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Air Transport Services Group Inc (NASDAQ:ATSG)
Q4 2019 Earnings Call
Mar 3, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q4 2019 Air Transport Services Group Incorporated Earnings Conference Call. My name is Vanessa and I will be your operator for today's call.

[Operator Instructions]

I will now turn the call over to Joe Hete, CEO.

Joe Hete -- Chief Executive Officer

Thank you, Vanessa. Good morning and welcome to our fourth quarter 2019 earnings conference call. With me today are, Quint Turner, our Chief Financial Officer, and Rich Corrado, our President and as we announced last week, our CEO elect. We issued our earnings release and our Form 10-K yesterday after the market closed. They are on our website atsginc.com.

I'm very happy to report to you that in 2019, we beat the annual adjusted EBITDA goal we set for ourselves as well as the market's expectations for our adjusted EPS. This is the third year in a row we have exceeded our adjusted EBITDA goal and the fourth quarter was the fifth in a row that our adjusted EPS has exceeded the consensus of the analysts who follow us. In 2019, we substantially outperformed our 2018 results. Revenues rose 63% to $1.45 billion, a record since we became a public company in 2003 excluding the reimbursements we used to include in revenue. Our adjusted earnings grew 32% to a record $105 million or $1.51 per share. And our adjusted EBITDA rose 45% to $452 million, both a record and $2 million above our $450 million guidance. That was despite significant unbudgeted investments in pilot training cost during the year due to flying schedules that expanded when Amazon adopted one-day delivery service. We are growing and generating strong returns for two main reasons, our leased aircraft fleet is growing and we acquired Omni Air in November 2018.

We're leasing more 767 freighters because e-commerce is driving delivery speeds and we bought Omni because its principal customers, the Department of Defense and other government units are largely immune from the business cycle like our aircraft lease investments. Because we are confident that we can continue to grow and generate superior returns, we're setting a 2020 goal of $487.2 million to $492 million in adjusted EBITDA. That includes completing our current 767 freighter lease commitments to Amazon and UPS, leasing other 767s to new and existing customers and growing our airline and other businesses. Also, more about those goals shortly.

First, Quint is ready to review our consolidated results for 2019 and Rich will cover our businesses. Quint?

Quint Turner -- Chief Financial Officer

Thanks, Joe. Good morning to all of you on the call right now and to those who will listen later 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 the market demand for our assets and services including potential reduced flight operations arising from the outbreak of COVID-19.

Our operating airline's 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, the 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, changes in general economic and our industry-specific conditions and other factors that are contained from time to time in ATSG's filings with the US Securities and Exchange Commission, including the Form 10-K we filed yesterday. 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 reconciliations to GAAP measures which are included in our earnings release and on our website.

As Joe said, 2019 was another record year for ATSG with both fourth quarter and annual results well above our results from a year ago. We also took several steps to secure continued access to growth capital at today's very attractive long-term rates. I'll say more about that in a moment. Our revenues again rose sharply, this time by 44% for the quarter and by 63% to $1.45 billion for the year. Our work for the US Department of Defense and other government units by all three of our airlines Omni, ABX and ATI was again the biggest source of our gains last year. The US DoD is ATSG's largest customer and represented 34% of our revenues for the year. 23% of our 2019 revenues came from Amazon and 14% from DHL. That's a lot different from just five years ago when DHL represented more than half of our 2014 revenues.

Our GAAP earnings from continuing operations were $60 million for the year and a loss of $41 million for the fourth quarter. For several years, our GAAP numbers have included large, unrealized effects of quarterly revaluations of several financial instruments. These are mainly the effects of revaluing interest rate hedges on our bank debt and the non-cash effects of changes in the projected value and number of the warrants we have already issued to Amazon or those we anticipate issuing in the future. Another significant item this quarter that favorably affected both our GAAP and non-GAAP earnings is a reduction in our projected state tax rate. A greater portion of our flight operations during 2019 including Omni's were outside of state tax jurisdictions. That resulted in a one-time fourth quarter state tax benefit of $4.9 million or $0.07 per share. The company expects its effective tax rate for this year to be 24% after excluding the impact of warrant remeasurements and related amortizations of aircraft lease incentives. ATSG did not pay cash federal income taxes in 2019 and we don't expect to pay significant federal taxes until 2024 or later.

Diluted GAAP earnings per share from continuing operations were a positive $0.78 for the year, and a negative $0.70 for the quarter. GAAP earnings exclude the per share effects of mark-to-market changes and warrant liabilities when they are accretive. The adjusted earnings, adjusted EPS and adjusted EBITDA we reported this quarter, exclude those warrant related gains and losses. They also leave out the amortization of warrant lease incentives for Amazon from CAM, affiliate losses from Airbus A321 development costs and the non-service related cost of our retiree benefit plans. You can see how each of those items affected our results in the tables included in our earnings release. Netting those effects, our adjusted earnings for the fourth quarter were $39 million or $0.56 per share, up from $23 million or $0.33 a year ago. Annual adjusted earnings were $105 million or $1.51 per share in 2019, up 32% versus $79 million or $1.16 per share in 2018. Fourth quarter adjusted EBITDA increased by 29% to $124 million which pushed our total for the year 45% higher to $452 million or $140 million better than a year ago.

