AIR TRANSPORT SERVICES GROUP, INC. The following Management's Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations ofAir Transport Services Group, Inc. , and its subsidiaries. It should be read in conjunction with the accompanying consolidated financial statements and related notes included in Item 8 of this report as well as Business Development described in Item 1 and Risk Factors in Item 1A of this report.
INTRODUCTION
We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services, and other support services to the air transportation and logistics industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. Our principal subsidiaries include three independently certificated airlines (ABX, ATI and OAI) and an aircraft leasing company (CAM). The health and safety of our employees is paramount. Maintaining the health of our employees during the /COVID-19 pandemic is essential for us to operate safely and maintain our customers' networks. We have taken precautions to prevent, detect and limit the spread of the COVID-19 virus in the workplace. These practices include daily temperature checks, requiring face masks, periodically sanitizing facilities, frequent cleaning of high touch surfaces, supporting remote working, travel restrictions, promoting social distancing and frequent hand washing, contact tracing, quarantining, and other practices prescribed by theCenters for Disease Control and Prevention . Our airline operations rely on flight crews, aircraft maintenance technicians, flight support personnel and aircraft loading personnel. We rely on a skilled workforce to perform aircraft maintenance. Similarly, we staff personnel near airports to sort customer packages, load aircraft and maintain related equipment. We have added extra precautions and redundancies related to crews reserves, employee travel protocols, sanitation and other measures. We have not experienced a wide-spread outbreak at any location. However, a COVID-19 outbreak among our flight crews, at one of our maintenance facilities, at customer sorting centers or an airport could result in workforce shortages, facility closures and significant numbers of flight cancellations. In such event, flight delays and additional costs could become significant. A COVID-19 outbreak at one of our maintenance facilities, or at customer sorting centers could result in workforce shortages and facility closures. We have two reportable segments: CAM, which leases Boeing 777, 767, and 757 aircraft and aircraft engines, and ACMI Services, which includes the cargo and passenger transportation operations of the three airlines. Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services to customers, load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments. OnNovember 9, 2018 , the Company acquired OAI, a passenger airline, along with related entities (referred to collectively as "Omni"). Revenues and operating expenses include the activities of Omni for periods since their acquisition by the Company onNovember 9, 2018 . AtDecember 31, 2020 , we owned 100 Boeing aircraft that were in revenue service. AtDecember 31, 2020 , CAM also owned eight Boeing 767-300 aircraft either already undergoing or awaiting induction into the freighter conversion process. In addition to these aircraft, we leased two freighter aircraft provided by a customer and four passenger aircraft. Our largest customers are theU.S. Department of Defense (DoD ), ASI, which is a subsidiary of Amazon, and DHL. TheDoD comprised 31%, 34% and 15% of the Company's consolidated revenues during the years endedDecember 31, 2020 , 2019 and 2018, respectively. The Company's airlines have been providing passenger and cargo airlift services to theU.S. DoD since the mid 1990's. Contracts with the USTC are typically for a one-year period, however, the current passenger international charter contract has a two-year term with option periods, at the election of theDoD , throughSeptember 2024 and the contract with ATI to provide combi aircraft operations, runs throughDecember 2021 . Due to the acquisition of OAI, theDoD comprises a larger portion of our 2020 and 2019 consolidated revenues compared to previous years. Revenues from our commercial arrangements with ASI comprised approximately 30%, 23% and 27% of our consolidated revenues during the years endedDecember 31, 2020 , 2019 and 2018, respectively. OnMarch 8, 2016 , we entered into an Air Transportation Services Agreement (as amended, the "ATSA") with ASI pursuant to which we lease Boeing 767 freighter aircraft to ASI, operate the aircraft via our airline subsidiaries and provide ground 30 -------------------------------------------------------------------------------- handling services by our subsidiary, LGSTX. Under the ATSA, we operate aircraft based on pre-defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network. The operating term of the ATSA runs through March of 2024 and is thereafter subject to renewal provisions. The aircraft lease terms range from 5 to 10 years. For more information about the ATSA, including its amendments, see Item 1 of this report. The table below summarizes aircraft lease placements and commitments with Amazon as ofDecember 31, 2020 . Amazon Year of # of Leases Commencement Expiration Leased Boeing 767-200 12 2016 2023 Boeing 767-300 2 2016 2026 Boeing 767-300 6 2017 2027 Boeing 767-300 6 2019 2029 Boeing 767-300 5 2020 2030 Lease Commitments Boeing 767-300 11 2021 2031 In conjunction with the execution of the ATSA and its amendments, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement onMarch 8, 2016 (the 2016 Investment Agreement) and a second Investment Agreement onDecember 20, 2018 (the 2018 Investment Agreement). Pursuant to these Investment Agreements, the Company issued warrants to Amazon in conjunction with aircraft leases. Through the 2016 and 2018 Investment Agreements and the exercise of the warrants granted thereunder, Amazon could potentially own approximately 39.9% of the Company if all the issued and issuable warrants vest and are settled in full with cash. Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. The fair value of the warrants issued or issuable to Amazon are recorded as a lease incentive asset and are amortized against revenues over the duration of the aircraft leases. The warrants are accounted for as financial instruments, and accordingly, the fair value of the outstanding warrants are measured and classified in liabilities at the end of each reporting period. The Company's earnings are impacted by the fair value re-measurement of the Amazon warrants classified in liabilities at the end of each reporting period, customer incentive amortization and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described below for financial reporting. For additional information about the warrants, see Note D to the accompanying consolidated financial statements in this report. DHL accounted for 12%, 14% and 26% of the Company's consolidated revenues, excluding directly reimbursed revenues, during the years endedDecember 31, 2020 , 2019 and 2018, respectively. Under a CMI agreement with DHL, ABX operates and maintains aircraft based on pre-defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to DHL for its network. Under the pricing structure of the CMI agreement, ABX is responsible for complying withFAA airworthiness directives, the cost of Boeing 767 airframe maintenance and certain engine maintenance events for the aircraft leased to DHL that it operates. As ofDecember 31, 2020 , the Company, through CAM, leased 14 Boeing 767 aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft, expiring between 2021 and 2024. Eight of the 14 Boeing 767 aircraft were being operated by the Company's airlines for DHL. We also operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL during 2019 and the first half of 2020. During 2020, DHL terminated operating agreements for three of the Boeing 757 aircraft. The decline in the percentage of revenues from DHL primarily reflects the removal of the Boeing 757 operations and increased revenues from other customers compared to last year. 31 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Revenue and Earnings Summary External customer revenues from continuing operations increased by$118.4 million , or 8%, to$1,570.6 million during 2020 compared to 2019. Customer revenues increased in 2020 for contracted airline services, charter flights, aircraft leasing and aviation fuel sales, compared to the previous year periods. Beginning in lateFebruary 2020 , our revenues were disrupted due to the COVID-19 pandemic. TheDoD and other customers began canceling scheduled passenger flights as a result of the pandemic. The decline in revenues from these cancellations was offset by an increase in flying for our customers' package