Air Transport Services Group, inc (ATSG) Q3 2021 Earnings Call Transcript

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Air Transport Services Group, inc (ATSG)
Q3 2021 Earnings Call
Nov 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Third Quarter 2021 Air Transport Services Group, Inc. Earnings Conference Call. My name is Darryl, and I will be your operator for today's call. [Operator Instructions]

I will now turn the call over to Mr. Joe Payne, Chief Legal Officer. Mr. Payne, you may begin.

Joe Payne -- Chief Legal Officer

Good morning, and welcome to our third quarter 2021 earnings conference call. We issued our earnings release yesterday after the market closed. It's on our website, atsginc.com. Let me begin by advising you that during the course of this call, we will make projections and other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call. Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes. These factors include, but are not limited to the following, which relate to the current COVID-19 pandemic. The pandemic may continue for a longer period, or its effect on commercial and military passenger flying may be more substantial than we currently expect; cause disruptions to our workforce and staffing capability, including through our compliance with federally mandated COVID-19 vaccination and testing requirements; cause disruptions in our ability to access airports and maintenance facilities; and adversely impact our customers' creditworthiness or the ability of our vendors and third-party service providers to maintain customary service levels.

Other factors that could cause ATSG's actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: unplanned changes in the market demand for our assets and services, including the loss of customers or a reduction in the level of services we perform for customers; 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; 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 key agreements with customers, lenders and government agencies; the impact of current supply chain constraints, both within and outside the United States, which may be more severe or persist longer than we currently expect; the impact of a competitive labor market, which could restrict our ability to fill key positions; changes in general economic and/or industry-specific conditions; and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q we will file on Monday.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings per share, adjusted EBITDA and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG's financial condition and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.

And now I'll turn the call over to Rich Corrado, our President and CEO, for his opening comments.

Rich Corrado -- President and Chief Executive Officer

Thanks, Joe. Good morning, everyone. You just heard Joe mentioned that we're disclosing for the first time this quarter another non-GAAP metric in our financial reporting: adjusted free cash flow. It's part of a broader set of disclosures to help us highlight the power of our business model to our shareholders and to help many of you who tell the ATSG story to prospective investors on our behalf. The earnings release we issued yesterday includes a summary of our GAAP cash flow statement, along with the breakout of the sustaining portion of our total capital expenditures. As Quint will discuss shortly, supported by the slides accompanying our remarks, significant cash remains after funding those essential payments to maintain the assets we already operate. Our business model's highly visible future cash flows afford us many attractive capital allocation options, including further growth investments and direct shareholder returns. For the third quarter, we generated a record $153 million in quarterly adjusted EBITDA, our traditional non-GAAP measure, and put nearly all of it back into the business to keep it humming and stoke our growth engine, midsized freighter leasing.

We have placed 13 Boeing 767s into external customer leases since September 2020. Our airlines again achieved double-digit growth in revenue block hours versus the prior year, and we're strongly profitable with improved margins. Omni Air was a notable contributor to those gains due in part to its supporting role in Operation Allies Refuge, the U.S. component of the evacuation of Americans and at-risk civilians from Afghanistan. Omni has completed 79 missions and transported over 20,000 passengers in this effort. I know I speak for everyone at ATSG in expressing our gratitude to the Omni team for their courage and dedication in completing these vital missions. There are many other great elements to our third quarter story and our now a stronger outlook for adjusted EBITDA through the end of the year.

I'll be back to share them after Quint reviews our results in more detail. Quint?

Quint Turner -- Chief Financial Officer

Thank you, Rich, and welcome to everyone on the call this morning. Our consolidated revenues grew a substantial 15% for the quarter to a record $466 million. Both our aircraft leasing and airline businesses delivered outstanding results with gains of 22% and 10%, respectively. Revenue growth reflects the impact of 13 more freighter aircraft leases and a related increase in CMI flying by our airlines from freighters we are leasing to and flying for Amazon. Our Defense Department revenues were also strong due in large part to the Afghanistan evacuation missions we flew through September. Block hours flown for the Department of Defense increased by 581 or 7% compared to the third quarter of 2020. Third quarter adjusted EBITDA of $153 million was up 22% from a year ago and up 20% from the record $128 million we generated in the second quarter. Again, these gains reflect our additional 767 leases and flight operations for Amazon and also leases of our 767-300s and 200s to Raya, SkyTaxi, MasAir and Astral, diversifying our customer base and enlarging our global footprint in Asia, Europe, Latin America and Africa.

On slide four, for the trailing 12 months ended September 30 of this year, our adjusted EBITDA increased to $508 million from $481 million at the end of the second quarter of 2021. We project for the full year 2021, we will produce adjusted EBITDA of at least $535 million. In the year ago period, reflected on slide four, adjusted EBITDA benefited from additional passenger charters to recover Americans during the pandemic. As a reminder, our adjusted EBITDA excludes the benefits of federal pandemic relief assistance under the Payroll Support Program for all periods shown. On slide five, our capital spending for the third quarter has roughly plateaued at an annualized rate of about $545 million but remains above our prior run rate. The lower section of each bar shows the portion of our capital spending that we have allocated to growth, which consists mainly of feedstock aircraft purchases and freighter modification costs. The upper portion of the bars show spending for what we call sustaining capex, which primarily includes scheduled aircraft maintenance and engine overhauls, technology improvements and other non-aircraft spending.