Operating income for 2019 rose 59% to $177 million. Our revenue growth offset significant increases in fuel, depreciation and amortization and salaries and benefit expenses. Almost all of the increases stemmed from aircraft and headcount additions, including those related to Omni and from expanded flight operations for Amazon. Interest expense including $9 million that was non-cash increased 18% to $66 million in 2019. Higher borrowings for the Omni acquisition and aircraft investments were the principal factors. Cash flow from operations in 2019 increased nearly $100 million to $397 million and capital spending rose $161 million to $454 million. The bulk of that spending, $328 million, was to acquire 11 Boeing 767-300 passenger aircraft and for passenger-to-freighter modification costs. One of those acquired aircraft was deployed in passenger service for Omni's customers. When we announced our third quarter results in November, we also announced another amendment to our secured credit facility, which reduced our rate markups over LIBOR for our revolver in term debt, expanded our capacity and extended the use of the senior secured credit agreement into late 2024. It also paved the way for our initial publicly rated debt offering in January, a 500 million private offering of eight-year unsecured notes. Response to the offering was so favorable that we were able to raise its size to $500 million from the anticipated $400 million and it priced at an attractive 4.75% fixed rate. Proceeds were used to pay down the balances on our revolver debt, which will provide us great flexibility in access and capital going forward. The addition of the unsecured bond in our debt capital structure lengthens our remaining debt duration and along with the favorable bank amendment in November, also reduces our annual interest expense. That completes our financial highlights for the quarter and year.

Rich is ready to cover our operations. Rich?

Rich Corrado -- President

Thanks Quint, and good morning everybody. Our ATSG businesses stepped up to the challenge of integrating Omni and its people and assets into our operation as they continued to deliver superior service for all of their customers. CAM, our foundational aircraft leasing business grew revenues net of warrant related lease incentives by 18% for the quarter and 25% for the year. CAM had a full year of results from the 11 passenger aircraft that are acquired from Omni and leased back to them in 2018 plus revenues from seven more newly converted 767 freighters added during the year. External customer revenues increased 8% for both the quarter and the year. CAM's pre-tax earnings for the fourth quarter were $18 million, up 17% and $69 million, up 5% for the year. CAM's allocated interest and depreciation expense each increased by 16% for the fourth quarter. Interest expense rose 76% and depreciation rose 25% for the year due to both organic and acquired fleet growth. A 2019 highlight for CAM was lease commitments for five 767 freighters for UPS, two of which were delivered in 2019. A third was delivered in January and the remaining two will be ready later this year. While we have a long history of peak season ACMI flying for UPS, this was the first time they have leased the aircraft from us. Our airlines had a strong quarter and year, thanks to the addition of Omni and more CMI flying for Amazon.

Total block hours increased 47% for the fourth quarter and 40% for 2019, which included an expanded flight schedule for us in support of Amazon's one-day delivery commitment and stepped up ACMI operations for UPS. ACMI Services revenues increased 51% in the fourth quarter and nearly doubled for the year, topping $1 billion for the first time. The fourth quarter included a full three months of Omni contributions compared with less than two months worth in 2018. Pretax earnings from ACMI Services increased 83% for the quarter and nearly tripled for the year over 2018. Good margins on airline operations by Omni Air were the principal factor. Our air and ground operations employees including mechanics, flight crews and ground and logistics employees did a great job during peak and that continues into this year. ABX Air management continues to negotiate with union representatives of its flight crews for an amended agreement and has made progress on some fronts. Their next meeting scheduled for later this month.

Our overall 767 fleet expansion plan includes two leased-in passenger 300s that Omni agreed to take before we acquired them. That will bring Omni's overall fleet to 16 including 10 passenger 767-300s, three 767-200s and three 777s. Omni is already lining up customers for its two additions. This year, our airlines are scheduled to fly six 767 aircraft that CAM does not own, up from two at the end of 2018. That includes four Omni passenger 767s and two 767 freighters Amazon leases from another owner but opted to shift to ATI for CMI operations last fall. Revenues from other activities increased by 10% for both the fourth quarter and full year. Both maintenance and ground services for external customers increased. Our ground operations for Amazon continued to evolve as we added gateways for them in Charlotte, Tampa and our support services here in Wilmington, offsetting the loss of gateways we manage for them through mid-2019. Pretax earnings from other businesses more than tripled during the fourth quarter and rose 20% for the year. Fourth quarter gains came mostly from more ground support for Amazon. That's the summary of our operations for the quarter and 2019. I'll turn it back to Joe for his outlook comments.