delivery networks and charter flight operations during 2020. Revenues for 2018 were$892.3 million and included only a few weeks of revenue for OAI which was acquired onNovember 9, 2018 . The consolidated net earnings from continuing operations were$25.1 million for 2020 compared to$60.0 million for 2019 and$67.9 million for 2018. The pre-tax earnings from continuing operations were$41.4 million for 2020 compared to$71.6 million for 2019 and$87.5 million for 2018. Earnings were affected by the following specific events and certain adjustments that do not directly reflect our underlying operations among the years presented. On a pre-tax basis, earnings included net losses of$100.8 million and$12.3 million and net gains of$7.3 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon. •Pre-tax earnings were also reduced by$20.7 million ,$17.2 million and$16.9 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, for the amortization of customer incentives given to ASI in the form of warrants. •Pre-tax earnings from continuing operations included expenses of$12.0 million , gains of$9.4 million and expenses of$8.2 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, for settlement charges, curtailments and other non-service components of retiree benefit plans. •Pre-tax earnings included losses of$13.6 million ,$17.4 million and$10.5 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, for the Company's share of development costs for a joint venture and the partial sale of an airline investment. •Pre-tax earnings for the year endingDecember 31, 2020 were decreased by an impairment charge of$39.1 million for our four Boeing 757 freighter aircraft and related assets. •During 2020, the Company recognized$47.2 million of government grants from the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). •Pre-tax earnings for 2019 and 2018 also included expense of$0.4 million and$5.3 million , respectively, for acquisition fees incurred during the Company's acquisition of Omni. After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows), were$156.2 million for 2020 compared to$128.3 million for 2019 and$104.6 million for 2018. Adjusted pre-tax earnings from continuing operations for 2020 improved by 21.8% compared to 2019, driven by increased revenues primarily from CAM and the ACMI Services segments. While improved, our results in 2020, particularly for commercial passenger flying,DoD flying and aircraft maintenance services, were detrimentally impacted by the COVID-19 pandemic. Adjusted pre-tax earnings from continuing operations for 2019 improved by 22.6% compared to 2018, driven primarily by additional revenues and the improved financial results of our airline operations, including Omni, which we acquired inNovember 2018 . Adjusted pre-tax earnings for 2019 also improved due to additional aircraft leases and the expansion of gateway ground operations for ASI. Pre-tax earnings for 2019 included additional interest expense of$37.8 million due to the acquisition of Omni and the expansion of the fleet. 32 --------------------------------------------------------------------------------
A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below (in thousands):
Years Ending
2020 2019 2018
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services $ 327,170 $ 301,984 $ 245,860
Lease incentive amortization (18,509) (16,708) (16,904)
Total CAM 308,661 285,276 228,956
ACMI Services 1,147,279 1,078,288 548,839
Other Activities 334,300 314,014 286,579
Total Revenues 1,790,240 1,677,578 1,064,374
Eliminate internal revenues (219,665) (225,395) (172,029)
Customer Revenues $ 1,570,575 Pre-Tax Earnings (Loss) from Continuing Operations: CAM, inclusive of interest expense
$ 77,424 $ 68,643 $ 65,576 ACMI Services 66,897 32,055 11,448 Other Activities (5,933) 13,422 11,170 Net unallocated interest expense (2,825) (3,024) (460) Government grants 47,231 - - Impairment of aircraft and related assets (39,075) - - Net financial instrument re-measurement (loss) gain (100,771) (12,302) 7,296 Transaction fees - (373) (5,264)
Other non-service components of retiree benefits costs, net 12,032
(9,404) 8,180
Loss from non-consolidated affiliate (13,587) (17,445) (10,468)
Pre-Tax Earnings (Loss) from Continuing Operations 41,393 71,572 87,478
Add other non-service components of retiree benefit costs, net
(12,032) 9,404 (8,180)
Less government grants (47,231) - -
Add impairment of aircraft and related assets 39,075 - -
Add charges for non-consolidated affiliates 13,587 17,445 10,468
Add lease incentive amortization 20,671 17,178 16,904
Add transaction fees - 373 5,264
Add net loss (gain) on financial instruments 100,771 12,302 (7,296)
Adjusted Pre-Tax Earnings from Continuing Operations
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is
pre-tax earnings excluding the following: (i) settlement charges and other
non-service components of retiree benefit costs; (ii) gains and losses for the
fair value re-measurement of financial instruments; (iii) customer incentive
amortization; (iv) the transaction fees related to the acquisition of Omni; (v)
the start-up costs of a non-consolidated joint venture; (vi) the sale of an
airline investment and (vii) impairment charges for aircraft and related assets.
We exclude these items from adjusted pre-tax earnings because they are
distinctly different in their predictability or not closely related to our
on-going operating activities. We also excluded the recognition of government
grants from adjusted earnings to improve comparability between periods.
Management uses adjusted pre-tax earnings to compare the performance of core
operating results between periods. Presenting this measure provides investors
with a comparative metric of fundamental operations while highlighting changes
to certain items among periods. Adjusted pre-tax earnings should not be
considered in isolation or as a substitute for analysis of the Company's results
as reported under GAAP.
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Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table
as of December 31, 2020 , 2019 and 2018. Our CAM-owned operating aircraft fleet
has increased by 12 aircraft since the end of 2018, driven by customer demand
for the Boeing 767-300 converted freighter. Our freighters, converted from
passenger aircraft, utilize standard shipping containers and can be deployed
into regional cargo markets more economically than larger capacity aircraft,
newly built freighters or other competing alternatives. At December 31, 2020 ,
the Company owned eight Boeing 767-300 aircraft that were either already
undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity during 2020 is summarized below:
•CAM completed the modification of seven Boeing 767-300 freighter aircraft
purchased in the previous year and began to lease six of these aircraft to
external customers under a multi-year lease. ATI operates two of these aircraft
for the customer. CAM leased the seventh aircraft to ATI.
•CAM completed the modification of two Boeing 767-300 freighter aircraft
purchased in 2020 and began to lease one of these aircraft to an external
customer under a multi-year lease. CAM leased the other aircraft to ATI.
•CAM leased two Boeing 767-300 freighter aircraft purchased during 2020 to an
external customer under a multi-year lease. ATI operates these aircraft for the
customer.
•CAM leased two Boeing 767-200 freighter aircraft to external customers under a
multi-year lease.
•CAM sold one Boeing 767-300 freighter aircraft to an external customer.
•An external customer returned one Boeing 737-400 freighter aircraft to CAM. CAM
sold the Boeing 737-400 aircraft to another external customer during the second
quarter of 2020.
•An external customer returned one Boeing 767-200 freighter aircraft to CAM.
This aircraft was leased to an external customer under a multi-year lease.
•CAM purchased two Boeing 767-300 freighter aircraft and nine Boeing 767-300
passenger aircraft for the purpose of converting the passenger aircraft into a
standard freighter configuration. Four of these aircraft were leased to
customers as noted above. The remaining aircraft are expected to be leased to
external customers during 2021.
•ABX returned two Boeing 767-200 freighter aircraft and one Boeing 767-300
freighter aircraft to CAM. CAM leased the Boeing 767-300 aircraft to an external
customer under a multi-year lease and the two Boeing 767-200 freighters were
retired.
•ATI returned three Boeing 757-200 freighter aircraft to CAM and the aircraft
were retired.
•ATI returned one Boeing 767-300 freighter aircraft to CAM. CAM leased the
Boeing 767-300 aircraft to an external customer under a multi-year lease. ATI
operates this aircraft for the customer.
•OAI began to lease two Boeing 767-300 passenger aircraft from an external
lessor.
