. It's on our website, atsginc.com. We will file our Form 10-Q later this week.

Halfway through 2019, we're meeting our targets and working toward a successful second half, as focused as ever on growing markets such as e-commerce infrastructure and transport for our US troops and their supplies. Here are the second quarter headlines. Compared with the second quarter last year, our revenues were up 64%. Our adjusted earnings were up 10% to $18.7 million or $0.27 per share, and our adjusted EBITDA rose 50% to $104.8 million. Our airline operations are expanding, and our leased aircraft fleet is growing.

Our air network services for the Department of Defense and Amazon are up versus the prior year, and we have 16 more aircraft in our operating fleet than a year ago. Our relationship with DHL is now governed by an amended agreement signed in April that extends our 16-year role in its US and Mideast networks for at least three more years, and we added more capacity under our senior credit facility to ensure we can deliver the aircraft and services our customers want. Our strong start and projection of a strong peak season for the air networks we serve give me confidence that we will achieve our full-year adjusted EBITDA outlook of $450 million.

Quint is ready to review our consolidated results and changes in our balance sheet. Rich will cover our segment highlights, and I'll close with comments on our outlook. Quint?

Quint O. Turner -- Chief Financial Officer

Thanks, Joe. Good morning to all of you on the call right now and to those who will listen on replay. As always, I'll start by saying that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These factors include, but are not limited to, changes in market demand for our assets and services; our operating 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 traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; our ability to remain in compliance with our agreements with key customers and lenders; and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q we will file this week.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted 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. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.

As Joe said, our second quarter results compare very favorably with our results from a year ago, and our adjusted earnings rose 10%, thanks to contributions from the freighters and passenger aircraft we've added to CAM's leasing portfolio. On a consolidated basis, second quarter revenues were $335 million, up $131 million or 64% from the prior year. Our acquisition of Omni Air last November was the principal factor in that gain, as it was in the first quarter. The Department of Defense is ATSG's largest customer, representing 36% of our revenues for the second quarter. 20% of revenues came from Amazon and 15% from DHL.

Once again, our GAAP results reflect the unrealized effect of quarterly revaluations of several financial instruments. These include non-cash effects of the warrants we have issued to Amazon, based primarily on changes in ATSG's stock price from quarter-to-quarter and the effects of revaluing interest rate hedges on our bank debt. Second quarter earnings from continuing operations were a negative $26.6 million on a GAAP basis versus positive $24.5 million a year ago. On a diluted basis, GAAP earnings per share for the second quarter were negative $0.45 versus positive $0.21 a year ago. That $0.66 variance primarily reflects a $0.52 after-tax loss from warrant and derivative revaluation versus a $0.01 gain a year ago. Other factors included a $0.10 increase in losses from affiliates, primarily reflecting our share of Airbus 321 development costs via our joint venture with Precision.

Higher non-cash charges for the non-service related costs of retiree benefit plans also were a headwind against GAAP earnings versus the prior year. The adjusted earnings, EPS and adjusted EBITDA we report exclude those items. As a result, our adjusted EPS for the second quarter was $0.27 versus $0.25 a year ago. On the same basis, our adjusted EBITDA increased by 50% to $105 million.

Operating expenses increased $117 million or 65% with significant Omni-related increases in fuel, depreciation and amortization and salaries and benefits. Compensation costs also increased because of higher headcount at ATI to support expanded CMI flying in the second half. D&A, overall, increased 52%, and maintenance increased 8% for the quarter. Interest expense increased $11 million to $17 million, which includes the effect of higher borrowings to acquire Omni, our larger capex budget and higher rates. Our capital spending for the second quarter was $125 million and $217 million for the first half. We acquired three Boeing 767 passenger aircraft during the quarter, including one we held out to freighter conversion dedicated to Omni Air in response to increased demand for passenger charter flying in the second half.

We are maintaining our projection for full year capex spend of about $475 million, mostly to acquire and modify more 767s for deployment through next year. Joe will talk more about that shortly. Also, we added $100 million of credit capacity when we amended our credit facility in May to continue our fleet development program. With our growing EBITDA, we expect to maintain a comfortable debt-to-EBITDA ratio under 3.5 times through the balance of the year.

That's the top-level summary of our financial results for the quarter. Rich is ready to share some segment highlights. Rich?

Rich Corrado -- Chief Operating Officer

Thanks, Quint, and good morning, everybody. As Joe said, our principal aircraft leasing and airline operations are off to a solid start this year, and even better results are anticipated in the second half. ACMI Services on a pre-tax basis earned $1 million in the second quarter, up $0.5 million from a year ago. That performance was, of course, led by Omni's contributions which began last November. Pretax earnings at ACMI Services were lower than the strong first quarter results, due to the timing of maintenance events, including engines, and fewer block hours for the DoD in the second quarter.

During the second quarter, we incurred approximately $3 million of ramp-up costs for expanded second half flight operations for Amazon, and we expect approximately $4 million more of those costs in Q3 as well. We do anticipate sequential improvement in earnings for ACMI Services in the third quarter and significantly improved segment earnings in the fourth quarter when ramp-up will be complete and scheduled airframe maintenance is light.

On the hiring front, we have hired over 70 new pilots as well as technicians and other employees to fully support CMI and ACMI operations this year and allow us to continue to provide exceptional service to our customers. We amended the collective bargaining agreement with our ATI pilots a year ago with new wage and benefits packages, but we remain in contract discussions with our ABX Air pilots.

