Air Transport Services Group Annual Report 2017

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2017 Annual Report

Air Transport Services Group, Inc.

145 Hunter Drive

Wilmington, Ohio 45177

www.atsginc.com

OUTSIDE BACK COVER

OUTSIDE FRONT COVER

Air Transport Services Group 2017 Annual Report

To Our Shareholders

Investor Information

Your company ended 2017 with substantial

increases in revenues and earnings on the strength
of very good performances by all of our businesses.

On a consolidated basis, fourth-quarter
revenues increased by more than $100 million
to $323 million, and by nearly $300 million
for the year to $1.1 billion. Those are record totals
for us since our business model changed in 2010.
We earned $21.7 million, or 36 cents per share
diluted in 2017, up from $21.1 million, or 33 cents
per share diluted in 2016, as recorded under
Generally Accepted Accounting Principles.

Two non-cash items, however, had a major effect
on those GAAP results. The largest was a net loss
for the year from revaluation of warrants we have
issued to Amazon incrementally under commercial
agreements we signed with them in 2016. These
revaluations occur quarterly, and reflect changes in
the size of our warrant liability from share-price
changes and additional vested warrants. Unrealized
losses tied to increases in that liability are in part
good news for shareholders, as losses are driven
mainly by increases in our stock price.

The Amazon warrant revaluation loss, plus non-
cash amortization of the lease incentives also tied to

the warrants, was $95.7 million in 2017. The other
principal item affecting our GAAP results was a
$59.9 million tax benefit from the tax-law changes
enacted in December.

2017’s solid performance was aided by

across-the-board growth in each of our businesses
and a solid peak season of airline service for our
customers. In August, we completed our
commitment to supply Amazon with twenty
leased 767s to serve as the backbone of its new
air network, plus the flight crews, maintenance,
and logistics to support them. As a result, Amazon
became our largest customer in 2017, accounting
for 44 percent of our total revenues. DHL revenues
were 24 percent, and the U.S. Military 7 percent
of our total revenues.

The principal factor for the airlines was expanded
flying during a busy peak, which included operations
for our principal customers, DHL and Amazon,
as well as some peak season flying for other
customers. Taken together, our block hours exceeded
the prior year by 22 percent. Also contributing to
our airlines improved performance was a reduction
in year-over-year expense associated with scheduled
airframe inspections.

Board of Directors

Stock Information

NASDAQ: ATSG.

Company documents electronically

filed with the SEC also may be

found at www.atsginc.com.

Registrar and Transfer Agent

Computershare Investor Services

(877) 581-5548 or (781) 575-2879

www.computershare.com/investor

P.O. Box 30170

221 Quality Circle, Ste 210

College Station, TX 77842

Randy D. Rademacher

Sr. Vice President and Chief Financial Officer

for Reading Rock, Inc., a privately owned

manufacturer and distributor of concrete

products and other building materials,

since 2008. Mr. Rademacher has been a

Director of the Company since December

2006 and Chairman of the Board since May

2015. He is a member of both the Audit

Committee and the Nominating and

Governance Committee.

Richard M. Baudouin

Senior Advisor for Infinity Transportation, a

company owned by Global Atlantic Financial

Corp., since 2016. Prior to his current role at

Infinity Transportation, Mr. Baudouin was a

principal of Infinity Aviation Capital, LLC,

an investment firm involved in aircraft leasing,

from 2011 to 2016, and was a co-founder and

former managing director of Aviation Capital

Group, a commercial aircraft leasing company,

from 1989 to 2010. Mr. Baudouin has been a

Director of the Company since January 2013.

He is the Chairman of the Nominating and

Governance Committee and is a member of

the Audit Committee.

Joseph C. Hete

President and Chief Executive Officer of

Air Transport Services Group, Inc. and

Chief Executive Officer of ABX Air, Inc.

Mr. Hete has been with the company

since 1980.

Independent Auditors

Deloitte & Touche LLP

Cincinnati, Ohio

Annual Meeting

The annual meeting of stockholders

will be May 10, 2018, at 11 a.m.

local time at The Roberts Centre,

123 Gano Road, Wilmington, Ohio.

Investor Relations

Telephone inquiries may be

directed to (937) 434-2700.

Raymond E. Johns, Jr. (General USAF Ret.)

Executive Vice President of FlightSafety

International Inc., a global provider of flight

training for commercial, business and military

aviation professionals and flight simulation

equipment, since 2014. Prior to his retirement

from the military, Mr. Johns led the U.S. Air Force

Air Mobility Command at Scott Air Force Base

in Illinois. Mr. Johns has been a Director of

the Company since October 2017. He is a

member of both the Audit Committee and

Nominating and Governance Committee.

J. Christopher Teets

Partner of Red Mountain Capital Partners LLC,

an investment management firm, since 2005.

Mr. Teets has been a Director of the Company

since February 2009. He is the Chairman of the

Compensation Committee and a member of the

Nominating and Governance Committee.

Jeffrey J. Vorholt

Independent consultant and private investor.

Mr. Vorholt was formerly a full-time faculty

member at Miami University (Ohio) and

concurrently an Adjunct Professor of Accountancy

at Xavier University (Ohio) from 2001 to 2006.

A CPA and attorney, he was the Chief Financial

Officer of Structural Dynamics Resource

Corporation from 1994 until its acquisition

by EDS in 2001. Mr. Vorholt has been a

Director of the Company since January 2004.

He is the Chairman of the Audit Committee and

is a member of the Compensation Committee.

INSIDE FRONT COVER

INSIDE BACK COVER

Air Transport Services Group 2017 Annual Report

CAM, our leasing business, had a good year,
despite lower margins. Additional earnings from a
larger leased fleet were offset by higher lease
incentives to Amazon, depreciation, and increased
interest expense as CAM’s portfolio of aircraft
expanded to meet the strong demand for leased
767s. CAM also absorbed a $2 million non-cash
charge to its share of our interest expense tied
to the convertible feature of debt we issued in
late September.

2018 is off to a great start. In March 2018, the

pilot employees of our subsidiary Air Transport
International, Inc. ratified an amendment to the
collective bargaining agreement between ATI and
their representative, the Air Line Pilots Association.
The amended agreement extends four years from its
ratification and will support ATI’s continued growth
and superior service to customers.

We are targeting $300 million in capital
expenditures, roughly what we spent in 2017,
mainly to deliver ten more converted Boeing 767
freighters this year, and place them with customers
under multi-year dry leases. Two of those will be
from a group of three additional feedstock 767-300s
we are acquiring in 2018. We may buy more if our
demand projections prove out.

We have adopted the FASB’s new revenue
recognition standard, and revised our segment

reporting structure for 2018. Under the new rules,
revenues related to costs of aircraft fuel and certain
other aviation-related expenses that are directly
reimbursed to ATSG and controlled by the customer
will be reported net of the corresponding expenses.
Had those rules been in effect for 2017, our revenue
would have been approximately $290 million lower
than the $1.1 billion we reported, with no changes
to earnings or cash flows.

Our aircraft maintenance and conversion

operations will now be reported in a new segment
called MRO Services. Other Activities will include
our ground services, equipment leasing, and postal
center services, plus corporate and other customer
support operations.

We also took steps last year to de-risk our balance

sheet, while preserving our long-term access to
attractive low-cost growth capital. In March, we
amended our secured revolving credit facility to add
$120 million in borrowing capacity. In August, we
offloaded a portion of our pension liability to an
annuity underwriter. And in September, we issued
$259 million in 1.125% convertible notes.

As of January 1, 2018, nearly 80 percent of our
$575 million in debt principal was fixed rate, with
an average coupon rate of under 3 percent. We
entered 2018 with $291 million available under
our revolving credit facility. Our cash flow from

Air Transport Services Group 2017 Annual Report

operations, which rose 22 percent in 2017,
should continue to grow as our fleet expands,
even as we continue to maintain a conservative
debt leverage profile.

Our additional 767 aircraft purchases and
planned deployments in 2018 are the best way
we can tell you that we are very positive about
the economy in general, and the express-network
portion of the air cargo business that we serve
directly. We expect all of our 2018 aircraft
deployments to be straight external dry leases
that the customer will operate. Most are already
committed to customers, and most will use some
or all of our maintenance capabilities.

A significant part of the market opportunity

we serve is driven by increases in e-commerce
fulfillment demand, which is driving the growth of
express networks providing same- and second-day
service to points throughout the U.S. and around
the world. Our goal is to remain the No. 1 source
of dedicated midsize freighters that are essential
elements of those networks.

With that goal in mind, we are expanding our
aircraft type offerings within the midsize niche to
offer models that can efficiently extend those
networks into smaller markets.

We teamed with Precision Conversions last year

to develop a converted freighter variant of the

Airbus A321, an aircraft with a great record of
reliability and efficiency for passenger airlines
around the world. It combines the operating
efficiency of a smaller narrow-body like the
Boeing 737, but with the cubic capacity of the
larger narrow-body Boeing 757s we operate today.
Once approved, we intend for CAM to invest in
A321s and convert them to freighters to support
customers eager for the cost-efficient capacity
they can provide.

Our strategy remains to maximize cash flow
and invest it where we can find the highest return.
For now, that’s primarily to invest in the very same
attractive aircraft assets that have made us so
successful thus far and have delivered the
substantial shareholder returns we all have
enjoyed the last few years.

Joseph C. Hete
President & Chief Executive Officer
Air Transport Services Group, Inc.

A321-200PCF FEATURES

1. Class A Flight Deck and vestibule

5. Class E main deck cargo compartment

9. L4/R4 doors deactivated

as basic configuration

2. 9G rigid barrier / smoke barrier

6. Class C lower deck cargo
compartment unchanged

3. Main deck cargo door 142” x 86”

7. Installation of main deck cargo

4. MDCD hydraulically actuated and

loading system

electronically sequenced (self-contained)

8. Window plugs installed

10. Reinforced floor structure

11. L2/R2 door deleted

12. 68.7” clearance for CFM-56

and 62.2” for V2500

13. L3/R3 doors deleted

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

Commission file number 000-50368

________________________________________________________________

(Exact name of registrant as specified in its charter)

________________________________________________________________

Delaware
(State of Incorporation)

26-1631624
(I.R.S. Employer Identification No.)

145 Hunter Drive, Wilmington, OH 45177
(Address of principal executive offices)
937-382-5591
(Registrant’s telephone number, including area code)
________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)

Name of each exchange on which registered: NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None

________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). YES

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer
Non-accelerated filer

(Do not check if a smaller reporting company)

Accelerated filer
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter:
$1,260,495,219. As of March 1, 2018, 59,067,276 shares of the registrant’s common stock, par value $0.01, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held May 10, 2018 are incorporated by reference
into Parts II and III.

FORWARD LOOKING STATEMENTS

This annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
in Item 7, contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks
and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any
statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as
“future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar
terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed
in “Risk Factors” in Item 1A . The Company assumes no obligation to revise or update any forward-looking statements for any reason, except
as required by law.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
2017 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Item 1.

Business

Item 1A.

Item 1B.

Item 2.

Item 3.

Item 4.

Risk Factors

Unresolved Staff Comments

Properties

Legal Proceedings

Mine Safety Disclosures

PART I

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Item 6.

Item 7.

Item 7A.

Item 8.

Item 9.

Item 9A.

Item 9B.

Item 10.

Item 11.

Item 12.

Item 13.

Item 14.

Equity Securities

Selected Consolidated Financial Data

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Quantitative and Qualitative Disclosures About Market Risk

Financial Statements and Supplementary Data

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Controls and Procedures

Other Information

Directors, Executive Officers and Corporate Governance

PART III

Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Certain Relationships and Related Transactions, and Director Independence

Principal Accounting Fees and Services

Item 15.

Exhibits and Financial Statement Schedules

SIGNATURES

PART IV

Page

83
83

[This page intentionally left blank]

PART I

ITEM 1. BUSINESS

Company Overview

Air Transport Services Group, Inc. is a holding company whose subsidiaries primarily operate within the airfreight
and logistics industry. We lease aircraft and provide airline operations, ground services, aircraft modification and
maintenance, and other support services mainly to the cargo transportation and package delivery industries. Our
subsidiaries offer a range of complementary services to delivery companies, freight forwarders, airlines and government
customers. We offer standalone services along with bundled, customized solutions, scalable to our customers' needs.
(When the context requires, we may use the terms “Company” and “ATSG” in this report to refer to the business of
ATSG and its subsidiaries on a consolidated basis.) Our services are summarized below.

Aircraft leasing: We lease cargo aircraft through ATSG's leasing subsidiary, Cargo Aircraft Management, Inc.
(“CAM”). CAM services global demand for medium range and medium capacity airlift by offering Boeing 767, 757
and 737 aircraft leases. CAM is able to provide competitive lease rates by converting passenger aircraft into cargo
freighters. CAM monitors the market for available medium passenger aircraft, typically 15 to 20 years beyond their
original manufacture date. After evaluation of an aircraft's condition and technical specifications, CAM acquires
passenger aircraft that meet its requirements for projected into-service costs and rate of return targets. CAM then
manages the modification of a passenger aircraft into a freighter. As a result, the converted freighters can be deployed
into regional markets more economically than larger capacity aircraft, newly built freighters or other competing
alternatives. CAM's aircraft leases are typically under multi-year agreements.

ACMI services: ATSG wholly owns two airlines, ABX Air, Inc. (“ABX”) and Air Transport International, Inc.
(“ATI”), each independently certificated by the U.S. Department of Transportation. The Company's airlines separately
offer a combination of aircraft, crews, maintenance and insurance services. These services are commonly referred to
as ACMI services or CMI services depending on the selection of services contracted. ABX operates Boeing 767 freighter
aircraft, while ATI operates Boeing 767 and Boeing 757 freighter and 757 "combi" aircraft. Combi aircraft are capable
of carrying passengers and cargo containers on the main deck. The airlines can conduct cargo operations worldwide.

Support services: We provide transportation related services such as aircraft maintenance, crew training and ground
handling to delivery companies, freight forwarders and other airlines. Customers who lease our aircraft often need
related support services. Offering support services provides us with a competitive advantage for diversification and
incremental revenues. Our businesses and subsidiaries providing support services are summarized below:

• Ground Services: We provide mail and package sorting services, as well as related maintenance services for
material handling equipment, ground equipment and facilities through our LGSTX Services, Inc. (“LGSTX”)
subsidiary. LGSTX also rents ground equipment and sells aviation fuel in Ohio.

• Aircraft maintenance and modification services: We provide airframe modification and maintenance,
component repairs, engineering services and aircraft line maintenance through our subsidiaries Airborne
Maintenance and Engineering Services, Inc. (“AMES”) and Pemco World Air Services, Inc. ("Pemco"). AMES
Material Services, Inc. ("AMS") resells and brokers aircraft parts. ABX also provides line maintenance services
at certain airports.

•

Flight support services: We offer flight crew training, air dispatch and flight monitoring.

The business development and marketing activities of our operating subsidiaries are supported by the Company's
Airborne Global Solutions, Inc. ("AGS") subsidiary. AGS markets the various services and products offered by our
subsidiaries by bundling solutions that leverage the entire portfolio of our subsidiaries' capabilities and experience in
global cargo operations. Our bundled services are flexible and scalable to complement the customers own resources
to support operational growth. Further, AGS assists our subsidiaries in achieving their sales and marketing plans by
identifying customers' business and operational requirements while providing sales leads.

General Business Development

The Company is incorporated in Delaware and its headquarters is in Wilmington, Ohio. ATSG's common shares
are publicly traded on the NASDAQ Stock Market under the symbol ATSG. ATSG was formed in 2007 for the purpose
of creating a holding company structure that resulted in ABX, which was incorporated in 1980, becoming a subsidiary
of ATSG. Between 1980 and August 2003, ABX was an affiliate of Airborne, Inc. (“Airborne”), a former publicly
traded, integrated delivery service provider. On August 15, 2003, ABX was separated from Airborne and became an
independent publicly traded company, in conjunction with the acquisition of Airborne by an indirect wholly-owned
subsidiary of DHL Worldwide Express, B.V. In 2004, we began to provide mail sorting services to the United States
Postal Service, ("USPS"). The Company acquired CAM, ATI and Capital Cargo International Airlines, Inc. ("CCIA")
on December 31, 2007. ATI began operations in 1979 and was an affiliate of BAX Global, Inc. (“BAX/Schenker”)
prior to 2006. In 2009, a significant portion of the aircraft maintenance operations of ABX, including a hangar facility
in Wilmington, were spun-out into AMES, a wholly-owned subsidiary of the Company. Similarly, in 2010, the material
handling and aviation ground support operations of ABX were spun-out into a wholly-owned subsidiary of the Company,
now known as LGSTX. During 2013, we merged CCIA into ATI, with ATI as the surviving entity.

In January 2014, we acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden. West Atlantic
AB, through its two airlines, Atlantic Airlines Ltd. and West Atlantic Sweden AB, operates a fleet of approximately 45
aircraft. West Atlantic AB operates its aircraft on behalf of European regional mail carriers and express logistics
providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing
767 and 737 aircraft. We account for our equity interest under the equity method of accounting.

The Company has had long term contracts with DHL since August 2003. In 2010, we entered into commercial
agreements with DHL under which DHL leased thirteen Boeing 767 freighter aircraft from CAM and ABX operates
those aircraft under a separate crew, maintenance and insurance agreement. The initial term of the operating agreement
was five years, while the terms of the aircraft leases were seven years. Effective April 1, 2015, the Company and DHL
amended and restated the agreements (together the "CMI agreement") which extended the Boeing 767 aircraft lease
terms and the operation of those aircraft through March 2019 and added two aircraft leases for Boeing 767 aircraft.

In September 2015, we began to operate a trial air network for Amazon.com Services, Inc. ("ASI"), the successor
to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. (“Amazon”). We provided cargo handling
and logistical support as the network grew to five dedicated Boeing 767 freighter aircraft during 2015. On March 8,
2016, the Company and ASI entered into an Air Transportation Services Agreement (the “ATSA”) which became
effective April 1, 2016. Pursuant to the ATSA, CAM leases 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing
767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years.
Under the ATSA, our airline subsidiaries operate those aircraft for an initial term of five years while our LGSTX
subsidiary provides gateway services for ASI at certain airports. As of December, 31, 2017, we leased 12 CAM-owned
Boeing 767-200 freighter aircraft and eight CAM-owned Boeing 767-300 freighter aircraft to ASI that were operated
by our airlines.

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement
and a Stockholders Agreement, each dated March 8, 2016. The Investment Agreement calls for the Company to issue
warrants in three tranches, which will result in Amazon having the right to acquire up to 19.9% of the Company’s
outstanding common shares measured as further described below. The exercise price of the warrants is $9.73 per share,
which represents the closing price of ATSG’s common shares on February 9, 2016. The first tranche of warrants, issued
upon execution of the Investment Agreement, grants Amazon the right to purchase approximately 12.81 million ATSG
common shares, all of which are now vested. The second tranche of warrants, which will be issued on March 8, 2018,
will give Amazon the right to purchase approximately 1.59 million ATSG common shares, all of which will be vested
upon the issuance of the warrants. The third tranche of warrants will be issued on September 8, 2020 and will also vest
immediately upon issuance. The third tranche of warrants will grant Amazon the right to purchase such additional
number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-
transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases
by the Company following the date of the Investment Agreement, after giving effect to the issuance of the warrants.
Each of the three tranches of warrants will be exercisable in accordance with its terms through the fifth anniversary of
the date of the Investment Agreement. We anticipate making the common shares underlying the warrants available
through a combination of share repurchases and the issuance of additional shares.

In December 2016, we acquired Pemco. Pemco provides aircraft maintenance, modification, and engineering
services. Pemco is based at the Tampa International Airport where it operates a two-hangar aircraft facility of 311,500
square feet and employs approximately 370 people. Pemco is a leading provider of passenger-to-freighter conversions
for Boeing 737-300 and 737-400 aircraft, having redelivered over 50 Boeing 737 converted aircraft to Chinese operators
over ten years. Pemco's aircraft conversion capabilities and aircraft hangar operations are marketed with our other air
transportation support services.

On August 3, 2017, we entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop
a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a supplemental
type certificate in 2019. We expect to make contributions equal to its 49% ownership percentage of the program's total
costs over the next two years. We account for our investment in the joint venture under the equity method of accounting.

Financial Information

The Company has three reportable segments, "CAM", “ACMI Services" and "Ground Services." Our other business
operations, including aircraft maintenance, engineering and modification services; aircraft part sales; ground equipment
leasing and maintenance; and mail and package sorting do not constitute reportable segments due to their size. Segment
revenues for 2017 are summarized below:

CAM

ACMI
Services

Ground
Services

Other Support
Services

External revenues (in
thousands)

$140,434

$614,721

$204,150

$108,895

Customer revenues for 2017 are summarized below.

DHL

Amazon

U.S. Military

Other

Percent of consolidated
revenues

24%

44%

25%

Additional financial information about our segments and geographical revenues is presented in Note N to the

accompanying consolidated financial statements.

Description of Business

CAM

CAM leases aircraft to ATSG's airlines and to external customers, including DHL and Amazon, usually under multi-
year contracts with a schedule of fixed monthly payments. Under a typical lease arrangement, the customer maintains
the aircraft in serviceable condition at its own cost. At the end of the lease term, the customer is typically required to
return the aircraft in approximately the same maintenance condition that existed at the inception of the lease, as measured
by airframe and engine time since the last scheduled maintenance event. CAM examines the credit worthiness of
potential customers, their short and long-term growth prospects, their financial condition and backing, the experience
of their management, and the impact of governmental regulation when determining the lease rate that is offered to the
customer. In addition, CAM monitors the customer’s business and financial status throughout the term of the lease.

As of December 31, 2017, CAM’s fleet consisted of 70 serviceable Boeing 767, 757 and 737 cargo aircraft. A
complete list of the Company's aircraft is included in Item 2, Properties. Through CAM, we have expanded in recent
years the Company's combined fleet of Boeing 767 and 757 aircraft. CAM has managed the modification of passenger
aircraft into cargo aircraft as well as purchased previously modified cargo aircraft. Since the beginning of 2015, CAM
has deployed 15 Boeing 767-300 and one Boeing 737 aircraft into its fleet.

ACMI Services

Through the Company's two airline subsidiaries, we provide airline operations to DHL, Amazon, delivery
companies, other airlines, freight forwarders and the U.S. Military. A typical operating agreement requires our airline
3

to supply, at a specific rate per block hour and/or per month, a combination of aircraft, crew, maintenance and insurance
("ACMI") for specified cargo operations. The customer is responsible for substantially all other aircraft operating
expenses, including fuel, landing fees, parking fees and ground and cargo handling expenses. The airlines also operate
charter agreements, including with the U.S. Military, which 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.

Our airlines operate medium wide-body aircraft freighters usually on intra-continental flights and medium range
inter-continental flights. The airlines typically operate our aircraft in the customers' regional networks that connect to
and from global cargo networks. We do not operate larger capacity, long haul inter-continental freighters such as the
Boeing 747, 777 or Airbus A380 aircraft. The freighter types we operate have lower investment and ongoing maintenance
costs and can operate cost efficiently with smaller loads on shorter routes than the larger capacity freighters.

Our airlines provide airlift to the Air Mobility Command ("AMC") through contracts awarded by the U.S.
Transportation Command ("USTC"), both of which are organized under the U.S. Military. ATI contracts with the AMC
for the operation of its unique fleet of four Boeing 757 "combi" aircraft, which are capable of simultaneously carrying
passengers and cargo containers on the main flight deck. ATI has been operating combi aircraft for the U.S. Military
since 1993. In January 2018, the USTC contracted with ATI to provide combi aircraft operations through December
2021 and awarded ATI three international routes for combi aircraft for 2018. These routes are not based on or related
to conflicts in the Middle East.

Our airlines participate in the Department of Defense ("DOD") Civil Reserve Air Fleet ("CRAF") program which
entitles our airlines to bid for military cargo charter operations. Our airlines may operate temporary "expansion" routes
for the U.S Military using the Boeing 757 combi and Boeing 767 freighter aircraft. Our participation in the CRAF
program allows the DOD to requisition specified aircraft for military use during a national defense emergency.

Approximately 5% of the Company's consolidated revenues for 2017 were derived from providing airline operations
for customers other than DHL, Amazon and the U.S. Military. These ACMI and charter operations are typically provided
to delivery companies, freight forwarders or other airlines.

Demand for air cargo services correlates closely with general economic conditions and the level of commercial
activity in a geographic area. Stronger general economic conditions and growth in a region typically increase the need
for product transportation. Historically, the cargo industry has experienced higher volumes during the fourth calendar
quarter of each year due to increased shipments during the holiday season. Generally, time-critical delivery needs,
such as just-in-time inventory management, increase the demand for air cargo delivery, while higher costs of aviation
fuel generally reduces the demand for air delivery services. When aviation fuel prices increase, shippers will consider
using ground transportation if the delivery time allows.

We have limited exposure to fluctuations in the price of aviation fuel under contracts with our customers. DHL,
like most of our ACMI customers, procures the aircraft fuel and fueling services necessary for their flights. Our charter
agreements with the U.S. Military are based on a preset pegged fuel price and include a subsequent true-up to the actual
fuel prices.

Aircraft Maintenance and Modification Services

We provide aircraft maintenance and modification services to other air carriers through our ABX, AMES and
Pemco subsidiaries. These subsidiaries have technical expertise related to aircraft modifications through a long history
in aviation. They own many Supplemental Type Certificates (“STCs”). An STC is granted by the FAA and represents
an ownership right, similar to an intellectual property right, which authorizes the alteration of an airframe, engine or
component. We market our subsidiaries capabilities by identifying aviation-related maintenance and modification
opportunities and matching them to customer needs.

AMES operates a Federal Aviation Administration (“FAA”) certificated 145 repair station in Wilmington, Ohio,
including hangars, a component shop and engineering capabilities. AMES is AS9100 quality certified for the aerospace
industry. AMES’ marketable capabilities include the installation of avionics systems and flat panel displays for Boeing
757 and 767 aircraft. In 2014, the Company completed the construction of a new hangar facility, bringing the total
hangar square footage to 310,000. The hangar provides the capability of servicing airframes as large as the Boeing
747-400 and the Boeing 777 aircraft. AMES has the capability to perform line maintenance and airframe maintenance

on McDonnell Douglas MD-80, Boeing 767, 757, 737, 777, 727 and Airbus A320 aircraft. AMES also has the capability
to refurbish airframe components, including approximately 60% of the components utilized by Boeing 767 aircraft.