Joe Hete -- Chief Executive Officer

Thanks, Rich. ATSG's results for 2019 were remarkable for more than just the records we posted against our own prior results. They also speak to the sustained cash flow that our business strategy yields and e-commerce and other growth drivers spurring demand for aircraft in support services. Nearly five years into our Amazon relationship and after a year and the charter and ACMI passenger business via Omni, we are executing on all cylinders. I usually begin any presentation about ATSG with the comment that our business starts with the lease. The nearly 100 aircraft we have in service today, including 63 freighters which are released externally make us far different from most of our peers and others in the air cargo and passenger charter space.

Our contracted cash flow from a growing share of these aircraft extends to the end of this decade and soon more will extend beyond it. Also that external lease cash flow continues regardless of changes in customer payload, fuel price volatility, health risks or other events beyond our control. Even with Omni in the fold as an ACMI and charter operator, we are still freighter lease driven today. Eight to 10 additional 767s are due to emerge from mod this year. Seven of them have lease contract commitments from Amazon and UPS and we have LOI's for the others. Our order book as indicated by our capex appetite of $420 million for 2020 is nearly full for the next two years. We continue to look forward to FAA approval later this year of our Airbus A321 freighter certificate. Once approved, we may acquire 321 feedstock aircraft later in 2021. Their values indicate a good potential return.

Our capex budget for 2020 however does not assume any 321 feedstock purchases. In the leasing business, deployments are not the entire story. Lease terminations and returns are a normal part of it as well. This year, we expect returns of three currently leased 767-200s and all four of our 757 freighters as their wet lease arrangements with DHL expire. We had factored transitioning time for those aircraft into our 2020 plan and it's reflected in our adjusted EBITDA goal for 2020 of $487 million to $492 million, what we know and can commit to today. As always, we'll update you on our outlook as the year progresses. At that level, our adjusted EBITDA will have increased nearly 60% in the last two years. The business we have built is a strong producer of sustainable cash flow. Our maintenance capex requirements are approximately $100 million per year. That means we have significant discretionary cash flow to produce shareholder value. At today's share price, our discretionary cash flow yield after maintenance capex and interest expense is more than 25%.

We expect our debt to adjusted EBITDA leverage ratio to come down from 3.3 times today to around 3 times by the end of the year and to decline further in 2021 as our capex spend drops. Like you, we are watching what appears to be an extreme response from Wall Street to the coronavirus threats. We are particularly concerned about what we see as investors in ability to differentiate ATSG from other companies that are far more vulnerable to its near-term effects. Our operations are primarily domestic and mostly time-definite express package related. Apart from that, however, our business model also has built-in flexibility. We can reallocate discretionary capital quickly toward opportunities that promise better returns than freighter investments. That could include subject to lender approval, redeploying some of our cash toward our share repurchase program if our current stock price persists. As always, our focus is on maximizing long-term returns from the businesses we operate and the investments we select.

Our track record for delivering on that commitment is hard to beat and much better than investments tied to the major market indexes. The job of this management team and those who execute their plans is to keep outperforming and show investors the value we're creating. That concludes our prepared remarks Vanessa, we're ready for the first question.

Questions and Answers:

Operator

Thank you. We will now begin our question-and-answer session.

[Operator Instructions]

And we have our first question from Jack Atkins with Stephens.

Jack Atkins -- Stephens -- Analyst

Hey guys, good morning, great quarter.

Joe Hete -- Chief Executive Officer

Thanks Jack.

Jack Atkins -- Stephens -- Analyst

Joe, congratulations on your semi-retirement I guess and Rich, congratulations on your new role.

Joe Hete -- Chief Executive Officer

Thank you, Jack.

Jack Atkins -- Stephens -- Analyst

So let me kind of start out with a question just around would you look at the feedstock available to you guys this year and next year, could you kind of update us in terms of where you think you'll be in terms of those 20 aircraft that you secured the rights for, I guess it was at the end of 2018? How many of those will be through conversion or at least will be in service at the end of 2020? Is there a way to kind of think about that?

Rich Corrado -- President

Yes, I think if you look at, we've already started deploying some of those. The first one went to Omni and passenger configuration. We've got some lined up this year to go and fulfill our Amazon commitment and some other commitments that we've got for this year. At the end of the year, we will have an additional three that will actually be converted for 2021 deployment and then about five airplanes that tranche left for conversion in 2021. So it's kind of -- it's the way the flow has gone.

Jack Atkins -- Stephens -- Analyst

So that's about eight, Rich if I'm hearing you right?

Rich Corrado -- President

Yes, so it's about eight. There are some -- some of that tranche is in conversion now. And so those will be the help us fulfill the Amazon commitment for second part of this year.

Jack Atkins -- Stephens -- Analyst

Okay, got you. That makes that makes sense. And I guess as you're looking out through this year, you sort of have your 2020 plan fairly well committed to from your customers at this point. You mentioned in the press release, you're seeing very strong customer demand for 2021 already. Can you talk about sort of the types of customers or the types of sort of missions that those planes will be going into service for maybe geographic comment as well in terms of where that demand's coming from?