As shown on the slide, approximately 2/3 of our total capital spend is for growth and 1/3 for sustaining our operating assets. For the full year 2021, we project total capital spending of $530 million, $335 million for growth and $195 million of sustaining capital. The next slide, slide six, shows adjusted free cash flow, which is our operating cash flow net of the sustaining capex I mentioned a minute ago. Unlike our adjusted EBITDA measure, our GAAP operating cash flow includes cash received under federal pandemic relief programs for passenger airlines. We did not receive any such cash in the third quarter but did receive payments of $83 million in the first half. That difference, along with other variances in our working capital, reduced our accelerating cash flow trend for the trailing 12 months ended in September. The bottom portion of each bar shows a significant adjusted free cash flow our business produces. For each trailing 12-month period shown, adjusted free cash flow has exceeded $330 million, which is capital potentially available for growth investment, debt repayment and other uses. Spending for fleet-related growth has roughly equaled our adjusted free cash flow for the period shown as we believe that investments tied to fleet expansion represent optimal use of that adjusted free cash flow in today's hot market for midsized freighters.

In future periods, we expect our adjusted free cash flow to increase as we execute additional long-term leases and expand customer operating agreements. Slide seven illustrates how the significant cash flows our businesses generate have enabled us to expand the size of our owned aircraft fleet while reducing our debt-to-EBITDA leverage. In other words, our business self-funds significant growth. Our current debt-to-EBITDA ratio, as defined under our senior secured credit agreement, stands at 2.2 times, down from 2.9 times at the end of September of 2020. The 122 aircraft CAM owned at the end of September, including aircraft staging for release and awaiting freighter mod, speak to the strong overall returns we are earning, while at the same time, delevering on an owned fleet now twice the size than it was five years ago.

With that summary of our financial and operating results for the quarter, I'll turn it back to Rich for some comments on our operations and outlook. Rich?

Rich Corrado -- President and Chief Executive Officer

Thanks, Quint. We couldn't have picked a better time to put the cash-generating power of our business strategy on full display in our reporting as our businesses are performing as well as the pandemic-constrained economy will allow. Record revenues and adjusted EBITDA for the quarter and year-to-date are the rewards of substantial fleet and other growth investments that Quint just outlined and the dedication and skillful execution by our people. And we can make a stronger case than nearly anyone in the transport sector that the future cash flows from our long-term relationships and business agreements with blue-chip customers are undervalued in today's market despite being highly visible. All of that aside, we still face challenges related to the pandemic, particularly in our passenger operations.

The good news is that we anticipate Omni's passenger charter operations to continue to make progress but expect fourth quarter passenger operations, including ATI's military combi, to yield results similar to last year's fourth quarter. Like others, we aren't immune to supply chain challenges. We had planned to put 16 or more converted 767s on lease this year. It has recently become clear that supply chain constraints impacting our freighter conversion lines will keep us one aircraft short of that mark in 2021, with that aircraft sliding into 2022. Even with this delay, deploying 15 converted 767-300 freighter aircraft and releasing four 767-200s will be a yearly record and represents a remarkable achievement for the teams that made it happen. We're taking steps to expand our freighter conversion capacity in multiple ways, including our commitment to convert and lease 20 Airbus A330 aircraft, starting with the first lease deployment in 2024.

We're also adding Boeing as an additional conversion source for at least four 767s with the first induction scheduled for August of next year. Additionally, we will continue to convert Boeing 767 aircraft with our longtime conversion vendor, IAI. Altogether, we have secured access to 70 conversion slots for Boeing 767-300 as well as Airbus A321 and A330 aircraft over the next five years. We are continuing to find willing customers for all of our midsized freighters that we can deliver. Our order book for Boeing 767-300 freighters is full until late 2023. We already have significant customer interest in both the A321 and 330 platforms. CAM has already purchased the first A321 it intends to convert at PEMCO's facilities in Tampa and deliver to the lease customers in 2022. We also have other operating accomplishments worth celebrating. ATI's customers are benefiting from a series of upgrades at its flight control center that are reducing fuel consumption.

The 17% increase in revenue block hours at all of our airlines is great news, but it's important to note that those gains would not have been possible without our airline's ability to attract and select new flight crew personnel from an outstanding pool of talent and get more than 100 of them trained, certified and ready to fly those assignments when our customers needed them. Our LGSTX Services business has worked hard to be a reliable partner for Amazon for the ground and fuel services it needs to match the rapid buildup of its fulfillment network. That includes the opening of a new gateway facility in September in Nashville and continued support of Amazon's gateway facilities in Charlotte, Tampa and here in Wilmington, Ohio. Earlier this year, our AMES aircraft maintenance business announced a new multiyear agreement with United Airlines for heavy maintenance work on its Airbus A321s and several of its Boeing aircraft types. That work will be completed in the AMES hangar facilities in Wilmington and Tampa.