CAM, our leasing business, had a good quarter. Revenues, net of warrant-related lease incentives, increased 27% due mainly to five more converted 767 freighters in service versus a year ago. CAM also had a full first half of revenues from the 11 passenger aircraft that are acquired from Omni and leased back to them. CAM's pre-tax earnings rose 8% to $17 million from the prior year quarter. That's net of $5 million more in allocated interest expense and $8.2 million more for depreciation than a year ago, much of it Omni related.

CAM had 56 cargo aircraft leased to external customers during the second quarter, two more than the prior year. 11 767s were awaiting or undergoing conversion to freighters at June 30, including three passenger 767s acquired for conversion during the second quarter of 2019. One of them was deployed in passenger service with Omni at the end of July in response to strong second half demand for charter passenger lift. We have seen increased interest from airlines who operate the 737 MAX and do believe that its continued grounding has created additional charter opportunity. We expect all of our aircraft to be fully deployed during peak season, but the steps required to get all of our aircraft ready for peak will include readying the 767s in staging now for redeployment.

Results of our maintenance and conversion businesses, previously reported via the MRO services segment, are once again included in other activities. Our consolidated revenues with Omni mean they are no longer large enough to require reporting as a separate segment. Pretax earnings for other activities, net of inter-company transactions, are up $1 million to $4 million versus the prior year. External maintenance results remain on track, partly offsetting the loss of our sort center management services for the US Postal Service last fall.

Amazon notified us during the second quarter that they will be insourcing the management of eight gateway facilities where we supported independent contract employees. The transition of our responsibilities to Amazon at these facilities will be completed this month. We have also gained some logistics work, including managing and staffing Amazon's gateway operation in Charlotte and the aircraft fueling and maintenance responsibilities for material handling and ground equipment in Wilmington. Amazon now operates a regional air hub here, currently involving eight of our 767 aircraft. The core competencies of our logistics group make it a virtual Swiss Army knife, which can add value for the customers who lease and operate our aircraft.

Our service remains best in class for our largest customers, and we get consistent positive feedback regarding not only our service quality, but also our ability to adapt to rapidly changing needs and respond with predictive solutions to improve service. Our customer-first service culture spans all of our service providers, and we feel that this differentiation, particularly in the express and e-commerce segment, will continue to reward us with growth going forward.

That completes the summary of our operations for the quarter. And with that, I'll turn it back over to Joe.

Joseph C. Hete -- President and Chief Executive Officer

Thanks, Rich. The fact all of our business units are performing well thus far and from an operating standpoint are mostly on track with our plans for the year. In April, we lengthened our six-year -- 16-year relationship with DHL by extending leases and operating agreements with them for 11 aircraft for another three years. Three of our other 767-300s are already leased to DHL for even longer terms.

When we announced our agreement with Amazon in December for 10 more leased 767s and lease extensions for the 20 we had already leased them, we expect to deploy five each in the second half of 2019 and 2020. At Amazon's request, we have changed that schedule to lease them six 767s this year and four more in 2020. In late June, CAM deployed the first of the six. The second one entered service in early July, and the third is due later this month. The three others will be in service by peak season. We also told you in May that we have agreed to lease four 767s to UPS in 2019 and potentially another in 2020, all under six-year terms. In addition, we'll be supporting UPS during peak with additional 767 capacity under short-term arrangements as we have done in past years.

Quick note that our projected capex spend for this year remains at $475 million, which is up $182 million from 2018. A portion of that is for increased capitalized maintenance cost for Omni aircraft, but most of it is to expand CAM's portfolio of 767 leased aircraft. I expect that we will be able to place a minimum of 10 more 767s for the full-year 2020. That includes four more 767s already committed to Amazon and the one we expect to lease to UPS next year.

We're in good shape for feedstock. We arranged with Jetran last year to purchase 20 767s, most of them formally in service with American Airlines. We have purchased five of our Jetran allotment so far. Last week, we contracted to purchase three other 767s from ANA with one to be acquired in 2020. We're continuing to make progress with our JV partner toward FAA approval of an STC for the Airbus A321-200 passenger-to-freighter conversion. We continue to expect that approval by the middle of next year and anticipate investing $6 million more in the second half of this year into the venture. CAM continues to assess the market for A321 feedstock in anticipation of STC approval in production, possibly beginning late next year.

Like those of you who analyze the air cargo space, we're still getting plenty of calls asking about the effect on ATSG and the current global trade disputes. Our response remains unchanged. We don't sell space. Our midsize freighters fly in time-definite regional networks, not in the long-haul lanes moving manufactured goods, and we get the bulk of our cash flow and return on investment from long-term aircraft leases with much of that lease demand coming from customers expanding their e-commerce and express networks.

Government entities now comprise more than 40% of our total revenue, which even further immunizes us from the effects of trade disruptions and economic cycles. In short, we do not base any significant exposure from tariffs or other trade negotiations. That doesn't mean we can't be impacted by other items, including customer changes in their network flight operations, including the DoD. Also, smaller regional air cargo operators sometimes struggle when markets shift, but we have built a business which can generate sustainable, growing cash flows over the long term, not just when the market conditions are stable. That differentiates us from our competitors, and we'll continue to create shareholder value.