Rich Corrado -- President

Sure. Obviously we specialize in the 767 freighter, it's what we're talking about. And if you look globally, about 90% of those 767 freighters on a global basis are deployed and express networks meaning you're talking FedEx, UPS, DHL, Amazon, the UPS network in Europe, some of the aircraft we have deployed with West Atlantic flying for multiple express carries over there. And so, and that's pretty much where our aircraft are targeted. We, at least our aircraft currently to either the express carriers or carriers that fly for them, cargo jet is a good example. We have four aircraft with them up in Canada and they fly for the Canada Post, for UPS, for Amazon. So that's where those aircraft are going. If you look at the global demand for air freight right now, 2019 was a very poor year, the worst year in a decade for global air cargo and that's your intercontinental moves, the ones that are impacted by trade and tariff disruption that we saw in 2019. But if you look at the other side of the coin, which is the express business, it's growing very well. UPS had over 25% growth in 2019 in their overnight product, you saw Amazon still going through some great growth, DHL in several parts of the world was up between 6% and 8%. So the express business powered by the e-commerce is growing very well, and that's where the 767s are deployed in those types of networks. Now for what we are looking at, it's the US, the Far East. We've got a couple of opportunities in Far East. We've got a signed agreement for one airplane already. And then we've got another deployment. We're looking at two more down in South America, so, or I should say, Mexico and South America. So it's the Americas, the Far East. We don't see much growth out of Europe right now on the express side, but keep in mind they have a very strong road network in Europe and so aircraft are not as prevalent as they are over here in -- given the size of the US.

Jack Atkins -- Stephens -- Analyst

Okay, that's very helpful. Thank you for that Rich. And I guess last question from me and I'll turn it over. But Rich, you've been in a senior leadership role at this company for a long time. So you've had a very clear role in the direction ATSG has taken for quite some time. But I guess now as you assume the role of CEO here in a few months, how are you thinking about your priorities for the organization as you look out over the next several years?

Rich Corrado -- President

Great question, Jack. We've, built a great -- Joe has built a great company, we have a great culture here, we have a great team. We've -- one of the strengths of the company has been our conservative approach to our balance sheet, to ensure that we've got capital to invest in the market when it's growing. We look at ourselves as a very efficient user of capital. So if the market is growing like it has been for the past five years, then we will take our cash flow and invest that in airplanes and growth. We'd rather get the growth and advocate it to somebody else. But if you look, if the market slows, then we'll have that cash available to do other things. And that could include returning some cash to shareholders. So on one level, we're going to continue that conservative view of our balance sheet and continue investing to get the best returns for our shareholders. I believe that the most important thing that this company can do is to maintain its service leadership. If you look at the way we build to meet our commitments to customers from a leasing basis and the way that we deliver when we fly for them on an express basis. Our heritage is as an express airline. And so quality, services, I believe is going to win the day. And so we're investing now in a lot of things internally to maintain that service leadership that includes updating, a lot of our IT systems, we're developing a much more robust continuous improvement program. So we're going to maintain our quality service approach and that we feel will be our best ticket to maintain our growth on the flying side. So leasing and flying. The other thing is we've got a real solid culture here in terms of the way we approach our customers. We strongly believe in the commitments that we make and that will always be a hallmark of who ATSG is. So I hope that answered your question, Jack.

Jack Atkins -- Stephens -- Analyst

It does. Thanks, Rich. Really appreciate it.

Rich Corrado -- President

Thanks, Jack.

Operator

And we have our next question from Kevin Sterling with the Benchmark Company.

Kevin Sterling -- Benchmark Company -- Analyst

Thank you. Good morning, gentlemen.

Joe Hete -- Chief Executive Officer

Good morning, Kevin.

Kevin Sterling -- Benchmark Company -- Analyst

First of all, Rich, let me say congratulations and Joe, I just want to tell you how much I've enjoyed working with you over the many years. I do hope you -- I know you're not completely -- fully retire, but I do hope you enjoy some semi-retirement and hope you don't drive your wife too crazy, if you are home.

Joe Hete -- Chief Executive Officer

Likely the other way around Kevin.

Kevin Sterling -- Benchmark Company -- Analyst

Well, congratulations. I've certainly enjoyed working with you for many years.

Joe Hete -- Chief Executive Officer

The same here.

Kevin Sterling -- Benchmark Company -- Analyst

So real quick. Can you guys, I guess, talk a little bit about the coronavirus and kind of maybe some customer conversations you're having. I know your business it's regional, it does seem isolated, but maybe a little bit about some of the conversations you're having with some of your express customers and how they're viewing the world today?

Rich Corrado -- President

Hey Kevin, the reality is, since most of our operations are domestic, we haven't seen any impact per se, but I'm sure you've seen some of the announcements where customer like Amazon for example is restricting travel, et cetera. And some people are pulling back from conferences and things of that nature, but where we have the greatest potential disruption from our revenue stream would be in the things we do for the military because of the number of foreign countries that we fly through. Some you can come through, but then you've got crews, it would be quarantined on the other end. So far we haven't had any disruptions in our service levels, but you just don't know how that thing is going to play out over time. So that's probably where we're most exposed would be on the international portion of our business, which is the military side.

