Full Description

Air Transport Services Group Inc. (ATSG) is a holding company whose principal subsidiaries include three independently United States-certificated airlines and an aircraft leasing company. The three airlines, ABX Air, Inc. (ABX), Capital Cargo International Airlines, Inc. (CCIA), and Air Transport International, LLC (ATI), primarily transport cargo within the United States and include operations in Europe, Central America, South America, and Asia. ATSG’s leasing subsidiary, Cargo Aircraft Management, Inc. (CAM), leases aircraft to ATSG’s airlines and to external customers. During the year ended December 31, 2008, the Company operated three segments: DHL, ACMI Services and CAM. The Company’s other business operations include aircraft maintenance and modification services, aircraft part sales, equipment leasing and maintenance, mail handling for the United States Postal Service (USPS), specialized services for aircraft fuel management and freight logistics.

ABX operates primarily under two commercial agreements with DHL; the aircraft, crew, maintenance and insurance agreement with DHL Network Operations (USA), Inc. (ACMI agreement) and the hub services agreement (Hub Services agreement) with DHL Express (USA), Inc., both of which became effective August 16, 2003, in conjunction with the acquisition of Airborne (DHL Network Operations (USA), Inc. and DHL Express (USA), Inc. are individually and collectively referred to herein as DHL). Revenues from DHL operations accounted for 72% of the Company’s consolidated 2008 revenues.

ABX provides the airlift for DHL’s express and deferred delivery services using its aircraft. ABX has also managed a United States network of hubs for DHL, including DHL’s primary United States sorting facility, which is located in the air park in Wilmington, Ohio. ABX staffed the network, providing package sorting and handling at as many as 19 hubs for DHL. Under the Hub Services agreement, ABX provides staff to conduct package sorting, as well as airport, facilities and equipment maintenance services for DHL.

The ACMI agreement and Hub Services agreement each allow DHL to reduce the scope of services that ABX provides. This includes, for example, the reduction in air routes that ABX flies, the removal of aircraft from service and the termination of hub management services. Since 2004, DHL has from time to time reduced the scope of services provided by ABX, and in 2008, DHL announced a restructuring plan to focus exclusively on handling international freight destined to or from the United States. By January 31, 2009, DHL had ceased to service intra-United States shipments (shipments having both an origin and destination within the United States). Between DHL’s restructuring announcement in May 2008 and February 2009, ABX removed 47 McDonnell Douglas DC-9 aircraft from DHL service, closed all regional sorting hubs, and downsized the Wilmington, Ohio sort operations.

At this time, ABX continues to provide airlift and package sorting for DHL’s international delivery services through ABX’s Boeing 767 aircraft and personnel at the Wilmington, Ohio night sort operations. ABX provides these services to DHL under the preexisting ACMI and Hub Services agreements, as amended in November 2008. The ACMI agreement automatically renews for a period of three years in August 2010, unless at least a one year notice of non-renewal is given. The Hub Services agreement renewed in August 2008, and automatically renews for additional periods of one year each, unless at least 90 days notice of non-renewal is given. Renewal of these agreements is uncertain.

CCIA and ATI each have contracts to provide air lift to BAX under ACMI agreements. BAX provides freight transportation and supply chain management services, specializing in the heavy freight market for business-to-business shipping. Revenues from BAX operations accounted for 14% of the Company’s consolidated revenues during 2008. During 2008, CCIA operated 12 Boeing 727s for the BAX network. ATI operated nine McDonnell Douglas DC-8s as part of the BAX network. The BAX central hub is located in Toledo, Ohio. CHI has the right to supply all main deck freighter airlift in BAX’s United States domestic network through December 31, 2011.

A typical ACMI contract requires the ABX to supply, at a specific rate per block hour, the aircraft, crew, maintenance and insurance for specified cargo operations, while the customer is responsible for substantially all other aircraft operating expenses, including fuel, landing fees, parking fees and ground and cargo handling expenses. Charter agreements usually require the airline to provide full service, including fuel and other operating expenses in addition to aircraft, crew, maintenance and insurance for a fixed, all-inclusive price. Under ACMI and charter arrangements, ABX has exclusive operating control of its aircraft, and its customers must typically obtain any government authorizations and permits required to service the designated routes. The Company reports its business from ACMI, charter and space available contracts, including the services it provides for BAX, in the ACMI Services segment.

The Company competes with Astar Air Cargo, Inc., World Air Holdings, Inc., Atlas Air Worldwide Holdings, Inc., Evergreen International, Inc. USPS, FedEx Corporation, BAX and United Parcel Service, Inc.