That concludes our prepared remarks, Brandon. We're ready for the first question.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from Stephens, we have Jack Atkins. Please go ahead.

Jack Atkins -- Stephens -- Analyst

Hey guys, good morning and congratulations on a great quarter here.

Joseph C. Hete -- President and Chief Executive Officer

Thank you.

Rich Corrado -- Chief Operating Officer

Thanks, Jack.

Jack Atkins -- Stephens -- Analyst

So Rich, let me, if I could, start off with a question for you and just kind of dovetailing on Joe's comments there at the end of his prepared remarks, but could you just maybe talk about what you're seeing and hearing from customers with regard to interest in incremental aircraft leases from here? Obviously, we saw Amazon pulling an aircraft forward into 2019 and UPS likely wanting another plane for 2020.

Could you just talk about what you're seeing and hearing generally in the marketplace? And has anything changed in the tone of your customers over the last three to six months? I mean, I think that's clearly a concern for folks. And from what we're seeing in your business, that's not having an impact but would just be curious if you're picking up on any changes in tone.

Rich Corrado -- Chief Operating Officer

No, Jack. In fact, we see the market as for -- what we do is very strong in all geographies within which we currently lease aircraft. If you look at the United States, we've already talked about what we're deploying this year. We've got a significant portfolio already committed for next year, and then we've got demand, talking to existing customers and new customers in the Far East. We're talking to customers in the Middle East.

The only place that shows a little bit of weakness is Europe. But even there, there are carriers looking for aircraft. So again, if you think about the market that we even talked about this a lot over the years, and that is, we fly these airplanes in regional markets, and we fly for express carriers and companies that provide e-commerce fulfillment. And those markets are going very strong. Look at UPS' second quarter results. They have 30% growth in their express business. 30% growth, as large as they are, is extremely significant. So we see the market as very strong. We're bullish on the market, and we've acquired some more feedstock this year. We think we'll have no problem deploying all the aircraft that we're going to produce next year going forward.

Jack Atkins -- Stephens -- Analyst

Okay. That's very encouraging. And I guess, just kind of following up on your comment there on sort of the market. I mean when we think about Amazon, who's obviously a major customer, speeding up their supply chain and going from two-day prime to one-day prime, that obviously has ripple effects across the rest of the market. And as you guys think about the potential market opportunity, I don't know how you want to slice it and dice it, but particularly within the domestic market for domestic express capacity over the next five to seven years, to me, it seems like there's quite a long runway there, but I just would be curious to get your take on how you see the market developing over the next several years, because that doesn't seem like the need for express capacity is doing anything but going up.

Rich Corrado -- Chief Operating Officer

No. Again, it's a good observation, Jack. If you look at the growth, again, of UPS, you look at the growth of Amazon and you look at the penetration of e-commerce since the retail segment of the United States, as an example, it's probably 12% to 13%. That's it. And you look at the retail environment that's struggling, you still see a lot of closures of brick-and-mortar stores with that business transitioning over to online.

So all those signals and all of the things that you read about, we see on the aircraft front. We're hearing from customers. We wouldn't have thought two years ago that we would be leasing airplanes to UPS, but here we are. And so trying to keep up with this growth, trying to get enough assets going forward, the customers that need 767s, A321s in the future, we're very bullish on the market.

Jack Atkins -- Stephens -- Analyst

Okay. That's great. And just last one for me, and I'll jump back in queue. But I guess this one's for Quint. Quint, when we think about capex needs looking out into 2020, and I know you guys are, sure, still formulating your budget for next year or just beginning that process, so I'm not looking for formal guidance. But as we sort of think about the $475 million this year, the plan, I think, is to convert and put into service 10 planes next year, I guess how should we be thinking about the capex needs of the business, just maybe if you want to put brackets on it or just sort of a rough ballpark? Next year, if the plan is to convert and place 10 planes into service, what would the capex requirements for that be -- for the business be next year under that scenario?

Quint O. Turner -- Chief Financial Officer

Well, Jack, again, as you noted, we're projecting in terms of a deployment plan a very similar year to what we're seeing this year. And it -- we will enter the year with, I think, 11 aircraft in mod that we already own the airframes, so we've got to complete those. But we will -- we do anticipate taking some more of the ex-American fleet next year in terms of additional airframes. And so I think it will be still a pretty significant capex year in 2020, down somewhat certainly, because we've been -- in terms of filling some of the orders, including the UPS order, we've been pretty aggressive about our acquisitions of airframes this year. So I would expect a lower number, but it won't -- will be north of -- certainly north of $300 million next year, well north of that, closer to probably $400 million as just a placeholder for now. But we'll, of course, give you updated guidance on that as we get further along in the year.

Jack Atkins -- Stephens -- Analyst

Okay. No. That's helpful. But I mean you've been north -- close to $400 million, which still imply some pretty nice free cash flow generation next year, and that's just kind of what I wanted to get some more color on. So that's helpful. Thanks again for the time, guys. Really appreciate it.

Quint O. Turner -- Chief Financial Officer

Sure. Thanks, Jack.

Joseph C. Hete -- President and Chief Executive Officer

Thanks, Jack.

Operator

From Stifel, we have David Ross. Please go ahead.

David Ross -- Stifel -- Analyst

Good morning, gentlemen.

