Note C - Significant Customers

3 Months Ended

Mar. 31, 2024

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

NOTE C—SIGNIFICANT CUSTOMERS

Three customers each account for a significant portion of the Company's consolidated revenues. The percentage of the Company's revenues for the Company's three largest customers, for the three month period ended March 31, 2024 and 2023 are as follows:

	Three Months Ended
	March 31,
	2024			2023
Customer	Percentage of Revenue
DoD		28	%		29	%
Amazon		34	%		35	%
DHL		13	%		14	%

The accounts receivable from the Company's three largest customers as of March 31, 2024 and December 31, 2023 are as follows (in thousands):

	March 31, 2024		December 31, 2023
Customer	Accounts Receivable
DoD	$	64,050	$	56,848
Amazon		83,209		74,509
DHL		9,777		8,040

DoD

The Company is a provider of cargo and passenger airlift services to the U.S. Department of Defense ("DoD"). The Company's airlines are eligible to bid for military charter operations for passenger and cargo transportation through contracts awarded by the DoD. The airlines draw from the Company's fleet of Boeing 757 combi, Boeing 777 passenger, Boeing 767 passenger and Boeing 767 freighter aircraft for the DoD operations. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes.

DHL

The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate CMI agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides additional air cargo transportation services for DHL through ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. As of March 31, 2024, the Company leased 14 Boeing 767 freighter aircraft to DHL comprised of one Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft, with expirations between 2025 and 2031. Further, beginning in third quarter of 2022, the Company began to operate four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August 2027.

Amazon

The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for Amazon.com Services, LLC, ("ASI") a subsidiary of Amazon, since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation of aircraft by the Company’s airline subsidiaries, and the management of ground services by LGSTX. As of March 31, 2024, the Company leased 34 Boeing 767 freighter aircraft to ASI with lease expirations between 2024 and 2031.

Amazon Investment Agreement

On December 22, 2018, the Company entered into an Amended and Restated Air Transportation Services Agreement ("A&R ATSA") with ASI, pursuant to which the Company, through CAM and its airline subsidiaries, agreed to (1) lease and operate ten additional Boeing 767-300 aircraft for ASI under the A&R ATSA, (2) extend the term of the 12 Boeing 767-200 aircraft then leased to ASI by two years to 2023 with an option for three more years, (3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years, and (4) extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company leased all ten of the 767-300 aircraft in 2020. In conjunction with the commitment to lease ten additional Boeing 767-300 aircraft, extend the duration of 20 existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into an Investment Agreement on December 20, 2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, the Company issued to Amazon warrants for 14.8 million common shares of ATSG, all of which have vested. The warrants have an exercise price of $21.53 per share. On May 6, 2024, this group of warrants was modified to extend their expiration date from December 2025 to December of 2029 in conjunction with the 3rd A&R ATSA described and defined below.

On May 29, 2020, the Company entered into a Second Amended and Restated Air Transportation Services Agreement (the "2nd A&R ATSA") with ASI, pursuant to which the Company agreed to lease 12 more Boeing 767-300 aircraft to ASI for operation by the Company's airline subsidiaries under the 2nd A&R ATSA. The first of these leases began in the second quarter of 2020 with the remaining eleven delivered in 2021. All 12 of these aircraft leases were for ten-year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing 12 aircraft, Amazon was issued warrants for 7.0 million common shares, all of which have vested. The exercise price of these warrants is $20.40 per share. On May 6, 2024, this group of warrants was modified to extend their expiration date from December 2025 to December of 2029 in conjunction with the 3rd A&R ATSA described below under subsequent event.

Issued and outstanding warrants are summarized below as of March 31, 2024:

			Common Shares in millions
	Exercise price		Vested		Non-Vested		Expiration
2018 Investment Agreement	$	21.53		14.8		0.0	December 20, 2025
2018 Investment Agreement	$	20.40		7.0		0.0	December 20, 2025

Prior to May 6, 2024 Amazon could earn additional warrants for up to 2.9 million common shares under the 2018 Investment Agreement by leasing up to five more cargo aircraft from the Company before January 2026. Incremental warrants granted for ASI’s commitment to any such future aircraft leases would have had an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease. This right to earn warrants was replaced on May 6, 2024 as noted below.

For all outstanding warrants vested, Amazon may select a cashless conversion option. Assuming ATSG's stock price at the time of conversion is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option by surrendering the number of shares with a market value equal to the exercise price.