Pemco operates an FAA certificated 145 repair station from a two hangar facility in Tampa, Florida. Pemco has
the capability to perform airframe maintenance on Boeing 767, 757, 737, McDonnell Douglas MD-80, Airbus A320,
A321 and various regional jet model aircraft. Pemco also has the capability to perform aircraft modification and
engineering services, including passenger-to-freighter and passenger-to-combi conversions for Boeing 737-200, Boeing
737-300 and Boeing 737-400 series aircraft.

AMS is an Aviation Suppliers Association, ASA 100 Accredited reseller and broker of aircraft parts. AMS carries
an inventory of Boeing 767, 757, 737 and DC-9 spare parts and also maintains inventory on consignment from original
equipment manufacturers, resellers, lessors and other airlines. AMS's customers include the commercial air cargo
industry, passenger airlines, aircraft manufacturers and contract maintenance companies serving the commercial
aviation industry, as well as other resellers.

Ground Services

We have provided mail sorting services under contracts with the USPS since September 2004. We provide labor,
equipment maintenance and facility management at USPS mail sort centers in Indianapolis, Dallas and Memphis. Under
each of these three contracts, we are compensated at a firm price for fixed costs and an additional amount based on the
volume of mail handled at each sort center. LGSTX also provides labor for load transfer services to the USPS at two
facilities. The contracts for the five facilities we service have been extended from their original expiration dates and
are currently scheduled to expire during September 2018. We understand the USPS is evaluating alternatives for these
facilities. The contract for some or all of these may not be renewed. LGSTX also arranges similar services to support
ASI at certain locations in the U.S. ASI can terminate these services at one or any location after giving a brief notice
period. Additionally LGSTX provides international mail forwarding services through the John F. Kennedy International
Airport and the O'Hare International Airport.

LGSTX also provides maintenance services for material handling and sorting equipment as well as ground support
equipment throughout the U.S. LGSTX has a large inventory of ground support equipment, such as power units,
airstarts, deicers and pushback vehicles that it rents to airports, ground handlers, airlines and other customers. LGSTX
is also licensed to resell aircraft fuel.

Flight Support

ABX is FAA certificated to offer flight crew training to customers and rent usage of its flight simulators for outside
training programs. ABX has three flight simulators. The Boeing 767 and DC-9 level C simulators allow ABX to qualify
flight crewmembers under FAA requirements without performing check flights in an aircraft.

The Company's subsidiary, Global Flight Source, Inc. ("GFS"), provides aircraft dispatch and flight monitoring to

ABX and ATI. GFS can provide these services to U.S certificated supplemental air carriers and foreign air carriers.

Competitive Conditions

Our airline subsidiaries compete with other cargo airlines to place aircraft under ACMI arrangements and charter
contracts. Other cargo airlines include Amerijet International, Inc., Atlas Air Worldwide Holdings, Inc., Kalitta Air
LLC, Northern Air Cargo, and National Air Cargo Group, Inc. The primary competitive factors in the air cargo industry
are operating costs, fuel efficiency, geographic coverage, aircraft range, aircraft reliability and capacity. The cost of
airline operations is significantly impacted by the cost of flight crewmembers, which can vary among airlines depending
on their collective bargaining agreements. Cargo airlines also compete for cargo volumes with passenger airlines that
have substantial belly cargo capacity. The air cargo industry is capital intensive and highly competitive, especially
during periods of excess capacity of aircraft compared to cargo volumes.

The scheduled delivery industry is dominated by integrated door-to-door delivery companies including DHL, the
USPS, FedEx Corporation, United Parcel Service, Inc. and ASI. Although the volume of our business is impacted by
competition among these integrated carriers, we do not usually compete directly with them.

Competition for aircraft lease placements is generally affected by aircraft type, aircraft availability and lease rates.
We target our leases to cargo airlines and delivery companies seeking medium widebody airlift. The Airbus A300-600

and A330 aircraft can provide capabilities similar to the Boeing 767 for medium widebody airlift. Competitors in the
aircraft leasing markets include GE Capital Aviation Services and Altavair Aviation Leasing, among others.

The aircraft maintenance industry is labor intensive and typically competes based on cost, capabilities and reputation
for quality. U.S. airlines may contract for aircraft maintenance with maintenance and repair organizations ("MROs")
in other countries or geographies with a lower labor wage base, making the industry highly cost competitive. Other
aircraft MROs include AAR Corp and Hong Kong Aircraft Engineering Co.

Airline Operations

Flight Operations and Control

Each of the Company's airline operations are conducted pursuant to authority granted to them by the FAA and the
Department of Transportation ("DOT"). Airline flight operations, including aircraft dispatching, flight tracking, crew
training and crew scheduling are planned and controlled by personnel within each airline. The Company staffs aircraft
dispatching and flight tracking 24 hours per day, 7 days per week. The FAA prescribes the requirements, methods and
means by which air carrier flight operations are conducted, including but not limited to the qualifications and training
of flight crew members, the release of aircraft for flight, the tracking of flights, the time crew members can be on duty,
aircraft operating procedures, proper navigation of aircraft, compliance with air traffic control instructions and other
operational functions.

Aircraft Maintenance

Our airlines’ operations are regulated by the FAA for aircraft safety and maintenance. Each airline performs routine
inspections and airframe maintenance in accordance with applicable FAA-approved aircraft maintenance programs.
In addition, the airlines build into their maintenance programs FAA-mandated Airworthiness Directive and manufacturer
Service Bulletin compliance on all of their aircraft. The airlines’ maintenance and engineering personnel coordinate
routine and non-routine maintenance requirements. Each airline’s maintenance program includes tracking the
maintenance status of each aircraft, consulting with manufacturers and suppliers about procedures to correct
irregularities and training maintenance personnel on the requirements of its FAA-approved maintenance program. The
airlines contract with MROs, including AMES and Pemco, to perform heavy maintenance on airframes and engines.
Each airline owns and maintains an inventory of spare aircraft engines, auxiliary power units, aircraft parts and
consumable items. The quantity of spare items maintained is based on the fleet size, engine type operated and the
reliability history of the item types.

Security

The Transportation Security Administration (“TSA”) requires our air carriers to comply with security protocols as
set out in each carrier’s standard all-cargo aircraft operator security plan containing extensive security practices and
procedures that must be followed. The security plan provides for the conducting of background checks on those with
access to cargo and/or aircraft, the securing of the aircraft while on the ground, the acceptance and screening of cargo
to be moved by air, the handling of suspicious cargo and the securing of cargo ground facilities, among other
requirements. Comprehensive internal audit and evaluation programs are actively mandated and maintained.

Customers are required to inform the airlines in writing of the nature and composition of any freight which is
classified as "Hazardous Materials" and “Dangerous Goods” by the DOT. Notwithstanding these procedures, our airline
subsidiaries could unknowingly transport contraband or undeclared hazardous materials for customers, which could
result in fines and penalties and possible damage to the aircraft.

Insurance

Our airline subsidiaries are required by the DOT to carry a minimum amount of aircraft liability insurance. Their
aircraft leases, loan agreements and ACMI agreements also require them to carry such insurance. The Company
currently maintains public liability and property damage insurance, and our airline subsidiaries currently maintain
aircraft hull and liability insurance and war risk insurance for their respective aircraft fleets in amounts consistent with
industry standards. CAM’s customers are also required to maintain similar insurance coverage.

Employees

As of December 31, 2017, the Company had approximately 3,010 full-time and part-time employees. The Company
employed approximately 485 flight crewmembers, 1,415 aircraft maintenance technicians and flight support personnel,
685 warehousing, sorting and logistics personnel, 165 employees for airport maintenance and logistics, 35 employees
for sales and marketing and 225 employees for administrative functions. In addition to full time and part time employees,
the Company typically has approximately 400 temporary employees mainly serving the USPS operations and aircraft
line maintenance operations. On December 31, 2016, the Company had approximately 3,230 full-time and part-time
employees.

Labor Agreements

The Company’s flight crewmembers are unionized employees. The table below summarizes the representation of

the Company’s flight crewmembers at December 31, 2017.

Airline
ABX
ATI
ATI

Labor Agreement Unit

International Brotherhood of Teamsters
Air Line Pilots Association
Association of Flight Attendants

Contract
Amendable
Date
12/31/2014
5/28/2014
11/14/2023

Percentage of
the Company’s
Employees
8.4%
7.6%
1.3%

Under the Railway Labor Act (“RLA”), as amended, the crewmember labor agreements do not expire, so the existing
contract remains in effect throughout any negotiation process. If required, mediation under the RLA is conducted by
the National Mediation Board, which has the sole discretion as to how long mediation can last and when it will end.
In addition to direct negotiations and mediation, the RLA includes a provision for potential arbitration of unresolved
issues and a 30-day “cooling-off” period before either party can resort to self-help, including, but not limited to, a work
stoppage.

Training

The flight crewmembers are required to be licensed in accordance with Federal Aviation Regulations (“FARs”),
with specific ratings for the aircraft type to be flown, and to be medically certified as physically fit to operate aircraft.
Licenses and medical certifications are subject to recurrent requirements as set forth in the FARs, to include recurrent
training and minimum amounts of recent flying experience.

The FAA mandates initial and recurrent training for most flight, maintenance and engineering personnel. Mechanics
and quality control inspectors must also be licensed and qualified to perform maintenance on Company operated and
maintained aircraft. Our airline subsidiaries pay for all of the recurrent training required for their flight crewmembers
and provide training for their ground service and maintenance personnel. Their training programs have received all
required FAA approvals. Similarly, our flight dispatchers and flight followers receive FAA approved training on the
airlines' requirements and specific aircraft.

Intellectual Property

The Company owns many STCs issued by the FAA. The Company uses these STCs mainly in support of its own

fleets; however, AMES and Pemco have marketed certain STCs to other airlines.

Information Systems

We are dependent on technology to conduct our daily operations including data processing, communications and
regulatory compliance. We rely on critical computerized systems for aircraft maintenance records, flight planning,
crew scheduling, employee training, financial records and other processes. We utilize information systems to maintain
records about the maintenance status and history of each major aircraft component, as required by FAA regulations.
Using the systems, we track maintenance schedules and also control inventories and maintenance tasks, including the
work directives of personnel performing those tasks. We rely on information systems to track crewmember flight and
duty times, and crewmember training status. The Company’s flight operations systems coordinate flight schedules and
crew schedules.

We invest significant time and financial resources to acquire, develop and maintain information systems to facilitate
our operations. We rely increasing on third party applications and hosted technologies. To remain competitive we must
continue to deploy new technologies while controlling its costs and maintaining regulatory compliance.

Regulation

Our subsidiaries’ airline operations are primarily regulated by the DOT, the FAA and the TSA. Those operations
must comply with numerous economic, safety, security and environmental laws, ordinances and regulations. In addition,
they must also comply with various other federal, state, local and foreign laws and regulations.

Environment

The U.S. Environmental Protection Agency ("EPA") is authorized to regulate aircraft emissions and has historically
implemented emissions control standards adopted by the International Civil Aviation Organization ("ICAO"). In 2016,
however, the EPA issued a finding on greenhouse gas ("GHG") emissions from aircraft and its relationship to air
pollution. This finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft
emissions. Our subsidiaries’ aircraft currently meet all known requirements for engine emission levels as applicable
by engine design date. Under the Clean Air Act, individual states or the EPA may adopt regulations requiring reductions
in emissions for one or more localities based on the measured air quality at such localities. These regulations may seek
to limit or restrict emissions by restricting the use of emission-producing ground service equipment or aircraft auxiliary
power units. Further, the U.S. Congress has, in the past, considered legislation that would regulate GHG emissions,
and some form of federal climate change legislation is possible in the future.

In addition, the European Commission has approved the extension of the European Union Emissions Trading
Scheme ("ETS") for GHG emissions to the airline industry. Currently, under the European Union’s ETS, all ABX and
ATI flights that are wholly within the European Union are covered by the ETS requirements, and each year our airlines
are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such flights. If
the airline's flight activity during the year produced carbon emissions exceeding the number of carbon emissions
allowances that it had been awarded, the airline must acquire allowances from other airlines in the open market. ABX
and ATI operate intra-EU flights from time to time and management believes that such flights are operated in compliance
with ETS requirements.

Similarly, in 2016, the ICAO passed a resolution adopting the Carbon Offsetting and Reduction Scheme for
International Aviation (“CORSIA”), which is a global, market-based emissions offset program to encourage carbon-
neutral growth beyond 2020. A pilot phase is scheduled to begin in 2021 in which countries may voluntarily participate,
and full mandatory participation is scheduled to begin in 2027. ICAO continues to develop details regarding
implementation, but compliance with CORSIA will increase our operating costs.

The federal government generally regulates aircraft engine noise at its source. However, local airport operators
may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Airport Noise
and Capacity Act of 1990 provides that, in the case of Stage 3 aircraft (all of our operating aircraft satisfy Stage 3 noise
compliance requirements), an airport operator must obtain the carriers’ consent to, or the government’s approval of,
the rule prior to its adoption. We believe the operation of our airline subsidiaries’ aircraft either complies with or is
exempt from compliance with currently applicable local airport rules. However, some airport authorities have adopted
local noise regulations, and, to the extent more stringent aircraft operating regulations are adopted on a widespread
basis, our airline subsidiaries may be required to spend substantial funds, make schedule changes or take other actions
to comply with such local rules.

Department of Transportation

The DOT maintains authority over certain aspects of domestic air transportation, such as requiring a minimum level
of insurance and the requirement that a person be “fit” to hold a certificate to engage in air transportation. In addition,
the DOT continues to regulate many aspects of international aviation, including the award of international routes. The
DOT has issued ABX a Domestic All-Cargo Air Service Certificate for air cargo transportation between all points within
the U.S., the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The DOT has issued ATI certificate authority
to engage in scheduled interstate air transportation, which is currently limited to all-cargo operations. ATI's DOT

certificate authority also authorizes it to engage in interstate and foreign charter air transportation of persons, property
and mail. Additionally, the DOT has issued ABX and ATI Certificates of Public Convenience and Necessity authorizing
each of them to engage in scheduled foreign air transportation of cargo and mail between the U.S. and all current and
future U.S. open-skies partner countries, which currently consists of more than 120 foreign countries. ABX also holds
exemption authorities issued by the DOT to conduct scheduled all-cargo operations between the U.S. and certain foreign
countries with which the U.S. does not have an open-skies air transportation agreement.

By maintaining these certificates, the Company, through its airline subsidiaries, can conduct all-cargo charter
operations worldwide subject to the receipt of any necessary foreign government approvals. Prior to issuing such
certificates, and periodically thereafter, the DOT examines a company’s managerial competence, financial resources
and plans, compliance disposition and citizenship in order to determine whether the carrier is fit, willing and able to
engage in the transportation services it has proposed to and does undertake.

The DOT has the authority to impose civil penalties, or to modify, suspend or revoke our certificates and exemption
authorities for cause, including failure to comply with federal laws or DOT regulations. A corporation holding the
above-referenced certificates and exemption authorities must qualify as a citizen of the United States, which, pursuant
to federal law, requires that (1) it be organized under the laws of the U.S. or a state, territory or possession thereof,
(2) that its president and at least two-thirds of its Board of Directors and other managing officers be U.S. citizens,
(3) that less than 25% of its voting interest be owned or controlled by non-U.S. citizens, and (4) that it not otherwise
be subject to foreign control. We believe our airline subsidiaries possess all necessary DOT-issued certificates and
authorities to conduct our current operations and each continue to qualify as a citizen of the United States.

Federal Aviation Administration

The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities,
maintenance, flight dispatch, training, communications, the carriage of hazardous materials and other matters affecting
air safety. The FAA issues operating certificates and detailed "operations specifications" to carriers that possess the
technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each
aircraft that meets the requirements for aircraft design and maintenance. ABX and ATI believe they hold all airworthiness
and other FAA certificates and authorities required for the conduct of their business and the operation of their aircraft,
although the FAA has the power to suspend, modify or revoke such certificates for cause, or to impose civil penalties
for any failure to comply with federal laws and FAA regulations.

The FAA has the authority to issue regulations, airworthiness directives and other mandatory orders relating to,
among other things, the inspection, maintenance and modification of aircraft and the replacement of aircraft structures,
components and parts, based on industry safety findings, the age of the aircraft and other factors. For example, the FAA
has required ABX to perform inspections of its Boeing 767 aircraft to determine if certain of the aircraft structures and
components meet all aircraft certification requirements. If the FAA were to determine that the aircraft structures or
components are not adequate, it could order operators to take certain actions, including but not limited to, grounding
aircraft, reducing cargo loads, strengthening any structure or component shown to be inadequate, or making other
modifications to the aircraft. New mandatory directives could also be issued requiring the Company’s airline subsidiaries
to inspect and replace aircraft components based on their age or condition. As a routine matter, the FAA issues
airworthiness directives applicable to the aircraft operated by our airline subsidiaries, and our airlines comply, sometimes
at considerable cost, as part of their aircraft maintenance program.

In addition to the FAA practice of issuing regulations and airworthiness directives as conditions warrant, the FAA
has adopted new regulations to address issues involving aging, but still economically viable, aircraft on a more systematic
basis. FAA regulations mandate that aircraft manufacturers establish aircraft limits of validity and service action
requirements based on aircraft flight cycles and flight hours before which widespread fatigue damage might occur.
Service action requirements include inspections and modifications to preclude development of widespread fatigue
damage in specific aircraft structural areas. The Boeing Company has provided its recommendations of the limits of
validity to the FAA, and the FAA has now approved the limits for the Boeing 757 and 767 model aircraft. Consequently,
after the limit of validity is reached for a particular model aircraft, air carriers will be unable to continue to operate the
aircraft without the FAA first granting an extension of time to the operator. There can be no assurance that the FAA
would extend the deadline, if one were to be requested. For the oldest aircraft in our fleets, we estimate the limit of
validity would not be reached for at least 20 years.

The FAA requires each of the airline subsidiaries to implement a drug and alcohol testing program with respect to
all employees and, unless already subject to testing, contractor employees that engage in safety sensitive functions.
Each of the airlines complies with these regulations.

Transportation Security Administration

The TSA, an administration within the Department of Homeland Security, is responsible for the screening of
passengers, baggage and cargo and the security of aircraft and airports. Our airline subsidiaries comply with all applicable
aircraft and cargo security requirements. The TSA has adopted cargo security-related rules that have imposed additional
burdens on our airlines and our customers. Among other things, the TSA requires each airline to perform criminal
history background checks on all employees. In addition, we may be required to reimburse the TSA for the cost of
security services it may provide to the Company’s airline subsidiaries in the future.

International Regulations

When operating in other countries, our airlines are subject to aviation agreements between the U.S. and the respective
countries or, in the absence of such an agreement, by principles of reciprocity. International aviation agreements are
periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or
termination of the agreements affecting our international operations. Commercial arrangements such as ACMI
agreements between our airlines and our customers in other countries, may require the approval of foreign governmental
authorities. Foreign authorities may limit or restrict the use of our aircraft in certain countries. Also, foreign government
authorities often require licensing and business registration before beginning operations.

Other Regulations

Various regulatory authorities have jurisdiction over significant aspects of our business, and it is possible that new
laws or regulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse
effect on our operations. In addition to the above, other laws and regulations to which we are subject, and the agencies
responsible for compliance with such laws and regulations, include the following:

•

The labor relations of our airline subsidiaries are generally regulated under the Railway Labor Act, which
vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines
and labor unions arising under collective bargaining agreements;

The Federal Communications Commission regulates our airline subsidiaries’ use of radio facilities pursuant
to the Federal Communications Act of 1934, as amended;

U.S. Customs and Border Protection issues landing rights and inspects cargo imported from our subsidiaries’
international operations;

Our airlines must comply with U.S. Citizenship and Immigration Services regulations regarding the
citizenship of our employees;

The Company and its subsidiaries must comply with wage, work conditions and other regulations of the
Department of Labor regarding our employees.

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury and other government
agencies administer and enforce economic and trade sanctions based on U.S. foreign policy, which may
limit our business activities in and for certain areas.

Executive Officers of the Registrant

Information about executive officers of the Company is provided in Item 10. Directors, Executive Officers and

Corporate Governance, of this report, and is incorporated in this item by reference.

Available Information

Our filings with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from
our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC. The SEC maintains an

Internet site that contains reports, proxy and information statements and other information regarding Air Transport
Services Group, Inc. at www.sec.gov.

ITEM 1A. RISK FACTORS

The risks described below could adversely affect our financial condition or results of operations. The risks below
are not the only risks that the Company faces. Additional risks that are currently unknown to us or that we currently
consider immaterial or unlikely could also adversely affect the Company.

The economic conditions in the U.S. and in other markets may negatively impact the demand for the Company’s aircraft
and services.

Air cargo transportation volumes are strongly correlated to general economic conditions, including the price of
aviation fuel. An economic downturn could reduce the demand for delivery services offered by DHL, Amazon and
other delivery businesses, in particular expedited shipping services utilizing aircraft. Further, during an economic
slowdown, customers generally prefer to use ground-based or marine transportation services instead of more expensive
air transportation services. Accordingly, an economic downturn could reduce the demand for airlift and cargo aircraft
leases. Additionally, if the price of aviation fuel rises significantly, the demand for cargo aircraft and air transportation
services may decline. During periods of downward economic trends and rising fuel costs, freight forwarders and
integrated delivery businesses are more likely to defer market expansion plans. As a result, we may experience delays
in the deployment of available aircraft with customers under lease, ACMI or charter arrangements.

Our costs incurred in providing airline services could be more than the contractual revenues generated.

Each airline develops business proposals for ACMI, charters, DHL, ASI and other operating contracts by projecting
operating costs, crew productivity and maintenance expenses. Projections contain key assumptions, including
maintenance costs, flight hours, aircraft reliability, crewmember productivity and crewmember compensation and
benefits. We may overestimate revenues, the level of crewmember productivity, and/or underestimate the actual costs
of providing services when preparing business proposals. If actual costs are higher than projected or aircraft reliability
is less than expected, future operating results may be negatively impacted.

The Company’s airlines rely on flight crews that are unionized. If collective bargaining agreements increase our
costs and we cannot recover such increases, our operating results would be negatively impacted. It may be necessary
for us to terminate customer contracts or curtail planned growth.

Our operating results could be adversely impacted by negotiations regarding collective bargaining agreements with
flight crewmember representatives.

The flight crewmembers for each of the Company's airlines are unionized. ABX's crewmembers are represented
by the International Brotherhood of Teamsters ("IBT") while ATI's crewmembers are represented by the Air Line Pilots
Association ("ALPA"). The collective bargaining agreement ("CBA") between ABX and IBT and between ATI and
ALPA are both currently amendable and the respective parties are each in the process of renegotiating the terms of their
CBA. The airline and the union are each required to maintain the status quo during the renegotiation of the CBA;
neither the airline nor the union may engage in a lock-out, strike or other self-help until such time as they are released
from further negotiations by the mediator for the National Mediation Board ("NMB"), and after the conclusion of a
mandatory 30-day “cooling off” period. It is rare for mediators to declare an impasse and release the parties. Instead,
the NMB prefers to require the parties to remain in negotiations until such time as they come to an agreement. Despite
this process, it's possible for disruptions in customer service to occur from time to time, resulting in increased costs for
the airline and monetary penalties under certain customer agreements if monthly reliability thresholds are not achieved.
Further, if we do not maintain minimum reliability thresholds over an extended period of time, we could be found in
default of a customer agreement.

Contract negotiations with the union could result in reduced flexibility for scheduling crewmembers and higher

operating costs for the airlines, making the Company's airlines less competitive than other airlines.

The NMB ruled, during 2017, that ABX and ATI do not constitute a single transportation system for the purposes
of collective bargaining. The NMB could reconsider whether the airlines constitute a single transportation system and
require that the ABX and ATI crewmembers be represented by the same union. A single transportation system

determination by the NMB could give rise to complex contractual issues, including integrating the airlines' seniority
lists, and materially impact the dynamics with respect to future CBA negotiations. While it is unlikely that the NMB
would reconsider or find that ABX and ATI constitute a single transportation system, the case-by-case analysis used
by the NMB makes such predictions uncertain.

The rate of aircraft deployments may impact the Company’s operating results and financial condition.

The Company's future operating results and financial condition will depend in part on our subsidiaries’ ability to
successfully deploy aircraft in customers' operations while generating a positive return on investment. Our success
will depend, in part, on our customers' ability to secure additional cargo volumes, in both U.S. and international markets.
Deploying aircraft in international markets can pose additional risks, costs and regulatory requirements which could
result in periods of delayed deployments.

The actual demand for Boeing 767, 757 and 737 aircraft may be less than we anticipate. The actual lease rates for
aircraft available for lease may be less than we projected, or new leases may start later than we expect. Further, other
airlines and lessors may be willing to offer aircraft to the market under terms more favorable to lessees.

We may fail to meet the scheduled delivery date for aircraft required by customer agreements.

If CAM cannot meet the agreed delivery schedule for an aircraft lease, the customer may have the right to cancel

the aircraft lease, thus delaying revenues until the aircraft can be completed and re-marketed successfully.

Our airline operating agreements include on-time reliability requirements which can impact the Company's operating
results and financial condition.

Certain of our airline operating agreements contain monthly incentive payments for reaching specific on-time
reliability thresholds. Additionally, such airline operating agreements contain monetary penalties for aircraft reliability
below certain thresholds. As a result, our operating revenues may vary from period to period depending on the
achievement of monthly incentives or the imposition of penalties. Further, an airline could be found in default of an
agreement if it does not maintain minimum thresholds over an extended period of time. If our airlines are placed in
default due to the failure to maintain reliability thresholds, the customer may elect to terminate all or part of the services
we provide under certain customer agreements after a cure period.