Quint O. Turner -- Chief Financial Officer

Hey, Dave.

Joseph C. Hete -- President and Chief Executive Officer

Hi, Dave.

David Ross -- Stifel -- Analyst

As you think about the plane additions going forward, the call for 10 more next year doesn't factor in any A321s, but you said that there's a possibility of, I guess, the certificate is approved that they could be entering the fleet as early as the second half of next year. Is that correct?

Joseph C. Hete -- President and Chief Executive Officer

Yes, Dave. I mean the -- right now, the target is to have the STC approved by the end of the second quarter of next year. Production would start off relatively slow in terms of gearing up multiple lines to produce the converted freighters, and of course, then there's the feedstock question. With the issues with the 737 MAX, if that continues to go down the rails further than what it already has, that's certainly going to keep some of the potential feedstock tied up. And then of course, right now, it's keeping feedstock prices pretty high. But we would expect potential acquisitions of feedstock aircraft by the latter part of next year, unlikely that we would have any converted into service at that point, but certainly, we'd be looking to do some acquisitions of the feedstock and get that program started.

David Ross -- Stifel -- Analyst

And would they mainly be converted in Tampa?

Joseph C. Hete -- President and Chief Executive Officer

We're looking at that as a go-to option at this point in time. We've got folks down there meeting today. It's been factored today and tomorrow, just to review what the potential is to set up multiple lines down there. So that's certainly high on the list.

David Ross -- Stifel -- Analyst

And when you think about the plane type versus the 767 model that's prevalent in e-commerce today, is that -- I guess do you think about it incrementally? Or is it a competition with the 767 for those customers who are on certain routes, where they're thinking about either/or?

Joseph C. Hete -- President and Chief Executive Officer

No. That would not be a competitor to the 767. We look at it on two fronts. Obviously, the reason we like the airplane is just because of the cubic capacity associated with it. It's essentially equivalent to a 757, give or take 1% or 2% of cubic capacity, but at significantly lower operating costs. And when you look at the potential marketplace out there, if you just say, well, OK, let's assume for a moment there's not any growth that would require those assets, just look at the number of 757 freighters that are in the marketplace today between FedEx, UPS, DHL and a couple of others, I mean, you're talking about well over 200 aircraft of 757 type that these would be replacements for. So anything that you would get from a pure growth standpoint would be additive to that, so we see it as a very strong market. It's not dissimilar to when we jumped into the 767 way back in the late '90s and as an ideal candidate for the express market, and now that same thing applies, that same process, idea applies to the 321 for the e-commerce and express markets.

David Ross -- Stifel -- Analyst

And then, Quint, on the capex side, how much would you consider the capex to be replacement capex, not typical maintenance capex and not growth capex, but any planes that are maybe coming out of service and you replace them with a new plane for a long-term contract, or is that minimal right now?

Quint O. Turner -- Chief Financial Officer

Yes. It's fairly minimal. I mean there could be as many as a couple airplanes that we elect. And keep in mind, Dave, when we take an aircraft out, and we've really only taken, I think, the one 767-200 freighter out so far, it's an elective thing. I mean we do it based upon the opportunities that are in front of us, so there's nothing that requires us to put the airplane out of service. But it may be that the demand for the larger 300, causes us to say, hey, it's a better investment rather than maybe do some maintenance on the 200 to go ahead and take it out of service, cannibalize engines and other parts and then invest in the 300s, which, of course, carry with them a higher EBITDA production, higher lease rates. So it's not even replacement. It's not a one-for-one, because you're getting an asset back that has a higher cash-generating potential.

David Ross -- Stifel -- Analyst

And then when you look at the 2020, is there any need to replace much of the fleet or is it still humming along, and all that capex is pretty much going to be for growth?

Quint O. Turner -- Chief Financial Officer

Again, it's elective. But I would say over the next couple of years, you may see two or three 200s that we elect to, as I've said, invest in a higher-production 300 asset and bring them down. But that would -- I just, sort of a estimate, but that would be, I guess, a placeholder.

David Ross -- Stifel -- Analyst

All right. Thank you very much.

Quint O. Turner -- Chief Financial Officer

Thanks, Dave.

Operator

From Cowen & Company, we have Helane Becker. Please go ahead.

Conor Cunningham -- Cowen & Company -- Analyst

Hey, guys. It's actually Conor Cunningham on for Helane. Appreciate the comments on the trade dispute. Your results and guidance certainly suggest that you're insulated from all the issues there, but I just wanted to come at it from a different angle. Maybe you can talk about what surprised you as a result of the trade dispute. It actually seems like you might be benefiting from shifting trade flows. So, just interested on your thoughts there.

Quint O. Turner -- Chief Financial Officer

We really haven't seen -- I guess, it's really hard to tell what benefit we're seeing from it, because the type of flying that we do is network flying. And so if there's more packages in the plane, the planes get higher utilization as a result and the routes that we're flying. We haven't been asked on the -- we have very few charter resources available, and they tend to be not available over consistent periods because of the way we fly. So haven't seen much. I have heard anecdotally just things that come into the charter desk, where tariffs and things that have popped up in the US, on seafood and some other things, have resulted in Canadian routes picking up more volume going to China and to other parts of the world. So there are some things that are changing a little bit, but it doesn't really come into play with our business.