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2020 2019 2018
ACMI ACMI ACMI
Services CAM Total Services CAM Total Services CAM Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter 5 28 33 7 26 33 5 29 34
Boeing 767-200 Passenger 2 - 2 2 - 2 2 - 2
Boeing 767-300 Freighter 5 45 50 5 35 40 5 28 33
Boeing 767-300 Passenger 7 - 7 7 - 7 6 - 6
Boeing 777-200 Passenger 3 - 3 3 - 3 3 - 3
Boeing 757-200 Freighter 1 - 1 4 - 4 4 - 4
Boeing 757-200 Combi 4 - 4 4 - 4 4 - 4
Boeing 737-400 Freighter - - - - 1 1 - 2 2
Total 27 73 100 32 62 94 29 59 88
Operating lease
Boeing 767-200 Passenger 1 - 1 1 - 1 1 - 1
Boeing 767-300 Passenger 3 - 3 1 - 1 1 - 1
Boeing 767-300 Freighter 2 - 2 2 - 2 - - -
Total 6 - 6 4 - 4 2 - 2
Other aircraft
Owned Boeing 767-300 under
modification - 8 8 - 8 8 - 5 5
Owned Boeing 767 available or - - - - 2 2 - 1 1
staging for lease
As ofDecember 31, 2020 , ABX, ATI and OAI were leasing 27 in-service aircraft internally from CAM for use in ACMI Services. Of CAM's 28 externally leased Boeing 767-200 freighter aircraft, 12 were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX, six were leased to DHL and were being operated by a DHL-affiliated airline and nine were leased to other external customers. Of the 45 Boeing 767-300 freighter aircraft, 19 were leased to ASI and operated by ABX or ATI, seven were leased to DHL and operated by ABX, and 19 were leased to other external customers, one of which was operated by ATI. The carrying values of the total in-service fleet as ofDecember 31, 2020 , 2019 and 2018 were$1,535.3 million ,$1,387.6 million and$1,334.9 million , respectively. The table above does not reflect one Boeing 767-200 passenger aircraft and three Boeing 757 aircraft that are being marketed for sale. 2020 and 2019CAM CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the Company's airlines. CAM acquires passenger aircraft and manages the modification of the aircraft into freighters. The follow-on aircraft leases normally cover a term of five to ten years. As ofDecember 31, 2020 and 2019, CAM had 73 and 62 aircraft under lease to external customers, respectively. CAM's revenues grew by$23.4 million during 2020 compared to 2019, primarily as a result of additional aircraft leases. Revenues from external customers totaled$205.0 million and$168.1 million for 2020 and 2019, respectively. CAM's revenues from the Company's airlines totaled$103.6 million during 2020, compared to$117.2 million for 2019. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased$25.2 million in 2020 compared to 2019, as a result of new aircraft leases in 2020. 35 -------------------------------------------------------------------------------- During 2020, CAM added 11 Boeing 767-300 aircraft to its portfolio and placed 11 Boeing 767-300 aircraft to external customers under long-term leases. CAM's pre-tax earnings, inclusive of internally allocated interest expense, were$77.4 million and$68.6 million during 2020 and 2019, respectively. Increased pre-tax earnings reflect the eleven aircraft placed into service in 2020, offset by a$1.0 million increase in internally allocated interest expense due to higher debt levels and a$13.5 million increase in depreciation expense driven by the addition of eleven Boeing aircraft in 2020 compared to 2019. In addition to the eight Boeing 767-300 aircraft which were in the modification process atDecember 31, 2020 , CAM has agreements to purchase five more Boeing 767-300 aircraft and expects to complete their modifications through 2021. CAM's operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the time frames required by customers. We expect to lease at least twelve newly modified Boeing 767-300 freighters and re-deploy four Boeing 767-300 freighters during 2021, comprising eleven to Amazon and five to other external customers. CAM's future operating results will also depend on the timing and lease rates under which aircraft are redeployed when leases expire. During 2021, three leases for Boeing 767-200 aircraft are expected to be returned. CAM's future operating results will also be impacted by the additional amortization of warrant incentives as incremental long-term aircraft leases to ASI commence. ACMI Services The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for theDoD , usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. Total revenues from ACMI Services increased$69.0 million during 2020 compared with 2019 to$1,147.3 million . Improved revenues were driven by a 14% increase in billable block hours during 2020. Increased revenues for 2020 included additional aircraft operations for ASI and DHL, while block hours flown for theDoD declined. Revenues for the year endingDecember 31, 2020 were impacted by the COVID-19 pandemic. In lateFebruary 2020 , theDoD began canceling combi aircraft flights and in March, commercial customers began canceling scheduled passenger flights as a result of the pandemic. Combined block hours flown for contracted commercial passenger and combi flights declined 39% for the year endedDecember 31, 2020 , compared toDecember 31, 2019 due to the pandemic. The decline in revenues from these cancellations was mitigated by increased flying for customer e-commerce networks and passenger charter flights for theDoD and other governmental agencies, including flights to return people tothe United States who were stranded abroad as a result of the pandemic. Operations during the year endingDecember 31, 2020 also included additional transoceanic flights to replace cargo capacity normally serviced in the belly-hold of passenger aircraft. ACMI Services had pre-tax earnings of$66.9 million during 2020, compared to$32.1 million for 2019 inclusive of internally allocated interest expense. Improved pre-tax results in 2020 compared to 2019 were a result of expanded revenues from ASI and DHL and ad hoc passenger charters. During 2020, we began to operate five more CAM-owned Boeing 767-300 aircraft under the Amazon ATSA. ACMI Services benefited from reduced travel costs including lower airfares during 2020 compared to 2019. Internally allocated interest expense decreased to$20.5 million for 2020 compared to$25.0 million for 2019. As ofDecember 31, 2020 , ACMI Services included 73 in-service aircraft as follows: •Twelve passenger aircraft, four combi aircraft and eleven freighter aircraft leased internally from CAM. •Four passenger aircraft leased from an external lessor •Eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the DHL CMI agreement •31 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA. Two ASI provided freighter aircraft operated by ATI under the ATSA •One CAM-owned freighter leased to a customer and operated by ATI 36 -------------------------------------------------------------------------------- Maintaining profitability in ACMI Services will depend on a number of factors, including the impact of the COVID-19 pandemic, customer flight schedules, crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate. We expect our operating results from commercial passenger and combi flights to continue to be detrimentally impacted by the pandemic during 2021. TheDoD has reduced normal personnel movements while most of our other passenger service customers have suspended their operations and demand for commercial passenger charters has significantly declined. During 2020, theDoD and other government agencies contracted for special airlift capacity and missions which may not continue to occur near the same level in the months ahead. Similarly, customers may find alternatives for the incremental e-commerce routes we operate. While it is difficult to predict, we expect lower revenues from passenger operations during 2021 than we had in 2020. InDecember 2020 , ABX and its pilots union amended the collective bargaining agreement. While the changes in the amendment are expected to positively impact productivity, we expect compensation costs to increase between$7 million to$8 million for ABX pilots in 2021. We expect Amazon to lease at least eleven additional Boeing 767-300 aircraft from CAM in 2021 and contract the operation of those aircraft through our existing ATSA. We also expect Amazon to contract with us to operate at least two more Amazon-provided aircraft under the ATSA in 2021. Other Activities We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. Through ourFAA certificated maintenance and repair subsidiaries, we sell aircraft parts and provide aircraft maintenance and modification services. We also arrange and perform logistical services and package sorting services for certain ASI gateway locations in theU.S. We provide maintenance for ground equipment, facilities and material handling equipment and we resell aviation fuel inWilmington, Ohio . Additionally, we provide flight training services. External customer revenues from all other activities increased$12.3 million in 2020 compared to 2019 primarily due to more aviation fuel sales as customer operations at theWilmington, Ohio air hub expanded. Revenues from ground services increased due to the addition, since mid-2020, of operating contracts for two newUSPS mail facilities as well as increased volumes at two ASI package gateways we service. Ground services revenues during 2020 included reductions for equipment and facility maintenance revenues compared to 2019 as customers chose to in-source some of these services. Revenues from aircraft maintenance and part sales declined during 2020 as passenger airlines reduced their needs for services during the pandemic. The pre-tax earnings from other activities decreased by$19.4 million to a pretax loss of$5.9 million in 2020. Reduced earnings for 2020 are a result of reductions in revenues from higher margin ground maintenance and aircraft maintenance services. Additionally, we incurred start-up costs for twoUSPS mail facility contracts we were awarded during 2020. These reductions were partially offset by additional aviation fuel sales which earn a lower margin. Our customer base for aircraft maintenance revenues includes passenger airlines. We expect the adverse impact on our aircraft maintenance business to continue in the near term due to the COVID-19 pandemic. Expenses from Continuing Operations Salaries, wages and benefits expense increased$85.4 million , or 20% during 2020 compared to 2019 driven by higher employee headcount for flight operations, maintenance operations and package sorting services. The total headcount increased 20% as ofDecember 31, 2020 compared toDecember 31, 2019 . The increases during 2020 include additional flight crewmembers, aircraft maintenance technicians and other personnel to support increased block hours. Depreciation and amortization expense increased$20.5 million during 2020 compared to 2019. The increase reflects incremental depreciation for eleven Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since the beginning of 2020, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans. Maintenance, materials and repairs expense increased by$9.2 million during 2020 compared to 2019. Increased maintenance expense for 2020 was driven by increased flight hours and higher costs for unscheduled engine repairs at our airlines. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed. 37 -------------------------------------------------------------------------------- Fuel expense decreased by$6.7 million during 2020 compared to 2019. Fuel expense includes the cost of fuel to operateDoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. Fuel expense decreased during 2020 compared to 2019 due to lower prices for aviation fuel during the pandemic. Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services decreased$0.5 million during 2020 compared to 2019. Since mid-2019, certain customers chose to in-source some ground services that we had been performing on their behalf. Travel expense decreased by$13.6 million during 2020 compared to 2019. The decrease in travel expense was due to less employee travel and the lower costs of air travel during the pandemic. Landing and ramp expense, which includes the cost of deicing chemicals, increased by$1.3 million during 2020 compared to 2019, driven by increased block hours and network locations. Rent expense increased by$3.3 million during 2020 compared to 2019 due to an additional aircraft partially offset by lower facility rents during 2020. Insurance expense increased by$2.6 million during 2020 compared to 2019. Aircraft fleet insurance has increased due to additional aircraft operations and higher insurance rates during 2020 compared to 2019. Other operating expenses decreased by$4.0 million during 2020 compared to 2019. Other operating expenses include professional fees, employee training, utilities, commission expense to our CRAF team forDoD revenues and other expenses. Asset impairment charges were recorded during the second quarter of 2020, in conjunction with management's decision to retire four Boeing 757 freighter aircraft. Three of the 757 airframes have been removed from service and are available for sale. One remains in service through the first quarter of 2021. Impairment charges totaling$39.1 million were recorded, primarily reflecting the fair value of these assets as well as other surplus engines and parts. Operating results included a pre-tax contra expense of$47.2 million during 2020 to recognize grants received from theU.S. government under the CARES Act. For additional information about the CARES Act grants, see Note I of the unaudited condensed consolidated financial statements included in this report. Non Operating Income, Adjustments and Expenses Interest expense decreased by$3.8 million during 2020 compared to 2019. Interest expense during 2020 decreased compared to the previous year due to lower interest rates on our borrowings under the Senior Credit Agreement and lower debt balances outstanding during the year. The Company recorded unrealized pre-tax losses on financial instruments re-measurements of$100.8 million during the year endedDecember 31, 2020 , compared to$12.3 million for 2019. The gains and losses include the results of re-valuing, as ofDecember 31, 2020 and 2019, the fair value of the stock warrants granted to Amazon. Generally, the warrant value increases or decreases with corresponding increases or decreases in the ATSG share price during the measurement period. Warrant losses for 2020 reflect a 34% increase in the traded price of ATSG shares. Additionally, the value of certain warrants depend partially on the probability that warrants will vest upon the execution of aircraft leases. Increases in the traded value of ATSG shares and increases in the probability of vested warrants each result in an increase to the warrant value and resulted in warrant losses recorded to financial instruments for 2020. Non service components of retiree benefits were a net loss of$12.0 million for 2020 compared to a net gain of$9.4 million for 2019. The non service component gain and losses of retiree benefits are actuarially determined and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans. Income tax expense from earnings from continuing operations decreased$4.7 million for 2020 compared to 2019. Income taxes included deferred income tax effects for the gains and losses from warrant re-measurements and the amortization of the customer incentive. The income tax effects of the warrant re-measurements and the 38 -------------------------------------------------------------------------------- amortization of the customer incentive are different than the book expenses and benefits required by generally accepted accounting principles because for tax purposes, the warrants are valued at a different time and under a different valuation method. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items have an impact on the effective rate during a period. The effective tax rate, before including the warrant revaluations and incentive amortization, was 22% for 2020 compared to 19% for the year endedDecember 31, 2019 . Income tax expense for 2019 reflects a tax benefit of$4.9 million to re-measure deferred state income taxes using lower blended state tax rates than previously estimated. The effective rate for 2021 will be impacted by a number of factors, including the apportionment of income among taxing jurisdictions and the re-measurement of the stock warrants at the end of each reporting period. As a result of the warrant re-measurements and related income tax treatment, the overall effective tax can vary significantly from period to period. We estimate that the Company's effective tax rate for 2021, before applying the deductibility of the stock warrant re-measurement and related incentive amortization and the benefit of the stock compensation, will be approximately 23%. As ofDecember 31, 2020 , the Company had operating loss carryforwards forU.S. federal income tax purposes of approximately$316.5 million which do not expire but the use of which is limited to 80% of taxable income in any given year. We expect to utilize the loss carryforwards to offset federal income tax liabilities in the future. As a result, we do not expect to pay federal income taxes until 2024 or later. The Company may, however, be required to pay certain federal minimum taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights is primarily sourced tothe United States under international aviation agreements and treaties. When we operate in countries without such agreements, the Company could incur additional foreign income taxes. Discontinued Operations The financial results of discontinued operations primarily reflect pension, workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. Pre-tax gains related to the former sorting operations were$9.1 million for 2020 compared to$1.6 million for 2019. Pre-tax earnings during 2020 and 2019 were a result of reductions in self-insurance reserves for former employee claims and pension credits. 2019 compared to 2018 Fleet Summary 2019 & 2018 As ofDecember 31, 2019 , ABX, ATI and OAI were leasing 32 in-service aircraft internally from CAM for use in ACMI Services. As ofDecember 31, 2019 , one of CAM's 26 Boeing 767-200 freighter aircraft shown in the fleet table above and seven of the 35 Boeing 767-300 freighter aircraft were leased to DHL and operated by ABX. Additionally, 12 of CAM's 26 Boeing 767-200 freighter aircraft and 14 of CAM's 35 Boeing 767-300 freighter aircraft were leased to ASI and operated by ABX or ATI. CAM leased the other 13 Boeing 767-200 freighter aircraft and 14 Boeing 767-300 aircraft to external customers, including six Boeing 767-200 aircraft to DHL that were being operated by a DHL-affiliated airline. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM that was not in service condition or the process of freighter modification. Aircraft fleet activity during 2019 is summarized below: •CAM completed the modification of four Boeing 767-300 freighter aircraft purchased in the previous year and three Boeing 767-300 freighter aircraft purchased in 2019. After leasing one aircraft to ATI for a short period, CAM began to lease that aircraft to an external customer under a multi-year lease. CAM leased four other aircraft to an external customer under multi-year leases. ATI operates all five of these aircraft for the customer. CAM leased the last two aircraft to another external customer under multi-year leases. •ATI returned one Boeing 767-300 freighter and CAM began to lease this aircraft to an external customer under a multi-year lease. ATI operates the aircraft for the customer. •External customers returned three Boeing 767-200 freighter aircraft, one Boeing 767-300 freighter aircraft and one Boeing 737-400 freighter aircraft to CAM. CAM leased two of the Boeing 767-200 aircraft to ABX and the Boeing 767-300 aircraft to ATI. CAM sold the Boeing 737-400 aircraft to an external customer. 39 -------------------------------------------------------------------------------- •ATI began to operate two Boeing 767-300 freighter aircraft provided by our customer, ASI. •CAM purchased ten Boeing 767-300 passenger aircraft and one Boeing 767-300 freighter aircraft for the purpose of converting nine of the passenger aircraft into a standard freighter configuration. CAM leased one of these aircraft to Omni as a passenger aircraft. As ofDecember 31, 2018 , ABX, ATI and OAI were leasing 29 in-service aircraft internally from CAM for use in ACMI Services. As ofDecember 31, 2018 , three of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above and seven of the 28 Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, 12 of CAM's 29 Boeing 767-200 aircraft and eight of CAM's 28 Boeing 767-300 aircraft were leased to ASI and operated by ABX or ATI. CAM leased the other 14 Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft to external customers, including six Boeing 767-200 aircraft to DHL that were being operated by a DHL-owned airline. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM that was not in service condition or the process of freighter modification. Aircraft fleet activity during 2018 is summarized below: •CAM completed the modification of nine Boeing 767-300 freighter aircraft, six purchased in the previous year and three purchased in 2018. CAM began to lease seven of those aircraft under multi-year leases to external customers. CAM began to lease the other two aircraft to ATI. •CAM completed the modification of one Boeing 737-400 freighter aircraft purchased in the previous year and entered into a multi-year lease with an external customer. •With the Company's acquisition of Omni, CAM added two Boeing 767-200 passenger aircraft, six Boeing 767-300 passenger aircraft and three Boeing 777-200 passenger aircraft. All eleven of these passenger aircraft are being leased to OAI. Additionally, OAI leases two other Boeing 767 aircraft from third party lessors. •ABX returned one Boeing 767-300 and two Boeing 767-200 freighter aircraft to CAM. The 767-300 aircraft was then leased to an external customer under a multi-year lease and is being operated by ABX while the two 767-200 aircraft were leased to different external customers under multi-year leases. •CAM sold one Boeing 767-300 freighter aircraft, which was under lease to an external customer. •CAM purchased eight Boeing 767-300 passenger aircraft for the purpose of converting the aircraft into standard freighter configuration. •External lessees returned two Boeing 767-200 freighter aircraft to CAM. One of these aircraft is being prepped for redeployment to another lessee while the other aircraft was removed from service. CAM As ofDecember 31, 2019 and 2018, CAM had 62 and 59 aircraft under lease to external customers, respectively. CAM's revenues grew by$56.3 million during 2019 compared to 2018, primarily as a result of additional aircraft leases. Revenues from external customers totaled$168.1 million and$156.5 million for 2019 and 2018, respectively. CAM's revenues from the Company's airlines totaled$117.2 million during 2019, compared to$72.4 million for 2018, reflecting lease revenues for the addition of the eleven passenger aircraft acquired with Omni inNovember 2018 . CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased$56.1 million in 2019 compared to 2018, primarily as a result of the addition of the eleven passenger aircraft acquired with Omni inNovember 2018 and new aircraft leases in 2019. Since the beginning of 2019, CAM has added eight Boeing 767-300 aircraft to its lease portfolio. CAM also added two Boeing 767-200 passenger aircraft, six Boeing 767-300 passenger aircraft and three Boeing 777-200 passenger aircraft to its lease portfolio after the Company's acquisition of Omni inNovember 2018 . CAM's pre-tax earnings, inclusive of internally allocated interest expense, were$68.6 million and$65.6 million during 2019 and 2018, respectively. Increased pre-tax earnings reflect the eleven passenger aircraft leased to Omni as well as the eight aircraft placed into service in 2019, offset by a$16.5 million increase in internally allocated interest expense due to higher debt levels and$31.6 million more depreciation expense driven by the addition of eight Boeing aircraft in 2019 compared to 2018. 40 -------------------------------------------------------------------------------- During 2019, CAM purchased ten Boeing 767-300 passenger aircraft for freighter conversion and one Boeing 767-300 freighter aircraft. Three of the passenger aircraft were converted to freighters and leased to external customers during 2019 and one of the passenger aircraft was leased internally as a passenger aircraft. As ofDecember 31, 2019 CAM had eight Boeing 767-300 aircraft being modified from passenger to freighter configuration. ACMI Services As ofDecember 31, 2019 , ACMI Services included 71 in-service aircraft, including 12 passenger aircraft and 20 freighter aircraft leased internally from CAM, eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under a DHL CMI agreement, 26 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA, two freighter aircraft from an external lessor under lease to ASI and operated by ATI under the ATSA, another CAM-owned freighter leased to a customer and operated by ATI and two passenger aircraft leased from an external lessor. As ofDecember 31, 2019 , ACMI Services revenues included the operation of seven more CAM-owned aircraft compared toDecember 13, 2018 . Total revenues from ACMI Services increased$529.4 million during 2019 compared with 2018 to$1,078.3 million . Improved revenues were driven by the acquisition of OAI and a 40% increase in billable block hours. Increased revenues for 2019 included additional aircraft operations for ASI and theDoD . On a combined basis, ACMI Services revenues for the year endedDecember 31, 2019 would have been$980.6 million with the inclusion of OAI. ACMI Services had pre-tax earnings of$32.1 million during 2019, compared to$11.4 million for 2018 inclusive of internally allocated interest expense. Improved pre-tax results in 2019 compared to 2018 were bolstered by expanded revenues from the acquisition of OAI and the timing of scheduled airframe maintenance events. Scheduled airframe maintenance expense decreased by$2.9 million during 2019 compared to 2018. Airframe maintenance expense varies depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for maintenance. Internally allocated interest expense increased to$25.0 million for 2019 compared to$6.3 million for 2018 as a result of acquiring OAI. ACMI Services' results were negatively impacted by unscheduled engine repairs and the training costs of new flight crew members to keep pace with customers' expanding flight schedules. InMarch 2018 , ATI began to implement an amendment to the collective bargaining agreement with its crewmembers. The amendment resulted in increased wages for the ATI crewmembers beginning in the second quarter of 2018. Other Activities External customer revenues from all other activities increased$18.9 million in 2019. Declines inUSPS revenue during 2019 were offset by additional facility maintenance services, ground support services and fuel sales provided by ASI. The pre-tax earnings from other activities increased by$2.3 million to$13.4 million in 2019, primarily due to additional ground services and fuel sales to ASI. Expenses from Continuing Operations Salaries, wages and benefits expense increased$133.0 million during 2019 compared to 2018 driven by higher headcount for flight operations, maintenance services and package sorting services. The increase in expense for 2019 included$100.4 million for Omni, acquired inNovember 2018 . The increase during 2019 also included higher flight crew wages in conjunction with an amendment to the collective bargaining agreement with the ATI crewmembers, and additional aircraft maintenance technician time to support increased block hours. Increases in salaries, wages and benefits expense were partially offset by personnel reductions due to the expiration of theUSPS contracts. Depreciation and amortization expense increased$78.6 million during 2019 compared to 2018. The increase in depreciation expense included$56.5 million for Omni assets acquired inNovember 2018 . The increase also reflects incremental depreciation for 12 Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since mid-2018, as well as capitalized heavy maintenance and navigation technology upgrades. Maintenance, materials and repairs expense increased by$23.5 million during 2019 compared to 2018. The increase in expense for 2019 included$15.6 million for Omni, acquired inNovember 2018 . Increased maintenance 41 -------------------------------------------------------------------------------- expense for 2019 included unscheduled engine repairs and additional costs to support increased block hours that were flown for cargo customers. Fuel expense increased by$115.7 million during 2019 compared to 2018. Fuel expense includes the cost of fuel to operateDoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. The increase for 2019 included$95.8 million for Omni and$14.8 million for increased fuel sales. The remainder of the increase was due to increased fuel for more cargo block hours flown for theDoD in 2019. Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services increased$47.4 million during 2019 compared to 2018. This increase included$45.7 million due to the inclusion of Omni, since its acquisition in November of 2018. Travel expense increased by$56.6 million during 2019 compared to 2018. The increase for 2019 included$50.5 million for Omni. Landing and ramp expense, which includes the cost of deicing chemicals, increased by$5.2 million during 2019 compared to 2018. The increase included$5.7 million for Omni. Rent expense increased by$2.1 million during 2019 compared to 2018. This increase included$5.1 million for Omni. This increase was partially offset by decreases in building rent after the expiration of the contracts for the fiveUSPS facilities. Insurance expense increased by$1.2 million during 2019 compared to 2018. Aircraft fleet insurance has increased due to additional aircraft operations during 2019 compared to 2018. Other operating expenses increased by$35.4 million during 2019 compared to 2018. Other operating expenses include professional fees, employee training, utilities, commission expense to our CRAF team forDoD revenues and other expenses. The increase for 2019 included$27.4 million for Omni which was acquired inNovember 2018 and over$6.5 million related to employee training for additional flight crews necessary to support revenue growth. 42 -------------------------------------------------------------------------------- The following table provides pro forma operating expenses (in thousands) for the Company after giving effect to the Omni acquisition. This information is based on adjustments to the historical consolidated financial statements of Omni using the purchase method of accounting for business combinations. The pro forma adjustments do not include any of the cost savings and other synergies anticipated to result from the acquisition. These pro forma expenses have been prepared for comparative purposes only and do not purport to be indicative of results that would have actually been reported as of the date or for the quarter presented had the acquisition taken place on such date or at the beginning of the quarter indicated, or to project the Company's financial position or results of operations which may be reported in the future. The pro forma results exclude non-recurring charges recorded by Omni that were directly related to the acquisition by the Company.