If ABX fails to maintain aircraft reliability above a minimum threshold under the restated CMI agreement for two
consecutive calendar months or three months in a rolling twelve month period, we would be in default of the restated
CMI agreement with DHL. In that event, DHL may elect to terminate the restated CMI agreement, unless we maintain
the minimum reliability threshold during a 60-day cure period. If DHL terminates the CMI agreement due to an ABX
event of default, we would be subject to a monetary penalty payable to DHL.

If our airlines fail to maintain aircraft reliability above a minimum threshold under the ATSA for either a specified
number of consecutive calendar months or a specified number of calendar months (whether or not consecutive) in a
specified trailing period, we could be held in default. In that event, ASI may elect to terminate the ATSA and pursue
those rights and remedies available to it at law or in equity.

The anticipated strategic and financial benefits of our relationship with Amazon may not be realized.

We entered into the agreements with Amazon with the expectation that the transactions would result in various
benefits including, among others, growth in revenues, improved cash flows and operating efficiencies. Achieving the
anticipated benefits from the agreements is subject to a number of challenges and uncertainties, such as unforeseen
costs. If we are unable to achieve our objectives the expected benefits may be only partially realized or not at all, or
may take longer to realize than expected, which could adversely impact our financial condition and results of operations.

The Company's future earnings and earnings per share, as reported under generally accepted accounting principles,
will be impacted by the Amazon stock warrants.

We expect that the warrants issuable to Amazon will increase the number of diluted shares reported. As of December
31, 2017, the Company's liabilities reflected 14.83 million stock warrants issued to Amazon. Further, the warrants are
subject to fair value measurements during periods that they are outstanding. Accordingly, future fluctuations in the
fair value of the warrants may adversely impact the Company's reported earnings measures.

Changes in the fair value of certain financial instruments could impact the financial results of the Company.

Certain financial instruments are subject to fair value measurements at the end of each reporting period. Accordingly,
future fluctuations in their fair value may adversely impact the Company's reported earnings. See Note D in the
accompanying consolidated financial statements for further information about the fair value of our financial instruments.

The convertible note hedge transactions and the warrant transactions that we entered into in September 2017 may
affect the value of our common stock.

In connection with the pricing of our 1.125% senior convertible notes due 2024 (the "Notes") and the exercise by
the initial purchasers of their option to purchase additional Notes, we entered into privately-negotiated convertible note
hedge transactions with the hedge counterparties. The convertible note hedge transactions cover, subject to customary
anti-dilution adjustments, the number of shares of common stock that initially underlie the Notes. We also entered into
separate, privately-negotiated warrant transactions with the hedge counterparties relating to the same number of shares
of our common stock that initially underlie the Notes, subject to customary anti-dilution adjustments.

The hedge counterparties and/or their affiliates may modify their hedge positions with respect to the convertible
note hedge transactions and the warrant transactions from time to time after the pricing of the Notes. They may do so
by purchasing and/or selling shares of our common stock and/or other securities of ours, including the Notes in privately-
negotiated transactions and/or open-market transactions or by entering into and/or unwinding various over-the-counter
derivative transactions with respect to our common stock. The hedge counterparties are likely to modify their hedge
positions during any observation period for the Notes.

The effect, if any, of these activities on the market price of our common stock will depend on a variety of factors,
including market conditions, and cannot be determined at this time. Any of these activities could, however, adversely
affect the market price of our common stock. In addition, the hedge counterparties and/or their affiliates may choose
to engage in, or to discontinue engaging in, any of these transactions with or without notice at any time, and their
decisions will be at their sole discretion and not within our control.

We are subject to counterparty risk with respect to the convertible note hedge transactions. The hedge counterparties
are financial institutions, and we will be subject to the risk that they might default under the convertible note hedge
transactions. Our exposure to the credit risk of the hedge counterparties is unsecured by any collateral. Global economic
conditions have from time to time resulted in failure or financial difficulties for many financial institutions. If a hedge
counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings
with a claim equal to our exposure at that time under our transactions with that hedge counterparty. Our exposure will
depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market
price and volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse
tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide
no assurances as to the financial stability or viability of any hedge counterparty.

Conversion of the Notes or exercise of the warrants may dilute the ownership interest of stockholders. Any sales in
the public market of the common stock issuable upon such conversion of the Notes or such exercise of the warrants
could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may
encourage short selling by market participants because the conversion of the Notes could depress the price of our
common stock.

Under the provisions of airline operating and aircraft lease agreements with customers, customers may be able to
terminate the operating agreements or aircraft lease agreements, subject to early termination provisions.

Customers can typically terminate one or more of the aircraft from their related airline operating agreement for
convenience at any time during the term, subject to a 60 day notice period and paying the Company a fee. Additionally,
the lease agreements may contain provisions for terminating an aircraft lease for convenience, including a notice period
and paying a lump sum amount to the Company.

Amazon may terminate the ATSA in its entirety after providing 180 days of advance notice after the first six months
of the term and paying to the Company a significant termination fee which reduces after the second anniversary of the
ATSA.

DHL may terminate the restated CMI agreement in its entirety after providing 180 days of advance notice after

the first six months of the term and paying a significant termination fee which amortizes down during the term.

The U.S. Military may not renew our contracts or may reduce the number of routes that we operate.

Our contracts with the U.S. Military are typically for one year and are not required to be renewed. The U.S. Military
may terminate the contracts for convenience or in the event we were to fail to satisfy reliability requirements or for
other reasons. The number and frequency of routes is sensitive to changes in military priorities and U.S. defense
budgets.

Our business could be negatively impacted by adverse audit findings by the U.S. Government.

Our U.S. Military contracts are subject to audit by government agencies, including with respect to performance,
costs, internal controls and compliance with applicable laws and regulations. If an audit uncovers improprieties, we
may be subject to civil or criminal penalties, including termination of such contracts, forfeiture of profits, fines and
suspension from doing business with the U.S. Military.

Our participation in the CRAF Program could adversely restrict our commercial business in times of national emergency.

Both of our air carriers participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program, which permits the U.S.
Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift
exceeds the capability of military aircraft.

Proposed rules from the DOT, FAA and TSA could increase the Company's operating costs and reduce customer
utilization of airfreight.

New FAA rules for Flightcrew Member Duty and Rest Requirements (FMDRR) for passenger airline operations
became effective in January 2014. The new rules apply to our operation of combi aircraft for the U.S military and
impact the required amount and timing of rest periods for pilots between work assignments and modified duty and rest
requirements based on the time of day, number of scheduled segments, flight types, time zones and other factors. Failure
to remain in compliance with these rules may subject us to fines or other enforcement action.

There are separate crew rest requirements applicable to all-cargo aircraft of the type operated by the Company.
The FAA has rejected, as have the Courts, an attempt to apply the passenger airline operations to all cargo operations.
If such rest requirements and restrictions were imposed on our cargo operations, these rules could have a significant
impact on the costs incurred by our airlines. The airlines would attempt to pass such additional costs through to their
customers in the form of price increases. Customers, as a result, may seek to reduce their utilization of aircraft in favor
of less expensive transportation alternatives.

The concentration of aircraft types and engines in the Company's airlines could adversely affect our operating and
financial results.

The combined aircraft fleet is concentrated in two aircraft types. If any of these aircraft types encounter technical
difficulties that resulted in significant FAA airworthiness directives or grounding, our ability to lease the aircraft would
be adversely impacted, as would our airlines' operations. The market growth in demand for the Boeing 767 and 757
aircraft types and configurations may be less than we anticipate. Customers may develop preferences for the Airbus
A300-600 and A330 aircraft or other mid-size aircraft types, instead of the Boeing 767 and 757 aircraft.

The cost of aircraft repairs and unexpected delays in the time required to complete aircraft maintenance could negatively
affect our operating results.

Our aircraft provide ACMI services throughout the world, sometimes operating in remote regions. Our aircraft
may experience maintenance events in locations that do not have the necessary repair capabilities or are difficult to
reach. As a result, we may incur additional expenses and lose billable revenues that we would have otherwise earned.
Under certain customer agreements, we are required to provide a spare aircraft while scheduled maintenance is
completed. If delays occur in the completion of aircraft maintenance, we may incur additional expense to provide
airlift capacity and forgo revenues.

Lessees of our aircraft may fail to make contractual payments or fail to maintain the aircraft as required.

Our financial results depend on our lease customers' ability to make lease payments and maintain the related aircraft.
Our customers' ability to make payments could be adversely impacted by changes to their financial liquidity,
competitiveness, economic conditions and other factors. A default of an aircraft lease by a customer could negatively
impact our operating results and cash flows and result in the repossession of aircraft.

While we often require leasing customers to pay monthly maintenance deposits, customers are normally responsible
for maintaining our aircraft during the lease term. Failure of a customer to perform required maintenance and maintain
the appropriate records during the lease term could result in higher maintenance costs, a decrease in the value of the
aircraft, a lengthy delay in or even our inability to place the aircraft in a subsequent lease, any of which could have an
adverse effect on our results of operations and financial condition.

We rely on third parties to modify aircraft and provide aircraft and engine maintenance.

We rely on certain third party aircraft modification service providers and aircraft and engine maintenance service
providers that have expertise or resources that we do not have. Third party service providers may seek to impose price
increases that could negatively affect our competitiveness in the airline markets. An unexpected termination or delay
involving service providers could have a material adverse effect on our operations and financial results. A delay in an
aircraft modification could adversely impact our revenues and our ability to place the aircraft in the market. We must
manage third party service providers to meet schedules and turn-times and to control costs in order to remain competitive
to our customers.

Delta TechOps, a division of Delta Airlines, Inc., is the primary engine maintenance provider for the Company's
General Electric CF6 engines that power our fleet of Boeing 767 aircraft. If Delta TechOps does not complete the
refurbishment of our engines within the contractual turn-times or if we must replace Delta TechOps as the maintenance
provider for some or all of the Company's CF6 engines, our operations and financial results may be adversely impacted.

The Company's operating results could be negatively impacted by disruptions of its information technology and
communication systems.

Our businesses depend heavily on information technology and computerized systems to communicate and operate
effectively. The Company's systems and technologies, or those of third parties on which we rely, could fail or become
unreliable due
to equipment failures, software viruses, cyberattacks, natural disasters, power failures,
telecommunication outages, or other causes. Certain disruptions could prevent our airlines from flying as scheduled,
possibly for an extended period of time, which could have a negative impact on our operating results and reliability.
We continually monitor the risks of disruption, take preventative measures, develop backup plans and maintain
redundancy capabilities. The measures we use may not prevent the causes of disruptions we could experience or help
us recover failed systems quickly.

The costs of maintaining safeguards, recovery capabilities and preventive measures may continue to rise. Further,

the costs of recovering or replacing a failed system could be very expensive.

The costs of our aircraft maintenance facilities could negatively impact our financial results.

We lease and operate a 310,000 square foot aircraft maintenance facility and a 100,000 square foot component repair
shop in Wilmington, Ohio. Additionally, we lease and operate a 311,500 square foot, two-hangar aircraft maintenance
complex in Tampa, Florida. Accordingly, a large portion of the operating costs for our aircraft maintenance and
conversion business are fixed. As a result, we need to retain existing aircraft maintenance business levels to maintain
a profitable operation. The actual level of revenues may not be sufficient to cover our operating costs. Additionally,
revenues from aircraft maintenance can vary among periods due to the timing of scheduled maintenance events and
the completion level of work during a period.

The Company could violate debt covenants.

The Senior Credit Agreement contains covenants including, among other requirements, limitations on certain
additional indebtedness and guarantees of indebtedness. The Senior Credit Agreement is collateralized by certain of
the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the terms of the
Senior Credit Agreement, the Company is required to maintain aircraft collateral coverage equal to 125% of the
outstanding balance of the term loan and the maximum capacity of the revolving credit facility or 150% of the outstanding
balance of the term loan and the total funded revolving credit facility, whichever is less. The Senior Credit Agreement
stipulates events of default, including unspecified events that may have material adverse effects on the Company. If
an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement
and loans. In such an event, the Company’s cost of borrowings could increase, and our ability to modify and deploy
aircraft could be limited as a result.

Operating results may be affected by fluctuations in interest rates.

The Company enters into interest rate derivative instruments from time to time in conjunction with its debt levels.
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for fluctuating
interest rates for at least 50% of the outstanding balance of the new unsubordinated term loan. We typically do not
designate the derivative instruments as hedges for accounting purposes. Future fluctuations in LIBOR interest rates
will result in the recording of gains and losses on interest rate derivatives that the Company holds.

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 earnings before interest, taxes, depreciation and amortization
expenses ("EBITDA"). At the Company's current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving
credit facility both bear a variable interest rate of 3.07%. Additional debt or lower EBITDA may result in higher interest
rates on the variable rate portion of the Company's debt.

The Company sponsors defined benefit pension plans and post-retirement healthcare plans for certain eligible
employees. The Company's related pension expense, the plans' funded status and funding requirements are sensitive
to changes in interest rates. The plans' funded status and annual pension expense are recalculated at the beginning of
each calendar year using the fair value of plan assets and market-based interest rates at that point in time, as well as
assumptions for asset returns and other actuarial assumptions. Future fluctuations in interest rates including the impact
on asset returns, could result in the recording of additional expense for pension and other post-retirement healthcare
plans.

The costs of insurance coverage or changes to our reserves for self-insured claims could affect our operating results
and cash flows.

The Company is self-insured for 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 impact our results of operations and cash flows.

The ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes
may be further limited.

Limitations imposed on the ability to use net operating losses (“NOLs”) to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect and
could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules
and limitations may apply for state income tax purposes.

Changes in the ownership of the Company on the part of significant shareholders could limit our ability to use
NOLs to offset future taxable income. In general, under Section 382 of the Internal Revenue Code of 1986, as amended
(the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its
pre-change NOLs to offset future taxable income. In general, an ownership change occurs if the aggregate stock
ownership of significant stockholders increases by more than 50 percentage points over such stockholders’ lowest
percentage ownership during the testing period (generally three years).

Strategic investments in other businesses may not result in the desired benefits.

We enter into joint venture and other business ownership agreements with the expectation that such investment will
result in various benefits including revenue growth through geographic diversification and product diversification,
improved cash flows and better operating efficiencies. Achieving the anticipated benefits from such agreements is
subject to a number of challenges and uncertainties. The expected benefits may be only partially realized or not at all,
or may take longer to realize than expected, which could adversely impact our financial condition and results of
operations. We may make additional capital contributions to these business.

We may need to reduce the carrying value of the Company’s assets.

The Company owns a significant amount of aircraft, aircraft parts and related equipment. Additionally, the balance
sheet reflects assets for income tax carryforwards and other deferred tax assets. The removal of aircraft from service
or continual losses from aircraft operations could require us to evaluate the recoverability of the carrying value of those
aircraft, related parts and equipment and record an impairment charge through earnings to reduce the carrying value.

We have recorded goodwill and other intangible assets related to acquisitions and equity investments. If we are
unable to achieve the projected levels of operating results, it may be necessary to record an impairment charge to reduce
the carrying value of goodwill, equity investments and related intangible assets. Similarly, if we were to lose a key
customer or one of our airlines were to lose its authority to operate, it could be necessary to record an impairment
charge.

If the Company incurs operating losses or our estimates of expected future earnings indicate a decline, it may be

necessary to reassess the need for a valuation allowance for some or all of the Company’s net deferred tax assets.

We may be impacted by government requirements associated with transacting business in foreign jurisdictions.

The U.S and other governments have imposed trade and economic sanctions in certain geopolitical areas. The U.S.
Departments of Justice, Commerce and Treasury, as well as other government agencies have a broad range of civil and
criminal penalties they may seek to impose for violations of the Foreign Corrupt Practices Act (“FCPA”), sanctions
administered by the Office of Foreign Assets Control (“OFAC”) and other regulations. In addition, the DOT, FAA and
TSA may at times limit the ability of our airline subsidiaries to conduct flight operations in certain areas of the world.
Under such laws and regulations, we may be obliged to limit our business activities, we may incur costs for compliance
programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, the U.S.
government has increased their oversight and enforcement activities with respect to these laws and the relevant agencies
may continue to increase these activities.

Penalties, fines and sanctions levied by governmental agencies or the costs of complying with government regulations
could negatively affect our results of operations.

The operations of the Company’s subsidiaries are subject to complex aviation, transportation, security,
environmental, labor, employment and other laws and regulations. These laws and regulations generally require our
subsidiaries to maintain and comply with a wide variety of certificates, permits, licenses and other approvals. Their
inability to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or
regulations could result in substantial fines or, in the case of DOT and FAA requirements, possible suspension or
revocation of their authority to conduct operations.

The costs of maintaining our aircraft in compliance with government regulations could negatively affect our results of
operations and require further investment in our aircraft fleet.

All aircraft in the Company’s fleet were manufactured prior to 1998. Manufacturer Service Bulletins and FAA
regulations and FAA airworthiness directives issued under its “Aging Aircraft” program cause operators of such aged
aircraft to be subject to additional inspections and modifications to address problems of corrosion and structural fatigue
at specified times. The FAA may issue airworthiness directives that could require significant costly inspections and
major modifications to such aircraft. The FAA may issue airworthiness directives that could limit the usability of certain
aircraft types. In 2012, the FAA issued an airworthiness directive that requires the replacement of the aft pressure
bulkhead on Boeing 767-200 aircraft based on a certain number of landing cycles. As a result, we expect that some
the Company's Boeing 767-200 aircraft will be affected. The cost of compliance is estimated to be approximately $1.0
million per aircraft over the next several years.

In addition, FAA regulations require that aircraft manufacturers establish limits on aircraft flight cycles to address
issues involving aging, but still economically viable, aircraft, as described in Item 1 of this report, under "Federal
Aviation Administration." These regulations may increase our maintenance costs and eventually limit the use of our
aircraft.

The FAA and ICAO are in the process of developing programs to modernize air traffic control and management
systems. The FAA's program, Next Generation Air Transportation Systems, is an integrated system that requires
updating aircraft navigation and communication equipment. The FAA has mandated the replacement of current ground
based radar systems with more accurate satellite based systems on our aircraft by 2020. The ICAO began phasing in
similar requirements for aircraft operating in Europe during 2015. These programs may increase our costs and limit
the use of our aircraft. Aircraft not equipped with advanced communication systems may be restricted to certain
airspace.

Failure to maintain the operating certificates and authorities of our airlines would adversely affect our business.

The airline subsidiaries have the necessary authority to conduct flight operations pursuant to the economic authority
issued by the DOT and the safety based authority issued by the FAA. The continued effectiveness of such authority is
subject to their compliance with applicable statutes and DOT, FAA and TSA rules and regulations, including any new
rules and regulations that may be adopted in the future. The loss of such authority by an airline subsidiary could cause
a default of covenants within the Senior Credit Agreement and would materially and adversely affect its airline
operations, effectively eliminating the airline's ability to continue to provide air transportation services.

The Company may be affected by global climate change or by legal, regulatory or market responses to such potential
climate change.

The Company is subject to the regulations of the U.S. Environmental Protection Agency ("EPA") and state and
local governments regarding air quality and other matters. In part, because of the highly industrialized nature of many
of the locations where the Company operates, there can be no assurance that we have discovered all environmental
contamination or other matters for which the Company may be responsible.

Concern over climate change, including the impact of global warming, has led to significant federal, state and
international legislative and regulatory efforts to limit greenhouse gas ("GHG") emissions. The European Commission
has mandated the extension of the European Union Emissions Trading Scheme ("ETS") for GHG emissions to the
airline industry. Under the European Union ETS, all ABX and ATI flights that are wholly within the European Union
are now covered by the ETS requirements, and each year we are required to submit emission allowances in an amount
equal to the carbon dioxide emissions from such flights. Exceedance of the airlines' emission allowances would require
the airlines to purchase additional emission allowances on the open market.

Similarly, in 2016, the International Civil Aviation Organization (“ICAO”) passed a resolution adopting the Carbon
Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is a global, market-based emissions
offset program to encourage carbon-neutral growth beyond 2020. A pilot phase is scheduled to begin in 2021 in which
countries may voluntarily participate, and full mandatory participation is scheduled to begin in 2027. ICAO continues
to develop details regarding implementation, but compliance with CORSIA will increase our operating costs.

The U.S. Congress and certain states have also considered legislation regulating GHG emissions. In addition, even
in the absence of such legislation, the EPA could regulate greenhouse GHG emissions, especially aircraft engine
emissions. In July 2016, the EPA, issued a finding that aircraft engine emissions cause or contribute to air pollution
that may reasonably be anticipated to endanger public health. This finding is a regulatory prerequisite to the EPA’s
adoption of a new certificate standard for aircraft emissions. However, the U.S. recently withdrew from the Paris
climate accord, an agreement among 196 countries to reduce GHG emissions, and the effect of that withdrawal on
future U.S. policy regarding GHG emissions, on CORSIA and on other GHG regulation is uncertain.

The cost to comply with potential new laws and regulations could be substantial for the Company. These costs
could include an increase in the cost of fuel and capital costs associated with updating aircraft. Until the timing, scope
and extent of any future regulation becomes known, we cannot predict its effect on the Company’s cost structure or
operating results. Further, even without such legislation or regulation, increased awareness and adverse publicity in
the global marketplace about greenhouse gas emitted by companies in the airline and transportation industries could
harm our reputation and reduce demand for our services.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port
authority, the terms of which expire in May of 2019 and June 2036 with options to extend. The leases include corporate
offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component repair shop at the air park.
ABX also has the non-exclusive right to use the airport, which includes one active runway, taxiways and ramp space.
Additionally, the Company leases and operates a 311,500 square foot, two hangar aircraft maintenance complex in
Tampa, Florida.

As of December 31, 2017, the Company and its subsidiaries' in-service aircraft fleet consisted of 70 owned aircraft.
The aircraft were all formerly passenger aircraft that have been modified for cargo operations. The aircraft are generally
described as being mid-size or having medium wide-body cargo capabilities. The cargo aircraft carry gross payloads
ranging from approximately 47,900 to 129,000 pounds. These aircraft are well suited for intra-continental flights and
medium range inter-continental flights. Because an airline's flight operations can be hindered by inclement weather,
sophisticated landing systems and other equipment are utilized to minimize the effect that weather may have on flight
operations. For example, ABX’s and ATI's Boeing 767-200 and 767-300 aircraft are operated for Category III landings.
This allows their crews to land under weather conditions with forward runway visibility of only 600 feet at airports
with Category III Instrument Landing Systems.

The table below shows the combined fleet of aircraft in service condition.

In-service
Aircraft as of
December 31, 2017

Aircraft Type

Total

Owned

Year of
Manufacture

Gross Payload
(Lbs.)

Still Air Range
(Nautical Miles)

767-200 SF (1)

767-300 SF (1)

757-200 PCF (1)

757-200 Combi (2)

737-400 SF (1)

Total in-service

1982 - 1987

85,000 - 100,000

1,700 - 5,300

1988 - 1997

121,000 - 129,000

3,200 - 7,100

1984 - 1991

1989 - 1992

1991

68,000

58,000

47,900

2,100 - 4,800

2,600 - 4,300

2,200 - 2,800

____________________
(1)

These aircraft are configured for standard cargo containers loaded through large standard main deck cargo
doors.
These aircraft are configured as “combi” aircraft capable of carrying passenger and cargo containers on the
main flight deck.

(2)

In addition, as of December 31, 2017, CAM had one Boeing 767-200 passenger aircraft that is not reflected in the
table above. The Boeing 767-200 aircraft discontinued passenger service in 2015 when a customer's operation ended.
CAM also owns six Boeing 767-300 aircraft and one Boeing 737-400 aircraft which were undergoing or preparing to
undergo modification to a standard freighter configuration and are expected to be completed in 2018.

We believe that our existing facilities and aircraft fleet are appropriate for our current operations. As described in
Note H to the accompanying financial statements, we plan to invest in additional aircraft to meet our growth plans. We
may make additional investments in aircraft and facilities if we identify favorable opportunities in the markets that we
serve.

ITEM 3. LEGAL PROCEEDINGS

We are currently a party to legal proceedings, including FAA enforcement actions, in various federal and state
jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these
proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any,
arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims
which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material
to our financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

The Company's common stock is publicly traded on the NASDAQ Global Select Market under the symbol ATSG.
The following table shows the range of high and low prices per share of ATSG common stock for the periods indicated:

2017 Quarter Ended:
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017

2016 Quarter Ended:
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016

Low

High

22.55
20.84
15.78
14.97

12.94
12.73
12.36
9.05

$
$
$
$

Low

26.75
25.91
24.21
17.81

High

17.29
14.91
15.43
15.53

$
$
$
$

On February 28, 2018, there were 1,494 stockholders of record of ATSG’s common stock. The closing price of

ATSG’s common stock was $26.47 on February 28, 2018.

Dividends

We are restricted from paying dividends on ATSG's common stock in excess of $100.0 million during any calendar

year under the provisions of the Senior Credit Agreement. No cash dividends have been paid or declared.

Stock Repurchases

On August 5, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of outstanding
common stock. In May 2016, the Board amended the Company's common stock repurchase program increasing the
amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. In
February 2018, the Board increased the authorization from $100.0 million to $150.0 million. The Board's authorization
does not require the Company to repurchase a specific number of shares or establish a time frame for any repurchase
and the Board may terminate the repurchase program at any time. Repurchases may be made from time to time in the
open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There
were no repurchases made during the fourth quarter of 2017. As of December 31, 2017, the Company had repurchased
6,435,349 shares and the maximum dollar value of shares that could then be purchased under the program was $14.9
million.

Securities authorized for issuance under equity compensation plans

For the response to this Item, see Item 12.

Performance Graph

The graph below compares the cumulative total stockholder return on a $100 investment in ATSG’s common stock
with the cumulative total return of a $100 investment in the NASDAQ Composite Index and the cumulative total return
of a $100 investment in the NASDAQ Transportation Index for the period beginning on December 31, 2012 and ending
on December 31, 2017.

Air Transport Services Group, Inc.

NASDAQ Composite Index

NASDAQ Transportation Index

12/31/2012
100.00

12/31/2013
201.75

12/31/2014
213.47

12/31/2015
251.37

12/31/2016
398.01

12/31/2017
577.06

100.00

141.63

133.76

162.09

187.65

173.33

162.30

187.19

193.79

242.29

248.92

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial
statements and the notes thereto and the information contained in Item 7 of Part II, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data and the
consolidated operations data below are derived from the Company’s audited consolidated financial statements.