And finally, AMES' PEMCO division completed delivery of its second Boeing 737-700 FlexCombi and received an order for another. PEMCO also inducted the first of what we anticipate will be many Airbus A321s for conversion to freighters. Those are a few of the operating and commercial successes that helped us generate record financial results this year and will contribute to the results for several years to come. They are part of the reason why we are able to announce an increase in our financial guidance for 2021. Our adjusted EBITDA is now expected to be at least $535 million this year, ahead of the $525 million target we set last February. I expect ATSG's business to post strong positive free cash flows net of our sustaining capex spend for years to come. That concludes our prepared remarks.

Quint and I, along with Mike Berger, our Chief Commercial Officer, are ready to answer your questions. May we have the first question, operator?

Questions and Answers:

Operator

Thank you. And our first question is from Jack Atkins from Stephens.

Jack Atkins -- Stephens -- Analyst

Okay great. Good morning. Congrats on a great quarter, guys.

Rich Corrado -- President and Chief Executive Officer

Thanks, Jack.

Quint Turner -- Chief Financial Officer

Thanks, Jack.

Jack Atkins -- Stephens -- Analyst

So I guess, maybe first, if we could talk about the guidance for a moment and the increased outlook for 2021. Quint, I don't know if you want to take this, but maybe if you wouldn't mind kind of walking us through some of the puts-and-takes behind the raise. I would imagine there was a little bit of an additional benefit from Omni related to the Afghanistan withdrawal in the third quarter, but it sounds like that maybe the ramp in expected underlying military demand was maybe a little bit below expectations. I guess if you could just kind of help us kind of walk through all the different puts-and-takes there from a high level, that'd be helpful.

Quint Turner -- Chief Financial Officer

Sure, Jack. It's certainly true that the Afghanistan evacuation added some revenue opportunity in Omni during the third quarter, and that is a part of it. However, the expenses necessary to satisfy those opportunities were also probably higher than the folks might expect. We had to pay some premium pay certainly to the flight crews and the flight attendants who work those flights. So from an EBITDA perspective, it wasn't as big a driver as some might suspect. I think that we've seen -- and we saw it last quarter, the second quarter, we saw it in the third quarter and expect it to continue in the fourth, we've seen improvement in our airline ACMI operations. We've -- we're getting larger, certainly, in our support for our network cargo customers. And as you would expect, you look for efficiencies as you grow in size in those networks. We're also seeing some improvement, certainly, with Omni in terms of the commercial passenger business. It's still constrained with the pandemic effects. But as you guys who've been watching college football and things know, things are a little bit more normal. We're seeing some signs of life there, and that's helped. And of course, CAM and the deployments that -- we talked about the, I don't know, 40-plus percent earnings increase in CAM over the prior year quarter. CAM is doing an outstanding job of delivering on its lease commitments for customers with a record number of leases put in place. And again, these are long-term agreements. So that is all helping to come together to allow us to bump our guidance.

Rich Corrado -- President and Chief Executive Officer

Jack, I'd also add to that. I think it's important to note that we have put in -- if you recall, we talked about a lot of technology improvements and operational improvements that we were working on. And those are starting to bear fruit now. We put a continuous improvement program in about 1.5 years ago and did a large supply chain optimization program across the enterprise to leverage the full scale buying power of ATSG for all the individual entities, and that's bearing fruit. We've implemented new flight scheduling, planning and following as well as crew optimization, scheduling software at the two cargo airlines. And so that is starting to allow us to be more efficient with our crews. And so when you look at the better performance by the airlines, it wasn't all volume-related. There was a lot of hard work by a lot of people, leveraging technologies and projects that are helping us become more efficient and productive.

Jack Atkins -- Stephens -- Analyst

Okay. So that's really helpful. Thank you for walking us through that. I guess maybe for my next question here, the 70 conversion slots that you guys have secured over the course of the next -- I believe you said five years, Rich, I guess, two questions there. One, could you maybe provide us some visibility into how many of those you think are kind of already spoken for? Do you feel like you've got visibility into sort of demand for those? And then secondly, kind of within that broadly, could you talk about the types of customers that are -- you think those incremental 70 planes will be going to over the next five years? Are these going to be large sort of enterprise-level customer contracts like we've seen over the past five years? Or do you think they're going to be smaller-type contracts with kind of one-off customers? I was just kind of curious if you can maybe break that down a bit for us.

Mike Berger -- Chief Commercial Officer

Yes, Jack, it's Mike. I'll take that one. We really see it as a continued combination in regards to the type of customers that we project these aircraft to go to. Certainly, you've heard us over the last several quarters talk about the expansion globally of the push into other regions of the world, and we're going to continue to build upon those customers. And they certainly are part of our order book today. So the Astrals, the Rayas, the SkyTaxis of the world, they will become bigger customers for us, no question in the future. We're also excited about the opportunities that we have -- new opportunities and new customers in those parts of the world as well. In regards to the enterprise-type customers, yes, we certainly believe that the e-commerce growth is going to continue to drive the market for our big enterprise customers.

So we continue to see a large -- you'll see a combination of both, and the engine continues to be the e-commerce and m-commerce that are driving the integrators as well as the regional players. So in regards to how much visibility we have, in regards to it, 2022, we have previously said that our order book from a conversion standpoint will be at least 10 767s. As we look out further into 2023, at this point, we've got visibility on probably close to somewhere between -- in the high teens to -- somewhere in the high teens for 2023 deliveries based on that. And as Rich mentioned earlier, our 330 conversion slots start in July of 2023 and run through December of 2025. So our first 330 deliveries will be very early in January, starting January 2024. So that gives you some insights in regards to how it looks.

