Air Transport Services Group

ATSG Expands and Extends its Aircraft Leasing and Operating Agreements with Amazon

• ATSG to lease and operate ten more Boeing 767-300 freighters for Amazon, with deliveries of five each in 2019 and 2020;
• Multi-year lease extensions for ATSG’s existing twenty 767s in Amazon network;
• Extension of network operating agreement through March 2026;
• Additional warrants increasing Amazon’s potential ownership of ATSG to 33.2%;
• Warrant incentives available to Amazon increasing its potential ownership to 39.9%

WILMINGTON, OH – December 21, 2018 – Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body cargo aircraft leasing, air cargo transportation and related services, today announced agreements to lease and operate ten additional Boeing 767s for Services, Inc., to extend leases for twenty 767 aircraft ATSG currently provides to Amazon, and to extend the operating agreement through which ATSG’s airlines operate those aircraft in the Amazon Air network.

In conjunction with the new and amended commercial arrangements, Amazon will be granted warrant rights which, if exercised, would further expand its potential equity stake in ATSG. The arrangements also provide warrant incentives for Amazon to lease up to seventeen additional cargo aircraft from ATSG, not including the ten 767 lease commitments for 2019-2020 and the twenty 767 aircraft ATSG currently provides to Amazon.

“Our customers love massive selection and fast delivery, and the Amazon Air capacity we are building enables Prime delivery speeds for customers from Seattle, Washington to Miami, Florida,” said Dave Clark, Senior Vice President of Worldwide Operations at Amazon. “By expanding the Amazon Air network through our partnership with ATSG we’re able to ensure we have the capacity to quickly and efficiently deliver packages to customers for years to come.”

“We’re pleased to expand and extend for several years our support of Amazon’s exceptional ability to provide reliable and fast delivery to its customers,” said Joe Hete, President and CEO of ATSG. “As the world’s leading source of customer-dedicated 767 cargo aircraft, we have the access to aircraft and unmatched operating capabilities to continue to support Amazon Air for many years to come.”

Key features of the new and amended arrangements include:

Commitment for Lease and Operation of Ten Additional 767-300s: Amazon commits to lease ten additional 767-300 aircraft from Cargo Aircraft Management, Inc. (CAM), ATSG’s leasing subsidiary, and place them with an ATSG airline for operation. CAM will deliver five of the 767s in 2019 and the remainder in 2020. All of the leases will be for ten years, with the possibility to extend them for up to three more years.

Extended Terms for Existing Twenty 767 Leases:
̶ Existing five-year leases of twelve 767-200 aircraft to Amazon from CAM that began in 2016 will be extended by two years into 2023, with an option to extend for up to three additional years.
̶ Existing seven-year leases of eight 767-300 aircraft to Amazon from CAM that began in 2016 and 2017 will be extended by three years until 2026 and 2027, with an option to extend for up to three additional years.

Extension of Aircraft Operating Agreement: The Air Transportation Services Agreement (ATSA) that began in 2016, through which ATSG’s airline subsidiaries operate and perform certain maintenance services on aircraft leased to Amazon by CAM, will be extended by five years through March 2026, with an option to extend for an additional three years.

New Warrants Issued to Amazon: In conjunction with the commitment for ten additional 767 leases, extensions of twenty existing 767 aircraft leases and the ATSA described above, Amazon will be issued warrants to expand its potential ownership stake in ATSG’s equity to approximately 33.2%. Under terms of the commercial agreements executed in March 2016, Amazon already holds, or has rights to receive, warrants for the purchase of ATSG shares that would represent a 19.9% ownership stake in ATSG, if exercised prior to their expiration in March 2021. The new warrants will expire if not exercised within seven years from their issuance date. They have an exercise price of $21.53 per share, based on the volume-weighted average price of ATSG’s shares over the 30 trading days immediately preceding execution of a non-binding term sheet by the parties on October 29, 2018.

Warrant Rights Tied to Future Aircraft Leases: Amazon will be able to earn incremental warrant rights, increasing its potential ownership in ATSG’s equity from 33.2% up to 39.9% of ATSG’s fully diluted common shares currently outstanding, by leasing up to seventeen more ATSG cargo aircraft before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price of the $21.53 referenced above, provided the parties reach binding agreements on future lease terms before April 2019. Beginning in April 2019, pricing of warrants related to future aircraft leases will be based on the volume-weighted average price of ATSG’s shares during the 30 trading days immediately preceding contractual commitment for each lease.

Warrants potentially issuable under these new agreements with Amazon will require an increase in the number of authorized common shares of ATSG. Management intends to submit a proposal calling for an appropriate increase in the number of authorized common shares for shareholder consideration at the company’s next annual meeting of shareholders in May 2019.

“We view the prospect of a strong, growing customer like Amazon becoming a significant equity holder as a positive for all ATSG stakeholders,” said Joe Hete. “Our mission is to provide Amazon with exceptional service while creating equity value for all of our shareholders.”

Additional information about these agreements is provided in a Form 8-K that ATSG expects to file with the U.S. Securities & Exchange Commission on the same date as this release.

About Air Transport Services Group, Inc. (ATSG)
ATSG is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft. Through its principal subsidiaries, including three airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, passenger ACMI and charter services, aircraft maintenance and conversion services, and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Airborne Maintenance and Engineering Services, Inc. including its subsidiary, Pemco World Air Services, Inc.; Air Transport International, Inc.; ATSG West Leasing Limited; Cargo Aircraft Management, Inc.; and Omni Air International, LLC.

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, the successful implementation and operation of the expanded air network for Amazon; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; our airlines’ ability to maintain on-time service and control costs; shareholder approval of the proposed equity arrangements with Amazon that are described in this release; 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.