OPERATING RESULTS:
Continuing revenues
Operating expenses (1) (3)
Net interest expense and other non operating charges
Financial instrument (gain) loss (2)
Earnings (loss) from continuing operations before
income taxes
Income tax gain (expense) (4)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of
taxes (3)
Consolidated net earnings (loss)

EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:

Basic
Diluted

WEIGHTED AVERAGE SHARES:

Basic
Diluted

SELECTED CONSOLIDATED
FINANCIAL DATA:

Cash and cash equivalents
Property and equipment, net
Goodwill and intangible assets (1)
Total assets
Post-retirement liabilities (3)
Long term debt and current maturities, other than leases
Deferred income tax liability (4)
Stockholders’ equity
____________________
(1)
(2)

2017

As of and for the Years Ended December 31
2015
(In thousands, except per share data)

2014

2016

2013

$1,068,200
974,905
20,042
79,789

$ 768,870
705,122
11,187
18,107

$ 619,264
546,474
11,147
(920)

$ 589,592
525,067
13,845
(1,096)

$ 580,023
566,838
14,175
(631)

(6,536)

34,454

62,563

51,776

(359)

28,276
21,740
(3,245)

(13,394)
21,060
2,428

(23,408)
39,155
2,067

(19,702)
32,074
(2,214)

(19,266)
(19,625)
(3)

18,495

23,488

41,222

29,860

$ (19,628)

$
$

0.37
0.36

$
$

0.34
0.33

$
$

0.61
0.60

$
$

0.50
0.49

$
$

(0.31)
(0.31)

58,907
59,686

61,330
62,994

64,242
65,127

64,523
65,211

63,992
63,992

$
32,699
1,159,962
44,577
1,548,844
63,266
515,758
99,444
395,279

$
16,358
1,000,992
45,586
1,259,330
79,528
458,721
122,532
311,902

17,697
875,401
38,729
1,041,721
110,166
318,200
96,858
364,157

30,560
847,268
39,010
1,011,203
94,368
344,094
83,223
347,489

31,699
838,172
39,291
1,018,613
32,865
384,515
95,912
368,968

In 2013, the Company recorded an impairment charge of $52.6 million on goodwill.
During 2016 and 2017, the re-measurement of financial instrument fair values, primarily for warrants granted to a customer
resulted in losses of $79.8 million and $18.1 million, respectively, before income taxes. (See note B to the accompanying
consolidated financial statements.)
During 2014, ABX settled $98.7 million of pension obligation from the pension plans assets. The settlement resulted in
pre-tax charges of $6.7 million to continued operations and $5.0 million to discontinued operations for 2014. Effective
December 31, 2016, ABX modified its unfunded, non-pilot retiree medical plan to terminate benefits to all participants.
As a result, ABX settled $0.6 million of retiree medical obligations and recorded a pre-tax gain of $2.0 million to continued
operations. On August 30, 2017, the ABX transferred investment assets from the pension plan trust to purchase a group
annuity contract. As a result, ABX recorded pre-tax settlement charges of $5.3 million to continued operations and $7.6
million to discontinued operations. As a result of fluctuating interest rates and investment returns, the funded status of
the Company's defined benefit pension and retiree medical plans vary from year to year. (See note I to the accompanying
consolidated financial statements.)
Earnings from continuing operations for 2017 was impacted by a $59.9 million reduction in deferred income taxes related
to the Tax Cuts and Jobs Act legislation enacted in December 2017. (See note J to the accompanying consolidated financial
statements.)

(3)

(4)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following Management’s Discussion and Analysis has been prepared with reference to the historical financial
condition and results of operations of Air Transport Services Group, Inc., and its subsidiaries and should be read in
conjunction with the “Risk Factors” in Item 1A of this report, our historical financial statements, and the related notes
contained in this report.

INTRODUCTION

The Company leases aircraft, provides air cargo lift and performs aircraft maintenance and other support services
primarily to the air cargo transportation and package delivery 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 two independently certificated airlines, ABX Air, Inc.
(“ABX”) and Air Transport International, Inc. (“ATI”), and an aircraft leasing company, Cargo Aircraft Management,
Inc. (“CAM”). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters
and offering them to customers under long-term leases.

We have three reportable segments: CAM, which leases Boeing 767, Boeing 757 and Boeing 737 aircraft and
aircraft engines, ACMI Services, which primarily includes the cargo transportation operations of the two airlines, and
Ground Services, which provides mail and package sorting services as well as related equipment maintenance services
to customers. Our other business operations, which primarily provide support services to the transportation industry,
include aircraft maintenance and modification services. These operations do not constitute reportable segments due
to their size.

Our largest customers are DHL Network Operations (USA), Inc. and its affiliates ("DHL"), Amazon.com Services,
Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon"), and the
U.S. Military. At December 31, 2017, CAM owned 70 cargo aircraft that were in revenue service. This fleets consists
of 36 Boeing 767-200 aircraft, 25 Boeing 767-300 aircraft, four Boeing 757-200 aircraft, four Boeing 757 "combi"
aircraft and one Boeing 737-400 aircraft. The Boeing 757 combi aircraft are capable of simultaneously carrying
passengers and cargo containers on the main flight deck. At December 31, 2017, CAM also owned six Boeing 767-300
aircraft and one Boeing 737-400 aircraft either already undergoing, or awaiting induction in the freighter conversion
process.

We have had long term contracts with DHL since August 2003. DHL accounted for 24%, 34% and 46% of the
Company's consolidated revenues during the years ended December 31, 2017, 2016 and 2015, respectively. In 2010,we
executed commercial agreements under which DHL leased thirteen Boeing 767 freighter aircraft from CAM and ABX
operated those aircraft under a separate crew, maintenance and insurance agreement. In 2015, the Company and DHL
amended and restated their Air Transportation Services Agreement ("CMI agreement") and the Boeing 767-200 aircraft
lease terms with DHL were extended. Under the CMI agreement, ABX operates and maintains the aircraft through
March 2019 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
with FAA airworthiness directives, the cost of Boeing 767 airframe maintenance and certain engine maintenance events
for the DHL-leased aircraft that it operates. As of December 31, 2017, the Company, through CAM, leased 16 Boeing
767 aircraft to DHL, ten Boeing 767-200, through March 2019 and six Boeing 767-300 expiring between 2019 and
2024. Twelve of the 16 Boeing 767 were being operated by the Company's airlines for DHL. Additionally, the airlines
operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL.

We have been providing freighter aircraft and services for cargo handling and logistical support for Amazon's ASI
since September 2015. On March 8, 2016, we entered into an Air Transportation Services Agreement (the “ATSA”)
with ASI pursuant to which CAM agreed to lease 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200
freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Since
August 2017, we have leased all 20 Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation
of those aircraft by our airline subsidiaries, for a term of five years, and the performance of ground handling services
by our subsidiary, LGSTX Services, Inc. ("LGSTX"). Under the ATSA, we operate the 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.
CAM owns all of the Boeing 767 aircraft that are leased and operated under the ATSA. The ATSA became effective

on April 1, 2016. Revenues from our commercial arrangements with ASI comprised approximately 44%, 29% and 5%
of our consolidated revenues from continuing operations during the years ended December 31, 2017, 2016 and 2015,
respectively.

Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting
guidance for equity-based payments to non-employees and 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. As of December 31,
2017, our liabilities reflected 14.83 million warrants having a fair value of $14.24 per share. During 2017, the re-
measurements of the warrants to fair value resulted in a non-operating loss of $81.8 million before the effect of income
taxes.

The U.S. Military comprised 7%, 12% and 16% of the Company's consolidated revenues during the years ended
December 31, 2017, 2016 and 2015, respectively. The Company's airlines contract their services to the Air Mobility
Command ("AMC"), through the U.S. Transportation Command ("USTC"), both of which are organized under the U.S.
Military.

RESULTS OF OPERATIONS

Fleet Summary

Our cargo aircraft fleet is summarized in the following table as of December 31, 2017, 2016 and 2015. Our CAM-
owned operating aircraft fleet has increased by 15 aircraft since the end of 2015 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, 2017, the Company owned six Boeing 767-300
aircraft and one Boeing 737-400 aircraft that were either already undergoing, or awaiting induction into the freighter
conversion process.

Aircraft fleet activity during 2017 is summarized below:

- CAM completed the modification of seven Boeing 767-300 freighter aircraft purchased in the previous year
and began to lease five of those aircraft, which are being operated by ATI, under a multi-year lease to ASI.
CAM began to lease the sixth aircraft to ATI and the Company leased the seventh aircraft under a multi-year
lease to an external customer.

- CAM leased one Boeing 767-300 freighter aircraft, which was modified during 2016, to ASI under a multi-
year lease. ATI was separately contracted to operate that aircraft.

- CAM leased one Boeing 767-200 freighter, which was being staged for leasing, to ATI.

- External lessees returned two Boeing 767-200 freighter aircraft which were operated by ABX. Two Boeing
767-200 aircraft were redeployed to external customers.

- CAM purchased eight Boeing 767-300 passenger aircraft during 2017 for the purpose of converting the aircraft
into standard freighter configuration. Two of these aircraft completed the freighter modification and entered
into multi-year leases with external customers.

- The Company purchased two Boeing 737-400 passenger aircraft during 2017 for the purpose of converting the
aircraft into standard freighter configuration. One aircraft completed the freighter modification process and
entered into a multi-year lease with an external customer.

In-service aircraft

Aircraft owned

Boeing 767-200

Boeing 767-300

Boeing 757-200

Boeing 757-200 Combi

Boeing 737-400

Total

Operating lease

Boeing 757-200

Total
Other aircraft

Owned Boeing 767-300
under modification
Owned Boeing 737-400
under modification
Owned Boeing 767 available
or staging for lease

2017

2016

2015

ACMI
Services CAM Total

4 —

—

— —

—

1
—
— —

—

1
—

4 —

— —

—

— —
1
—

—

—
1

4 —

— —

1 —

—

— —
— —

—

—
—

As of December 31, 2017, ABX and ATI were leasing 19 in-service aircraft internally from CAM for use in ACMI
Services. As of December 31, 2017, six of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above
and six of the 21 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 21 Boeing 767-300 aircraft were leased to ASI and operated by ABX or
ATI. CAM leased the other 11 Boeing 767-200 aircraft and seven Boeing 767-300 aircraft to external customers,
including four Boeing 767-200 aircraft to DHL that are being operated by a DHL-owned airline. The carrying values
of the total in-service fleet as of December 31, 2017, 2016 and 2015 were $955.2 million, $793.9 million and $742.6
million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.

Revenue and Earnings Summary

External customer revenues from continuing operations increased by $299.3 million to $1,068.2 million during
2017 compared to 2016. Excluding directly reimbursed ACMI Services revenues, customer revenues increased $226.1
million, or 33% during 2017 compared with 2016. External customer revenues increased due to additional aircraft
leases from CAM's leasing operations, expanded CMI and logistic services for ASI and aircraft maintenance and
modification services for various customers.

The consolidated net earnings from continuing operations were $21.7 million for 2017 compared to $21.1 million
for 2016. The pre-tax losses from continuing operations were $6.5 million for 2017 compared to pre-tax earnings of
$34.5 million, for 2016. Earnings were affected by specific events and certain adjustments that do not directly reflect
our underlying operations among the years presented. Consolidated net earnings for 2017 were impacted by $59.9
million of tax benefits for the re-measurement of the Company's deferred tax assets and liabilities at the new federal
corporate tax rate of 21% enacted by the Tax Cuts and Jobs Act legislation in December 2017. On a pre-tax basis,
earnings included net losses of $79.8 million and $18.1 million for the years ended December 31, 2017 and 2016,
respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon. Pre-
tax earnings were also reduced by $14.0 million and $4.5 million for the years ended December 31, 2017 and 2016,
respectively, for the amortization of lease incentives given to ASI in the form of warrants. Additionally, pre-tax earnings
from continuing operations included expenses of $6.1 million and $6.8 million for the years ended December 31, 2017
and 2016, respectively, for settlement charges, curtailments and other non-service components of retiree benefit plans.
Pre-tax earnings for the year ended December 31, 2017 included a $3.1 million loss for the Company's share of
development costs for a new joint venture. Pre-tax earnings for the year ended December 31, 2016, also included a
$1.2 million charge for the Company's share of capitalized debt issuance costs that were charged off when West Atlantic
AB, a non-consolidated affiliate, restructured its debt. 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 $96.5 million for 2017 compared to $65.1 million for 2016, an increase of
48%.

Adjusted pre-tax earnings from continuing operations for 2017 improved compared to 2016, driven primarily by
additional revenues and the improved financial results of our airline operations. We also experienced additional revenues
and earnings due to the acquisition of Pemco World Air Services, Inc. ("Pemco") in December 2016 and the expansion
of gateway ground operations for ASI. This growth in revenue was partially offset by the cost necessary to support
expanded flight operations, including training costs for new flight crews, higher depreciation expense and more
employee expenses, particularly in support of logistical services. Pre-tax earnings for 2017 included an additional
interest expense of $2.1 million for the amortization of convertible debt discount and issuance costs. Operating results
for 2016 were negatively impacted when ABX flight crew members went on strike for two days, which disrupted our
customers' operations and reduced our revenues.

A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is

shown below (in thousands):

Years Ending December 31
2016

2015

2017

Revenues from Continuing Operations:

CAM

Aircraft leasing and related services
Lease incentive amortization

Total CAM
ACMI Services

Airline services
Reimbursable
Total ACMI Services

Ground Services

Other Activities

Total Revenues

Eliminate internal revenues

Customer Revenues

Pre-Tax Earnings from Continuing Operations:

CAM, inclusive of interest expense
ACMI Services
Ground Services

Other Activities

Net unallocated interest expense

Net financial instrument re-measurement (loss) gain
Loss from non-consolidated affiliate

Pre-Tax Earnings from Continuing Operations

Add other non-service components of retiree benefit costs, net
Add charges for non-consolidated affiliate
Add lease incentive amortization
Add net loss (gain) on financial instruments

Adjusted Pre-Tax Earnings from Continuing Operations

223,546
(13,986)
209,560

199,598
(4,506)
195,092

459,272
155,469
614,741

206,631

227,205

1,258,137

(189,937)

410,598
82,261
492,859

116,796

145,743

950,490

177,789
—
177,789

395,486
37,623
433,109

60,163

101,832

772,893

(181,620)

(153,629)

1,068,200

768,870

619,264

61,510

68,608

2,476
9,369

4,355

(1,322)

(79,789)

(3,135)

(6,536)
6,105
3,135
13,986
79,789
96,479

(32,125)
10,603

6,020

(545)

(18,107)

—

34,454
6,815
1,229
4,506
18,107
65,111

57,457

(2,654)
5,395

3,166

(1,721)

920

—

62,563
(1,040)
—
—
(920)
60,603

Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding
settlement charges and other non-service components of retiree benefit costs, gains and losses for the fair value re-
measurement of financial instruments, lease incentive amortizations, the start-up costs of a non-consolidated joint
venture and the charge off of debt issuance costs from a non-consolidated affiliate during the first quarter of 2016. 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. 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.

ACMI Reimbursable revenues shown above include revenues related to fuel, landing fees, navigation fees and
certain other operating costs that are directly reimbursed to the airlines by their customers. Prior to April 1, 2015, the
cost of airframe maintenance for CAM-owned, Boeing 767-200 aircraft operated for DHL and provided by the airlines
were directly reimbursed.

We are adopting the Financial Accounting Standards Board's Accounting Standards Update No. 2014-09, “Revenue
from Contracts with Customers (Topic 606)” ("Topic 606”) effective January 1, 2018. We are adopting Topic 606 using
a modified retrospective approach, under which financial statements will be prepared under the revised guidance for
the year of adoption, but not for prior years. We determined that under Topic 606, the Company is an agent for aircraft

fuel and certain other costs reimbursed under its ACMI and CMI contracts and for certain ground services that it arranges
for ASI. Under the new standards, such reimbursed amounts will be reported net of the corresponding expenses
beginning in 2018. In addition to the ACMI Services reimbursable revenues shown above, revenues during 2017 and
2016 included $134.0 million and $44.5 million for directly reimbursed ground services, which under the new standard,
would have been reported net of the related expenses. This application of Topic 606 will not have an impact on our
reported earnings in any period.

2017 and 2016

CAM

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 eight years.

As of December 31, 2017 and 2016, CAM had 51 and 41 aircraft under lease to external customers, respectively.
CAM's revenues grew by $14.5 million during 2017 compared to 2016, primarily as a result of additional aircraft leases.
Revenues from external customers totaled $140.4 million and $117.6 million for 2017 and 2016, respectively. CAM's
revenues from the Company's airlines totaled $69.1 million during 2017, compared to $77.5 million for 2016, reflecting
the transition of CAM owned aircraft to long-term leases with external customers. CAM's aircraft leasing and related
services revenues, which excludes customer lease incentive amortization, increased $23.9 million in 2017 compared
to 2016, primarily as a result of new aircraft leases since mid-2016, additional engine maintenance agreements and the
timing of maintenance related revenues. From mid-2016 through the end of December 2017, we have added 13 Boeing
767-300 freighter aircraft and one Boeing 737-400 freighter aircraft to CAM's lease portfolio.

CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $61.5 million and $68.6 million
during 2017 and 2016, respectively. Decreased pre-tax earnings reflect a $5.0 million increase in internally allocated
interest expense due to higher debt levels, the $9.5 million increase in the amortization of the ASI lease incentive in
2017 compared to 2016, and $15.7 million more depreciation expense driven by the addition of ten Boeing aircraft in
2017 compared to 2016. These increases were partially offset by additional external lease revenues and the timing of
customer maintenance revenues.

CAM's agreement to lease 20 Boeing 767 freighter aircraft to ASI includes 12 Boeing 767-200 freighter aircraft
for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Leases for six of these
aircraft began in April 2016, and the remaining fourteen were executed by the third quarter of 2017, to fulfill the 20
aircraft requirement.

During 2017, CAM purchased eight 767-300 passenger aircraft for freighter conversion, two of which were leased
to external customers during 2017 after completing the conversion process. As of December 31, 2017, the remaining
six of these Boeing 767-300 passenger aircraft were being modified from passenger to freighter configuration. The
Company also purchased two Boeing 737-400 aircraft during 2017 and one aircraft was being modified from passenger
to freighter configuration as of December 31, 2017, while the other was leased to an external customer after completing
the conversion process.

CAM expects to complete the freighter modification of the seven passenger aircraft which it owned at December
31, 2017 and two more acquired in early 2018. CAM has customer commitments or letters of intent for seven of these
nine aircraft. CAM's future operating results will depend on the timing and lease rates under which these aircraft are
ultimately leased. 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.

ACMI Services

The ACMI Services segment provides airline operations to its customers, typically under contracts providing for
a combination of aircraft, crews, maintenance and insurance ("ACMI"). Our customers are usually 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 the U.S. Military, usually require the airline to provide full

service, including fuel and other operating expenses for a fixed, all-inclusive price. As of December 31, 2017, ACMI
Services included 51 in-service aircraft, including 19 leased internally from CAM, 12 CAM-owned freighter aircraft
which are under lease to DHL and operated by ABX under the restated CMI agreement, and 20 CAM-owned freighter
aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA.

Total revenues from ACMI Services increased $121.9 million during 2017 compared with 2016 to $614.7 million.
Airline services revenues from external customers, which do not include revenues for the reimbursement of fuel and
certain operating expenses, increased $48.7 million. Improved revenues were driven by additional aircraft operations
for ASI and reflect a 22% increase in billable block hours. As of December 31, 2017, ACMI Services were included
the operation of five more CAM-owned aircraft compared to December 31, 2016. Beginning in April 2016, in
conjunction with the long-term leases executed between ASI and CAM, the related aircraft rent revenues for five aircraft
operated for ASI during the first quarter of 2016 are reflected under CAM instead of ACMI Services.

ACMI Services had pre-tax earnings of $2.5 million during 2017, compared to pre-tax losses of $32.1 million for
2016. Improved pre-tax results in 2017 compared to 2016 were bolstered by expanded revenues, the timing of scheduled
airframe maintenance events, lower flight crew and related training expenses and decreased pension expense. Scheduled
airframe maintenance expense decreased $5.5 million during 2017 compared to 2016. Airframe maintenance expense
varies depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for
maintenance. Pension expense for ACMI Services, including the non-service components of retiree benefit costs,
decreased $1.0 million as actuarially determined for 2017, compared to 2016. The pension expense in 2017 included
a $5.3 million pre-tax charge for the settlement of certain retirement obligations through a third party group annuity
contract.

Operating results for ACMI Services were negatively impacted in 2016 by $7.0 million in lost revenue due to a
work stoppage by ABX crewmembers represented by the Airline Professionals Association of the International
Brotherhood of Teamsters in November 2016. Although the flight crews were ordered back to work within two days
through a temporary restraining order issued by a U.S. district court, the full revenue schedule of flying operations did
not resume for nearly three weeks. During 2016, we incurred additional costs for flight crews to keep pace with ASI's
expanding air network. During 2016, flight crew compensation increased by $13.0 million to pay additional crews
while being trained for expanded aircraft operations and when ABX's flight crews stopped volunteering for additional
flight time, ABX paid a premium to assign trips to crewmembers and awarded additional compensatory days off.

Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules,
crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we
operate. The Company's airlines are each negotiating with their respective flight crewmembers' collective bargaining
units. These negotiations could result in changes that may effect our productivity, employee compensation levels and
the marketability of our services.

Ground Services

The Ground Services segment provides mail and package sorting and logistical support to the U.S. Postal Service
(“USPS”) at five USPS facilities and similar services to certain ASI gateway locations in the U.S. The Ground Services
segment also provides maintenance for ground equipment, facilities and material handling equipment.

Total revenues from Ground Services were $206.6 million and $116.8 million for 2017 and 2016, respectively.
Revenues increased $89.8 million during 2017 compared to 2016, reflecting higher contractual costs and increased
volumes at the USPS and ASI locations. The pre-tax earnings from Ground Services decreased by $1.2 million to $9.4
million in 2017, primarily reflecting the termination of hub logistics services we provided through May of 2017 for
ASI at the airport in Wilmington, Ohio.

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 the Company's Airborne Maintenance and
Engineering Services, Inc. ("AMES") and Pemco, subsidiaries, we sell aircraft parts and provide aircraft maintenance
and modification services. We also resell aviation fuel in Ohio and provide flight training.

External customer revenues from all other activities increased $65.3 million to $108.9 million for 2017. The
increase in revenue was driven by an increase in airframe maintenance and modification revenues due to the addition
of Pemco, which was acquired at the end of 2016. Revenues from aircraft maintenance services can vary among periods
due to the timing of scheduled maintenance events and the completion level of work during a period.

The pre-tax earnings from other activities decreased by $1.7 million to $4.4 million in 2017. Additional earnings
from expanded aircraft maintenance and modification services were offset by reduced aviation fuel sales after ASI
discontinued its hub in Wilmington, Ohio, higher administrative expenses and losses from an airline affiliate accounted
for under the equity method.

Expenses from Continuing Operations

Salaries, wages and benefits expense increased $50.5 million during 2017 compared to 2016 driven by higher
headcount for flight operations, maintenance services and package sorting services. The increase in expense for 2017
included $33.6 million for Pemco, acquired in December 2016. The increase during 2017 also included additional line
maintenance resources to support our customers expanded network and increased block hours. During 2017, employee
benefit expenses increased due to the higher level of headcount.

Depreciation and amortization expense increased $19.1 million during 2017 compared to 2016. The increase in
depreciation expense reflects incremental depreciation for 13 Boeing 767-300 aircraft, one Boeing 737-400 aircraft
and additional aircraft engines added to the operating fleet since mid-2016, 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 $22.5 million during 2017 compared to 2016. The increase
is primarily due to the addition of Pemco's maintenance and materials, which added $36.4 million of expenses for 2017
compared to 2016. The additional expense from Pemco was partially offset by fewer airframe checks for the Company's
airlines and lower airframe maintenance costs for third party customers during 2017 compared to 2016. Aircraft
maintenance expenses can vary among periods due to the number of scheduled airframe maintenance checks and the
scope of the checks that are performed. In May 2017, our airlines entered into maintenance agreements for certain
General Electric CF6 engines that power many of the Boeing 767-300 aircraft leased from CAM. Under the agreement,
the engines are maintained by the service provider for a fixed fee per cycle. As a result, beginning in June 2017, the
airlines began to record engine maintenance expense as flights occur. As a result, our airlines recorded an additional
$4.2 million of engine maintenance expense, partially offset by a reduction to engine depreciation expense.

Fuel expense increased by $62.4 million during 2017 compared to 2016. Fuel expense includes the cost of fuel to
operate U.S. Military charters, reimbursable fuel billed to DHL, ASI and other ACMI customers, as well as fuel used
to position aircraft for service and for maintenance purposes. The increase in fuel expense was due to a higher level
of customer-reimbursed fuel which increased $66.9 million for 2017 compared to 2016. Fuel expense for military
customers and other purposes declined due to fewer block hours flown for military customers in 2017.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services
and other airport services. Contracted ground and aviation services increased $89.6 million during 2017 compared to
2016. The increase is primarily due to additional logistical support services arranged for ASI gateways.

Travel expense increased by $7.3 million during 2017 compared to 2016. The increase reflects additional airline

services and a higher level of employee headcount in airline operations during 2017 compared to 2016.

Landing and ramp expense, which includes the cost of deicing chemicals, increased by $8.8 million during 2017
compared to 2016, driven by additional flight operations. Landing and ramp fees can vary based on the flight schedules
and the airports that are used in a period.

Rent expense increased by $2.0 million during 2017 compared to 2015. Rent expense increased due to the
acquisition of Pemco, acquired at the end of 2016, as well as increases in aircraft simulators rented to train new flight
crews.

Insurance expense increased by $0.4 million during 2017 compared to 2016. Aircraft fleet insurance has increased

due to additional aircraft operations during 2017 compared to 2016.

Other operating expenses increased by $7.2 million during 2017 compared to 2016. Other operating expenses
include professional fees, employee training and utilities. Other operating expenses during the first quarter of 2016
included a $1.2 million charge for the Company's share of capitalized debt issuance costs that were written off when
West Atlantic AB, a non-consolidated affiliate, restructured its debt. Other operating expenses increased by $3.1 million
due to the addition of Pemco.