Rich Corrado -- President and Chief Executive Officer

I'd also say, Jack, that as far as customers for those airplanes, we're pretty much booked through the middle of 2023 on the 767 side. All three 2021 -- A321s have customers that we're working with right now. So as far as -- it's not just the slots. And I should say we also have feedstock for the 767 through the third quarter of 2023. So we've got feedstock, we have slots, and we have customers. So 2022 is looking closed out, and 2023 is we're finalizing things for that.

Mike Berger -- Chief Commercial Officer

Yes. And just one final thing. I mentioned the slots in terms of 330s, but the customer interest in regards to getting customers actually assigned to the 330s has been very, very strong. We've been at industry conferences over the last month or two. We'll go to another one here, Rich and I, in Austin and I spent a couple of weeks. So the conversation and discussions around the future aircraft, specifically the 330, are even stronger than we thought. So we're extremely excited about the future of that aircraft.

Jack Atkins -- Stephens -- Analyst

Okay. No, that's very helpful. I guess maybe for my last question before I turn it over, I know you guys historically have sort of thought about pricing your assets relative to the cost of capital, right? You're trying to achieve a specific level of unlevered return on invested capital and then looking to boost that with additional services that you can add on after that. But just given the high level of demand that you guys have been seeing now for quite some time and the visibility you have in demand looking forward, how are you thinking about the per unit economics of these aircraft moving forward? Is there an opportunity to sort of move the needle higher, just given the level of demand we're seeing for your assets specifically looking out over the next several years?

Rich Corrado -- President and Chief Executive Officer

Yes. It's a good question, Jack. The -- as far as the market goes, we deal with all different types of customers. Some are very large and will take large blocks of airplanes at a time, as you know. Others will take medium blocks. And then we have smaller customers that tend to do business with our larger customers in other parts of the world. MasAir is a good example. Down in Mexico, they fly for DHL. SkyTaxi in Europe flies for DHL. Just some examples. And so there, when you look at kind of the negotiating leverage side, it doesn't -- even though these are smaller companies, they have to have a cost structure that can compete for that same type of business. So we've been able to ratchet rates up a little bit. Keep in mind that when you're negotiating a lease term, how long the lease is, whether it's an eight year lease, a seven year lease or a 10-year lease, will impact the lease rate per month. And so a lot of times, customers will want to extend the term to get a better lease rate. But we've been able to get, ratchet up a little bit, particularly on releases and extensions. In the past, pretty much when you gave an extension to a customer, you take a haircut on it because there was a benefit to the company not having to have the aircraft come back and be down for two to four months, while you recheck it and get it ready for another customer, if you had one available. So -- but now with the demand out there, customers are hanging on to aircraft a lot longer. They're renewing their leases ahead of time, and the rates are firming up on those renewals. So that's all good news.

Jack Atkins -- Stephens -- Analyst

That is good news. I will turn it over. Thank you again for the time.

Rich Corrado -- President and Chief Executive Officer

All right Jack, thanks.

Operator

Our next question is from Helane Becker from Cowen.

Helane Becker -- Cowen -- Analyst

Thank, Jared. Thanks everybody for the time. Well, first of all, thanks for adjusted free cash flow. That's very helpful. And I appreciate that. And then for my question, I have two questions. One is with the amount of flying you did for moving people out of Afghanistan and so on, how should we think about the DOD revenue going forward? I'm assuming we're not going to have as much and just kind of wondering how to think about that.

Quint Turner -- Chief Financial Officer

Yes. I think -- Helane, this is Quint. We -- in terms of the fourth quarter, I think we said we're expecting a fourth quarter similar to what we saw in the fourth quarter of 2020. As far as changes in the DOD longer term in terms of the volume of military flying, what we've seen in the past is that when theaters change, it doesn't necessarily have a large impact on the actual volume of flying because troops move from theater to theater, and the rotations of those troops still take place. Training exercises move around. But ultimately, that we -- our experience in the past has been that -- or Omni's experience is that it hasn't made a real significant difference over the long pull. But now you don't -- as we've said in the past, we don't get as much visibility, right, on the passenger side with the DOD as we would, for example, with scheduled cargo network flying for our other customers.

Helane Becker -- Cowen -- Analyst

Right. Got you. Okay. That's very helpful. And then my other question is on AMES. So I think you mentioned about United and I -- doing the maintenance for them. And I know you have some other customers for them. When you think about growth for them, how do you think about -- I guess, how many outside customers could they have? Because they also do some of your in-house maintenance, I think. So how big can they get as non-ATSG customers?

Rich Corrado -- President and Chief Executive Officer

So it's a good question because we're -- this is Rich, Helane. Thank you. It's a good question because we are constantly balancing that internal versus external revenue as it relates to the AMES profile. Generally, they -- we have demands, particularly the CAM puts on them, and then the other -- the airlines have C checks, etc. And sometimes there's things that only AMES can do. For example, they're the only MRO in the world that will do an aft pressure bulkhead as far as we know. And so we have some of those from time to time. So we tend to populate the specific needs of airplane -- our own airplanes, where we know it's more beneficial for AMES to do those airplanes. We do send some of our airplanes outside due to -- allowing AMES to optimize external customer views. So when we get a customer like United that has a multiyear agreement that will be consuming hangar space nose to tail for a long period of time, that's a good deal for us. It's a very predictable amount of revenue and cash.