Year Ended
Pro Forma Pro Forma
Actual ATSG Actual Omni Adjustments Results
Operating Expenses
Salaries, wages and benefits $ 300,514 $
85,316
178,895 54,118 9,960 242,973
Maintenance, materials and repairs 146,692 14,525 (467) 160,750
Fuel 39,293 89,653 - 128,946
Contracted ground and aviation services 16,640 44,898 - 61,538
Travel 34,443 39,101 - 73,544
Landing and ramp 5,968 6,171 - 12,139
Rent 13,899 6,471 - 20,370
Insurance 6,112 1,724 - 7,836
Transaction fees 5,264 - (5,264) -
Other operating expenses 33,607 21,012 - 54,619
Total Operating Expenses $ 781,327 $
362,989
The following adjustments were made to the historical financial records to create the unaudited pro forma information in the table above: •Adjustments to eliminate transactions between the Company and Omni during the year endedDecember 31, 2018 . •Adjustment to reflect estimated additional depreciation and amortization expense of$10.0 million for the year endedDecember 31, 2018 , resulting from the fair value adjustments to Omni's intangible and tangible assets. Pro forma combined depreciation expense for the periods presented reflect the increased fair values of the aircraft acquired and longer useful lives of the aircraft, indicative of the Company's polices and intent to modify certain aircraft to freighters as an aircraft is removed from passenger service. Non Operating Income, Adjustments and Expenses Interest expense increased by$37.8 million during 2019 compared to 2018. Interest expense increased due to a higher average debt level, including additional financing under the Senior Credit Agreement of$675.0 million to finance the acquisition of Omni and higher interest rates on the Company's outstanding loans. The Company recorded unrealized pre-tax losses on financial instrument re-measurements of$12.3 million during the year endedDecember 31, 2019 , compared to unrealized pre-tax net gains of$7.3 million for 2018. The gains and losses include the results of re-valuing, as ofDecember 31, 2019 and 2018, the fair value of the stock warrants granted to Amazon. Increases in the traded value of ATSG shares and increases in the probability of vested warrants each result in an increase to the warrant value and resulted in warrant losses recorded to financial instruments for 2019. Warrant losses for 2019 were a results of a 3% increase in the traded value of ATSG shares and an increase in the probabilities of additional aircraft leases. The decrease in the fair value of the warrant obligation betweenDecember 31, 2017 andDecember 31, 2018 corresponded to a decrease in the traded price of ATSG's shares and resulted in a gain in 2018. 43 -------------------------------------------------------------------------------- Non service components of retiree benefits were a net loss of$9.4 million for 2019 compared to a net gain of$8.2 million for 2018. The non service component gain and losses of retiree benefits are actuarially determined and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans. Income tax expense from earnings from continuing operations decreased$8.0 million for 2019 compared to 2018. Income taxes included deferred income tax effects for the gains and losses from warrant re-measurements and the amortization of the customer incentive. The income tax effects of the warrant re-measurements and the amortization of the customer incentive are different than the book expenses and benefits required by generally accepted accounting principles because for tax purposes, the warrants are valued at a different time and under a different valuation method. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items have an impact on the effective rate during a period. The effective tax rate, before including the warrant revaluations and incentive amortization was 19% for 2019 compared to 24% for the year endedDecember 31, 2018 . The adjusted effective tax rate declined for 2019 compared to 2018 due to a higher percentage of our revenues and earnings occurring in states and other tax jurisdictions with lower tax rates than previously estimated for the services and leases that we provide. Income tax expense for 2019 reflects a tax benefit of$4.9 million to re-measure deferred state income taxes using lower blended state tax rates than previously estimated. Discontinued Operations Pre-tax gains related to the former sorting operations were$1.6 million for 2019 compared to$1.8 million for 2018. Pre-tax earnings during 2019 and 2018 were a result of reductions in self-insurance reserves for former employee claims and pension credits. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash Flows Net cash generated from operating activities totaled$512.3 million ,$396.9 million and$298.0 million in 2020, 2019 and 2018, respectively. Improved cash flows generated from operating activities during 2020 and 2019 included additional aircraft leases to customers and increased operating levels of the ACMI Services segment. Operating cash flows for 2020 include the receipt of$75.8 million of grant funds from the CARES Act. Cash outlays for pension contributions were$10.8 million ,$5.4 million and$22.2 million in 2020, 2019 and 2018, respectively. Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were$510.4 million ,$453.5 million and$292.9 million in 2020, 2019 and 2018, respectively. Capital expenditures in 2020 included$353.4 million for the acquisition of eleven Boeing 767-300 aircraft and freighter modification costs;$76.0 million for required heavy maintenance; and$81.0 million for other equipment, including purchases of aircraft engines and rotables. Capital expenditures in 2019 included$328.0 million for the acquisition of eleven Boeing 767-300 aircraft and freighter modification costs;$76.1 million for required heavy maintenance; and$49.4 million for other equipment, including the purchases of aircraft engines and rotables. Our capital expenditures in 2018 included$197.1 million for the acquisition of eight Boeing 767-300 aircraft and freighter modification costs;$61.7 million for required heavy maintenance; and$34.1 million for other equipment, including purchases of aircraft engines and rotables. Cash proceeds of$24.6 million ,$10.8 million and$17.6 million were received in 2020, 2019 and 2018, respectively, for the sale of aircraft engines and airframes. During 2020, 2019 and 2018, we spent$13.3 million ,$24.4 million and$866.6 million , respectively, for acquisitions and investments in other businesses. Spending in 2018 included$855.1 million for the acquisition of Omni, net of cash acquired. During 2020, 2019 and 2018, we contributed$13.3 million ,$12.3 million and$11.4 million , respectively, for entry and subsequent contributions into a joint-venture withPrecision Aircraft Solutions, LLC , to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. In 2019, we acquired a group of companies that had been under common control referred to asTriFactor , a material handling systems integrator. 44 -------------------------------------------------------------------------------- Net cash used in financing activities was$19.6 million in 2020 and net cash provided by financing activities was$57.0 and$870.5 million in 2019 and 2018, respectively. Our financing activities in 2020 included a debt offering of$500 million in senior unsecured notes (the "Senior Notes"). The net proceeds of$500.0 million from the Senior Notes were used to pay down the revolving credit facility. During 2020, we drew a total of$180.0 million from the revolving credit facility. We made debt principal payments of$689.4 million including the pay down of the revolving credit facility. OnNovember 9, 2018 , in conjunction with the Omni acquisition, the Company amended its Senior Credit Agreement to include a term loan of$675.0 million and drew an additional$180.0 million from the revolving credit facility. In addition to the acquisition of Omni, borrowing was required to purchase and modify aircraft for deployment into air cargo markets. During 2018, we spent$3.6 million to buy 157,000 shares of the Company's common stock pursuant to a share repurchase plan authorized in 2014. The repurchase plan, which originally authorized the Company to purchase up to$50.0 million of common stock, was amended by the Board inMay 2016 to increase such authorization to up to$100 million and amended by the Board again inFebruary 2018 to increase such authorization to up to$150 million . Commitments The table below summarizes the Company's contractual obligations and commercial commitments (in thousands) as ofDecember 31, 2020 . Payments Due By Year Contractual Obligations Total 2021 2022 and 2023 2024 and 2025 2026 and after Debt obligations, including interest payments$ 1,749,348 $ 53,882
33,558 9,525 13,809 9,128 1,096
Aircraft and modification obligations 195,390 195,390 - - -
Aircraft and other leases 39,703 9,935 15,316 12,199 2,253
Total contractual cash obligations