Interest expense increased by $5.7 million during 2017 compared to 2016. Interest expense increased due to a
higher average debt level and interest rates on the Company's outstanding loans, offset by more capitalized interest
related to our fleet expansion during 2017. Capitalized interest increased $0.5 million during 2017 to $1.8 million.
Interest expense in 2017 was also impacted by the convertible notes issued in September 2017. The convertible notes
have a principal value of $258.8 million and bear interest at a cash coupon rate of 1.125%. At the time of issuance,
the value of the conversion feature of the convertible notes was recorded as a debt discount and is being amortized
along with debt issuance cost to interest expense over the seven year term of the convertible notes. The non-cash
amortization of the debt discount and issuance costs was $2.1 million during 2017.

The Company recorded pre-tax net losses on financial instruments of $79.8 million during the year ended December
31, 2017, compared to losses of $18.1 million during 2016. The losses are primarily a result of re-measuring, as of
December 31, 2017 and 2016, the fair value of the stock warrants granted to Amazon. Increases in the fair value of
the warrant obligation since the previous re-measurement dates of December 31, 2016 and 2015, respectively,
corresponded to an increase in the traded price of the Company's shares and resulted in non-cash losses. The non-cash
gains and losses resulting from quarterly re-measurements of the warrants may vary widely among quarters.

Income tax benefits from earnings from continuing operations for 2017 included a benefit of $59.9 million due to
the enactment of the Tax Cuts and Jobs Act ("Tax Act") in December 2017. The re-measurement of deferred tax balances
using the lower federal rates enacted by the Tax Act, resulted in a reduction in our net deferred tax liability and the
recognition of a deferred tax benefit. Income tax benefits increased $41.7 million for 2017 compared to the 2016
income tax expense. Income taxes included a deferred income tax deduction for the loss from warrants and the
amortization of the customer lease incentive. The income tax deductibility of the warrant loss and the amortization of
the customer lease incentive is less than the book expenses 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 effective tax
rate, before including the effects of the Tax Act, warrant losses and incentive amortization was 37.5% for 2017 compared
to 35.3% for the year ended December 31, 2016. The higher effective tax rate for 2017 compared to 2016 reflects a
lesser amount of discrete tax benefits related to state income taxes and employee stock incentive awards during 2017
compared to 2016.

The effective rate for 2018 will be impacted by a number of factors, including the Tax Act 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 2018, before applying the deductibility of the stock warrant re-measurement and related incentive
amortization and the benefit of the stock compensation, will decline to approximately 24% due to the lower federal
corporate tax rates.

As of December 31, 2017, the Company had operating loss carryforwards for U.S. federal income tax purposes
of approximately $57.6 million which will begin to expire in 2031 if not utilized before then. 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 2023 or later. The Company may, however, be required to pay minimum taxes and certain state and
local income taxes before then. The Company's taxable income earned from international flights are primarily sourced
to the 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, package sorting and
aircraft fueling services provided to DHL. Pre-tax losses related to the former sorting operations were $5.1 million for
2017 compared to pre-tax gains of $3.8 million for 2016. During 2017, pension expense for discontinued operations
included a $7.6 million pre-tax charge for the settlement of certain retirement obligations through a third party group
annuity contract. Pre-tax earnings during 2016 were a result of reductions in self- insurance reserves for former employee
claims and pension credits.

2016 compared to 2015

Summary

External customer revenues from continuing operations increased by $149.6 million to $768.9 million during 2016
compared to 2015. Excluding directly reimbursed revenues, customer revenues increased $105.0 million, or 18%
during 2016 compared with 2015. Increased external customer revenues from CAM's leasing operations, expanded
ACMI services for ASI, increased aircraft maintenance services and additional logistics services, also for ASI, were
partially offset by lower ACMI service revenues for DHL during 2016, compared to 2015.

The consolidated net earnings from continuing operations were $21.1 million for 2016 compared to $39.2 million
for 2015. The pre-tax earnings from continuing operations were $34.5 million for 2016 compared to $62.6 million,
for 2015. Earnings were affected by 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 $18.1 million for the year
ended December 31, 2016, for the re-measurement of financial instruments, primarily warrant obligations granted to
Amazon during 2016, to fair value. The larger re-measurement loss for 2016 compared to 2015 primarily reflects the
increase in the value of the traded ATSG share price after the warrants were granted in 2016. Pre-tax earnings for 2016
were also reduced by $4.5 million for the amortization of lease incentives given to ASI in the form of warrants during
2016. Additionally, pre-tax earnings from continuing operations for 2016 were unfavorably impacted by a $9.9 million
increase in actuarial losses for the non-service component of retiree benefit plan costs compared to 2015. Separately,
pre-tax earnings for the year ended December 31, 2016, included an actuarial gain of $2.0 million for the settlement
of a retiree medical plan during 2016. Pre-tax earnings for the year ended December 31, 2016, also included a $1.2
million charge for the Company's share of capitalized debt issuance costs that were charged off when West Atlantic
AB, a non-consolidated affiliate, restructured its debt. After removing the effects of these items, adjusted pre-tax
earnings from continuing operations were $65.1 million for 2016 compared to $60.6 million for 2015.

Adjusted pre-tax earnings from continuing operations for 2016 improved compared to 2015, driven by additional
aircraft lease revenues, increased aircraft maintenance revenues and additional logistics support services for ASI. This
growth in revenue was partially offset by the cost necessary to support expanded operations, including training costs
for new flight crews, additional premium pay for ABX flight crews, higher aircraft depreciation expense and more
employee expenses, particularly in our support services businesses. Operating results for 2016 were negatively impacted
when ABX flight crew members went on strike for two days, which disrupted our customers' operations and reduced
our revenues.

Fleet Summary 2016 & 2015

As of December 31, 2016, ACMI Services leased 18 of its in-service aircraft internally from CAM. As of
December 31, 2016, eight of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above and six of the
12 Boeing 767-300 aircraft, were leased to DHL and operated by ABX. Additionally, 12 of CAM's 29 Boeing 767-200
aircraft and two of CAM's 12 Boeing 767-300 aircraft were leased to ASI and operated by ABX or ATI. CAM leased
the other nine Boeing 767-200 aircraft and four Boeing 767-300 aircraft to external customers, including two Boeing
767-200 aircraft to DHL for operation by a DHL affiliate. Aircraft fleet activity during 2016 is summarized below:

- CAM completed the modification of two Boeing 767-300 freighter aircraft purchased in the previous year and
began to lease both aircraft under a multi-year lease to external customers. One of these aircraft is being operated
by ABX for the customer.

- CAM purchased eleven Boeing 767-300 passenger aircraft during 2016 for the purpose of converting the aircraft
into standard freighter configuration. Two aircraft completed the freighter modification and entered into long-
term leases with ASI in 2016, and are both being operated by ATI under multi-year leases. CAM sold one of
the eleven aircraft to an external customer during 2016. One aircraft completed the freighter modification and
entered into service with ATI during the fourth quarter. This aircraft was subsequently entered into a long-term
lease with ASI in January 2017, and is being operated by ATI under a multi-year agreement. The remaining
seven Boeing 767-300 passenger aircraft were undergoing or preparing to undergo modification to a standard
freighter configuration as of December 31, 2016 and are expected to be completed in 2017.

- In conjunction with the ATSA, ABX and ATI returned a total of ten Boeing 767-200 freighter aircraft to CAM
and external lessees returned two Boeing 767-200 freighter aircraft. All twelve were subsequently leased to
ASI under multi-year leases. ABX and ATI were separately contracted to operate the aircraft for ASI.

- Five other Boeing 767-200 freighter aircraft were returned from external lessees. Four were subsequently
leased to ABX or ATI while one is now being prepped for other leasing.

- ABX returned one Boeing 767-200 freighter and one Boeing 767-300 freighter to CAM, which were
subsequently leased to different external lessees. ABX is operating the Boeing 767-300 freighter for the
customer.

- ATI ceased operating one DHL-owned Boeing 757-200 freighter aircraft during the third quarter.

As of December 31, 2015, ACMI Services leased 25 of its in-service aircraft internally from CAM. As of
December 31, 2015, 11 of CAM's 23 Boeing 767-200 aircraft shown in the aircraft fleet table above and four of the
seven Boeing 767-300 aircraft, were leased to DHL and operated by ABX. CAM leased the other twelve Boeing
767-200 aircraft and three Boeing 767-300 aircraft to external customers, including two Boeing 767-200 aircraft to
DHL for operation by a DHL affiliate. Aircraft fleet activity during 2015 is summarized below:

- During the first quarter, two DHL-owned Boeing 767-200 aircraft, previously leased to ABX for operation in
DHL's network, were returned to DHL.

- CAM placed one recently modified Boeing 767-300 freighter aircraft with an external customer in February
2015 under a multi-year lease.

- In February 2015, CAM purchased a Boeing 767-300 freighter aircraft that ABX was leasing from an external
lessor and began to lease it to ABX.

- ABX returned three Boeing 767-200 freighters to CAM, two of which were leased to external lessees in April
and the third of which was leased to another external lessee in October.

- During the second quarter, DHL began to lease directly from CAM three Boeing 767-300 aircraft that ABX
had been providing under shorter term arrangements. ABX continued to operate the aircraft.

- During the second quarter, ATI began to operate a Boeing 757 freighter that DHL leases from a third party.

- During the fourth quarter, DHL transitioned two CAM Boeing 767-200 aircraft leases to another airline in the
Middle East.

- External lessees returned two other Boeing 767-200 freighter aircraft to CAM, which leased one to another
external customer and the other aircraft to ABX during the fourth quarter of 2015.

- CAM purchased one Boeing 767-300 passenger aircraft in June and completed its modification to standard
freighter configuration in November. CAM began to lease that aircraft, which is operated by ABX, to DHL
under a multi-year lease.

- CAM purchased one Boeing 767-300 passenger aircraft in July and another one in November, which were both
being modified to standard freighter configuration as of December 31, 2015. One was subsequently leased to
an external customer in February 2016 and the other was leased to an external customer in July 2016.

CAM

CAM's revenues grew $17.3 million during 2016 compared to 2015, primarily as a result of additional aircraft
leases. As of December 31, 2016 and 2015, CAM had 41 and 30 aircraft under lease to external customers, respectively.
33

Revenues from external customers totaled $117.6 million and $93.4 million for 2016 and 2015, respectively. CAM's
revenues from the Company's airlines totaled $77.5 million during 2016, compared to $84.4 million for 2015. Since
mid-2015, we have added six Boeing 767-300 freighter aircraft to CAM's lease portfolio through December 31, 2016.

CAM's pre-tax earnings, inclusive of an interest expense allocation, were $68.6 million and $57.5 million during
2016 and 2015, respectively. Increased earnings reflect additional external lease revenues and lower interest expense,
offset by higher depreciation expense for additional Boeing 767-300 aircraft and increased expenses to place and support
the larger fleet of Boeing aircraft.

During 2016, CAM purchased eleven 767-300 passenger aircraft for freighter conversion. As of December 31,
2016, seven of these Boeing 767-300 passenger aircraft were being modified from passenger to freighter configuration.
One aircraft had been sold, while another three had completed freighter modification.

ACMI Services

As of December 31, 2016, ACMI Services included 46 in-service aircraft, including 18 leased internally from
CAM, 14 CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the restated CMI
agreement, and 14 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under
the ATSA.

Revenues from ACMI Services increased $59.8 million during 2016 compared with 2015 to $492.9 million. Airline
services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain
operating expenses, increased $15.1 million. Improved revenues were driven by additional aircraft operations for ASI
and reflect an 18% increase in billable block hours. As of December 31, 2016, ACMI Services were operating six more
CAM-owned aircraft compared to December 31, 2015. Beginning in April 2016, in conjunction with the long-term
leases executed between ASI and CAM, the related aircraft rent revenues for five aircraft operated for ASI during 2015
are reflected under CAM instead of ACMI Services. Compared to 2015, billable block hours for DHL declined during
2016, reflecting three fewer aircraft in service for DHL.

Operating results for ACMI Services were impacted in 2016 by additional costs for flight crews to keep pace with
ASI's expanding air network. Flight crew compensation increased by $13.0 million to pay additional crews while being
trained for expanded aircraft operations and when ABX's flight crews stopped volunteering for additional flight time,
ABX paid a premium to assign trips to crewmembers and awarded additional compensatory days off. Operating results
for ACMI Services were also negatively impacted by $7.0 million in lost revenue due to a work stoppage by ABX
crewmembers represented by the Airline Professionals Association of the International Brotherhood of Teamsters in
November 2016. Although the flight crews were ordered back to work within two days through a temporary restraining
order issued by a U.S. district court, the full revenue schedule of flying operations did not resume for nearly three
weeks.

Primarily due to these flight crew related factors, ACMI Services incurred pre-tax losses of $32.1 million during
2016, compared to pre-tax losses of $2.7 million for 2015. Larger pre-tax losses in 2016 compared to 2015 were also
affected by more scheduled airframe maintenance events during 2016, and increased pension expenses. Scheduled
airframe maintenance expense increased $6.5 million during 2016 compared to 2015. Airframe maintenance expense
varies depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for
maintenance. Pension expense for ACMI Services, including the non-service components of retiree benefit costs,
increased $9.6 million as actuarially determined for 2016, compared to 2015. Operating results for ACMI Services
were also impacted by increased depreciation expense for two additional Boeing 767-300 aircraft in operation and
reductions in CMI operations for DHL compared to 2015.

Ground Services

Total revenues from Ground Services were $116.8 million and $60.2 million for 2016 and 2015, respectively.
Revenues increased $56.6 million during 2016 compared to 2015, reflecting higher contractual costs and increased
volumes at the USPS and ASI locations.

The pre-tax earnings from Ground Services increased by $5.2 million to $10.6 million in 2016, primarily reflecting
the increased volume at USPS and ASI locations and the increase of hub logistics services we provided for Amazon at
the airport in Wilmington, Ohio.

Other Activities

External customer revenues from all other activities were $43.6 million and $35.7 million for 2016 and 2015,
respectively. The increase in revenue was driven by an increase in airframe maintenance and conversion revenues.
Revenues from aircraft maintenance can vary among periods due to the timing of scheduled maintenance events and
the completion level of work during a period.

The pre-tax earnings from other activities increased by $2.9 million to $6.0 million in 2016, reflecting increased

airframe maintenance and aviation fuel sales during 2016.

Expenses from Continuing Operations

Salaries, wages and benefits expense increased $49.9 million during 2016 compared to 2015 driven by higher
headcount for flight operations, maintenance services, package handling services and additional pilot premium pay
while new crewmembers were being trained for our customers' expanding networks. Our employee headcount increased
32% during 2016 compared to 2015. We also added employees to support the ASI network, additional aircraft
maintenance contracts and increased volume for the USPS. The non-service components of retiree benefit costs
increased $9.9 million during 2016 due to lower investment returns during the previous year.

Depreciation and amortization expense increased $10.1 million during 2016 compared to 2015. The increase in
depreciation expense reflects incremental depreciation for six Boeing 767-300 aircraft and additional aircraft engines
added to the operating fleet since mid-2015, as well as capitalized heavy maintenance and navigation technology
upgrades.

Maintenance, materials and repairs expense increased by $9.7 million during 2016 compared to 2015. The increase
stemmed primarily from additional airframe checks and related component repairs, driven by increased block hours
flown.

Fuel expense increased by $34.5 million during 2016 compared to 2015. Fuel expense includes the cost of fuel to
operate U.S. Military charters, reimbursable fuel billed to DHL, ASI and other ACMI customers, as well as fuel used
to position aircraft for service and for maintenance purposes. The average price per gallon of aviation fuel decreased
about 24% for 2016 compared to 2015. The decrease in the average price per gallon of fuel was offset by a higher
level of customer-reimbursed fuel which increased $45.1 million for 2016 compared to 2015.

Travel expense increased by $2.0 million during 2016 compared to 2015. The increase reflects the higher level

of employee headcount in airline operations during 2016 compared to 2015.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo sorting services
and other airport services. Contracted ground and aviation services increased $38.5 million due to additional volumes
of mail and parcels processed for the USPS and ASI.

Rent expense was flat in 2016 compared to 2015. Rent expense decreased during the first half of 2016 primarily
due to the purchase of one Boeing 767-300 aircraft and the return of two Boeing 767-200 aircraft which were previously
leased from external providers during the first quarter of 2015. This was offset by increased rent in the second half of
2016 associated with an aircraft simulator rented to train new flight crews.

Landing and ramp expense, which includes the cost of deicing chemicals, increased by $3.7 million during 2016
compared to 2015, driven by additional flight operations. Landing and ramp fees can vary based on the flight schedules
and the airports that are used in a period.

Insurance expense increased by $0.8 million during 2016 compared to 2015. Aircraft fleet insurance has increased

due to additional aircraft operations during 2016 compared to 2015.

Other operating expenses increased by $9.5 million during 2016 compared to 2015. Other operating expenses
include professional fees, employee training, utilities, the cost of parts sold to customers and gains on the disposition
of equipment. Other operating expenses during the first quarter of 2016 included a $1.2 million charge for the Company's
share of capitalized debt issuance costs that were written off when West Atlantic AB, a non-consolidated affiliate,
restructured its debt. Other operating expenses also increased due to additional sales of aircraft parts during 2016
compared to 2015.

Interest expense increased by $0.1 million during 2016 compared to 2015. Interest expense increased due to a
higher average debt level and interest rates on the Company's outstanding loans, offset by more capitalized interest
related to our fleet expansion during 2016. Capitalized interest increased $1.1 million during 2016 to $1.3 million.

The Company recorded pre-tax net losses on financial instruments of $18.1 million during the year ended December
31, 2016, compared to gains of $0.9 million during 2015. The 2016 losses are primarily a result of re-measuring, as
of December 31, 2016, the fair value of the stock warrants granted to Amazon in March of 2016. An increase in the
fair value of the warrant obligation since the initial measurement on May 12, 2016, corresponded to an increase in the
traded price of the Company's shares and resulted in the non-cash, pre-tax loss of $19.1 million for 2016.

Income tax expense for earnings from continuing operations decreased $10.0 million for 2016 compared to 2015

and includes a deferred income tax deduction for the warrant loss and the amortization of the customer lease incentive.
The income tax deductibility of the warrant loss and the amortization of the customer lease incentive is less than the
GAAP expenses for these items because for tax purposes, the warrants are valued at a different time and under a different
valuation method than required by GAAP. The effective tax rate, before including the warrant loss and incentive
amortization was 35.3% for 2016 compared to 37.4% for the year ended December 31, 2015. The lower effective tax
rate for 2016 compared to 2015 reflects the recognition of a discrete tax benefit related to the conversion of employee
stock awards during the first and fourth quarters of 2016.

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, package sorting and
aircraft fueling services provided to DHL. Pre-tax earnings related to the former sorting operations were $3.8 million
for 2016 compared to $3.2 million for 2015. Pre-tax earnings during 2016 and 2015 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 $235.0 million, $193.1 million and $173.7 million in 2017,
2016 and 2015, respectively. Improved cash flows generated from operating activities during 2017 and 2016, were
driven primarily by additional aircraft leases to customers and by increased operating levels of the ACMI Services
segment. Cash outlays for pension contributions were $4.5 million, $6.3 million and $6.2 million in 2017, 2016 and
2015, 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 $296.9 million, $264.5 million and $158.7 million
in 2017, 2016 and 2015, respectively. Capital expenditures in 2017 included $209.4 million for the acquisition of eight
Boeing 767-300 aircraft and two Boeing 737-400 aircraft and freighter modification costs; $53.3 million for required
heavy maintenance; and $34.2 million for other equipment, including purchases of aircraft engines and rotables. Capital
expenditures in 2016 included $185.3 million for the acquisition of eleven Boeing 767-300 aircraft, freighter
modification costs and next generation navigation modifications; $30.4 million for required heavy maintenance; and
$48.8 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures in
2015 included $78.3 million for the acquisition of four Boeing 767-300 aircraft, freighter modification costs and next
generation navigation modifications; $45.3 million for required heavy maintenance; and $35.1 million for other
equipment.

Cash proceeds of $0.4 million, $12.4 million and $6.8 million were received in 2017, 2016 and 2015, respectively,

for the sale of aircraft engines, airframes and parts.

During 2017 and 2016, we spent $11.8 million and $17.4 million, respectively, to purchase equity interests in other
businesses and to acquire Pemco. Spending during 2017 included entry into a joint-venture with Precision Aircraft
Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft.

Net cash provided by financing activities was $79.7 million and $75.1 million in 2017 and 2016, respectively, while
net cash used for financing activities was $36.0 million in 2015. During 2017, we drew $115.0 million from the
revolving credit facility under the Senior Credit Agreement to fund capital spending. We made debt principal payments

of $254.4 million. Our borrowing activities were necessary to acquire and modify aircraft for deployment into air cargo
markets.

In September 2017, we received proceeds of $258.8 million from the issuance of convertible notes. In conjunction
with the issuance of convertible notes, we received $38.5 million for the issuance of stock warrants and paid $56.1
million for related convertible note hedges. We paid issuance costs of $6.5 million for these transactions. The net
proceeds from these transactions were $234.7 million, of which $205.0 million was used to pay down the balance of
our revolving credit facility, thereby increasing the amount available for future draws under that facility. The convertible
notes bear interest at a cash coupon rate of 1.125% and mature on October 15, 2024, unless repurchased or converted
in accordance with their terms prior to such date. The convertible notes are unsecured indebtedness, subordinated to
the Company's existing and future secured indebtedness and other liabilities, including trade payables. The convertible
notes and the related transactions are described further in Note F of the accompanying condensed consolidated financial
statements.

During 2017, we spent $11.2 million to buy 530,637 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 in May 2016 to increase such authorization to up to $100
million and amended by the Board again in February 2018 to increase such authorization to up to $150 million. We
spent $63.6 million and $10.3 million during 2016 and 2015, respectively, to repurchase shares under the authorized
plan.

Commitments

The table below summarizes the Company's contractual obligations and commercial commitments (in thousands)

as of December 31, 2017.

Contractual Obligations
Debt obligations, including interest payments

Facility leases

Aircraft and modification obligations

Other leases

Payments Due By Period

Total
$ 636,997

Less Than
1 Year

31,026

2-3
Years
$ 53,350

4-5
Years
$ 288,413

After 5
Years
$ 264,208

34,176

85,305

924

11,109

85,305

433

7,175

3,873

12,019

—

491

—

Total contractual cash obligations

$ 757,402

$ 127,873

$ 61,016

$ 292,286

$ 276,227

The long term debt bears interest at 1.125% to 6.74% per annum at December 31, 2017. After the repayment of
a $3.7 million aircraft loan in January 2018, the Company's remaining long term debt bears interest at 1.125% to 3.07%
per annum. For additional information about the Company's debt obligations, see Note F of the accompanying financial
statements.

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 $22.9 million expected to be funded in
2018. For additional information about the Company's pension obligations, see Note I of the accompanying financial
statements.

We estimate that capital expenditures for 2018 will total $300 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 flow and the Senior Credit Agreement, the latter of which we anticipate amending for
the purpose of obtaining additional borrowing. 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 H of the accompanying financial statements.

Since August 3, 2017, the Company has been part of a joint-venture with Precision 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 the FAA in 2019. We expect to make contributions equal to the Company's 49%
ownership percentage of the program's total costs during 2018 and 2019.

Liquidity

The Company has a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term
loan of $70.6 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn
$245.0 million, net of repayments, as of December 31, 2017. The revolving credit facility has a capacity of $545.0
million, permitted additional indebtedness of $300.0 million of which $258.8 million has been utilized for the issuance
of convertible notes, and an accordion feature whereby the Company can draw up to an additional $100.0 million
subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 767
and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain
collateral coverage equal to 125% of the outstanding balances of the term loan and the maximum capacity of revolving
credit facility or 150% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever
is less. 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 $545.0 million. Each year, through May 6, 2019, the
Company may request a one year extension of the final maturity date, subject to the lenders' consent. Absent such
future extensions, the maturity date is currently set to expire on May 30, 2022.

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 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.

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 (earnings before interest, taxes, depreciation and amortization expenses). At the Company's
current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving credit facility both bear a variable interest
rate of 3.07%.

At December 31, 2017, the Company had $32.7 million of cash balances. The Company had $290.7 million available
under the revolving credit facility, net of outstanding letters of credit, which totaled $9.3 million. We believe that the
Company's current cash balances and forecasted cash flows provided from its 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.

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 of December 31, 2017 and 2016, 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 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 in the 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

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 customer
agreements, including consumption of aircraft fuel, are generally recognized as the costs are incurred. Revenues from
charter service agreements are recognized on scheduled and non-scheduled flights when the specific flight has been
completed. Aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of
the applicable lease agreements. Revenues from the sale of aircraft parts and engines are recognized when the parts
are delivered. Revenues earned and expenses incurred in providing aircraft-related maintenance, modifications, repair
or technical services are recognized in the period in which the services are completed. Revenues derived from sorting
mail and packages are recognized in the reporting period in which the services are performed. Revenue is not recognized
until collectibility is reasonably assured.

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 application of 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 first step of the goodwill impairment test requires a 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 indication of impairment
exists and a second step is not performed. If the carrying amount of a reporting unit is higher than its fair value, there
is an indication that an impairment may exist and a second step is performed. In the second step, fair values are assigned
to all of the assets and liabilities of a reporting unit, including any unrecognized intangible assets, and the implied fair
value of goodwill is calculated. If the implied fair value of goodwill is less than the recorded goodwill, an impairment
loss is recorded for the difference and charged to operations.