And so we optimize around that. We've got other deals such as with Frontier down in -- down at AMES in Tampa. And then we have conversion lines that are dedicated for the A321 and right now for the 737 down in -- down at Tampa. Those conversion lines will probably shift. By 2023, we'll have two A321 lines most likely up in AMES, and we'll probably back off on the 737. But -- so it's really when we look at our annual plan, it's what's on the docket for C checks and odd maintenance items. We do profile. CAMs needs to -- or whatever they're doing. It's one of the huge advantages that CAM has over other leasing companies is to have access to an MRO that will prioritize their business. And so when we have lessees that want upgraded avionics or they want some special work under the airplane or they want us to help them put the aircraft on their certificate, all those things we can do, it's captive and CAM -- and we prioritize that with our MROs for CAM.

Mike Berger -- Chief Commercial Officer

But in terms of total MRO capacity, it's kind of limited based on facility space.

Rich Corrado -- President and Chief Executive Officer

Right.

Helane Becker -- Cowen -- Analyst

Thanks very much, I will see you in a few weeks.

Rich Corrado -- President and Chief Executive Officer

Thanks, Helane.

Operator

Our next question is from Frank Galanti from Stifel.

Frank Galanti -- Stifel -- Analyst

Great. Thank you very much. Thank you for breaking out the -- just the free cash flow and that sustaining capex number. That was very helpful. I want to dig in on that a little bit. Last quarter, you had said -- I guess, my question is on a maintenance capex side, that it was closer to $160 million a year. I just wanted to kind of get a clarification around that versus kind of the $195 million guidance today -- or for 2021. Are those numbers -- were those numbers kind of different? Was I asking a different question? Or is this kind of a higher year than normal? And I guess, the real question is, what does that number look like generally going into the future? And previously, you'd said that with scale, kind of linearly with plane additions, can you give us a sense how to think about that on a per plane basis?

Quint Turner -- Chief Financial Officer

Yes. That's a good question, Frank. The -- if you look at what is in that sustaining, we wanted to put growth and make it as pure as possible with just feedstock purchases plus conversion. And then what we're calling sustaining is primarily what you would call maintenance capex, which is heavy maintenance on airframe that's scheduled and engine overhauls, etc. But it also includes some of the capex that we invest here to -- Rich mentioned some of the technology improvements that we've invested in, IT and so forth. And so from year-to-year, from period to period, like, for example, we've significantly upgraded, revised some of our big systems around here, whether it's flight, dispatch or maintenance. We've made some investments in that, which, thankfully, we're pretty much at the end of. I think, at this period, that cycle is kind of over. But that, I think, is responsible for the little bit higher maintenance or sustaining capex guidance that we've given of $195 million. I do believe that the -- and timing of scheduled maintenance can have an impact from period to period.

But in general, I think kind of the $160 million to $180 million number is a good number for our fleet-driven maintenance capex on an annual basis. And the thing about our business model is as the fleet grows, because we lease these aircraft out to -- for the most part, to external lessees, they are responsible for the maintenance during the life of the lease. So you think about our business model, the maintenance or the sustaining capex will not grow in line with the fleet because, for the most part, that's the lessee's responsibility. So you're going to see an expanding -- over time, you're going to see the adjusted free cash flow ATSG produces go up as we build out CAM's portfolio of leased aircraft. It's not going to drive substantial maintenance capex. Now we will have -- in terms of engines, we will have some more capex as we enter next year, associated with some of the 767 engines that had previously been covered under power by our agreements. So that will have some impact. That's more of an accounting thing than it is a cash flow thing because we won't be paying for the power by cycle expense for that -- the maintenance of those engines. Instead, we'll be capitalizing those overhauls. And so you'll see that have some impact. But the good thing about our model is it shifts maintenance responsibility largely to our customers.

Frank Galanti -- Stifel -- Analyst

Okay. That's really helpful. And then I wanted to ask on the capital commitments for 70 slots for conversions you guys have booked. And obviously, part of that capex requirements is going to be the feedstock and not all of that -- those feedstock assets have been purchased. Can you sort of give us a sense for how much that total capex is? What's sort of happening to feedstock pricing today? And then from a holistic perspective, what -- how does that sort of break out on an annual basis? Is that expected to be funded with internally generated cash flows? And this is a big question, but what does that look like then on a debt basis for the company? What level of debt is -- what are you guys comfortable with?

Quint Turner -- Chief Financial Officer

Let me help you out a little bit on that if I can. Because I think you're right, it's kind of a broad question there. But the slot commitments are typically involved putting deposits down to secure slots, but then those deposits are part of your cost of conversion when you induct the airplane. But where you put them at risk, obviously, is if you wanted to walk away and not use the slot, then you would forfeit your deposits, right? And so we don't want to talk necessarily about what specific conversion providers have required in terms of deposits. But we account for those expenditures as capital expenditures when we put down the cash, when we make the deposits. And it becomes effectively part of the -- into service and conversion cost of the aircraft because when you induct it, it just gets applied to the cost of the conversion. So hopefully, that answers that. In terms of commitments, you're right, I mean, the timing of capital expenditures for our aircraft investments for CAM are going to be more driven by the timing of feedstock purchases.