Kevin Sterling -- Benchmark Company -- Analyst

I got you. But on the flip side, the military starts moving troops around in and out of some of these affected countries, that could help you as well. Am I think about that right, possibly?

Rich Corrado -- President

Yes. I mean there is that potential but like I said it's a very fluid situation, there is calls almost on a daily basis with the folks at DoD, so that everybody is up to speed on how things are changing.

Kevin Sterling -- Benchmark Company -- Analyst

Also you guys, you talked about returning capital to shareholders. I know you mentioned a buyback and things like that. Would you consider possibly looking at buying back some of the converts that are in the open market possibly? Is everything on the table as you think about returns of capital to shareholders?

Quint Turner -- Chief Financial Officer

Hi, Kevin, it's Quint. Yes, I mean, we don't -- nothing would be off the table per se, but I think at the -- yes, I think our references were more with regard to the current share price being where it's at. And we certainly think that the reaction to the coronavirus has been extreme with respect to our stock. As Joe said, we really haven't seen disruption to this point. And so I think that was more. There's about, I think we have about little over $60 million left on the authorization the Board put in place. As we've mentioned on previous calls, we have a bank covenant that requires you to be under three times after giving effect and we're currently around 3.3 times. But certainly there is -- based upon the allocation alternatives that are in front of us and that the stock price persists there, that's something we're going to take a very hard look at. It becomes a more attractive option to do that certainly when you're talking about the share price that has been our view unjustly punched.

Kevin Sterling -- Benchmark Company -- Analyst

I agree with you, I think. It's time to throw the baby out with the bathwater. Lastly, and I know this, I know we're just in 2020 and you guys have given 2020 guidance. As I look at your capex, I think for 2020 it's down roughly $30 million from 2019. I believe you briefly referenced 2021, you said it might be even a little bit lower in 2021 and I mean are we talking significantly lower or kind of in that $400 million plus level possibly just to kind of maintain growth capex, maintenance capex for 2021 is it as we think about that, is it either that $400 million range, I guess my question is, we don't see it go materially lower but also it's probably not going to go higher but maybe that $400 million range give or take, for 2021 right way to think about a combination of growth capex plus maintenance?

Joe Hete -- Chief Executive Officer

I mean, Kevin, if you think about of course we are down versus last year. I think we had guided to $460 million for 2019. So we came in I think $7 million below that. So part of what you're seeing in the $420 million we are projecting for 2020 is just a spillover of that and then we talked about the eight to 10 aircraft in service. We've said that maintenance capex for us is about $100 million. So that kind of gets you in that $420 million zip code. But as Rich said, at the end of the year, we'll have -- projections are to have eight 767-300s in mod, about three of those, the investment is pretty much in as of the end of the year. So in some respects, we're prepaying on 21 deployments a little bit. That has to do with the timing of the mod slots. And so that really has the effect of reducing the requirement we will have in 2021. So I think that the $400 million you're referring to could be quite a bit less than $400 million. And that's what we mentioned here. When we talk about the improving picture for free cash flow, I mean, we expect to the delever this year but most of that comes from the growth in our EBITDA. And then as you look at 2021, certainly, there is significant opportunity for free cash flow. I mean our maintenance capex is about $100 million, we've got cash interest of about $55 million, we've probably put in $7 million in pension plans. So if you're thinking about EBITDA of $490 million [Phonetic], that's about roughly $328 million of discretionary cash flow, call it, that can go toward what we view as the best alternative to create value for the shareholders. Now that's been growth of late because as Rich said, you don't want to advocate growth when those good opportunities are there, but when we're looking at '21, I think you could see a lot of that cash flow making it -- being available as free cash flow. So it could be significantly less than the $400 million.

Kevin Sterling -- Benchmark Company -- Analyst

Okay. That's great. I mean if I hear you, your goal right now is, you're going to delever, maybe you get down about three times by year-end and then 2021 could really be a massive free cash flow year for you guys, give you a lot of optionality. Is that a fair statement?

Joe Hete -- Chief Executive Officer

Yes, I mean the company when you look at on a per share basis, if you've got that much discretionary cash flow, that's like $4.5 to $5 per share of discretionary cash flow that you've got available. On our current share price, that's over a 25% yield. So, I mean we're going to have a lot of opportunities. Certainly, we don't want to disappoint our customers who are waiting on aircraft. And when those opportunities look good, they generally are going to be the first option for us, but I think that very good chance '21 has a lot of capex reduction and cash flow.

Kevin Sterling -- Benchmark Company -- Analyst

Got you. That's all I had. Thanks so much for your time and once again, Joe, best of luck to you.

Joe Hete -- Chief Executive Officer

Thanks, Kevin.

Operator

And we have our next question from Chris Stathoulopoulos with Susquehanna.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Good morning, everyone.

Joe Hete -- Chief Executive Officer

Hey, Chris.