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 Pemco, separately, using multiples of EBITDA and
revenues from comparable publicly traded companies. Based on our analysis, as of December 31, 2017, both CAM's
and Pemco's fair values exceeded their carrying values by more than 25%. Our key assumptions used for CAM's

goodwill testing include uncertainties, including the level of demand for cargo aircraft by shippers, the U.S. Military
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 Pemco's goodwill testing include the level of revenues
that customers will seek from Pemco and the cost of labor and contract resources Pemco is expected to incur. 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 the U.S. Military, may decide
that they do not need as many aircraft as projected or may find alternatives 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, 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 claim 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 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 which begin to expire in 2031. Based upon projections of taxable income, we determined that it
was more likely than not that the NOL CF’s will be realized prior to their expiration. 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 6.25%. 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 at December 31, 2017 was 31% equities, 68% fixed income and 1% cash.
The pension trust includes $27.2 million of investments (4% 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 6.25% 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 2017 would
be increased by approximately $6.7 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 of December 31 (as shown in Note I to the accompanying consolidated financial statements), but also
affects the succeeding year’s pension and post-retirement healthcare expense. The discount rates selected for
December 31, 2017, based on the method described above, were 4.00% for crewmembers and 4.05% for non-
crewmembers. If we were to lower our discount rates by a hypothetical 50 basis points, pension expense in 2017 would
be increased by approximately $7.3 million.

Our mortality assumptions at December 31, 2017, reflect the most recent projections released by the Actuaries
Retirement Plans Experience Committee, a committee within the Society of Actuaries, a professional association in
North 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, 2017

2017
Pension
expense

6,734

Pension
obligation

Accumulated
other
comprehensive
income (pre-tax)
—

— $

7,338

14,072

(48,175)
(48,175)

48,175

Change in assumption
100 basis point decrease in rate of return

50 basis point decrease in discount rate

Aggregate effect of all the above changes

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk for changes in interest rates.

The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for fluctuating
interest rates, for at least fifty percent of the outstanding balance of the unsubordinated term loan. Accordingly, in
February 2016, the Company entered into an interest rate swap instrument. Additionally, the Company entered into
another three interest rate swaps in February 2017, April 2017 and June 2017, respectively. As a result, future fluctuations
in LIBOR interest rates will result in the recording of unrealized gains and losses on interest rate derivatives held by
the Company. The combined notional values were $196.3 million as of December 31, 2017. See Note G in the
accompanying consolidated financial statements for a discussion of our accounting treatment for these hedging
transactions.

As of December 31, 2017, the Company has $196.6 million of fixed interest rate convertible debt and $315.6 million
of variable interest rate debt outstanding. Variable interest rate debt exposes us to differences in future cash flows
resulting from changes in market interest rates. Variable interest rate risk can be quantified by estimating the change
in annual cash flows resulting from a hypothetical 20% increase in interest rates. A hypothetical 20% increase or decrease
in interest rates would have resulted in a change in interest expense of approximately $2.3 million for the year ended
December 31, 2017.

The convertible debt issued at fixed interest rates is exposed to fluctuations in fair value resulting from changes in
market interest rates. Fixed interest rate risk can be quantified by estimating the increase in fair value of our long term
convertible debt through a hypothetical 20% increase in interest rates. As of December 31, 2017, a 20% increase in
interest rates would have decreased the fair value of our fixed interest rate convertible debt by approximately $0.2
million.

The Company is exposed to concentration of credit risk primarily through cash deposits, cash equivalents, marketable
securities and derivatives. As part of its risk management process, the Company monitors and evaluates the credit
standing of the financial institutions with which it does business. The financial institutions with which it does business
are generally highly rated. The Company is exposed to counterparty risk, which is the loss it could incur if a counterparty
to a derivative contract defaulted.

As of December 31, 2017, the Company's liabilities reflected 14.83 million stock warrants issued to a customer.
The fair value of the stock warrant obligation is re-measured at the end of each reporting period and marked to market.
The fair value of the stock warrant is dependent on a number of factors which change, including the Company's common
stock price, the volatility of the Company’s common stock and the risk-free interest rate. See Note D in the accompanying
consolidated financial statements for further information about the fair value of the stock warrants

The Company sponsors defined benefit pension plans and post-retirement healthcare plans for certain eligible
employees. The Company's related pension expense, plans' funded status, and funding requirements are sensitive to
changes in interest rates. The funded status of the plans and the annual pension expense is recalculated at the beginning
of each calendar year using the fair value of plan assets. market-based interest rates at that point in time, as well as
assumptions for asset returns and other actuarial assumptions. Higher interest rates could result in a lower fair value
of plan assets and increased pension expense in the following years. At December 31, 2017, ABX's defined benefit
pension plans had total investment assets of $681.6 million under investment management. See Note I in the
accompanying consolidated financial statements for further discussion of these assets.

The Company is exposed to market risk for changes in the price of jet fuel. The risk associated with jet fuel,

however, is largely mitigated by reimbursement through the agreements with its customers.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity

Notes to Consolidated Financial Statements

Page
45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Air Transport Services Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Air Transport Services Group, Inc. and subsidiaries
(the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and
the related notes and the schedule listed in the Table of Contents at Item 15a (2) (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company's
internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.

Emphasis of a Matter

As discussed in Note B to the consolidated financial statements, the Company's three principal customers account for
a substantial portion of the Company's revenue. The Company's financial security is dependent on its ongoing
relationship with its three principal customers existing as of December 31, 2017.

/s/ DELOITTE & TOUCHE LLP

Cincinnati, Ohio
March 1, 2018

We have served as the Company's auditor since 2002.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

ASSETS
CURRENT ASSETS:

Cash and cash equivalents
Accounts receivable, net of allowance of $2,445 in 2017 and $1,264 in 2016
Inventory
Prepaid supplies and other
TOTAL CURRENT ASSETS

Property and equipment, net
Lease incentive
Goodwill and acquired intangibles
Convertible note hedges
Other assets

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:

Accounts payable
Accrued salaries, wages and benefits
Accrued expenses
Current portion of debt obligations
Unearned revenue
TOTAL CURRENT LIABILITIES

Long term debt
Convertible note obligations
Stock warrant obligations
Post-retirement obligations
Other liabilities
Deferred income taxes

TOTAL LIABILITIES

Commitments and contingencies (Note H)
STOCKHOLDERS’ EQUITY:

December 31, December 31,

2017

2016

32,699
109,114
22,169
20,521
184,503
1,159,962
80,684
44,577
53,683
25,435
$ 1,548,844

16,358
77,247
19,925
19,123
132,653
1,000,992
54,730
45,586
—
25,369
$ 1,259,330

99,728
40,127
10,455
18,512
15,850
184,672
497,246
54,359
211,136
61,355
45,353
99,444
1,153,565

60,704
37,044
10,324
29,306
18,407
155,785
429,415
—
89,441
77,713
52,542
122,532
927,428

Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior
Participating Preferred Stock
Common stock, par value $0.01 per share; 85,000,000 shares authorized;
59,057,195 and 59,461,291 shares issued and outstanding in 2017 and 2016,
respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

—

591
471,456
(13,748)
(63,020)
395,279
$ 1,548,844

595
443,416
(32,243)
(79,866)
331,902
$ 1,259,330

See notes to consolidated financial statements.
46

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

REVENUES
OPERATING EXPENSES

Salaries, wages and benefits
Depreciation and amortization
Maintenance, materials and repairs
Fuel
Contracted ground and aviation services
Travel
Landing and ramp
Rent
Insurance
Other operating expenses

OPERATING INCOME
OTHER INCOME (EXPENSE)

Interest income
Net gain (loss) on financial instruments
Loss from non-consolidated affiliate
Interest expense

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
INCOME TAX BENEFIT (EXPENSE)
EARNINGS FROM CONTINUING OPERATIONS

EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES
NET EARNINGS

BASIC EARNINGS (LOSS) PER SHARE

Continuing operations
Discontinued operations
TOTAL BASIC EARNINGS PER SHARE

DILUTED EARNINGS (LOSS) PER SHARE

Continuing operations
Discontinued operations
TOTAL DILUTED EARNINGS PER SHARE

WEIGHTED AVERAGE SHARES

Basic
Diluted

Year Ended December 31
2016
768,870

2017
$ 1,068,200

2015
619,264

282,211
154,556
141,575
149,579
147,092
27,390
22,271
13,629
4,820
31,782
974,905
93,295

116
(79,789)
(3,135)
(17,023)
(99,831)

231,667
135,496
119,123
87,134
57,491
20,048
13,455
11,625
4,456
24,627
705,122
63,748

131
(18,107)
—
(11,318)
(29,294)

(6,536)

34,454

181,785
125,443
103,961
52,615
18,983
18,007
9,727
11,677
3,645
20,631
546,474
72,790

85
920
—
(11,232)
(10,227)

62,563

(13,394)

(23,408)

28,276

21,740
(3,245)

21,060
2,428

18,495

23,488

0.37
(0.06)
0.31

0.36
(0.05)
0.31

0.34
0.04
0.38

0.33
0.04
0.37

39,155
2,067

41,222

0.61
0.03
0.64

0.60
0.03
0.63

58,907
59,686

61,330
62,994

64,242
65,127

See notes to consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Years Ended December 31
2016

2017

2015

NET EARNINGS
OTHER COMPREHENSIVE INCOME (LOSS):

Defined Benefit Pension

Defined Benefit Post-Retirement

Gains and Losses on Derivatives

Foreign Currency Translation

18,495

23,488

41,222

16,513

20,214

(16,111)

204

—

129

(986)

—

(82)

315

(4)

(336)

TOTAL COMPREHENSIVE INCOME (LOSS), net of tax

35,341

42,634

25,086

See notes to consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Years Ended December 31
2016

2015

2017

OPERATING ACTIVITIES:

Net earnings (loss) from continuing operations
Net earnings (loss) from discontinued operations
Adjustments to reconcile net earnings to net cash provided by operating
activities:

21,740
(3,245)

21,060
2,428

39,155
2,067

Depreciation and amortization
Pension and post-retirement
Deferred income taxes
Amortization of stock-based compensation
Amortization of DHL promissory note
Net (gain) loss on financial instruments

Changes in assets and liabilities:

Accounts receivable
Inventory and prepaid supplies
Accounts payable
Unearned revenue
Accrued expenses, salaries, wages, benefits and other liabilities
Pension and post-retirement assets
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES

INVESTING ACTIVITIES:

Capital expenditures
Proceeds from property and equipment
Acquisitions and investments in businesses
Redemption of long term deposits

NET CASH (USED IN) INVESTING ACTIVITIES

FINANCING ACTIVITIES:

Principal payments on long term obligations
Proceeds from borrowings
Proceeds from convertible notes
Payments for financing costs
Purchase convertible note hedges
Proceeds from issuance of warrants
Purchase of common stock
Withholding taxes paid for conversion of employee stock awards

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF PERIOD

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid, net of amount capitalized
Federal alternative minimum and state income taxes paid

SUPPLEMENTAL NON-CASH INFORMATION:

Accrued capital expenditures

170,751
20,933
(30,771)
3,632
—
79,789

(31,313)
(4,107)
23,500
(7,331)
780
(13,083)
3,717
234,992

(296,939)
381
(11,792)
9,975
(298,375)

(254,446)
115,000
258,750
(7,887)
(56,097)
38,502
(11,184)
(2,914)
79,724

16,341
16,358
32,699

13,693
1,938

25,142

$
$

140,002
11,532
13,807
3,165
—
18,107

(9,597)
(5,269)
5,603
(3,216)
5,678
(11,819)
1,611
193,092

125,443
6,920
23,691
2,454
(1,550)
(920)

(14,410)
(3,896)
4,424
(1,116)
8,375
(16,098)
470
175,009

(264,477)
12,380
(17,395)
—
(269,492)

(158,714)
6,841
—
—
(151,873)

(44,069)
185,000
—
—
—
—
(63,570)
(2,300)
75,061

(1,339)
17,697
16,358

10,738
923

9,118

(69,344)
45,000
—
—
—
—
(10,345)
(1,310)
(35,999)

(12,863)
30,560
17,697

10,748
870

7,033

$
$

See notes to consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)

Common Stock

Number
64,854,950

Amount
649
$

Additional
Paid-in
Capital
$ 526,669

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total

(96,953) $

(82,876) $ 347,489

BALANCE AT JANUARY 1, 2015
Stock-based compensation plans

Grant of restricted stock
Issuance of common shares, net of
withholdings

Forfeited restricted stock

170,800

137,457

(6,900)

Purchase of common stock

(1,079,167)

Tax benefit from common stock
compensation
Amortization of stock awards and
restricted stock

Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2015
Stock-based compensation plans

—

(11)

(2)

(1,311)

—
(10,334)

783

2,454

64,077,140

641

$ 518,259

Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock

171,500

42,796

(4,600)

—

(2)

(2,300)

—

Purchase of common stock

(4,825,545)

(48)

(63,522)

Tax benefit from common stock
compensation
Warrants granted to customer

Amortization of stock awards and
restricted stock

Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2016
Stock-based compensation plans

1,087

(13,271)

3,165

59,461,291

595

$ 443,416

Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock

113,000

17,441

(3,900)

—

(1)

(2,914)

—

Purchase of common stock

(530,637)

(5)

(11,179)

Warrants issued

Amortization of stock awards and
restricted stock

Total comprehensive income
BALANCE AT DECEMBER 31, 2017

38,502

3,632

59,057,195

591

$ 471,456

—

(1,310)

—

(10,345)

783

41,222
(55,731) $

2,454
(16,136)
25,086
(99,012) $ 364,157

—

(2,300)

—

(63,570)

1,087

(13,271)

23,488
(32,243) $

3,165
19,146
42,634
(79,866) $ 331,902

—

(2,914)

—

(11,184)

38,502

18,495
(13,748) $

3,632
35,341
16,846
(63,020) $ 395,279

See notes to consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT
ACCOUNTING POLICIES

Nature of Operations

Air Transport Services Group, Inc. is a holding company whose subsidiaries primarily operate within the airfreight
and logistics industry. The Company leases aircraft and provides airline operations, ground services, aircraft
modification and maintenance services and other support services mainly to the cargo transportation and package
delivery industries. The Company's subsidiaries offer a range of complementary services to delivery companies, freight
forwarders, airlines and government customers.

The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the
Company's airlines as well as to non-affiliated airlines and other lessees. The airlines, ABX Air, Inc. (“ABX”) and Air
Transport International, Inc. (“ATI”), each have the authority, through their separate U.S. Department of Transportation
("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. The Company
provides air transportation services to a concentrated base of customers. The Company provides a combination of
aircraft, crews, maintenance and insurance services for a customer's transportation network through customer "CMI"
and "ACMI" agreements and through charter contracts in which aircraft fuel is also included. ATI provides passenger
transportation to the U.S. Military using "combi" aircraft, which are certified to carry passengers as well as cargo on
the main deck. In addition to its aircraft leasing and flight services the Company sells aircraft parts, provides aircraft
maintenance and modification services, equipment maintenance services and manages mail and package sorting services
for customers.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Air Transport Services Group, Inc.
and its wholly-owned subsidiaries. Investments in an affiliate in which the Company has significant influence but does
not exercise control are accounted for using the equity method of accounting. Using the equity method, the Company’s
share of a nonconsolidated affiliate's income or loss is recognized in the consolidated statement of earnings and
cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment.
Inter-company balances and transactions are eliminated. The financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the United States of America ("GAAP").

Revenues and operating expenses include the activities of PEMCO World Air Services, Inc., ("Pemco") a wholly
owned subsidiary, for periods since its acquisition by the Company on December 30, 2016. Pemco offers aircraft
maintenance and modification services. Certain historical expenses related to the Company's other aircraft maintenance
and modification businesses have been reclassified from Other operating expenses to Maintenance, materials and repairs
to conform with the current year presentation of the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial statements. Estimates and assumptions are used
to record allowances for uncollectible amounts, self-insurance reserves, spare parts inventory, depreciation and
impairments of property, equipment, goodwill and intangibles, stock warrants and other financial instruments, post-
retirement obligations, income taxes, contingencies and litigation. Changes in estimates and assumptions may have a
material impact on the consolidated financial statements.

Cash and Cash Equivalents

The Company classifies short-term, highly liquid investments with maturities of three months or less at the time
of purchase as cash and cash equivalents. These investments, consisting of money market funds, are recorded at cost,
which approximates fair value. Substantially all deposits of the Company’s cash are held in accounts that exceed
federally insured limits. The Company deposits cash in common financial institutions which management believes are
financially sound.

Accounts Receivable and Allowance for Uncollectible Accounts

The Company's accounts receivable is primarily due from its significant customers (see Note B), other airlines, the
U.S. Postal Services ("USPS"), delivery companies and freight forwarders. The Company performs a quarterly
evaluation of the accounts receivable and the allowance for uncollectible accounts by reviewing specific customers'
recent payment history, growth prospects, financial condition and other factors that may impact a customer's ability to
pay. The Company establishes an allowance for uncollectible accounts for probable losses due to a customer's potential
inability or unwillingness to make contractual payments. Account balances are written off against the allowance when
the Company ceases collection efforts.

Inventory

The Company’s inventory is comprised primarily of expendable aircraft parts and supplies used for aircraft
maintenance. Inventory is generally charged to expense when issued for use on a Company aircraft. The Company
values its inventory of aircraft parts and supplies at weighted-average cost and maintains a related obsolescence reserve.
The Company records an obsolescence reserve on a base stock of inventory for each fleet type. The amortization of
base stock for the obsolescence reserve corresponds to the expected life of each fleet type. Additionally, the Company
monitors the usage rates of inventory parts and segregates parts that are technologically outdated or no longer used in
its fleet types. Slow moving and segregated items are actively marketed and written down to their estimated net
realizable values based on market conditions.

Management analyzes the inventory reserve for reasonableness at the end of each quarter. That analysis includes
consideration of the expected fleet life, amounts expected to be on hand at the end of a fleet life, and recent events and
conditions that may impact the usability or value of inventory. Events or conditions that may impact the expected life,
usability or net realizable value of inventory include additional aircraft maintenance directives from the FAA, changes
in DOT regulations, new environmental laws and technological advances.

Goodwill and Intangible Assets

The Company assesses, during the fourth quarter of each year, the carrying value of goodwill. The first step of
the assessment is the estimation of fair value of each reporting unit, which is compared to the carrying value. If step
one indicates that impairment potentially exists, a second step is performed to measure the amount of impairment, if
any. Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value. The Company
also conducts impairment assessments of goodwill, indefinite-lived intangible assets and finite-lived intangible assets
whenever events or changes in circumstance indicate an impairment may have occurred. Finite-lived intangible assets
are amortized over their estimated useful economic lives.

Property and Equipment

Property and equipment held for use is stated at cost, net of any impairment recorded. The cost and accumulated
depreciation of disposed property and equipment are removed from the accounts with any related gain or loss reflected
in earnings from operations.

Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life

or lease term. Depreciable lives are summarized as follows:

Boeing 767, 757 and 737 aircraft and flight equipment

Ground equipment
Leasehold improvements, facilities and office equipment

10 to 18 years

3 to 10 years

3 to 25 years

The Company periodically evaluates the useful lives, salvage values and fair values of property and equipment.
Acceleration of depreciation expense or the recording of significant impairment losses could result from changes in
the estimated useful lives of assets due to a number of reasons, such as excess aircraft capacity or changes in regulations
governing the use of aircraft.

Aircraft and other long-lived assets are tested for impairment when circumstances indicate the carrying value of
the assets may not be recoverable. To conduct impairment testing, the Company groups 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 the asset group is less than the carrying value. If impairment exists, an adjustment is recorded 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.
For assets held for sale, impairment is recognized when the fair value less the cost to sell the asset is less than the
carrying value.

The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft
type. The costs of airframe maintenance for Boeing 767-200 aircraft operated by ABX are expensed as they are incurred.
The costs of major airframe maintenance for the Company's other aircraft are capitalized and amortized over the useful
life of the overhaul. Many of the Company's General Electric CF6 engines that power the Boeing 767-200 aircraft are
maintained under “power by the hour” and "power by the cycle" agreements with an engine maintenance provider.
Further, in May 2017, the Company entered into similar maintenance agreements for certain General Electric CF6
engines that power many of the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained
by the service provider for a fixed fee per cycle and/or flight hour. As a result, the cost of maintenance for these engines
is generally expensed as flights occur. Maintenance for the airlines’ other aircraft engines, including Boeing 767-300
and Boeing 757 aircraft, are typically contracted to service providers on a time and material basis and the costs of those
engine overhauls are capitalized and amortized over the useful life of the overhaul.

In the event the Company leases aircraft from external lessors, the Company may be required to make periodic
payments to the lessor under certain aircraft leases for future maintenance events such as engine overhauls and major
airframe maintenance. Such payments are recorded as deposits until drawn for qualifying maintenance costs. The
maintenance costs are expensed or capitalized in accordance with the airline's accounting policy for major airframe
and engine maintenance. The Company evaluates at the balance sheet date, whether it is probable that an amount on
deposit will be returned by the lessor to reimburse the costs of the maintenance activities. When an amount on deposit
is less than probable of being returned, it is recognized as additional maintenance expense.

Capitalized Interest

Interest costs incurred while aircraft are being modified are capitalized as an additional cost of the aircraft until the
date the asset is placed in service. Capitalized interest was $1.8 million, $1.3 million and $0.2 million for the years
ended December 31, 2017, 2016 and 2015, respectively.

Discontinued Operations

A business component whose operations are discontinued is reported as discontinued operations if the cash flows
of the component have been eliminated from the ongoing operations of the Company and represents a strategic shift
that had a major impact on the Company. The results of discontinued operations are aggregated and presented separately
in the consolidated statements of operations.

Self-Insurance

The Company is self-insured for certain workers’ compensation, employee healthcare, automobile, aircraft, and
general liability claims. The Company maintains excess claim coverage with common insurance carriers to mitigate
its exposure to large claim losses. The Company records 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. Other liabilities included $18.4 million and $18.7 million at December 31, 2017 and December 31,
2016, respectively, for self-insured reserves. Changes in claim severity and frequency could result in actual claims
being materially different than the costs accrued.

Pension and Post-Retirement Benefits

The funded status of any of the Company's defined benefits pension or post-retirement health care plan is the
difference between the fair value of plan assets and the accumulated benefit obligations to plan participants. The over
funded or underfunded status of a plan is reflected in the consolidated balance sheet as an asset for over funded plans,
or as a liability for underfunded plans.

The funded status is ordinarily re-measured annually at year end using the fair value of plans assets, market based
discount rates and actuarial assumptions. Changes in the funded status of the plans as a result of re-measuring plan
assets and benefit obligations, are recorded to accumulated comprehensive loss and amortized into operating expense
using a corridor approach. The Company's corridor approach amortizes variances in plan assets and benefit obligations
that are a result of the previous measurement assumptions into earnings when the net deferred variances exceed 10%
of the greater of the market value of plan assets or the benefit obligation at the beginning of the year. The amount in
excess of the corridor is amortized over the average remaining service period to retirement date of active plan participants.
Costs adjustments for plan amendments are also deferred and amortized over the expected working life or the life
expectancy of plan participants. Irrevocable settlement transactions that relieve the Company from responsibilities of
providing retiree benefits and significantly eliminate the Company's relate risk may result in recognition of gains or
losses from accumulated other comprehensive loss.

Security and Maintenance Deposits

The Company's customer leases typically obligate the lessee to maintain the Company's aircraft in compliance with
regulatory standards for flight and aircraft maintenance. The Company may require an aircraft lessee to pay a security
deposit or provide a letter of credit until the expiration of the lease. Additionally, the Company's leases may require a
lessee to make monthly payments toward future expenditures for scheduled heavy maintenance events. The Company
records security and maintenance deposits in other liabilities. If a lease requires monthly maintenance payments, the
Company is typically required to reimburse the lessee for costs they incur for scheduled heavy maintenance events
after completion of the work and receipt of qualifying documentation. Reimbursements to the lessee are recorded
against the previously paid maintenance deposits.

Income Taxes

Income taxes have been computed using the asset and liability method, under which deferred income taxes are
provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets
and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance
against net deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. Tax
credits are accounted for as a reduction of income taxes in the year in which the credit originates. All deferred income
taxes are classified as noncurrent in the statement of financial position.

The Company recognizes the benefit of a tax position taken on a tax return, if that position is more likely than not
of being sustained on audit, based on the technical merits of the position. An uncertain income tax position is not
recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties
accrued related to uncertain tax positions in operating expense.

Purchase of Common Stock

The Company's Board of Directors has authorized management to repurchase outstanding common stock of the
Company from time to time on the open market or in privately negotiated transactions. The authorization does not
require the Company to repurchase a specific number of shares and the Company may terminate the repurchase program
at any time. Upon the retirement of common stock repurchased, the excess purchase price over the par value for retired
shares of common stock is recorded to additional paid-in-capital.

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 lessee 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.

Comprehensive Income

Comprehensive income includes net earnings and other comprehensive income or loss. Other comprehensive
income or loss results from certain changes in the Company’s liabilities for pension and other post-retirement benefits,
gains and losses associated with interest rate hedging instruments and fluctuations in currency exchange rates related
to the foreign affiliate.

Fair Value Information

Assets or liabilities that are required to be measured at fair value are reported using the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic
820-10 Fair Value Measurements and Disclosures establishes three levels of input that may be used to measure fair
value:

•

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination
of fair value requires significant management judgment or estimation.

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. 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. Revenues earned and expenses incurred in providing aircraft-related maintenance, repair or
modification services are usually recognized in the period in which the services are completed and delivered to the
customer. Revenues derived from sorting parcels are recognized in the reporting period in which the services are
performed. Revenue is not recognized until collectibility is reasonably assured.

Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”) to supersede existing revenue
recognition guidance. During 2016, the FASB issued additional ASU's to further amend the new revenue recognition
guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue
to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive
in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing
and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes
in judgments and about assets recognized for costs incurred to obtain or fulfill a contract.

The new revenue recognition standards are effective for annual reporting periods beginning after December 15,
2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. Topic 606 may be
adopted using either a full retrospective approach, under which all years included in the financial statements will be
presented under the revised guidance, or a modified retrospective approach, under which financial statements will be
prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities

recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for open
contract performance at that time. The Company is adopting the standard effective January 1, 2018, using the modified
retrospective method.

The Company's adoption efforts have included the identification of revenue within the scope of the standard, the
evaluation of customer contracts in conjunction with new guidance and an assessment of the qualitative and quantitative
impacts of the new standard on its financial statements. The evaluation included the application of each of the five
steps identified in the Topic 606 revenue recognition model.