The Company resumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions stemming from the Coronavirus Aid, Relief and Economic Security Act. As the Company repurchases its own shares, Amazon has the option to sell shares of ATSG's common stock to the Company to maintain its ownership percentage of less than 19.9% of the Company's outstanding shares pursuant to the terms of an Investment Agreement dated March 8, 2016, as amended. On August 14, 2023 Amazon sold 1,177,000 shares of ATSG common stock back to the Company for cash of $22.9 million. These transactions resulted in Amazon maintaining its ownership percentage of less than 19.9% of ATSG's outstanding common shares at the time.

As of March 31, 2024 and December 31, 2023, the Company's liabilities reflected warrants and Amazon sale options from the 2018 Amazon agreements having a fair value of $1.6 million and $1.7 million, respectively. During the three month period ended March 31, 2024, the re-measurements of warrants and sale options to fair value resulted in net non-operating gains of $0.1 million compared to net non-operating losses of $0.8 million in the corresponding period in 2023.

Subsequent Event

On May 6, 2024, the Company entered into a Third Amended and Restated Air Transportation Services Agreement with ASI (the "3rd A&R ATSA") pursuant to which the Company, through its subsidiary air carriers, will sublease and operate ten additional Boeing 767-300 freighter aircraft to be provided by ASI, with the potential to add up to ten additional Boeing 767-300 freighter aircraft. The Company's subsidiary air carriers are scheduled to begin operating the first of those ten aircraft in June of this year with the remaining aircraft being delivered through November of this year. The initial term of the 3rd A&R ATSA runs through May 6, 2029, and may be extended by the parties for an additional five years subject to mutual agreement.  In conjunction with the execution of the 3rd A&R ATSA, the Company issued warrants to Amazon for up to 2.9 million common shares of ATSG (the “2024 Subsequent Warrant”).  The 2024 Subsequent Warrant vests in four equal tranches of 728,750 shares of ATSG common stock on its issue date and each of the first three anniversaries thereof; provided that, for each of the second, third and fourth tranches, Amazon has compensated ATSG for a certain number of flight hours in a specified period immediately preceding such anniversary.  The 2024 Subsequent Warrant has a term of seven years, and the exercise price is $12.96 per share of ATSG common stock.  As partial consideration for the 3rd A&R ATSA, the 2024 Subsequent Warrant was issued to replace Amazon’s prior warrant right under the 2018 Investment Agreement for 2.9 million common shares related to aircraft leases commitments. 

Also on May 6, 2024, in conjunction with the execution of the 3rd A&R ATSA, the Company and Amazon agreed upon the form of the warrant to be issued to purchase up to 2.9 million additional common shares (the “Third Subsequent Warrant”). The Third Subsequent Warrant will be issued by the Company upon the earlier of the first anniversary of the 3^rd A&R ATSA and the date upon which the Company begins providing services to Amazon with the tenth aircraft to be placed into service by Amazon pursuant to the 3rd A&R ATSA.  The Third Subsequent Warrant will vest in (i) one tranche of 291,500 shares of ATSG common stock upon Amazon’s entry into each aircraft lease extension with ATSG for at least three years, and (ii) four equal tranches of 72,875 shares of ATSG common stock upon each placement by Amazon of additional aircraft into service with ATSG (i.e., aircraft beyond the tenth aircraft, up to a maximum of ten additional aircraft), with the first tranche vesting with the placement of the aircraft into service and the remaining tranches vesting on each of the first three anniversaries thereof; provided that, for each of the second, third and fourth tranches, Amazon has compensated ATSG for a certain number of flight hours in a specified period immediately preceding such anniversary plus a certain number of flight hours per additional aircraft placed into service during such specified period.  The Third Subsequent Warrant will have a term of seven years and the exercise price per share of ATSG common stock will be the volume weighted average price of ATSG's common stock for the 30 trading days preceding the warrant issue date.

Additionally, on May 6, 2024, the expiration dates for the two existing vested warrants totaling 21.8 million shares (the warrants issued on December 20, 2018 for 14.8 million shares and the warrants issued on May 29, 2020, for 7.0 million shares) issued pursuant to the 2018 Investment Agreement, were extended from December 2025 to December of 2029.

The Company's accounting for warrants issued to a customer is determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments.  Generally, warrants issued to a customer are recorded as an incentive asset using their fair value at the time of issuance if it is probable of vesting at the time of grant.  The incentive is amortized against revenues over the duration of related flight operations and leases.  The Company's earnings in future periods will be impacted by the re-measurements of warrant fair value, amortizations of the incentive and the related income tax effects. For income tax calculations, the value and timing of related tax deductions may differ from that used for financial reporting.