Here's part 2:
Other activities and overhead expenses
Revenues from ABX Air’s other, non-DHL operations increased 74 percent to $15.1 million, including sharp increases in aircraft parts and maintenance services, along with full-scale operations at sorting centers that ABX Air manages for the U.S. Postal Service. The operating results of these business activities, combined with non-reimbursed administrative expenses resulted in a pre-tax loss of $231,000 for the quarter, compared to pre-tax earnings of $1.1 million for the corresponding 2007 period. The principal factor was the allocation of $800,000 in corporate overhead not reimbursed by DHL.
The U.S. Postal Service has awarded ABX a holiday-season contract for management of sorting operations at its center near Dallas, Texas. It is expected to generate fourth-quarter revenues of approximately $1.9 million.
Outlook/Other Items
Future of DHL Relationship
The ACMI Agreement may terminate at DHL’s option on August 15, 2010, while the Hub Services agreement is subject to annual renewals on the same date each year. Both agreements grant DHL substantial flexibility to reduce the scope of services that ABX Air provides to DHL and to terminate them with specified notice.
On November 11, DHL announced that it will no longer offer package delivery services to and from points within the United States after January 2009, but will serve the U.S. market with international delivery services to and from U.S. cities. DHL said that it still intends to pursue replacing ABX Air with UPS as its principal source of U.S. airlift and sorting services, but likely will require support from ABX Air during a transition period lasting through June 2009. The specific level of support required and plan for DHL’s release of aircraft from the ACMI Agreement has not been provided to ABX by DHL.
“While we understand DHL’s situation, we are saddened that its decision will cost the jobs of most of the 7,000 remaining ABX Air employees who have loyally supported DHL in Wilmington and several other locations,” Hete said.
Hete noted that several important transition issues related to the wind-down of services under the DHL agreements, including funding for ABX Air pension plans, remain unresolved. Also, the company must work with both creditors and labor groups to gain the flexibility it needs to implement its post-DHL strategy. If those issues can be resolved promptly, he said, the outlook for ATSG is very positive.
“We are adjusting our business plans to conditions in financial markets and the soft economy. But we are not dialing back our commitment to achieve results in keeping with the high quality assets we control, and the talented people who manage them. As our aircraft are released from DHL service, we will raise cash by selling a number of them back to DHL. Then we will apply those proceeds to convert the 767s we retain from DHL, and deploy them along with the rest of our aircraft under dry lease or ACMI arrangements – whichever generates the greatest return to our shareholders. That’s how we will emerge from this transition as a strong, flexible, and highly competitive global air cargo service company.”
Settlement and Amendments to ACMI and Hub Services Agreements
As previously disclosed, ABX Air and DHL have agreed to amend their ACMI and Hub Services agreements to set all mark-up amounts for the fourth quarter of 2008 and the first quarter of 2009 at levels comparable to those ABX Air earned in the same prior-year quarters. Additionally, a dispute with DHL arising from an arbitration panel’s ruling has been settled, such that ABX Air will retain DHL’s reimbursement of $2.2 million in ABX Air’s legal expenses. And, the companies have agreed to fix ABX Air’s quarterly allocation of overhead expenses not subject to DHL reimbursement at $800,000 through the first quarter of 2009.
“Because a significant portion of our costs to administer DHL’s air transport and package sorting operations are not volume-sensitive, a fixed-dollar markup is essential for us to carry out those responsibilities effectively as the volume in DHL’s domestic network declines,” Hete said. “We believe that the new structure provides us with the opportunity to earn a reasonable return for our shareholders on our work for DHL through the current environment. As we announced on Monday, November 10, DHL has agreed to fix the incremental mark-ups under its two commercial agreements with ABX at $11.4 million in the fourth quarter of 2008, and at $5.6 million for the first quarter of 2009.”
Insurance Settlement
On June 28, 2008, one of ABX Air’s Boeing 767 aircraft experienced a fire prior to engine start and was declared a complete loss. It was insured for $30.3 million and has a net book value of $24.4 million as of September 30, 2008. ABX Air expects to record a gain in the fourth quarter of approximately $5.9 million from the receipt of the insurance proceeds in excess of the net book value.
Conference Call
ABX Air will host a conference call to review its financial results for the third quarter of 2008 on November 17 at 10:00 A.M. Eastern time. Participants should dial (888) 713-4214 and international participants should dial (617) 213-4866 ten minutes before the scheduled start of the call and ask for conference ID #17352634. The call will also be webcast live (listen-only mode) via
www.abxair.com and
www.earnings.com for individual investors and via
www.streetevents.com for institutional investors. A replay of the conference call will be available an hour after the conclusion of the call. It will be available by phone for five days after the call at (888) 286-8010 (international callers (617) 801-6888); use pass code ID #42388357. The webcast replay will remain available via
www.abxair.com and
www.earnings.com for 30 days.
Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. There are a number of important factors that could cause Air Transport Services Group’s (“ATSG’s”)actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, ABX Air’s ability to maintain cost and service level performance under its ACMI and Hub Services Agreements with DHL, further reductions in the scope of services under those agreements and the rate at which those reductions are made, the extent to which DHL reimburses ABX Air for costs arising from the termination of services under the ACMI and Hub Services agreements, ATSG’s success in identifying new customers to replace revenues from services terminated by DHL, the continuing availability of sufficient sources of liquidity, and other factors that are contained from time to time in ATSG’s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on ATSG's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. ATSG undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.