The Company determined that under Topic 606, it is an agent for aircraft fuel and certain other costs reimbursed
by customers under its ACMI and CMI contracts and for certain cargo handling services that it arranges for a customer.
Under the new revenue standard, such reimbursed amounts will be reported net of the corresponding expenses beginning
in 2018. This application of Topic 606 will not have an impact on the Company's reported earnings in any period.
Additionally under Topic 606, the Company will be required to record revenue over time, instead of at the time of
completion, for certain customer contracts for airframe and modification services that do not have an alternative use
and for which the Company has an enforceable right to payment during the service cycle. The Company is adopting
the provisions of this new standard using the modified retrospective method which requires the Company to record a
one time adjustment to retained deficit for the cumulative effect that the standard has on open contracts at the time of
adoption. The Company estimates that upon adoption of the new standard, it will accelerate approximately $3.6 million
of revenue resulting in immaterial adjustment to its January 1, 2018 retained deficit for open airframe and modification
services contracts. The Company's lease revenues within the scope of ASC 840, Leases, are specifically excluded from
Topic 606.

In February 2016, the FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will require the recognition
of right to-use-assets and lease liabilities for leases previously classified as operating leases by lessees. The standard
will take effect for annual reporting periods beginning after December 15, 2018, including interim reporting periods.
Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a
modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements (the date of initial application). The modified
retrospective approach would not require any transition accounting for leases that expired before the date of initial
application. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by
eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step
quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value
over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not
amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective
for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not expect the new standard to have a material impact on its financial statements and disclosures.

In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost "(ASU 2017-07"). ASU 2017-07 requires
an employer to report the service cost component of retiree benefits in the same line item or items as other compensation
costs arising from services rendered by the pertinent employees during the period. The other components of net benefit
cost are required to be presented separately from the service cost component and outside a subtotal of income from
operations. ASU 2017-07 is effective for years, and interim periods within those years, beginning after December 15,
2017, and requires retrospective application to all periods presented. This ASU will impact the Company's Operating
Income subtotal as reported in the Company's Consolidated Statement of Operations by excluding interest expense,
investment returns, settlements and other non-service cost components of retiree benefit expenses. Information about
interest expense, investment returns and other components of retiree benefit expenses can be found in Note I.

In February 2018, the FASB issued ASU “Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 amends ASC 220, Income Statement — Reporting
Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings
for stranded tax effects resulting from U.S. federal tax legislation known as the Tax Cuts and Jobs Act. In addition,

under the ASU 2018-02, a Company will be required to provide certain disclosures regarding stranded tax effects. ASU
2018-02 is effective for years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the impact of the standard on its financial statements and
disclosures

NOTE B—SIGNIFICANT CUSTOMERS

DHL

The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL")
since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 24%,
34% and 46% of the Company's consolidated revenues from continuing operations for the years ended December 31,
2017, 2016 and 2015, respectively. The Company’s balance sheets include accounts receivable with DHL of $15.7
million and $7.3 million as of December 31, 2017 and December 31, 2016, respectively.

The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under
a separate crew, maintenance and insurance (“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
Boeing 767 and Boeing 757 air cargo transportation services for DHL through additional ACMI agreements in which
the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated
from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such
as power units, air starts and related maintenance services to DHL under separate agreements.

Amazon

The Company has been providing freighter aircraft and services for cargo handling and logistical support for
Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc.
("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 20 Boeing 767 freighter aircraft to ASI, including
12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of
seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the
management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became
effective on April 1, 2016 and has a term of five years. CAM owns all 20 of the Boeing 767 aircraft that are leased
and operated under the ATSA.

Revenues from continuing operations performed for Amazon comprised approximately 44%, 29% and 5% of the
Company's consolidated revenues from continuing operations for the years ending December 31, 2017, 2016 and 2015,
respectively. The Company’s balance sheets include accounts receivable with Amazon of $44.2 million and $24.6
million as of December 31, 2017 and December 31, 2016, respectively.

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement
and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants
in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common
shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, granted
Amazon the right to purchase approximately 12.81 million ATSG common shares, including the right to purchase 7.69
million common shares vesting upon issuance on March 8, 2016, and the right to purchase the remaining 5.12 million
common shares vesting as the Company delivered additional aircraft leased under the ATSA, or as the Company achieved
specified revenue targets in connection with the ATSA. The second tranche of warrants grants Amazon a right to
purchase approximately 1.59 million ATSG common shares, and will be issued and vest on March 8, 2018. The third
tranche of warrants will be issued and vest on September 8, 2020. The third tranche of warrants will grant Amazon
the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to
19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for
share issuances and repurchases by the Company following the date of the Investment Agreement and after giving
effect to the warrants granted. The exercise price of the warrants is $9.73 per share, which represents the closing price
of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance

with its terms through March 8, 2021. The Company anticipates making available the common shares required for the
underlying warrants through a combination of share repurchases and the issuance of additional shares.

The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance
for equity-based payments to non-employees and for financial instruments. The warrants issued to Amazon as of March
8, 2016, were recorded to stockholders equity, having a fair value of $4.89 per share. At that time, the fair value of
the 7.69 million vested warrants issued to Amazon was recorded as a lease incentive asset and is being amortized against
revenues over the duration of the aircraft leases. On May 12, 2016, the Company’s stockholders approved an amendment
to the Certificate of Incorporation of the Company at the annual meeting of stockholders to increase the number of
authorized common shares and to approve the warrants in full as required under the rules of the Nasdaq Global Select
Market. The stockholders' approval enabled features of the warrants that required the vested warrants of the first tranche
and the warrants of the second and third tranches to be classified as financial instruments as of May 12, 2016.
Accordingly, the fair value of those warrants was measured and classified in liabilities on that date. Since May 12,
2016, 5.1 million additional warrants vested in conjunction with the execution of eight aircraft leases. As of December
31, 2017, the Company's liabilities reflected 14.83 million warrants having a fair value of $14.24 per share. During
2017, the re-measurements of the warrants to fair value resulted in a non-operating loss of $81.8 million before the
effect of income taxes.

The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements
of warrant fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax
calculations, the value and timing of related tax deductions will differ from the guidance described above for financial
reporting.

U.S. Military

A substantial portion of the Company's revenues are also derived from the U.S. Military. The U.S. Military awards
flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from
services performed for the U.S. Military were approximately 7%, 12% and 16% of the Company's total revenues from
continuing operations for the years ended December 31, 2017, 2016 and 2015, respectively. The Company's balance
sheets included accounts receivable with the U.S. Military of $6.7 million and $7.0 million as of December 31, 2017
and December 31, 2016, respectively.

NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS

As of December 31, 2017, 2016 and 2015, the goodwill amount for CAM was tested for impairment. To perform
the first step of the goodwill impairment test, the Company determined the fair value of CAM using industry market
multiples and discounted cash flows utilizing a market-derived rate of return (level 3 fair value inputs). The goodwill
included in the CAM segment was not impaired.

On December 30, 2016, the Company purchased 100% of the outstanding stock of Pemco for cash consideration
in a debt-free acquisition. Pemco offers aircraft maintenance, repair, and overhaul services as well as aircraft
modification services to its customers. The Company operates Pemco as a division of its existing aircraft maintenance
businesses. The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimated
fair value of net assets acquired was recorded as goodwill and reflects the strategic value of marketing Pemco's aircraft
conversion capabilities and current aircraft hangar operations with the Company's air transportation solutions. Identified
intangible assets include Supplemental Type Certificates ("STCs") granting approval by FAA for Pemco to market and
complete certain aircraft modifications. As of December 31, 2017, the goodwill amount for Pemco was tested for
impairment. To perform the first step of the goodwill impairment test, the Company determined the fair value of Pemco
using industry market multiples and discounted cash flows utilizing a market-derived rate of return (level 3 fair value
inputs). The goodwill recorded from the Pemco acquisition was not impaired.

The carrying amounts of goodwill are as follows (in thousands):

Carrying value as of December 31, 2015

Acquisition of Pemco

Carrying value as of December 31, 2016

Purchase price adjustment

Carrying value as of December 31, 2017

CAM

All Other

Total

34,395

—

34,395

—

34,395

— $

2,738

146

2,884

34,395

2,738

37,133

146

37,279

The Company's acquired intangible assets are as follows (in thousands):

Carrying value as of December 31, 2015

Acquisition of Pemco

Amortization

Carrying value as of December 31, 2016

Amortization

Carrying value as of December 31, 2017

Airline

Amortizing

Certificates

Intangibles

Total

3,000

1,334

—

3,000

—

3,000

4,400
(281)
5,453
(1,155)
4,298

4,334

4,400
(281)
8,453
(1,155)
7,298

The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-
lived intangibles assets, including customer relationship and STC intangibles, over 4 to 7 years. The Company recorded
intangible amortization expense of $1.2 million, $0.3 million and $0.3 million for the years ending December 31, 2017,
2016 and 2015, respectively. Estimated amortization expense for the next five years is $1.2 million, $1.2 million, $1.1
million, $0.3 million and $0.3 million.

Stock warrants issued to a lessee (see Note B) as an incentive are recorded as a lease incentive asset using their
fair value at the time that the lessee has met its performance obligation and amortized against revenues over the duration
of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):

Carrying value as of December 31, 2015

Warrants granted
Amortization

Carrying value as of December 31, 2016

Warrants granted

Amortization

Carrying value as of December 31, 2017

Lease

Incentive

—

59,236
(4,506)
54,730

39,940
(13,986)
80,684

The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases. Based on
the warrants granted as of December 31, 2017, the Company expects to record amortization, as a reduction to the lease
revenue, of $16.9 million, $16.9 million, $16.9 million, $11.7 million and $8.3 million for each of the next five years
ending December 31, 2022.

In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden
("West"). West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on
behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of
British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767
aircraft and one Boeing 737 from the Company. The Company’s carrying value of West was $7.1 million and $9.9

million at December 31, 2017 and 2016, respectively, including $5.5 million of excess purchase price over the Company's
fair value of West's nets assets in January of 2014. In 2017, the Company paid $2.4 million to West and entered into
a preferred equity instrument. The Company's equity interest and the preferred equity instrument are reflected in “Other
Assets” in the Company’s consolidated balance sheets as of December 31, 2017 and 2016.

On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC,
to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates
approval of a supplemental type certificate from the FAA in 2019. The Company expects to make contributions equal
to its 49% ownership percentage of the program's total costs over the next two years. During 2017, the company
contributed $8.7 million to the joint venture. The Company accounts for its investment in the joint venture under the
equity method of accounting, in which the carrying value of the investment is reduced for the Company's share of the
joint ventures operating losses. The carrying value of the joint venture, reflected in “Other Assets” in the Company’s
consolidated balance sheets, was $5.6 million at December 31, 2017.

The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an
ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value
has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded carrying
value and the fair value of the investment. The fair value is generally determined using an income approach based on
discounted cash flows or using negotiated transaction values.

NOTE D—FAIR VALUE MEASUREMENTS

The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance
sheets at fair values based on market values from identical or comparable transactions. The fair value of the Company’s
money market funds, stock warrant obligations, convertible note, convertible note hedges and interest rate swaps are
based on observable inputs (Level 2) from comparable market transactions. The fair value of the stock warrant
obligations were determined using a Black-Scholes pricing model which considers the Company’s common stock price
and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, and the
risk-free interest rate. The fair value of the note conversion obligations and the convertible note hedges were estimated
using a Black-Scholes pricing model and incorporate the terms and conditions of the underlying financial instruments.
The valuations are, among other things, subject to changes in both the Company's credit worthiness and the counter-
parties to the instruments as well as change in general market conditions. While the change in fair value of the note
conversion obligations and the convertible note hedges are generally expected to move in opposite directions, the net
change in any given period may be material.

The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):

As of December 31, 2017

Fair Value Measurement Using

Level 1

Level 2

Level 3

Total

Assets

Cash equivalents—money market
Interest rate swap

Convertible note hedges

Total Assets

Liabilities

Note conversion obligations

Stock warrant obligations

Total Liabilities

— $

1,326

— $

—

1,840

53,683

—

— $

56,849

— $

1,326

1,840

53,683

56,849

—

— $

(54,359)
(211,136)
(265,495) $

—

— $

(54,359)
(211,136)
(265,495)

As of December 31, 2016

Fair Value Measurement Using

Level 1

Level 2

Level 3

Total

Assets

Cash equivalents—money market

Interest rate swap

Total Assets

Liabilities

Interest rate swap

Stock warrant obligation

Total Liabilities

— $

—

— $

—

— $

482

547

1,029

(77) $

(89,441)
(89,518) $

— $

—

— $

—

— $

482

547

1,029

(77)
(89,441)
(89,518)

At December 31, 2017 each stock warrant was valued at $14.24 using a risk-free interest rate of 2.0% and a stock
volatility of 34%, based on the time period corresponding with the expiration period of the warrants (see Note B). At
December 31, 2016, each stock warrant was valued at $8.09 using a risk-free rate of 1.7% and a stock volatility of
37.5%. At December 31, 2017 the value of the convertible note hedges and note conversion obligations were valued
using a risk free interest rate of 2.3% and stock volatility of 34%.

As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt
obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately
$9.1 million more than the carrying value, which was $515.8 million at December 31, 2017. As of December 31, 2016,
the fair value of the Company’s debt obligations was approximately $0.2 million more than the carrying value, which
was $458.7 million. The non-financial assets, including goodwill, intangible assets and property and equipment are
measured at fair value on a non-recurring basis.

NOTE E—PROPERTY AND EQUIPMENT

The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight

equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):

Flight equipment
Ground equipment
Leasehold improvements, facilities and office equipment
Aircraft modifications and projects in progress

Accumulated depreciation
Property and equipment, net

December 31,
2017
1,801,808
53,523
26,897
121,760
2,003,988
(844,026)
1,159,962

December 31,
2016
1,541,872
49,229
27,364
113,518
1,731,983
(730,991)
1,000,992

CAM owned aircraft with a carrying value of $697.4 million and $524.3 million that were under leases to external
customers as of December 31, 2017 and 2016, respectively. Minimum future payments from external customers for
leased aircraft and equipment as of December 31, 2017 is scheduled to be $146.6 million, $111.0 million, $95.1 million,
$76.6 million and $63.0 million for each of the next five years ending December 31, 2022.

The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft
type. The costs of airframe maintenance for Boeing 767-200 operated by ABX are expensed as they are incurred. The
costs of major airframe maintenance for the Company's other aircraft are capitalized and amortized over the useful life
of the overhaul. Many of the Company's General Electric CF6 engines that power the Boeing 767-200 aircraft are
maintained under “power by the hour” and "power by the cycle" agreements with an engine maintenance provider.
Further, in May 2017, the Company entered into similar maintenance agreements for certain General Electric CF6
engines that power many of the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained
by the service provider for a fixed fee per cycle and/or flight hour. As a result, the cost of maintenance for these engines

is generally expensed as flights occur. During their term, these maintenance agreements contain provisions for a
minimum level of flight activity. Maintenance for the airlines’ other aircraft engines, including those powering Boeing
757 aircraft, are typically contracted to service providers on a time and material basis and the costs of those engine
overhauls are capitalized and amortized over the useful life of the overhaul.

NOTE F—DEBT OBLIGATIONS

Debt obligations consisted of the following (in thousands):

December 31,

2017

2016

Unsubordinated term loan

Revolving credit facility

Aircraft loans

Convertible debt

Total debt obligations

Less: current portion

70,568

245,000

3,640

196,550

515,758
(18,512)
497,246

85,636

355,000

18,085

—

458,721
(29,306)
429,415

Total long term obligations, net

The Company executed a syndicated credit agreement ("Senior Credit Agreement") in May 2011 which includes
an unsubordinated term loan and a revolving credit facility. Effective March 31, 2017, the Company executed an
amendment to the Senior Credit Agreement that extended the maturity of the term loan and revolving credit facility
to May 30, 2022, increased the capacity of the revolving credit facility by $120.0 million to $545.0 million and preserved
the accordion feature such that the Company can now draw up to an additional $100.0 million subject to the lenders'
consent. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date,
subject to the lenders' consent. In September 2017, the Company executed amendments to the Senior Credit Agreement.
These amendments increased the revolving credit facility's permitted additional indebtedness to $300.0 million for
convertible notes described below. The amendments also increased the amount of dividends the Company can pay and
the amount of common stock it can repurchase to $100.0 million during any calender year, provided the Company's
total secured debt to earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") ratio is under
3.00 times, after giving effect to the dividend or repurchase. As of December 31, 2017, the unused revolving credit
facility totaled $290.7 million, net of draws of $245.0 million and outstanding letters of credit of $9.3 million.

The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are
not collateralized under aircraft loans. Under the terms of the Senior Credit Agreement, the Company is required to
maintain collateral coverage equal to 125% of the outstanding balance of the term loan and the maximum capacity of
revolving credit facility or 150% of the outstanding balance of the term loan and the total funded revolving credit
facility, whichever is less. 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 $545.0 million.

The balance of the unsubordinated term loan is net of debt issuance costs of $0.7 million and $0.6 million for the
years ended December 31, 2017 and 2016, respectively. Under the terms of the Senior Credit Agreement, interest rates
are adjusted quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime
rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loan
and revolving credit facility bear a variable interest rate of 3.07% and 3.07%, respectively. The aircraft loan is
collateralized by one aircraft, and amortizes monthly with a balloon payment of approximately 20% with a maturity
in early 2018. The interest rates on the aircraft loan is 6.74% per annum payable monthly. The aircraft loan was paid
off by the Company in January 2018.

The Senior Credit Agreement contains covenants including, among other things, limitations on certain additional
indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA ratio and a fixed charge coverage ratio.
The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse

effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the
Senior Credit Agreement.

In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% Convertible Senior
Notes due 2024 ("Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities
Act. The Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15
each year, beginning April 15, 2018. The Notes mature on October 15, 2024, unless repurchased or converted in
accordance with their terms prior to such date. The Notes are unsecured indebtedness, subordinated to the Company's
existing and future secured indebtedness and other liabilities, including trade payables. Conversion of the Notes can
only occur upon satisfaction of certain conditions and during certain periods, beginning any calendar quarter
commencing after December 31, 2017 and thereafter, until the close of business on the second scheduled trading day
immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the Notes
can require the Company to repurchase their notes at the cash repurchase price equal to the principal amount of the
notes, plus any accrued and unpaid interest. Until the Company's shareholders increase the number of authorized shares
of common stock to cover the full number of shares underlying the Notes, the Company is required to settle conversions
solely in cash. If the number of authorized shares is increased, the Notes may be settled in cash, the Company’s common
shares or a combination of cash and the Company’s common shares, at the Company’s election. The initial conversion
rate is 31.3475 common shares per $1,000 principal amount of Notes (equivalent to an initial conversion price of
approximately $31.90 per common share). If a “make-whole fundamental change” (as defined in the offering circular
with the Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period
of time.

The Company evaluated the conversion features of the Notes under the applicable accounting guidance including
ASC 815, "Derivatives and Hedging," and determined that the conversion features require separate accounting as a
derivative. At the time of issuance, the fair value of this derivative was recorded on the balance sheet as the note
conversion obligations (a long-term liability) and an offsetting discount to the Notes. Until the Company's shareholders
increase the number of authorized shares of common stock, the note conversion obligations will be adjusted to reflect
its fair value at the end of each quarter. The fair value of the note conversion obligation at issuance was $57.4 million.
The fair value of the note conversion obligations at December 31, 2017 was $54.4 million and resulted in a non-operating
gain of $3.0 million before the effect of income tax during 2017.

The net proceeds from the issuance of the Notes were approximately $252.3 million, after deducting initial issuance
costs. These unamortized issuance costs and discount are being amortized to interest expense through October 2024,
using an effective interest rate of approximately 5.15%. The carrying value of the Company's Convertible debt is shown
below.

Principal value, Convertible Senior Notes, due 2024
Unamortized issuance costs

Unamortized discount

Convertible debt

December 31,

2017

258,750
(6,685)
(55,515)
196,550

In conjunction with the offering of the Notes, the Company purchased convertible note hedges under privately
negotiated transactions for $56.1 million. These transactions cover, subject to customary anti-dilution adjustments, the
number of the Company’s common shares that initially underlie the Notes, and are expected to reduce the potential
equity dilution with respect to our common stock, and/or offset any cash payments in excess of the principal amount
due, as the case may be, upon conversion of the Notes. The initial strike price of the convertible note hedges is $31.90
per share. The Company evaluated the convertible note hedges under the applicable accounting guidance, including
ASC 815, "Derivatives and Hedging," and determined that the convertible note hedges should be accounted for as
derivatives. These derivatives were capitalized on the balance sheet as long-term assets and are adjusted to reflect their
fair value at the end of the quarter. The fair value of the convertible note hedges at December 31, 2017 was $53.7
million. As of December 31, 2017, the re-measurement of the convertible note hedges to fair value resulted in a non-
operating loss of $2.4 million before the effect of income tax.

In conjunction with the offering of the Notes, the Company also sold warrants to the convertible note hedge
counterparties in separate, privately negotiated warrant transactions at a higher strike price and for the same number
of the Company’s common shares, subject to customary anti-dilution adjustments. The warrants could have a dilutive
effect on the Company’s outstanding common shares and the Company’s earnings per share to the extent that the traded
market price of the Company’s common shares exceeds the strike price of the warrants which is $41.35 per share and
is subject to certain adjustments under the terms of the warrant transactions. The Company evaluated the warrants
under the applicable accounting guidance, including ASC 815 "Derivatives and Hedging," and determined that the
warrants meet the definition of a derivative. However, because these warrants have been determined to be indexed to
the Company's own stock and meet the criteria for equity classification, they have been recorded in shareholder's equity.
In the event these warrants are exercised, the Company has enough authorized and unissued shares for their issuance.
The amount paid for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets
was $38.5 million. Taken together, the convertible note hedge and warrant transactions are intended to limit, during
Notes conversion events, the dilution of the Company's common shares until the traded market price exceeds $41.35.

The scheduled cash principal payments for the Company's debt obligations, as of December 31, 2017, for the next

five years are as follows (in thousands):

2018

2019

2020

2021

2022

2023 and beyond

Total principal cash payments

Less: unamortized issuance costs and discounts

Total debt obligations

NOTE G—DERIVATIVE INSTRUMENTS

Principal
Payments

18,640

15,000

256,250

258,750

578,640
(62,882)
515,758

The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection
from fluctuating interest rates, for at least fifty percent of the outstanding balance of the term loan. Accordingly, the
Company entered into interest rate swaps. The Company entered into two new interest rate swaps in February 2017
and April 2017, respectively, having initial values of $39.4 million and $50.0 million, respectively, and forward start
dates of June 30, 2017. The Company also entered into a new interest rate swap in July 2017, having an initial value
of $75.0 million and a forward start date of December 31, 2017. The table below provides information about the
Company’s interest rate swaps (in thousands):

Expiration Date
June 30, 2017

May 5, 2021

May 30, 2021

March 31, 2022

December 31, 2017

December 31, 2016

Stated
Interest
Rate

Notional
Amount

Market
Value
(Liability)

Notional
Amount

Market
Value
(Liability)

1.183%

1.090%

1.703%

1.900%

1.950%

—

35,625

50,000

75,000

—

719

240

416

465

43,125

—

(77)
547

—

The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future
fluctuations in LIBOR interest rates on derivatives held by the Company will result in the recording of unrealized gains

and losses into the statement of operations. The Company recorded net gains on derivatives of $1.4 million, $1.0
million and $0.9 million for the years ending December 31, 2017, 2016 and 2015, respectively. The liability for
outstanding derivatives is recorded in other liabilities and in accrued expenses.

During September 2017, the Company issued convertible debt in the form of the Notes and recorded a long-term
liability representing the Note conversion liability. In conjunction with the Notes, the Company purchased convertible
note hedges having the same number of the Company’s common shares, 8.1 million shares, and same strike price of
$31.90, that underlie the Notes. The convertible note hedges are expected to reduce the potential equity dilution with
respect to the Company's common stock, and/or offset any cash payments in excess of the principal amount due, as the
case may be, upon conversion of the Notes. The Company recorded a net gain before the effects of income taxes of
$0.6 million during the year ended December 30, 2017 for the revaluation of the convertible note hedges and the note
conversion obligations to fair value. For additional information see Note F, "Debt Obligations " and Note D "Fair Value
Measurements."

NOTE H—COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port
authority, the terms of which expire in May of 2019 and June of 2036 with options to extend the leases. The leased
facilities include corporate offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component
repair shop at the air park. ABX also has the non-exclusive right to use the airport, which includes one active runway,
taxi ways and ramp space. The Company also leases and operates a 311,500 square foot, two hangar aircraft maintenance
complex in Tampa, Florida. Additionally, the Company leases certain equipment and airport facilities, office space,
and maintenance facilities at locations outside of the airpark in Wilmington. The future minimum lease payments of
the Company as of December 31, 2017 are scheduled below (in thousands):

2018

2019

2020

2021

2022

2023 and beyond

Total minimum lease payments

Facility
Leases

Other
Leases

11,109 $

4,781

2,394

1,969

1,904

12,019

34,176 $

433

312

179

—

924

As of December 31, 2017 and 2016 the Company did not lease in any aircraft.

Purchase Commitments

The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767
passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of
a standard cargo door and loading system. At December 31, 2017, the Company was committed to acquire and modify
additional Boeing 767-300 passenger aircraft into standard freighter aircraft. In addition to four aircraft that were in
the modification process at December 31, 2017, the Company is committed to induct four more aircraft into the freighter
modification process through 2018, including commitments to purchase two more Boeing 767-300 passenger aircraft
during the first quarter of 2018. As of December 31, 2017, the Company's commitments to complete the conversions
of aircraft it owns or has the contracts to purchase totaled $85.3 million. Additionally, the Company could incur a
cancellation fee for part kits for any aircraft that is not inducted into conversion at IAI.

Guarantees and Indemnifications

Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or
one or more other parties that are considered reasonable 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 expiration of the respective lease or agreement.

Other

In addition to the foregoing matters, the Company is also a party to legal proceedings, including FAA enforcement
actions, in various federal and state jurisdictions from time to time arising out of the operation of the Company's
business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however,
the Company believes that its ultimate liability, if any, arising from pending legal proceedings, as well as from asserted
legal claims and known potential legal claims which are probable of assertion, taking into account established accruals
for estimated liabilities, should not be material to our financial condition or results of operations.

