Air Transport Services Trying To Recover From A Pandemic-Driven Air Cargo Hangover

Core Viewpoint - The air cargo market has experienced significant volatility, with a notable decline in demand leading to a decrease in stock prices for companies like Air Transport Services Group (ATSG) and its peers [2][3][8] Market Trends - Air cargo demand surged due to e-commerce growth but has since weakened, resulting in oversupply and reduced load factors [2][3] - Global air cargo traffic rebounded by over 14% in June 2024, but still remains down 4% compared to June 2021 [3] - Load factors have decreased, with global load factors at 45.8% and North American load factors under 40% as of June 2024 [3] Financial Performance - Air Transport's revenue declined by 8% in Q2 2024, with core revenue for ACMI flight services and CAM leasing operations also down by 7% [5] - EBITDA fell by 17% for the quarter, with margins decreasing to 26.7% [5] - The company reported a significant loss in the ACMI segment, with a $7 million loss compared to a $24 million profit a year ago [5] Capital Allocation Strategy - Air Transport has shifted to a more disciplined capital allocation approach, reducing capex from over $790 million in FY23 to below $400 million in 2024 [6] - The company aims to align capacity expansion with actual demand, avoiding the pitfalls of overbuilding seen in previous years [6] Future Outlook - Expectations for EBITDA margins in fiscal 2024 are around 25% to 26%, with potential for improvement as cargo traffic demand recovers [7] - Long-term revenue growth is projected at approximately 4%, driven by the continued expansion of e-commerce [7] - Future fleet expansion will significantly impact free cash flow, with capex expected to be in the low-to-mid-20% range of revenue [7] Investment Considerations - Despite past capital allocation mistakes and reliance on large customers, there is perceived value in Air Transport's fleet of high-quality freighters [8] - The company is seen as a potential opportunity for more aggressive investors, especially as air cargo metrics improve [8]