And you see us at the end of this quarter already with, I believe, 15 767s that we have purchased feedstock for, and those are in some stage of conversion, either in or awaiting conversion; and one A321. So that's already in our capex that we've reported for those aircraft. And then in future years, of course, we'll -- as Mike and Rich commented, we've already secured feedstock commitments to take aircraft to fill a large portion of these 70 slots, particularly for the 767 in the future years. We've negotiated conversion pricing and so forth. As far as how it impacts our debt or our debt leverage as we think about how we expect to grow our fleet, I mean, as you've seen with our business model, we have delevered while growing our fleet. One of our slides illustrated that quite clearly. And I think that with the adjusted free cash flow that we produce, we expect to continue to build out and grow our operating cash flow, our EBITDA and our fleet size without really adding debt to any significant degree because the model simply produces that much adjusted free cash flow. It's a great situation to be in because, as we said in our remarks, the business self-funds significant growth.

Mike Berger -- Chief Commercial Officer

Yes. In regards to the cost of the feedstock, I'll maybe take you through that piece of it. We've -- Rich had mentioned that we've identified or acquired feedstock that takes us through certainly through 2022 and almost all of 2023. On the 767 side, feedstock remains a little bit tight from a market standpoint, and that's really driven by the market demand and how the growth of the entire market is going. So there's really been, I would say, stability in pricing for 767s, really from before the pandemic in 2019 through the pandemic in 2020, and really still stable from a -- as we totally come out of the pandemic. So from that standpoint, feedstock prices have been relatively solid for the last couple of years. In regards to the A330, we haven't purchased any of those yet, but we continue to look at feedstock, and feedstock is very plentiful. And so we think the feedstock costs on that aircraft over the next couple of years will improve and come down as those airplanes become even more available.

Frank Galanti -- Stifel -- Analyst

Great. I really appreciate the answers. Thank you very much.

Operator

Our next question is from Chris Stathoulopoulos from Susquehanna.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Hey, good morning everyone. Thanks for taking my question. So if I look at the focus here and the disclosure on free cash flow, the time you spent in your prepared remarks on the balance sheet and also the out-year guidance on the slots, having followed you for a few years now or some time, if I put these together, I mean, are you signaling that perhaps just here is the next chapter for CAM and perhaps the enterprise as a whole, as Amazon and its order book is fully appreciated by the market now? And just assuming, I mean, where you're at next year, 128 aircraft at the end of the year, I mean, if I put these points together and make some modest assumptions around the slot conversions, could CAM be a top 15 lessor by mid-decade or so? Meaning, is it reasonable to assume that we could see somewhere in the low 200s on an active fleet by 2025, 2026? Thanks.

Rich Corrado -- President and Chief Executive Officer

Yes. I mean based on the amount of slots we have and the amount of airplanes we already own, over the next five years, we should be close to 200 airplanes. I mean we already, over the past few years, have been the largest lessor of freighter aircraft. There's a lot of large passenger lessors that acquire large blocks of airplanes, and they're just in a different business than we're in. There's a few larger freighter lessors that are also passenger lessors, like GECAS as an example, and they just merged as well. But -- so our goal is to maintain our leadership position in the medium range, medium wide-body freighter market globally. We're there now, and we intend to stay there. And everything we've done, whether it's our capital planning, whether it's the way we've restructured our balance sheet, whether it's the way we've acquired our slots, got into the A321, now the A330, is to maintain that position. We feel it's driving good returns for our shareholders and that the growth prospects in that segment because it's been powered by the e-commerce growth globally, that's still in a very low penetration compared to general retail, is going to have strong demand for years to come. And we think we're very well positioned at this point to continue to ride that wave.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And then, Quint, could you just remind us, as we look out past -- well, as we look at next year and through 2025 with these slots here, how we should think about ballpark EBITDA per aircraft, considering now that you're going to have a bit of a different mix here with this move to Airbus? Thanks.

Quint Turner -- Chief Financial Officer

Well, you're jumping out there, Chris, and it's a good question in terms of how far forward you're looking. We've talked about the 767, right, for a long time about what -- and Rich gave you what some of the variables are in terms of how we think about pricing based upon term and so forth. But the 767, just for the lease, before you think about value-added services, is probably $3.75 million to $4 million on an annual basis of -- in terms of revenue. And if you think about the EBITDA margins on our lease, it's probably over 90% on just the leasing income. If you think about the 330, the 330 is 15% to 20% larger than the 767 in terms of cube capacity and so forth, so 15% to 20% larger. So you're probably looking at a similar increase over those numbers in terms of what you would expect to produce on the 330 side. The 321 is kind of, what, 2/3 the size of a 767-300. Rich, you can jump in here, but...

Rich Corrado -- President and Chief Executive Officer

No, I would say that the investment and the lease on the A321 is going to be about 2/3 of what we get on the 767-300.