The long-term debt bears interest at 1.125% to 4.75% per annum atDecember 31, 2020 . For additional information about the Company's debt obligations, see Note G of the accompanying financial statements in this report. The Company provides defined benefit pension plans to certain employee groups. The table above does not include cash contributions for pension funding, due to the absence of scheduled maturities. The timing of pension and post-retirement healthcare payments cannot be reasonably determined, except for$2.1 million expected to be funded in 2021. For additional information about the Company's pension obligations, see Note J of the accompanying financial statements in this report. As ofDecember 31, 2020 , the Company had eight aircraft that were in or awaiting the modification process. Additionally, we placed non-refundable deposits to purchase five more Boeing 767-300 passenger aircraft through 2021. We expect to purchase additional aircraft for modification in 2021. We estimate that capital expenditures for 2021 will total$500 million of which the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance the capital expenditures from current cash balances, future operating cash flows and the Senior Credit Agreement. The Company outsources a significant portion of the aircraft freighter modification process to a non-affiliated third party. The modification primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, see Note I of the accompanying financial statements in this report. SinceAugust 3, 2017 , the Company has been part of a joint-venture withPrecision Aircraft Solutions, LLC , to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a supplemental type certificate from theFAA in 2021. We expect to make contributions equal to the Company's 49% ownership percentage of the program's total costs during 2021. 45 --------------------------------------------------------------------------------
Liquidity
We have a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of$612.2 million , net of debt issuance costs, and a revolving credit facility from which the Company has drawn$140.0 million , net of repayments, as ofDecember 31, 2020 . The Senior Credit Agreement expires inNovember 2024 if certain liquidity measures are maintained during 2024 and contains an incremental accordion capacity based on debt ratios. As ofDecember 31, 2020 , the unused revolving credit facility totaled$446.1 million and additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants, was limited to$250.0 million . OnJanuary 28, 2020 , we completed a debt offering of$500 million in senior unsecured notes (the "Senior Notes"). The Senior Notes were sold only to qualified institutional buyers inthe United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.75% per year, payable semiannually in arrears onFebruary 1 andAugust 1 of each year, beginning onAugust 1, 2020 . The Senior Notes will mature onFebruary 1, 2028 . The Senior Notes contain customary events of default and covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. The Senior Credit Agreement is collateralized by our fleet of Boeing 777, 767 and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, we are required to maintain collateral coverage equal to 115% of the outstanding balances of the term loans and the total funded revolving credit facility. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment, which was$600.0 million . Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization expenses) ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement. The Senior Notes contain customary events of default and covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt level to EBITDA. At the Company's current debt-to-EBITDA ratio, the unsubordinated term loans, the Senior Notes and the revolving credit facility bear variable interest rates of 1.4%, 4.75% and 1.4%, respectively. AtDecember 31, 2020 , the Company had$39.7 million of cash balances. We believe that the Company's current cash balances and forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending, scheduled debt payments and required pension funding for at least the next 12 months. As described in Note D of the accompanying audited consolidated financial statements in this report, the Company has issued warrants to Amazon. Vested warrants for 14.9 million shares expiring onMarch 8, 2021 , subject to extension if required to obtain regulatory approvals, exemptions, authorizations, consents or clearances (including the expiration or termination of any waiting periods), have a cash purchase price of$145 million if Amazon elects to exercise these warrants entirely in cash. Alternatively, Amazon may choose to settle the warrants in a cashless exchange. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofDecember 31, 2020 and 2019, we were not involved in any material unconsolidated SPE transactions. Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or more other parties that are considered usual and customary (e.g. use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after the expiration 46 --------------------------------------------------------------------------------
of the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following significant and critical accounting policies involve the more significant judgments and estimates used in preparing the consolidated financial statements. Revenue Recognition Aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of the applicable lease agreements. Revenues generated from airline service agreements are typically recognized based on hours flown or the amount of aircraft and crew resources provided during a reporting period. Certain agreements include provisions for incentive payments based upon on-time reliability. These incentives are typically measured on a monthly basis and recorded to revenue in the corresponding month earned. Revenues for operating expenses that are reimbursed through airline service agreements, including consumption of aircraft fuel, are generally recognized as the costs are incurred, on a net basis. Revenues from charter service agreements are recognized on scheduled and non-scheduled flights when the specific flight has been completed. Revenues from the sale of aircraft parts and engines are recognized when the parts are delivered. The Company typically records revenues and estimated earnings for its airframe maintenance and aircraft modification contracts using the percentage-of-completion cost input method. Revenues derived from sorting parcels are recognized in the reporting period in which the services are performed.Goodwill and Intangible Assets We assess in the fourth quarter of each year whether the Company's goodwill acquired in acquisitions is impaired in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 350-20 Intangibles-Goodwill and Other. Additional assessments may be performed on an interim basis whenever events or changes in circumstances indicate an impairment may have occurred. Indefinite-lived intangible assets are not amortized but are assessed for impairment annually, or more frequently if impairment indicators occur. Finite-lived intangible assets are amortized over their estimated useful economic lives and are periodically reviewed for impairment. The goodwill impairment test requires significant judgment, including the determination of the fair value of each reporting unit that has goodwill. We estimate the fair value using a market approach and an income approach utilizing discounted cash flows applied to a market-derived rate of return. The market approach utilizes market multiples from comparable publicly traded companies. The market multiples include revenues and EBITDA (earnings before interest, taxes, depreciation and amortization). We derive cash flow assumptions from many factors including recent market trends, expected revenues, cost structure, aircraft maintenance schedules and long-term strategic plans for the deployment of aircraft. Key assumptions under the discounted cash flow models include projections for the number of aircraft in service, capital expenditures, long term growth rates, operating cash flows and market-derived discount rates. The performance of the goodwill impairment test is the comparison of the fair value of the reporting unit to its respective carrying value. If the carrying value of a reporting unit is less than its fair value no impairment exists. If 47 -------------------------------------------------------------------------------- the carrying value of a reporting unit is higher than its fair value an impairment loss is recorded for the difference and charged to operations. See additional information about the goodwill impairment tests in Note C of the accompanying consolidated financial statements. Based on our analysis, the individual fair values of each reporting unit having goodwill exceeded their respective carrying values as ofDecember 31, 2020 . We have used the assistance of an independent business valuation firm in estimating an expected market rate of return, and in the development of a market approach for CAM and OAI separately, using multiples of EBITDA and revenues from comparable publicly traded companies. Our key assumptions used for CAM's goodwill testing include uncertainties, including the level of demand for cargo aircraft by shippers, theDoD and freight forwarders and CAM's ability to lease aircraft and the lease rates that will be realized. The demand for customer airlift is projected based on input from customers, management's interface with customer planning personnel and aircraft