Chris Stathoulopoulos -- Susquehanna -- Analyst

So continuing along the line of the coronavirus, your stock has been trading like a payload sensitive airline stock and let's say the virus accelerates and how are you thinking about the various risks to your businesses perhaps with a look toward the various subsidiaries and I'm guessing CAM, which is one of the largest contributors to your pre-tax earnings is fairly immune but what about the other segments such as LGST, Airborne or maintenance?

Rich Corrado -- President

Well, Chris, a lot of it's going to be dependent upon how widespread the virus is in terms of their customers. I think the customers are still going to be there. LGSTX for example is servicing the Amazon business and of course on the AMES piece of the MRO side, people have to get their airplanes fixed. So it's really a matter of, is there going to be -- is it going to get severe enough that you would end up with significant number of people being quarantined at home for a lack of a better definition to where they can can't to work and produce the revenue side of the equation. But as you pointed out, from a CAM's perspective, I mean the leases, the lease payments come in, regardless of whether the airplane is flying one hour or 100 hours or whether it's carrying one pound or 1,000 pounds on board. So that cash flow stream still comes in over time. But as I said earlier, the biggest exposure we have from a revenue perspective would be in the military side of the equation. But since most of the time we're flying in the military bases, the bet is that they will still continue to have those troop movements, and I think as Kevin even pointed out, there is the potential that you may even have an acceleration of the number of movements going on around the globe.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. So, along those lines, I know you have a relatively small commercial cargo charter business. So there's less opportunity to participate in any demand surges once China production is back online. But at the same time, I'm guessing there's opportunity on the scheduled services side, perhaps with the flying with DHL?

Rich Corrado -- President

Yes. We've got limited resources for extra flying and it's 767 flying. So it's regional based. So we're not going to fly a 767 from China into the US, it's not an efficient use of the aircraft. So there is a little bit of opportunity there, but not a lot, it's not like we have four or five airplanes sitting around waiting for work. It's not really, we don't do much pure charter work anymore. We have aircraft that are available, some of our aircrafts are available, like every other week because they fly military route one week and then they are available to back up the network. So it's not a big part of our business today. If, if there are opportunities, it would probably be in the fourth quarter where we do have a lot of aircraft available and we tend to use those to fly during peak.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then with all the pressure on the passenger airlines, particularly in China and of course there aircraft values, are there any opportunities you're seeing in the market with perhaps on opportunistic P2F, passenger to freighter, conversions? And then also are any concerns around credit profiles with any of your customers at this point? Thank you.

Rich Corrado -- President

We haven't seen any kind of flood of the market of feedstock. We track the 767 fleet out there and there is still over 300 of them left in the world. And there are some large -- some airlines that have large fleets of them and we keep a very good view of those and the ones that we are, we know will come available in 2021 and 2022 as an example, they have not made any decisions to release those aircraft early. The 737 MAX is still having an impact on the way airlines view their fleet and the way they view their -- what they're going to be releasing and what they need to hang on to. So at this point in time, we haven't seen any impact as it relates to feedstock availability.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay, thanks for the time.

Rich Corrado -- President

Thanks Chris.

Operator

Thank you. We have our next question from Steve O'Hara with Sidoti & Company.

Steve O'Hara -- Sidoti & Company -- Analyst

Hi, good morning.

Joe Hete -- Chief Executive Officer

Hey Steve.

Steve O'Hara -- Sidoti & Company -- Analyst

First, I just like to echo the comments regarding Joe and the new team. Congrats on everything in I'm sure you guys seem to have a deep bench. That's a good thing.

Joe Hete -- Chief Executive Officer

Thanks Steve.

Steve O'Hara -- Sidoti & Company -- Analyst

You're welcome. And then just I guess on looking at the 767-200s and I mean you have I think or had 33 at the end of the year, we expect to go down to 32 by year-end 2020. I mean, is there a potential for that to speed up in terms of these aircrafts coming back? Are they, what's the possibility of those coming back sooner? And as they come back, do you expect those to be replaced by 767-300s?

Rich Corrado -- President

So a couple of things. One is the aircraft is, the 767-200 is still in demand, is still an efficient aircraft and it's still a very reliable aircraft, that's just as reliable as the 767-300s. We met with DHL late last week on a, just a quarterly review meeting and they commented, we have six 767-200s flying, that they fly in their Middle East network and they commented on how great the reliability is for the airplane. We are taking the aircraft out of service when there is several maintenance events that occur. There is a 50,000 cycle limit that requires you to significantly step up your maintenance program, there's is an aft pressure bulkhead that's about $1.50 million to $1.75 million event. And there is a large S4C check that you have to do every four checks. And when two or three of those things come together, it doesn't make sense to invest that much money in the aircraft depending on how many cycles are left till 50,000. So that's why we've been taking aircraft out of service, they are still very much in demand. And so, we're pretty bullish on the aircraft going forward. We don't think we're going to have a lot coming back. We are having some returns this year, but we're also having some deployments. And so, the softness is that time between the transitioning when you get the aircraft back at the C-check and repayment for the new customer, etc. then you lose lease months. And so although we're getting some aircraft back, we're also redeploying some of those aircraft and just having to go through the transition, which is normal for a less sort of aircraft.