Quint Turner -- Chief Financial Officer

Yes. And we target, as you know, Chris, an unlevered return in excess of 10% on incremental capex investments that we make to build out our fleet. And certainly, we are beating that in today's market. And then you look to add those value-added services. It all depends upon how many of those services are leasing customers who want to buy. Do they want us to fly the airplane for them? Do they want us to maintain it, etc?

Chris Stathoulopoulos -- Susquehanna -- Analyst

Okay. And if I could get in one more question. The four slots at Boeing here, just curious why the move -- you've typically done the conversion with IAI. Is that just because of capacity or perhaps you've got a little bit better deal on pricing? Thanks.

Mike Berger -- Chief Commercial Officer

Yes. This is Mike. We -- it was solely driven based on ensuring that we meet our customer commitments. That's been our theme. Rich reemphasizes it all the time when he's out speaking. If we say we're going to do something, we're going to do it. And just this allowed us really to ensure that we meet those commitments starting in 2023. So these four slots that we secured with Boeing, two of them will be for next year, two of them will be for 2023, but all the airplanes will be delivered in 2023 at this point. So that's the nature of it. There are certain places in the world, if I could put it that way, where the Boeing freighter plays better for a variety of different reasons. So it gives us incremental flexibility and opens up even more opportunities to diversify our customer base and to ensure that we're, like I said, meeting the commitments to our customers.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Great. Thank you.

Operator

Our next question is from Stephanie Moore from Truist.

Stephanie Moore -- Truist -- Analyst

Hi. Good morning. Congrats on a great quarter.

Rich Corrado -- President and Chief Executive Officer

Thanks, Stephanie.

Quint Turner -- Chief Financial Officer

Thank you.

Mike Berger -- Chief Commercial Officer

Thank you.

Stephanie Moore -- Truist -- Analyst

You just touched on this a little bit in terms of the return profile of these new leases and kind of targeting at least a 10% return. It sounds like you've been exceeding that. But maybe if you could just break that out a little bit further and just walk through the math between procuring, obviously, the feedstock and the depreciating and really how we could back into the [Indecipherable] the return profile of these leases. And as a follow-up to that, what's the opportunity for these returns to maybe increase over time? So your thoughts overall in the long term. Thank you.

Quint Turner -- Chief Financial Officer

Yes. I mean, Stephanie, we -- of course, we don't necessarily -- because of -- as Rich says, there are some variables involved. We don't necessarily give the detail in terms of pricing strategy. But for example, I can tell you, if you take CAMs -- if you take the assets CAM has on its books, the pre -- not net book but investment cost and you look at what CAM is getting on those in terms of EBITDA, for example, inside of CAM, it's getting about a 12% return on an annual basis on its investments. And of course, CAM isn't the operating pieces of our company. It isn't the airlines. It isn't the MRO. So that's where those additional services are sold. So if you think about -- we've talked about the cost of a 767-300. To put it on-ramp in leasable condition, it can vary, obviously, depending upon the age of the aircraft, etc, but you're probably looking for somewhere around $30 million to put one on-ramp in leasable condition.

And we look to earn an unlevered return on that $30 million on an annual basis over the life of the asset, which we believe is 20-plus years, in excess of 10%. And as I mentioned, we're exceeding that based on the demand for these midsized cargo aircraft in today's market, and we expect to exceed that over the long haul. So as we've said a minute ago, the investment cost for a 321 is going to be less. It's a smaller aircraft, what Rich, about 2/3 the size of a 300. So you could say it's going to be somewhere probably in the neighborhood of $20 million putting it on ramp. And then you think about a 330, it's going to be 15% to 20% larger than that. So you can take that $30 million up some, right, in terms of your investment cost. But our return targets remain the same on those investments, and we expect to achieve or exceed those over the life of the asset.

Stephanie Moore -- Truist -- Analyst

Great. No, that's really helpful. And then just a house -- lastly, a housekeeping question for me, and I'm sorry if I missed this earlier. But I believe you said that you were -- you kind of locked in at least 10 new leases for 2022. Maybe you mentioned it's a high-teens number for 2023. What -- I'm sorry, I just missed the color around 2023.

Mike Berger -- Chief Commercial Officer

Yes, that's correct. We're still anticipating at least 10 in 2022 and the high teens, somewhere 18, 19 at this point in 2023, Stephanie.

Stephanie Moore -- Truist -- Analyst

Got it. That's it for me. Thank you so much.

Rich Corrado -- President and Chief Executive Officer

Thanks.

Quint Turner -- Chief Financial Officer

Thanks.

Operator

[Operator Instructions] And our next question is from Jack Atkins from Stephens.

Jack Atkins -- Stephens -- Analyst

Great. Just a quick follow-up here. The vaccine mandate has been a major topic of discussion, I think, over the course of the last couple of days, certainly, but I think over the course of this earnings season. I was just curious if you think that was going to have any sort of impact on either your work groups, your labor force in general or productivity. Is that something that you guys are kind of keeping an eye out for as this kind of goes into effect early next year?