Conor Cunningham -- Cowen & Company -- Analyst

Okay. And then just on the 10 aircraft next year. So as you said already, five of them which are currently or likely spoken for. I think in the past, you've talked about like 12 to 14 being able to induct by 12 to 14 aircraft annually depending on conversion slots. Can you just see what -- can you just speak to like what your customers might need to see to be closer toward like the 14, 15 range next year in the market?

Quint O. Turner -- Chief Financial Officer

Yes. So the five are not lightly committed, they're under agreement, so those are under agreement for deployment for next year. And when we talked about the 12 to 14, we were talking about the feedstock we have and the potential slots that we could get to allow us to deliver that many aircraft. A question we got last quarter was how many -- what's the most you could deliver in 2020, and that's the answer that we've provided.

We believe, based on the pipeline and the customers that we're talking to, we'll have no problem deploying the additional five. And as we said, we believe there's an upside there, potential depending on what the market looks like. So we're -- again, we look at the demands being very strong. To be halfway through 2019 and have half of our 2020 fleet already deployed, I think is a good statement of where the market sits right now.

Conor Cunningham -- Cowen & Company -- Analyst

Yes. Okay, and then I think you mentioned in the prepared remarks that you're talking to new customers in the Far East. I'm just curious on maybe you can revive some makeup of what they are. Are they traditional express companies or are you seeing more demand on the e-commerce -- from the e-commerce players? Thanks, again.

Quint O. Turner -- Chief Financial Officer

Good question. They happen to be -- a couple of them fly express networks, and a couple of them fly for other companies that have express networks. So it's the same type of flying that we do, but it's in geographies that -- where we don't have operating authority, but where our assets, represent a good economic platform through which to leverage the deliveries. The -- you look at companies like DHL, DHL has a large contracted base around the globe, and they have a lot of different operators that fly for that. So we currently lease to one in Malaysia that flies for DHL, and they're also looking at a growth profile as well. That's Raya Airways in Malaysia.

Conor Cunningham -- Cowen & Company -- Analyst

Okay. Do you actually think that there's -- what's the probability that you think that they move forward on these contracts? Do you think is it more favorable than not or -- just curious. Thanks.

Quint O. Turner -- Chief Financial Officer

Well, like I said, very favorable on deploying our assets. Where we deploy those will be where we can get the best return on the asset, so -- and it's great to have choices in terms of customers.

Conor Cunningham -- Cowen & Company -- Analyst

Okay, appreciate it.

Joseph C. Hete -- President and Chief Executive Officer

Thanks, Conor.

Operator

From Susquehanna, we have Chris Stathoulopoulos. Please go ahead.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Good morning.

Joseph C. Hete -- President and Chief Executive Officer

Hey, Chris.

Chris Stathoulopoulos -- Susquehanna -- Analyst

I was wondering if you could give us any additional color on the MAX grounding and the opportunity that Rich mentioned in his prepared remarks?

Rich Corrado -- Chief Operating Officer

Well, I think everybody pretty much knows the airlines that are impacted by the MAX grounding, it's a matter of what we have in the way of available capacity through Omni with their -- seeing as they've focused on the passenger market. We did, as we noted in our remarks, take one of the American aircraft and delivered to Omni as a growth asset, so they can employ in that kind of replacement lift. But right now, of course, nobody's going to commit to anything that's a real long term. Generally, you're talking about three to six-month contracts to replace their grounded 737s.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And in your release, you talked about not having or you suggest that you don't have a lot of exposure to payload-sensitive business models, which I look at as charter, but I don't think you've ever really sized up what your exposure might be to the charter market or shorter-term leases.

Rich Corrado -- Chief Operating Officer

We don't do much charter, because we don't have consistent assets available. If we do charter, it's a one-off, fly from here to Cambodia with -- and then try to get a load coming back, not two or three-month assignment or we don't put up airplanes on a scheduled basis. We don't sell block space. When we have extra aircraft, in fact, we usually stage it as a spare in one of our express networks to enhance service. And usually, those aircraft get used by the companies that we're staging them for, and we get additional revenue on the aircraft that way.

We think that's a much better deployment of that asset in terms of supporting our larger customers such as DHL and Amazon and getting incremental revenue in that way versus having assets in the commercial charter market.

Joseph C. Hete -- President and Chief Executive Officer

Yes. Chris, if you look at it from a pure ACMI perspective, we have four 757s that we fly on an ACMI basis with DHL. We have one that's with another customer on the West Coast, and then we have a couple that are tied into the military. Outside of that, everything else is either a part of the dry lease with the CMI or just a pure dry lease, so our exposure is virtually nil.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then last one. If you could you give us an update on labor talks with ABX Air and if you're seeing any signs of labor disruption similar to what a competitor recently pointed out. Thank you.

Joseph C. Hete -- President and Chief Executive Officer

No, as a credit to the guys at ABX, even though we're going through a protracted negotiating period, they continue to move the aircraft. We're not seeing any kind of game playing or increase in sick calls, fatigue calls, mechanical issues, anything of that nature. They're doing what they've always done, which is move the aircraft on time. And for all intents and purposes, they are the best in class out of our airlines in terms of the cargo sector.