Steve O'Hara -- Sidoti & Company -- Analyst

Right. Okay, thank you. And then maybe just looking at the improvement within the other business segment. I mean is that something that you think is sustainable going forward? And is there a further improvement maybe to come, I mean it looks like revenue in the fourth quarter was up very significantly. Just wondering about maybe the trajectory there but it seemed like a pretty steep growth in 2019 for the most part, back-end loaded. But I'm just curious maybe going forward. Thank you.

Rich Corrado -- President

Yes, Steve, on the maintenance side, the AMES, which is a big part of that, obviously we have a limited amount of hangar space. So additional growth potential there is somewhat limited in light of the facility space as well as the continuing challenge of trying to find qualified maintenance technicians. So it's a very nominal growth rate that we would expect in the maintenance side of the equation. On the logistics side of the business, if you recall last year, about mid-year we lost the management that we had over a number of locations for the Amazon gateways where we manage third-party providers. We backfilled some of that with the opening of two of our own managed gateways, one of them in Tampa, Florida and the other one in Charlotte. We continue to have both of those in place this year albeit the Tampa one will scale down about mid-year when Amazon opens up its own facility over in Lakeland, which is 20 miles or 30 miles away from Tampa. Still expect to have an operation in Tampa, although it'd be a lot less than what it was last year. So when you look at the guidance that we gave, one of the things that was factored in, there was a fact that part of the business would show lower returns than what we saw in 2019. In 2020, at least based on what we know today, we are chasing another -- number of other opportunities with Amazon, with DHL, with UPS on the logistics side of the business. So we're fortunate enough based on our track record of how we manage with our express heritage, how we can manage those facilities better than your normal third-party providers. We hope to be able to recoup some of that business as well.

Steve O'Hara -- Sidoti & Company -- Analyst

Okay. And then maybe finally on the -- I guess the loss from non-consolidated affiliates, I assume that's all of kind of the A321 conversion process. Can you just talk about maybe what you expect the total investment would be there and if there is any, if you have any customers lined up or how that process is going? Thank you.

Rich Corrado -- President

From 321 perspective, Steve, that's really where those numbers are coming from. And essentially, we're still targeting having the STC approved, call it mid-year of this year. The prototype aircraft already has an end user customer as well as the second aircraft, which will be inducted shortly to begin its modification process. At the end of the day we will have sales probably $25 million, $30 million invested on our piece of that for the development of that STC. But as you noticed in our remarks, one of the things we pointed to, was that the DHL no longer wanted to utilize 757s in their network and as we've said on previous calls, one of the reasons we jumped into the 321 is because it gives you essentially the same cubic capacity as a 757 for a significantly lower operating cost. And I guess that probably bears it about more than anything else is that the DHLs, as you know, they need to reduce the number of 757s in their network. So that bodes well for the 321 as it's the most likely of replacement, the only thing that comes through with an equivalent amount of cubic capacity and at a significant lower operating cost. So that's why we believe is going to be in the long poles, a significant portion of our fleet component.

Steve O'Hara -- Sidoti & Company -- Analyst

Okay. And maybe just a follow-up to that. I know Amazon has been taking 737s and I'm just wondering, is the A321 a decent comp to that or is it more for larger aircraft like 757? Thanks for the questions.

Rich Corrado -- President

Sure. This is Rich. The A321 is a larger aircraft. It's get about 90% of the cube of a 757. So if you look at the 757 today, it's got 15 upper deck positions and 737-800 has 11. So it's about 30% larger cube, if you will. But it flies with the same engines. And so if you look at this -- if you're carrying the same weight in A321 and 737-800, it's about 8% higher operating costs in A321s but you've got that much more cube capability to carry another three to four pallets worth of cube. So it's, it can compete with the 737-800 at little bit higher cost, but if you look at, if you are an express carrier, you could fly an A321 in place of 737-800, but then during peak, you get an automatic lift of 30% of cube to fill those lanes when the seasonal market warrants. It's a great airplane and obviously the investment we make were really high on it. But it isn't necessarily a direct replacement for the 737-800, it's a direct replacement for the 757-200.

Steve O'Hara -- Sidoti & Company -- Analyst

Okay, thank you very much.

Operator

[Operator Instructions]

We have our next question from Travis Pascavis with HIMCO.

Travis Pascavis -- HIMCO -- Analyst

Hi everyone, thanks for taking my question. Part of it was just answered, but maybe if you could just take a step back and describe the relationship with DHL and anything we should reach into in terms of the change, it doesn't sound like you've given the context in last question, but I would ask it direct?