Rich Corrado -- President and Chief Executive Officer

That's a great question, Jack. It's -- people ask what you lose sleep over, right? The problem with this vaccine mandate when it came -- first came out, there was very little to no guidance from the government when they first put it out. The two executive orders were signed: one regarding government contractors, which a lot of our operations fall under; and one that will be managed by OSHA for companies that have more than 100 employees. And so we have been working with our companies, particularly with the unions, in negotiating terms under which they would get vaccinated. We've been compensated -- we've allocated compensation for that, and we've also incented our own -- not our own employees, but non-CBA-covered employees to get vaccinated as well. So we've had a plan even before these executive orders to get the population vaccinated. But it's been really difficult to figure out how to look at some of our businesses, for example, LGSTX, which has some postal contracts, and they sort mail for the postal service, but they also have Amazon Gateway that are completely separated from the government contracts.

And then here in Wilmington, all of our -- where most of our companies reside, although some of our companies, like CAM, as an example, is not technically a government contractor, but they're in the same building and facility as our two airlines that are. And so under the guidelines, the brand new guidelines that were just issued earlier this week, they are now considered a -- CAM is not considered impacted by the government piece of this. So we've been shucking and jiving and bobbing and weaving, trying to figure out exactly how to execute on this thing. But right now, we feel really good. Our guiding principle has been two. One is safety, always, and that's been since the start of the pandemic; and the second one, for the fourth quarter, in particular, has been business continuity. And that's the guideline that we've been marching toward with each individual one of our companies as they tackle the requirements of the government going forward. I can say right now because we run a -- we've been doing surveys that's ongoing, and it's how an employee can get the incentive piece for getting vaccinated, and we've had over 80% of our employees respond.

And out of those employees, the ones that haven't, they have -- I think it's until -- they've got another two weeks, I think, before -- to respond and still get the incentive. And if you look at folks that are vaccinated or planning to get vaccinated or are at one shot of a 2-shot or have some type of medical or religious exemption, 92% of the folks who have responded are covered. We feel really good about that. All of the companies, the airlines and the MRO and LGSTX have committed that they believe that business continuity will be strong in the fourth quarter. And so we're real confident that we're going to be able to deliver for our customers and help them deliver for their customers. And so it's been -- I'm probably telling you how to build a watch when you ask me what time it is. But this has been a real focus of -- all the leaders in the company have done a fantastic job, I have to say, that managing their individual populations to get to the point now that we're confident that we're going to have -- we're going to be able to service our customers without any disruption in the fourth quarter.

Jack Atkins -- Stephens -- Analyst

Okay. That's fantastic. Thanks for that detailed response. I really appreciate it.

Rich Corrado -- President and Chief Executive Officer

Thanks Jack.

Operator

We have another question from Chris Stathoulopoulos from Susquehanna.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Thanks for taking my follow up. So obviously, you haven't had to make the adjustments to your workforce similar to your passenger peers here. But curious if you're seeing any pressuring along the -- pressure, excuse me, on the FTE line and what you're seeing in your hiring class for pilots and then also, where you are on the contract talks with ALPA for ATI and IBT on Omni. Thanks.

Rich Corrado -- President and Chief Executive Officer

Yes. So in terms of attracting pilots, we're still in great shape. Airlines are growing. Omni's get a soft spot right now. But we haven't had a problem attracting pilots, which is good. We're managing any attrition due to retirements and those types of things. We've got -- still, ATI is a very fast-growing airline. And so that's what pilots want to work for an airline that allows them to improve their career quicker and move from a first officer to a captain. So we've had very strong response to -- when we put out a class for training to add crews for all of our airlines, which has been solid. In terms of where the negotiations stand, both ATI and Omni crew agreements, pilot agreements are amendable right now.

And both are really at the beginning stages of their negotiations. They're in Section six bargaining. They're covered by the Railway Labor Act. And so these things generally take a long period of time. Right now, they've defined kind of the process, the negotiating process and the cadence of meetings. And so they're meeting three times -- three days each month to go through that. Really just working on the agreements now, having gotten into working on crew rules and some other things, haven't got into the compensation side of it yet. But they're working together well, both airlines and their unions. And we're hoping that we'll get through this and get into -- and maintain a good competitive cost structure and a good -- and a compensation program that allows us to continue to attract the best pilots in the business.

Chris Stathoulopoulos -- Susquehanna -- Analyst

Appreciate all the time today. Thank you.

Rich Corrado -- President and Chief Executive Officer

Thank you.

Chris Stathoulopoulos -- Susquehanna -- Analyst

All right Chris.

Operator

And I would now like to turn the call back over to CEO, Rich Corrado, for closing remarks.

Rich Corrado -- President and Chief Executive Officer

Thank you. This holiday season, the demands on logistics networks and the companies that operate them are greater than we've seen ever before. The people at the frontlines of these networks will be under even more stress than COVID has already imposed. Our people will rise to the challenge as they always have while keeping safety first. I ask you all to think of those people across those networks every time you hit that order button on your screen this season. Have a great holiday season, and we'll be back with you again in 2022. Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Joe Payne -- Chief Legal Officer

Rich Corrado -- President and Chief Executive Officer

Quint Turner -- Chief Financial Officer

Mike Berger -- Chief Commercial Officer

Jack Atkins -- Stephens -- Analyst

Helane Becker -- Cowen -- Analyst

Frank Galanti -- Stifel -- Analyst

Chris Stathoulopoulos -- Susquehanna -- Analyst

Stephanie Moore -- Truist -- Analyst

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