Right now, we're scheduled to go back in mediation in September. Hopefully, we'll continue to make some progress. We did a little bit the last time around. Sides have been working back and forth, the exchanging ideas. So hopefully, we'll see some progress on that front. And of course, as you know, we have both ATI and Omni which already have collective bargaining agreements in place.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Thank you.

Joseph C. Hete -- President and Chief Executive Officer

Thank, Chris.

Operator

From Seaport Global, we have Kevin Sterling. Please go ahead.

Kevin Sterling -- Seaport Global -- Analyst

Good morning, Joe, Quint and Rich.

Joseph C. Hete -- President and Chief Executive Officer

Hey, Kevin.

Quint O. Turner -- Chief Financial Officer

Good morning, Kevin.

Rich Corrado -- Chief Operating Officer

Good morning, Kevin.

Kevin Sterling -- Seaport Global -- Analyst

Hey, congrats on a really nice quarter.

Quint O. Turner -- Chief Financial Officer

Thank you.

Kevin Sterling -- Seaport Global -- Analyst

And I'm going to apologize up-front because, just because I always have phone issues. So if I ask a question that you've already been answered, please just tell me. As we think about -- and, Quint, this is probably for you. As I think about your EBITDA guidance for 2019, it implies roughly, call it, $230 million, $232 million of EBITDA for the back half of this year. And it sounds like Q4 is going to be stronger than Q3 because of heavier second-half flight schedules. But for modeling purposes, Quint, how should we think about that breakdown? I'm not looking for specific dollar figures, but is 60% of that EBITDA in Q4 and 40% in Q3 or 55% and 45%? Can you help us just for modeling purposes, just to make sure we're on the same page?

Quint O. Turner -- Chief Financial Officer

Yes, Kevin. Thanks for the question. I think if you look at Q3, and keep in mind we've got -- as we've said, our asset additions are coming skewed toward the latter half, and of course fourth quarter always has some peak for cargo in it, I would think about Q3 as -- if you look at our Q1, which was a strong quarter, and I think we did -- went a little over $113 million in adjusted EBITDA.

Now we have said that we expect some continued ramp-up costs in the third quarter, right? And I think we've estimated around $4 million. So if you think of that first quarter and then later on, had it had those ramp-up costs, you're just a bit below the $110 million level. That's kind of where we see third quarter. I mean -- and of course, fourth quarter is -- makes up the difference, and you can sort of see what the relationship is. You're right. We have quite about $230 million or so in the back half.

Kevin Sterling -- Seaport Global -- Analyst

Okay. Thank you so much. That's very, very helpful. And with your military flying with Omni, while down sequentially, I assume it looks like it was in line with your expectations. How should we think about military flying for Q3 and Q4? Do you have some visibility there?

Quint O. Turner -- Chief Financial Officer

Well, if you look at Omni, Q3, hopefully, would be a little bit stronger than what the second quarter wasn't, but Q4 is their light quarter. So when you think about how their business model works, on the cargo side, Q4 is always a peak. From a military standpoint, it's probably their lowest quarter of the year. But if you look at it sequentially from our military business, we were down about 700 hours from the first quarter, so we're down about 9%. If you look at it on a year-over-year basis, second quarter of last year to second quarter this year, we were actually in total, not just Omni, but also counting the cargo side, we were up about 4% on total military flying. Now there is some mix issues in there depending upon on the pact side of the equation as to whether you're flying with Omni a 777 or 767, but the numbers still are pretty strong year-over-year.

Kevin Sterling -- Seaport Global -- Analyst

Got you. Yeah, no, thank you very much. And last question here. And Joe, assuming you get the FAA certification for the Airbus A321 converted to freighter in mid-2020, when do you think we could see that aircraft possibly in your fleet? Is 2021 realistic? And are you beginning to get some customer indications or some interest from customers for this type of aircraft in 2020?

Joseph C. Hete -- President and Chief Executive Officer

Yes. I think in terms of being in our fleet, Kevin, it'd probably be 2021 would be the earliest in terms of the aircraft actually being available for operating purposes. But I think if you look in terms of any significant contribution, it would probably be out in the 2022 time frame. From a customer perspective, yes, I mean, the folks at Precision that are doing the marketing side of the equation are talking to a lot of people out there. There's a lot of interest in the aircraft. They said it's got ideal characteristics for the market where it is today with the lack of density, call it, in the e-commerce segment.

And of course, the operating costs compared with 757 are significantly less. So it's -- I think it's -- we're going to be well positioned with that aircraft type. The alternative to it would be a 737-800, but that 737-800 is about 25% less cubes than the 321. So if you're looking at something that replaces an existing 737-400, for example, the 321 is ideal from a growth standpoint as well as replacement for the 757. So we're pretty excited about it.

Kevin Sterling -- Seaport Global -- Analyst

Yeah, OK. Great. Thanks for your time today.

Joseph C. Hete -- President and Chief Executive Officer

Thanks, Kevin.

Quint O. Turner -- Chief Financial Officer

Thanks, Kevin.

Operator

[Operator Instructions] And from VA, we have Howard Rosencrans. Please go ahead.

Howard Rosencrans -- Value Advisory -- Analyst

Yes, hi, guys. Thank you. I don't want to get too lost in minutiae. I just want to make sure -- although I'm certainly baffled by the stock before and after, so maybe I'm missing something. You made some sort of comment about -- I just want -- the Amazon in terms of moving back and moving forward, fleet deliveries, and you mentioned something, I believe, about Amazon doing some insourcing and then -- which I guess I had some minutiae negative, and then you were going to add some logistics for them, so maybe just a touch more color to the extent you can provide on those items.