Rich Corrado -- President

Thanks for the question Travis. Now we have a very good relationship with DHL. We, like I said, we had our quarterly meeting with them. It was a great meaning the service we provide to them is best-in-class in terms of the flying that we do for them in the US, and again we leased other aircraft to them in other parts of the world, and they were very happy with that as well. 757 decision by them was more directed at kind of optimizing and rightsizing their fleet. As they grow, the 757 as an example, we had some lanes that hopped through a couple of markets. So we'll take some 737-800s that they're taking and put them on direct routes to some of those markets, just as an example. And so it's not reflective at all of the relationship that we have with them. We're looking for more opportunities going forward both on the leasing and flying basis. This happens to be, ATI, our airline that flies the 757 is the only 757 airline cargo airline in the country other than UPS and FedEx. And there's a reason for that, it's not an efficient aircraft, it works OK in express environment, if you've only got enough freight to fly, the lanes that it flies but it really is a higher cost aircraft and that's why you haven't seen us grow the airframe. We've always tried to push our customers toward the 767-200 rather than the 757 and I think DHL has looked at the 757 and looked at the alternatives that they have and they recognized as much as anybody that the aircraft is -- there are other opportunities to right-size your network and be more efficient.

Travis Pascavis -- HIMCO -- Analyst

Do you expect those to be released or will those be retiring? I missed that part.

Rich Corrado -- President

So we are looking for different opportunities for those aircraft. The one thing about the aircraft, they are powered by 2037 engines and those are very much in demand right now. And so, we may make more money leasing the end as than getting a lease revenue on the airplane through the ACMI operations. But we're looking for other opportunities. We've got a company, it shouldn't take two of them right now. Of course we've still got, we're still flying one of them right now, two of them right now for DHL and we will fly one into April. But, and two of them are on the deck here, but we believe we'll be able to get more revenue out of those aircraft by the end of the year and we'll be able to deploy at least two of them and then maybe some of the engines, but we believe we'll get some more value on of those aircraft.

Travis Pascavis -- HIMCO -- Analyst

Great, thanks a lot for answering my questions.

Rich Corrado -- President

Thanks, Travis.

Operator

And we have a follow-up question from Chris Stathoulopoulos with Susquehanna.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Hey, thanks for the follow-up. I was wondering if you could give us an update on labor and where you are with the CBA on ABX and whether this year's EBITDA guide includes any new labor deals?

Rich Corrado -- President

Yes, Chris. Right now I think last we mentioned to a number of investors when were are the Stifel Conference for example that we met in February at the National Mediation Board headquarters in Washington DC. We're scheduled to go back to the table, the week of the 23rd for three days. I believe it is of negotiations and we actually have one of the Board members involved in the negotiations at this point in time to try to move them along in a more rapid pace than what we've seen in the past. We have not factored any of those potential cost increases into our guidance for 2020. So anything that we would commit to would be a reduction of our overall guidance for a labor settlement. But as I've said on number of occasions, cautiously optimistic that we will get a deal done this year. Just a matter of what the end amount looks like from our perspective, as I've said on many occasions, we already have one airline call-in cargo for Amazon at ATI and we know what the cost is for that particular agreement and there is no rational reason for us to have any higher cost structure with the ABX folks, assuming we get a deal done. So that's kind of our guideline going through the negotiation process, but cautiously optimistic we'll get something done this year.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then as a follow-up to that, how should we think about headcount growth for this year, is mid-teens or similar to 12% to 14% we saw in 2019, a good place to start?

Rich Corrado -- President

Headcount will probably be less. I mean in terms of the number of flight crews we had to add last year with combination of the additional aircraft for Amazon, plus the fact, they went to the one-day service, we added on the ATI side, for example, like 118 pilots overall with just the additional five aircraft, four aircraft that we owe them this year, that number will come down significantly. Another driver in the overall headcount was the two gateways I mentioned earlier in Charlotte and Tampa. As Tampa spools down from the current volume of freight going through there to something less by the end of the year, that headcount will come down as well. So I wouldn't anticipate anywhere near as many as much of a headcount increase in 2020 as we saw in 2019.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. All right, thanks for the time.

Operator

Thank you. We have no further questions at this time, I will now turn the call back over to Joe Hete for closing remarks.

Joe Hete -- Chief Executive Officer

Thanks Vanessa. As has been mentioned by a couple of people here and I'm sure most people are aware by now that I announced that I will be retiring after the conclusion of the shareholder meeting on May 7. I do have to say that it was an honor and privilege and most times pleasurable working with you folks over the years. I think I'm leaving you in very capable hands with Rich and Joe Payne, our General Counsel; Quint, of course, who most of you know, and the newest addition to our senior team here, Ed Koharik and of course, Mike Berger, our Chief Commercial Officer. So I think you're in good hands. I appreciate all the support over the years and have a quality day.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Joe Hete -- Chief Executive Officer

Quint Turner -- Chief Financial Officer

Rich Corrado -- President

Jack Atkins -- Stephens -- Analyst

Kevin Sterling -- Benchmark Company -- Analyst

Chris Stathoulopoulos -- Susquehanna -- Analyst

Steve O'Hara -- Sidoti & Company -- Analyst

Travis Pascavis -- HIMCO -- Analyst

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