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Why Air Transport Services Group, Inc. Shares Jumped 19% in February

By Adam Levine-Weinberg – Mar 10, 2016 at 10:50AM

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The air cargo company is going into business with Amazon.com.

ATSG will provide air cargo service for Amazon.

What: Shares of air cargo specialist Air Transport Services Group (ATSG -4.43%) rose 19% last month, according to data provided by S&P Global Market Intelligence.

Most of the gains came on a single day: Feb. 10. On that day, The Wall Street Journal reported that Air Transport Services Group was operating cargo flights for e-commerce giant Amazon.com (AMZN 0.62%) and planned to expand that relationship.

ATSG Chart

Air Transport Services Group YTD Stock Performance, data by YCharts.

So what: Rumors about Amazon.com's interest in building out its own delivery capabilities have been swirling for quite some time. It has already started hiring its own drivers in some markets to deliver packages for its Prime Now same-day delivery service.

Controlling some of its own air cargo capacity would allow Amazon to reduce its reliance on package delivery firms for next-day and two-day deliveries. However, it is very difficult to start a new airline in the U.S., due to strict FAA regulations.

On Wednesday, Air Transport Services Group confirmed that it will lease 20 Boeing 767 freighters to Amazon for at least five years. ATSG will also operate the planes. As part of the agreement, Amazon will get warrants to acquire a 19.9% stake in ATSG over the next five years at $9.73 per share, ATSG's closing price the day before The Wall Street Journal reported its involvement with Amazon.

This news sent Air Transport Services Group stock soaring as much as 26.6% on Wednesday. The stock ended the day with a 16.7% gain.

Now what: The agreement with Amazon.com will undoubtedly provide some significant growth opportunities for ATSG. However, at this point, it isn't clear how profitable the contract will be. Investors also have to worry about the likely dilution from Amazon exercising its warrants.

On the other hand, if Amazon finds that having an in-house air cargo operation is good for its business, it could eventually look to buy the other 80% of Air Transport Services Group. That could potentially provide current shareholders a nice takeover premium.

Adam Levine-Weinberg owns shares of The Boeing Company. The Motley Fool owns shares of and recommends Amazon.com. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Amazon Stock Quote
Amazon
AMZN
$93.98 (0.62%) $0.57
Air Transport Services Group Stock Quote
Air Transport Services Group
ATSG
$27.15 (-4.43%) $-1.26

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