utilization trends. Our key assumptions used for OAI's goodwill testing include the number of aircraft that OAI will operate, the amount of revenues that the aircraft will generate, the number of flight crews and cost of flight crews needed. We are assuming that demand for commercial passenger flying will resume to pre-pandemic levels in 2023. Our key assumptions used forPemco's andTriFactor's goodwill testing includes the level of revenues that customers will seek and the cost of labor, parts and contract resources expected to be utilized. Certain events or changes in circumstances could negatively impact our key assumptions. Customer preferences may be impacted by changes in aviation fuel prices. Key customers, including DHL, Amazon and theDoD may decide that they do not need as many aircraft as projected or may find alternative providers. Long-lived assets Aircraft and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Factors which may cause an impairment include termination of aircraft from a customer's network, reduced demand due to an extended duration of the pandemic, extended operating cash flow losses from the assets and management's decisions regarding the future use of assets. To conduct impairment testing, we group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with an asset group is less than the carrying value. If impairment exists, an adjustment is made to write the assets down to fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined considering quoted market values, discounted cash flows or internal and external appraisals, as applicable. Depreciation Depreciation of property and equipment is provided on a straight-line basis over the lesser of an asset's useful life or lease term. We periodically evaluate the estimated service lives and residual values used to depreciate our property and equipment. The acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of our assets. We may change the estimated useful lives due to a number of reasons, such as the existence of excess capacity in our air networks, or changes in regulations grounding or limiting the use of aircraft.Self-Insurance We self-insure certain claims related to workers' compensation, aircraft, automobile, general liability and employee healthcare. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data and recent claims trends. Changes in claim severity and frequency could result in actual claims being materially different than the costs provided for in our results of operations. We maintain excess claims coverage with common insurance carriers to mitigate our exposure to large claim losses. Contingencies We are involved in legal matters that have a degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no assurance that the ultimate outcome of these matters will not differ materially from our assessment of them. There also can be no assurance that we know all matters that may be brought against us at any point in time. Income Taxes We account for income taxes under the provisions of FASB ASC Topic 740-10 Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the 48 -------------------------------------------------------------------------------- Company's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Fluctuations in the actual outcome of expected future tax consequences could materially impact the Company's financial position or its results of operations. The Company has significant deferred tax assets including net operating loss carryforwards ("NOL CFs") for federal income tax purposes. Based upon projections of taxable income, we determined that it was more likely than not that the NOL CFs will be realized. Accordingly, we do not have an allowance against these deferred tax assets at this time. We recognize the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Stock Warrants The Company's accounting for warrants issued to a lessee is determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The warrants issued to lessees are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligation. The lease incentive is amortized against revenues over the duration of related aircraft leases. The unexercised warrants are classified in liabilities and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss. Post-retirement Obligations The Company sponsors qualified defined benefit pension plans for ABX's flight crewmembers and other eligible employees. The Company also sponsors non-qualified, unfunded excess plans that provide benefits to executive management and crewmembers that are in addition to amounts permitted to be paid through our qualified plans under provisions of the tax laws. Employees are no longer accruing benefits under any of the defined benefit pension plans. The Company also sponsors unfunded post-retirement healthcare plans for ABX's flight crewmembers. The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates on our post-retirement costs. In actuarially valuing our pension obligations and determining related expense amounts, key assumptions include discount rates, expected long term investment returns, retirement ages and mortality. Actual results and future changes in these assumptions could result in future costs that are materially different than those recorded in our annual results of operations. Our actuarial valuation includes an assumed long term rate of return on pension plan assets of 5.75%. Our assumed rate of return is based on a targeted long term investment allocation of 30% equity securities, 65% fixed income securities and 5% cash. The actual asset allocation atDecember 31, 2020 was 30% equities, 69% fixed income and 1% cash. The pension trust includes$0.4 million of investments (less than 1% of the plans' assets) whose fair values have been estimated in the absence of readily determinable fair values. Such investments include private equity, hedge fund investments and real estate funds. Management's estimates are based on information provided by the fund managers or general partners of those funds. In evaluating our assumptions regarding expected long term investment returns on plan assets, we consider a number of factors, including our historical plan returns in connection with our asset allocation policies, assistance from investment consultants hired to provide oversight over our actively managed investment portfolio, and long term inflation assumptions. The selection of the expected return rate materially affects our pension costs. Our expected long term rate of return was 5.75% after analyzing expected returns on investment vehicles and considering our long term asset allocation expectations. Fluctuations in long-term interest rates can have an impact on the actual rate of return. If we were to lower our long term rate of return assumption by a hypothetical 100 basis points, expense in 2020 would be increased by approximately$8.3 million . We use a market value of assets as of the measurement date for determining pension expense. In selecting the interest rate to discount estimated future benefit payments that have been earned to date to their net present value (defined as the projected benefit obligation), we match the plan's benefit payment streams to high-quality bonds of similar maturities. The selection of the discount rate not only affects the reported funded status information as ofDecember 31 (as shown in Note J to the accompanying consolidated financial statements in this 49 -------------------------------------------------------------------------------- report), but also affects the succeeding year's pension and post-retirement healthcare expense. The discount rates selected forDecember 31, 2020 , based on the method described above, were 2.55% for crewmembers and 2.75% for non-crewmembers. If we were to lower our discount rates by a hypothetical 50 basis points, pension expense in 2020 would be increased by approximately$12.0 million . Our mortality assumptions atDecember 31, 2020 , reflect the most recent projections released by the Actuaries Retirement Plans Experience Committee, a committee within theSociety of Actuaries , a professional association inNorth America . The assumed future increase in salaries and wages is not a significant estimate in determining pension costs because each defined benefit pension plan was frozen during 2009 with respect to additional benefit accruals. The following table illustrates the sensitivity of the aforementioned assumptions on our pension expense, pension obligation and accumulated other comprehensive income (in thousands): Effect of change December 31, 2020 Accumulated 2020 other Pension Pension comprehensive Change in assumption expense obligation income (pre-tax)
100 basis point decrease in rate of return
- $ -
50 basis point decrease in discount rate 11,993 (56,337) 56,337
Aggregate effect of all the above changes 20,256 (56,337) 56,337
New Accounting Pronouncements
For information regarding recently issued accounting pronouncements and the
expected impact on our annual statements, see Note A "SUMMARY OF FINANCIAL
STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" in the accompanying
notes to Consolidated Financial Statements included in Part II, Item 8 of this
Form 10-K.
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