Rich Corrado -- Chief Operating Officer

Sure, Howard. On the moving forward and back, it's -- recall that the commitment from Amazon was 10 airplanes, and the initial thought structure of that was for five to be delivered in 2019 and five to be delivered in 2020. What's changed on that is we'll be delivering six in 2019 and four in 2020. So that's the -- how the aircraft are flying. Its still 10 airplanes, but they moved one forward due to their volume needs.

On the gateway logistics side, we had agreements -- still have agreements till the end of the month to handle eight of Amazon's gateways, but we do that on a contracted basis. So we manage the process, but we hire independent contractors actually do the loading and unloading, and we do it on a cost-plus basis. And so those eight locations are going to be insourced by Amazon, and we're losing that business. Now it's a very small margin, so it's not a significant amount of business that we're losing. That's being replaced by -- you won't see any impact because -- in the numbers because it's being replaced by other business that will roughly be about the same.

And that business is here and some of it's here in Wilmington, where we're doing some of the ground service equipment. We're doing the maintenance on that. We're doing the deice for them in the winter, and we're doing the material handling equipment maintenance for the large sort building that they have operating right now. In addition to that, we opened a new gateway that we're handling directly in other to hiring our own employees to do the sortation, the loading and unloading and loading of the airplane. And those two business segments of growth will offset the loss of the gateway business that they're in-sourcing.

Howard Rosencrans -- Value Advisory -- Analyst

The fact that you're moving the Amazon to six and four, so you're taking one more this year and one less next year, does that increase the associated start-up costs? So you mentioned that you absorbed three in Q3 and will absorb four in -- excuse me, three in Q2 and will absorb four in Q3. Is that heightened by the move-up, the pull forward of one aircraft for Amazon?

Rich Corrado -- Chief Operating Officer

Yes. So the aircraft we already had in our plan to convert and deploy, it happened to go to Amazon because of their business need. But what's increasing our costs versus our original plan was the need to crew that aircraft, and so we had to hire a complement of pilots for it, also a little bit of increased maintenance costs. And with the costs that we're talking about when we say we're ramping up, it's training costs for crews that is significant, but we don't get any revenue. Those crews aren't generating revenue until they're fully trained and in the aircraft. And so that's why when Quint had noted that sequentially in the third quarter and the fourth quarter, our ACMI operations will show improved results as a result of those crews that are currently in training, actually getting out and flying aircraft and generating revenue.

Howard Rosencrans -- Value Advisory -- Analyst

Okay. Apologize if I'm missing your answers. So the fact that you're adding, the fact that you're pulling forward one of the aircraft for Amazon, is that having a short-term negative impact on be it, let's say, Q3 in particular? Just to get -- so that maybe you get more positive benefit in '20 since you'll have less? That's my question.

Rich Corrado -- Chief Operating Officer

Yes, yes. So that we'll have increased crew training costs in Q3 to deploy for that additional aircraft that we're adding in Q4.

Howard Rosencrans -- Value Advisory -- Analyst

Okay. So that will decrease in '20 be your prior expectations, yes, sir?

Rich Corrado -- Chief Operating Officer

Correct, on the crew training front and ramp-up costs.

Joseph C. Hete -- President and Chief Executive Officer

But it will increase the revenue because the aircraft will be out there in Amazon's network flying for the whole year. Whereas right, now we anticipate that the 2020 aircraft would be backloaded similar to what 2019 was. So we'll actually have one airplane flying for them a lot sooner.

Howard Rosencrans -- Value Advisory -- Analyst

Okay. And you mentioned -- you sort of hopped over maintenance as it's no longer material, you're not going to break it out, etc. You didn't provide as much commentary in that regard, but I thought that -- obviously, you're a much bigger company now, but I thought that the maintenance -- thought that, that maintenance business had some pretty compelling prospects to grow nicely, particularly since you were looking into getting the -- into doing Airbus, etc. So I'm just wondering what your thoughts are. If we go out a little further, do you get accreditation for Airbus?

I'm just curious, your old MRO division, do you -- is that going to be -- can that generate some, I don't know, $5 million, $10 million or something in -- I think, at one point, I envisioned it was going to be a $15 million, $20 million EBITDA contributor maybe a few years out. So could you give us any sense since it's no longer a broken-out segment?

Joseph C. Hete -- President and Chief Executive Officer

No, Howard, in terms of the MRO side, I mean, there's two primary pieces to it. One is the heavy maintenance side, which requires the hangars, et cetera, then there's the line maintenance piece. Most of the line maintenance is focused on the internal airlines, the affiliates, but you're always limited in terms of the heavy maintenance side of the equation by your hangar capacity per se. So when you think about growth, if you're operating at max capacity within the square footage that you have available to you, it's going to level off, and your growth is going to be more born of what efficiencies you can bring to the table and what rate increases you can get out of your customer.

So we would not consider the MRO side to be a high-growth part of our business, like the leasing side is, obviously. But it's a good stable portion, and it always serves as a nice additive to our CAM leasing business, because it does give us the flexibility to move aircraft around more effectively, even if we had to wait for a third party to perform heavy maintenance checks, etc, as we transition aircraft back and forth. So it's one of those things that's kind of a needs of the business for us at this point in time.

We'll still continue to generate, as you said earlier, $5 million to $10 million worth of bottom line benefit, but going to $15 million or $20 million is probably not in the cards, unless we go out and build some more hangar space.

Howard Rosencrans -- Value Advisory -- Analyst

Well, I guess I meant through external, and I get a little confused between internal and external. I thought, if assuming you get all your Airbus certifications, I thought there was a bigger opportunity on an external basis, but maybe you're saying your space limited them. I apologize for my confusion.

Joseph C. Hete -- President and Chief Executive Officer

Yes. That's one of the reasons we're assessing it, Howard, to see what makes the most sense for the utilization of the space that we have. So stay tuned.

Howard Rosencrans -- Value Advisory -- Analyst

Okay. Any thoughts on whether you'll reallocate capital or go for a slight -- you're less than 3.5 times, and you're going to drop down further next year, particularly with lower capex next year. What are the prospects you'll assess to be returning some capital to shareholders through buying back stock? I think you've done some of that in the past. I'm just wondering what your perspective is on it, this time, maybe you could remind us as to sort of the prices you paid when you were buying in some of the -- sort of the issued Amazon stock, which you're now again issuing more of in the new deal.

Quint O. Turner -- Chief Financial Officer

Yes. I mean, Howard, it's Quint. As you've mentioned we've done stock buybacks in the past, and then we did a large buyback, I think it was in 2016, from -- at the time, our largest shareholder. And I think it was, what, $13, $13.07 or so that we bought about 3.8 million shares, if I recall. And we have that, as we've said, as a way to create value for our shareholders. We've been in the growth cycle, and Rich has described what our opportunities are. But to the extent that there's any slowing of growth or at least a reduction in capex, that creates more opportunity to look at, we believe, that as an accretive way to get value to our shareholders. So you're right. It will be an option that becomes a greater option for us, assuming that capex needs decline.

Howard Rosencrans -- Value Advisory -- Analyst

Okay. Well, you suggest it pretty confidently that they would, so all right. Thank you so much for you time. I appreciate it.

Quint O. Turner -- Chief Financial Officer

Thanks, Howard.

Joseph C. Hete -- President and Chief Executive Officer

Thanks, Howard.

Operator

And from Susquehanna, we have a follow-up from Chris Stathoulopoulos. Please go ahead.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Hey, thanks for the follow-up. I was wondering if you could just remind us of the mechanics around the military business. I believe the business goes on the government's fiscal calendar, which is October through September or thereabouts and whether -- also get some color what you're seeing around passenger flying for the military, where your competitor also recently announced that things were a little bit slower than expected. Thanks.

Joseph C. Hete -- President and Chief Executive Officer

Yes, Chris. You're correct that the government fiscal year is October 1 through September 30. When you look at the military flying, as I said, with Omni, a lot of it is determined by whether you're flying a 767 or, in our case, a 777, which obviously generates more revenue than the smaller 767. And in Atlas' case, it's a 747 versus a 767. And I think what Atlas ended up seeing was a decline in the 747 biz, even though the hours might be the same if you replace 747 hours with a 767, there's going to be a revenue decline.

If you look at hours, and we don't give a breakdown per se, but as I mentioned earlier, if you look on a year-over-year basis in the second quarter, we were down about 1.5% on total pax up and block hours with Omni.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then final question. Could you give us any color around how we should think about headcount growth for this year? I think, last year or December, you finished just a hair under 4,000. Is this kind of mid-to-upper single-digit growth the right way to think about it? Thank you.

Joseph C. Hete -- President and Chief Executive Officer

When you look at it from a growth standpoint, Chris, the -- obviously, as Rich mentioned earlier, we've got the Charlotte hub that we've started up for Charlotte gateway for Amazon. It's not a large facility per se, so it's not going to be a big numbers driver. Where we're really seeing the growth is on the airline side. And as we put in our opening remarks, we've hired over 70 flight crews year-to-date just at ATI in order to be able to meet the Amazon schedule requirements for the latter part of the year. So you're not talking big numbers, unless we're in a position to open up additional gateways, etc, but I would see growth from a people standpoint, 150 to 200 people max.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. Thank you.

Operator

And no further questions at this time. We'll now turn it back to Mr. Hete for closing remarks.

Joseph C. Hete -- President and Chief Executive Officer

Thank you, Brandon. Most of our colleagues in the air cargo industry are focused on what's happening in China and other markets affected by tariffs and economic uncertainty. That's not the case with us. The vast majority of our business is with customers that need what we provide, regardless of how the trade winds blow and whether the economy grows. We hope you appreciate the cash flow visibility our model provides and how it can carry our shareholder value higher in the years ahead. Thanks for joining us today, and have a quality day.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Joseph C. Hete -- President and Chief Executive Officer

Quint O. Turner -- Chief Financial Officer

Rich Corrado -- Chief Operating Officer

Jack Atkins -- Stephens -- Analyst

David Ross -- Stifel -- Analyst

Conor Cunningham -- Cowen & Company -- Analyst

Chris Stathoulopoulos -- Susquehanna -- Analyst

Kevin Sterling -- Seaport Global -- Analyst

Howard Rosencrans -- Value Advisory -- Analyst

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