Employees Under Collective Bargaining Agreements

As of December 31, 2017, the flight crewmember employees of ABX and ATI and flight attendant employees of

ATI were represented by the labor unions listed below:

Airline
ABX

ATI

Labor Agreement Unit
International Brotherhood of Teamsters

Air Line Pilots Association

Association of Flight Attendants

Percentage of
the
Company’s
Employees
8.4%

7.6%

1.3%

NOTE I—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Defined Benefit and Post-retirement Healthcare Plans

ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit
pension plan for a major portion of its other ABX employees that meet minimum eligibility requirements. ABX also
sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded.
Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-
retirement healthcare plan for its ABX employees, which is unfunded. Benefits for covered individuals terminate upon
reaching age 65 under the post-retirement healthcare plans.

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 of our post-retirement costs. The assumptions
considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts
are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning
retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these
assumptions could result in future costs significantly higher than those recorded in our results of operations.

ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s
sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit
obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.

On August 30, 2017, the Company transferred investment assets totaling $106.6 million from the pension plan trust
to purchase a group annuity contract from Mutual of America Life Insurance Company ("MUA"). The group annuity
contract transfers payment obligations for pension benefits owed to certain former, non-pilot retirees of ABX (or their
beneficiaries) to MUA. As a result of the transaction, the Company recognized pre-tax settlement charges of $5.3

million to continued operations and $7.6 million to discontinued operations due to the reclassification of $12.9 million
of pretax losses from accumulated other comprehensive loss.

Effective December 31, 2016, ABX modified its unfunded, non-pilot retiree medical plan to terminate benefits to
all participants. Retired participants were directed to public healthcare exchanges for more flexible and lower cost
alternatives. As a result, ABX settled $0.6 million of retiree medical obligations.

Funded Status (in thousands):

Accumulated benefit obligation
Change in benefit obligation
Obligation as of January 1
Service cost
Interest cost
Curtailment gain
Plan transfers
Benefits paid
Curtailments and settlement
Actuarial (gain) loss
Obligation as of December 31

Change in plan assets

Fair value as of January 1
Actual gain on plan assets
Plan transfers
Employer contributions
Benefits paid
Settlement payments
Fair value as of December 31

Funded status

Underfunded plans

Current liabilities
Non-current liabilities

Pension Plans

2017

740,783

791,182
—
33,585
8,483
2,643
(33,779)
(106,742)
45,411
740,783

715,885
99,090
2,643
4,476
(33,779)
(106,742) $
$
681,573

2016

791,182

777,320
—
35,872
—
1,226
(33,593)
—
10,357
791,182

672,153
69,836
1,226
6,263
(33,593)

— $
$

715,885

Post-retirement
Healthcare Plans

2017

2016

4,056

4,231
158
142
—
—
(412)
—
(63)
4,056

— $
—
—
412
(412)

— $
— $

4,231

4,999
123
170
—
—
(667)
(560)
166
4,231

—
—
—
667
(667)
—
—

(1,497) $
(57,713) $

(1,357) $
(73,940) $

(414) $
(3,642) $

(458)
(3,773)

$
$

Components of Net Periodic Benefit Cost

ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for the

years ended December 31, 2017, 2016 and 2015, are as follows (in thousands):

Service cost

Interest cost

Expected return on plan assets

Curtailments and settlements

Amortization of prior service cost

Amortization of net (gain) loss

Net periodic benefit cost (income)

Pension Plans

Post-Retirement Healthcare Plan

2017

2016

2015

2017

2016

2015

— $

33,585

35,872

34,584

(42,080)

(41,056)

(44,082)

12,923

—

7,778

13,472

7,170

12,206

8,288

(2,328) $

158

142

—

(51)

283

532

123

170

—

(1,997)

(103)

160

(1,647) $

177

192

—

(542)

292

119

Unrecognized Net Periodic Benefit Expense

The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components

of net periodic benefit expense at December 31 are as follows (in thousands):

Unrecognized prior service cost

Unrecognized net actuarial loss

Pension Plans

Post-Retirement
Healthcare Plans

2017

2016

2017

2016

— $

88,689

112,506

1,547

(51)
1,893

Accumulated other comprehensive loss

$ 88,689

$ 112,506

1,547

1,842

The amounts of unrecognized net actuarial loss recorded in accumulated other comprehensive loss that is expected
to be recognized as components of net periodic benefit expense during 2018 is $3.5 million and $0.2 million for the
pension plans and the post-retirement healthcare plans, respectively.

Assumptions

Assumptions used in determining the funded status of ABX’s pension plans at December 31 were as follows:

Discount rate - crewmembers

Discount rate - non-crewmembers

Expected return on plan assets

2017
4.00%

4.05%

6.25%

Pension Plans

2016
4.50%

4.60%

6.25%

2015
4.70%

4.75%

6.25%

Net periodic benefit cost was based on the discount rate assumptions at the end of the previous year.

The discount rate used to determine post-retirement healthcare obligations was 3.30% for pilots at December 31,
2017. The discount rate used to determine post-retirement healthcare obligations was 3.55% for pilots at December
31, 2016. The discount rate used to determine post-retirement healthcare obligations was 3.65% for pilots and 3.35%
for non-pilots at December 31, 2015. Post-retirement healthcare plan obligations have not been funded. The Company's
retiree healthcare contributions have been fixed for each participant, accordingly, healthcare cost trend rates do not
effect the post-retirement healthcare obligations.

Plan Assets

The weighted-average asset allocations by asset category are as shown below:

Asset category
Cash
Equity securities
Fixed income securities
Real estate

Composition of Plan Assets
as of December 31
2017

2016

1%
31%
68%
—%
100%

1%
30%
64%
5%
100%

ABX uses an investment management firm to advise it in developing and executing an investment policy. The
portfolio is managed with consideration for diversification, quality and marketability. The investment policy permits
the following ranges of asset allocation: equities – 15% to 35%; fixed income securities – 60% to 80%; real estate –

0%; cash – 0% to 10%. Except for U.S. Treasuries, no more than 10% of the fixed income portfolio and no more than
5% of the equity portfolio can be invested in securities of any single issuer.

The overall expected long term rate of return was developed using various market assumptions in conjunction with

the plans’ targeted asset allocation. The assumptions were based on historical market returns.

Cash Flows

In 2017 and 2016, the Company made contributions to its defined benefit plans of $4.5 million and $6.3 million,
respectively. The Company estimates that its contributions in 2018 will be approximately $22.4 million for its defined
benefit pension plans and $0.4 million for its post-retirement healthcare plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid out

of the respective plans as follows (in thousands):

2018

2019

2020

2021

2022

Years 2023 to 2027

Fair Value Measurements

Pension
Benefits

Post-retirement
Healthcare
Benefits

31,066
36,615

36,650

39,032

41,113

414
483

502

530

508

225,994

2,177

The pension plan assets are stated at fair value. The following is a description of the valuation methodologies used
for the investments measured at fair value, including the general classification of such instruments pursuant to the
valuation hierarchy.

Common Trust Funds—Common trust funds are composed of shares or units in non-publicly traded funds
whereby the underlying assets in these funds (cash, cash equivalents, fixed income securities and equity securities)
are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Holdings
of common trust funds are classified as Level 2 investments.

Corporate Stock—This investment category consists of common and preferred stock issued by domestic and
international corporations that are regularly traded on exchanges and price quotes for these shares are readily
available. These investments are classified as Level 1 investments.

Mutual Funds—Investments in this category include shares in registered mutual funds, unit trust and
commingled funds. These funds consist of domestic equity, international equity and fixed income strategies.
Investments in this category that are publicly traded on an exchange and have a share price published at the close
of each business day are classified as Level 1 investments and holdings in the other mutual funds are classified as
Level 2 investments.

Fixed Income Investments—Securities in this category consist of U.S. Government or Agency securities, state
and local government securities, corporate fixed income securities or pooled fixed income securities. Securities
in this category that are valued utilizing published prices at the close of each business day are classified as Level
1 investments. Those investments valued by bid data prices provided by independent pricing sources are classified
as Level 2 investments.

The pension plan assets measured at fair value on a recurring basis were as follows (in thousands):

As of December 31, 2017

Fair Value Measurement Using

Level 1

Level 2

Total

Plan assets

Common trust funds

Corporate stock

Mutual funds

Fixed income investments

Benefit Plan Assets

Investments measured at net asset value ("NAV")

Total benefit plan assets

As of December 31, 2016

Plan assets

Common trust funds

Corporate stock

Mutual funds

Fixed income investments

Benefit Plan Assets

— $

3,792

17,361

53,391

3,926

—

113,426

462,480

74,678

579,698

3,792

17,361

166,817

466,406

654,376

27,197

681,573

Fair Value Measurement Using

Level 1

Level 2

Total

— $

3,469

20,818

59,370

777

—

114,940

457,238

80,965

575,647

3,469

20,818

174,310

458,015

656,612

59,273

715,885

Investments measured at net asset value ("NAV")

Total benefit plan assets

Investments that were measured at NAV per share (or its equivalent) as a practical expedient have not been classified
in the fair value hierarchy. These investments include hedge funds, private equity and real estate funds. Management’s
estimates are based on information provided by the fund managers or general partners of those funds.

Real Estate—The real estate investment in a commingled trust account consists of publicly traded real estate
investment trusts and collateralized mortgage backed securities as well as private market direct property
investments. The valuations for the holdings in these investments are not based on readily observable inputs. These
assets have been valued using NAV as a practical expedient.

Hedge Funds and Private Equity—These investments are not readily tradeable and have valuations that are
not based on readily observable data inputs. The fair value of these assets is estimated based on information provided
by the fund managers or the general partners. These assets have been valued using NAV as a practical expedient.

The following table presents investments measured at fair value based on NAV per share as a practical expedient:

Fair Value

Redemption
Frequency

Redemption
Notice Period

Unfunded
Commitments

27,197

—

27,197

25,831

33,442

59,273

(1) (2)

(3)

90 days

(1) (2)

(3)

90 days

—

As of December 31, 2017

Hedge Funds & Private Equity

Real Estate

Total investments measured at NAV

As of December 31, 2016

Hedge Funds & Private Equity

Real Estate

Total investments measured at NAV

(1) Quarterly - hedge funds
(2) None - private equity
(3) Monthly

Defined Contribution Plans

The Company sponsors defined contribution capital accumulation plans (401k) that are funded by both voluntary
employee salary deferrals and by employer contributions. Expenses for defined contribution retirement plans were
$7.8 million, $7.1 million and $5.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

NOTE J—INCOME TAXES

The Company's deferred income taxes reflect the value of its net operating loss carryforwards and the tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
their amounts used for income tax calculations. Federal legislation known as the The Tax Cuts and Jobs Acts ("Tax
Act") was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from the previous
rate of 35% to 21% effective January 1, 2018. The Tax Act also makes broad and complex changes to the U.S. tax
code, including, but not limited to a one time tax on earnings of certain foreign subsidiaries, limitations of net operating
loss carryforwards created in tax years beginning after December 31, 2017, bonus depreciation for full expensing of
qualified property, and limitations on the deductibility of certain executive compensation. At December 31, 2017, the
Company calculated the effects of the enactment of the Tax Act as written, and made a reasonable estimate of the effects
on the existing deferred tax balances. The Company will continue to refine the calculations as additional analysis is
completed and the Company gains a more thorough understanding of the Tax Act, including the tax law related to the
deductibility of purchased assets, state tax treatment, and amounts related to employee compensation. The re-
measurement of deferred tax balances using the lower federal rates enacted by the Tax Act, resulted in a reduction in
the Company's net deferred tax liability and the recognition of a deferred tax benefit as depicted by the change in federal
statutory tax rate included below.

At December 31, 2017, the Company had cumulative net operating loss carryforwards (“NOL CFs”) for federal
income tax purposes of approximately $57.6 million, which begin to expire in 2031 if not utilized before then. The
deferred tax asset balance includes $1.8 million net of a $0.3 million valuation allowance related to state NOL CFs,
which have remaining lives ranging from one to twenty years. These NOL CFs are attributable to excess tax deductions
related primarily to the accelerated tax depreciation of fixed assets and cash contributions for its defined benefit pension
plans. At December 31, 2017 and 2016, the Company determined that, based upon projections of taxable income, it
was more likely than not that the NOL CF’s will be realized prior to their expiration, accordingly, no allowance against
these deferred tax assets was recorded.

The significant components of the deferred income tax assets and liabilities as of December 31, 2017 and 2016 are

as follows (in thousands):

Deferred tax assets:

December 31

2017

2016

Net operating loss carryforward and federal credits

17,021

The following summarizes the Company’s income tax provisions (benefits) (in thousands):

Years Ended December 31

2017

2016

2015

3,974

8,716

9,229

1,739

3,016

4,317

48,012

(129,201)
(5,858)
(12,119)
(278)
(147,456)
(99,444) $

(186,015)
(8,777)
(8,564)
(229)
(203,585)
(122,532)

20,596

4,746

27,060

13,785

2,727

7,728

4,411

81,053

524

—

371

21,073

—

1,440

—

22,513

23,408

1,178

820

590

—

151

11,338

—

1,085

—

12,423

13,394

1,384

27,625

—

3,396
(59,944)
(28,923)
(28,276) $
(1,848) $

Warrants

Post-retirement employee benefits

Employee benefits other than post-retirement

Inventory reserve

Deferred revenue

Other

Deferred tax assets

Deferred tax liabilities:

Accelerated depreciation

Partnership items

State taxes

Valuation allowance against deferred tax assets

Deferred tax liabilities

Net deferred tax (liability)

Current taxes:

Federal

Foreign

State

Deferred taxes:

Federal

Foreign

State

Change in federal statutory tax rates

Total deferred tax expense
Total income tax expense (benefit) from continuing operations $
Income tax expense (benefit) from discontinued operations
$

The reconciliation of income tax from continuing operations computed at the U.S. statutory federal income tax rates

to effective income tax rates is as follows:

Statutory federal tax rate

Foreign income taxes

State income taxes, net of federal tax benefit

Tax effect of non-deductible warrant expense

Tax effect of stock compensation

Tax effect of other non-deductible expenses

Change in federal statutory tax rates

Other

Effective income tax rate

Years Ended December 31

2017

2016

2015

35.0 %

(0.5)%

(39.7)%

(485.0)%

21.7 %

(19.6)%

917.2 %

3.5 %

432.6 %

35.0 %

— %

2.3 %

4.0 %

(3.4)%

1.6 %

— %

(0.6)%

38.9 %

35.0 %

— %

1.9 %

— %

0.9 %

— %

(0.4)%

37.4 %

The income tax deductibility of the warrant expense is less than the expense required by GAAP because for tax

purposes, the warrants are valued at a different time and under a different valuation method.

The reconciliation of income tax from discontinued operations computed at the U.S. statutory federal income tax

rates to effective income tax rates is as follows:

Statutory federal tax rate
State income taxes, net of federal tax benefit
Change in federal statutory tax rates
Effective income tax rate

Years Ended December 31
2016

2017

2015

35.0%
1.3%
—%
36.3%

The Company files income tax returns in the U.S. federal jurisdiction and various international, state and local
jurisdictions. The returns may be subject to audit by the Internal Revenue Service (“IRS”) and other jurisdictional
authorities. International returns consist primarily of disclosure returns where the Company is covered by the sourcing
rules of U.S. international treaties. The Company recognizes the impact of an uncertain income tax position in the
financial statements if that position is more likely than not of being sustained on audit, based on the technical merits
of the position. At December 31, 2017, 2016 and 2015, the Company's unrecognized tax benefits were $0.0 million,
$0.0 million and $0.0 million respectively. Accrued interest and penalties on tax positions are recorded as a component
of interest expense. Interest and penalties expense was immaterial for 2017, 2016 and 2015.

The Company began to file, effective in 2008, federal tax returns under a common parent of the consolidated group
that includes ABX and all the wholly-owned subsidiaries, except for Pemco which was acquired on December 30,
2016. The returns for 2016, 2015 and 2014 related to the consolidated group remain open to examination. The
consolidated federal tax returns prior to 2014 remain open to federal examination only to the extent of net operating
loss carryforwards carried over from or utilized in those years. Pemco filed returns on its own behalf prior to its
acquisition by the Company. State and local returns filed for 2005 through 2016 are generally also open to examination
by their respective jurisdictions, either in full or limited to net operating losses.

NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes the following items by components for the years ended

December 31, 2017, 2016 and 2015 (in thousands):

Balance as of January 1, 2015
Other comprehensive income (loss) before
reclassifications:

Actuarial gain (loss) for retiree liabilities

Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:

Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)

Hedging gain (reclassified to interest expense)

Income Tax (Expense) or Benefit

Other comprehensive income (loss), net of tax
Balance as of December 31, 2015
Other comprehensive income (loss) before
reclassifications:

Actuarial gain (loss) for retiree liabilities

Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:

Plan curtailment and settlement
Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)

Income Tax (Expense) or Benefit

Other comprehensive income (loss), net of tax
Balance as of December 31, 2016
Other comprehensive income (loss) before
reclassifications:

Actuarial gain (loss) for retiree liabilities

Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:

Plan settlement
Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)

Income Tax (Expense) or Benefit

Other comprehensive income (loss), net of tax
Balance as of December 31, 2017

Defined
Benefit
Pension
(81,191)

Defined
Benefit Post-
Retirement

(630)

Gains and
Losses on
Derivative
4

Foreign
Currency
Translation
(1,059)

Total
(82,876)

(32,640)
—

7,170

—

—
9,359
(16,111)
(97,302)

18,424

—

745
—

292

(542)
—
(180)
315
(315)

394

—

(1,997)

160

(103)
560
(986)
(1,301)

—

283

(51)
(91)
204
(1,097)

13,472

—
(11,682)
20,214
(77,088)

3,116

—

12,923

7,778

—
(7,304)
16,513

(60,575)

—
—

—

—
(50)
46
(4)
—

—

—
—
—
—

—

—
—
—

—

—
(517)

(31,895)
(517)

—

—
181
(336)
(1,395)

7,462

(542)
(50)
9,406
(16,136)
(99,012)

—
(126)

18,818
(126)

—

—
44
(82)
(1,477)

—

195

—

—
(66)
129
(1,348)

(1,997)

13,632

(103)
(11,078)
19,146
(79,866)

3,179

195

12,923

8,061

(51)
(7,461)
16,846
(63,020)

NOTE L—STOCK-BASED COMPENSATION

The Company's Board of Directors has granted stock incentive awards to certain employees and board members
pursuant to a long term incentive plan which was approved by the Company's stockholders in May 2005 and in May
2015. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with
market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards lapse at
the end of a specified service period, which is typically three years from the date of grant. Restrictions could lapse
sooner upon a business combination, death, disability or after an employee qualifies for retirement. The non-vested
stock units will be converted into a number of shares of Company stock depending on performance and market conditions
at the end of a specified service period, lasting approximately three years. The performance condition awards will be
converted into a number of shares of Company stock based on the Company's average return on invested capital during
the service period. Similarly, the market condition awards will be converted into a number of shares depending on the
appreciation of the Company's stock compared to the NASDAQ Transportation Index. Board members were granted
time-based awards with vesting periods of approximately six or twelve months. The Company expects to settle all of
the stock unit awards by issuing new shares of stock. The table below summarizes award activity.

Year Ended December 31

2017

2016

2015

Outstanding at beginning of period

Granted

Converted

Expired

Forfeited
Outstanding at end of period

Vested

Weighted
average
grant-date
fair value
9.97
$

17.52

9.47

9.22

13.55

12.30

7.61

Number of
Awards
1,040,569

243,940

(320,810)

(82,050)

(7,800)

873,849

441,424

Weighted
average
grant-date
fair value
7.52
$

15.47

7.32

7.44

10.23

9.97

6.60

Number of
Awards
1,157,659

314,060
(329,200)
(92,750)
(9,200)
1,040,569

472,294

Weighted
average
grant-date
fair value
6.21
$

9.61

5.97

5.52

7.36

7.52

6.03

Number of
Awards
1,406,550

390,200
(498,491)
(126,800)
(13,800)
1,157,659

511,109

The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-
based award granted by the Company was $16.72, $14.39 and $9.22 for 2017, 2016 and 2015, respectively, the fair
value of the Company’s stock on the date of grant. The average grant-date fair value of each market condition award
granted was $20.18, $19.65 and $10.99 for 2017, 2016 and 2015, respectively. The market condition awards were
valued using a Monte Carlo simulation technique based on volatility over three years for the awards granted in 2017,
2016 and 2015 using daily stock prices and using the following variables:

Risk-free interest rate

Volatility

2017

1.7%

34.7%

2016

1.1%

36.9%

2015

0.9%

41.5%

For the years ended December 31, 2017, 2016 and 2015, the Company recorded expense of $3.6 million, $3.2
million and $2.5 million, respectively, for stock incentive awards. At December 31, 2017, there was $3.8 million of
unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average
period of 1.5 years. As of December 31, 2017, none of the awards were convertible, 324,599 units of the Board members
time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards
could result in a maximum number of 1,084,524 additional outstanding shares of the Company’s common stock
depending on service, performance and market results through December 31, 2019.

NOTE M—COMMON STOCK AND EARNINGS PER SHARE

Earnings per Share

The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share

amounts):

Numerator:

Earnings from continuing operations

Denominator:

December 31

2017

2016

2015

21,740

21,060

39,155

Weighted-average shares outstanding for basic earnings per share

58,907

61,330

64,242

Common equivalent shares:

Effect of stock-based compensation awards and warrants

Weighted-average shares outstanding assuming dilution

Basic earnings per share from continuing operations

Diluted earnings per share from continuing operations

779

59,686

0.37

0.36

1,664

62,994

0.34

0.33

885

65,127

0.61

0.60

Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares
outstanding due to 241,000 shares, 327,700 shares and 348,600 shares of restricted stock for 2017, 2016 and 2015,
respectively, which are accounted for as part of diluted weighted average shares outstanding in diluted earnings per
share.

The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock
warrants recorded as a liability (see Note B), if such warrants have a anti-dilutive effect on earnings per share. The
dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods
in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares
is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during
the period and comparing that amount with the number of corresponding warrants outstanding.

The underlying warrants recorded as a liability as of December 31, 2017 and 2016 would have resulted in 14.8
million and 11.1 million additional shares of the Company's common stock, respectively, if the warrants were settled
by tendering cash. The warrants recorded in stockholders' equity as of December 31, 2017, would have resulted in 8.1
million additional shares of the Company's common stock, if the Company's stock price exceeded $41.35 and the
warrants were settled in shares.

Purchase of Common Stock

The Company repurchased common stock during 2017, including 380,637 shares on June 6, 2017 from an underwriter
in conjunction with an underwritten secondary offering by its largest shareholder, Red Mountain Partners, L.P., a fund
that is affiliated with Red Mountain Capital Partners, LLC (“Red Mountain”), a related party, for an aggregate purchase
price of $8.5 million. The share price of $22.42 was equal to the price per share paid by the underwriter to Red Mountain.

NOTE N—SEGMENT INFORMATION

The Company operates in three reportable segments. The CAM segment consists of the Company's aircraft leasing
operations and its segment earnings include an allocation of interest expense. The ACMI Services segment consists
of the Company's airline operations, including CMI agreements as well as ACMI and charter service agreements that
the Company has with its customers. Due to the similarities among the Company's airline operations, the airline
operations are aggregated into a single reportable segment, ACMI Services. The Ground Services segment provides
mail and package sorting services, as well as related maintenance services for ground equipment, facilities and material
handling equipment. The Ground Services segment became a reportable during 2017 due revenue growth exceeding
10% of the Company total revenues. Prior periods presented below have been prepared by removing Ground Services
from "All other" for comparative purposes. The Company's other activities, which include the sale of aircraft parts,
aircraft maintenance services, aircraft modifications, the sales of aviation fuel and other services, are not large enough
to constitute reportable segments and are combined in All other with inter-segment profit eliminations. Inter-segment
revenues are valued at arms-length market rates. Cash and cash equivalents are reflected in Assets - All other below.

The Company's segment information from continuing operations is presented below (in thousands):

Total revenues:

CAM

ACMI Services

Ground Services

All other

Eliminate inter-segment revenues

Total

Customer revenues:

CAM

ACMI Services

Ground Services

All other

Total

Depreciation and amortization expense:

CAM

ACMI Services
Ground Services

All other

Total

Segment earnings (loss):

CAM

ACMI Services

Ground Services

All other

Net unallocated interest expense

Net gain (loss) on financial instruments

Loss from non-consolidated affiliate
Pre-tax earnings from continuing operations

Year Ended December 31
2016

2015

2017

209,560

195,092

614,741

206,631

227,205

492,859

116,796

145,743

177,789

433,109

60,163

101,832

(189,937)

(181,620)

(153,629)

1,068,200

768,870

619,264

140,434

117,642

614,721

204,150

108,895

492,859

114,813

43,556

93,395

431,989

58,160

35,720

1,068,200

768,870

619,264

108,106

92,396

41,929

1,985

2,536

41,487

973

640

87,765

37,526

260

(108)

154,556

135,496

125,443

61,510

68,608

2,476

9,369

4,355

(1,322)

(79,789)

(3,135)

(32,125)

10,603

6,020

(545)

(18,107)

—

57,457

(2,654)

5,395

3,166

(1,721)

920

—

(6,536) $

34,454

62,563

The Company's assets are presented below by segment (in thousands):

Assets:

CAM

ACMI Services

Ground Services

All other

Total

December 31

2017

2016

2015

1,192,890

971,986

189,379

44,480

122,095

164,489

33,411

89,444

804,776

154,852

15,777

66,316

1,548,844

1,259,330

1,041,721

Interest expense allocated to CAM was $15.6 million, $10.6 million and $9.4 million for the years ending

December 31, 2017, 2016 and 2015, respectively.

During 2017, the Company had capital expenditures of $28.7 million, $283.8 million and $2.9 million for the ACMI

Services, CAM and Ground Services segments, respectively.

Entity-Wide Disclosures

The Company had revenues of approximately $170.1 million, $168.2 million and $206.5 million for 2017, 2016
and 2015, respectively, derived primarily from aircraft leases in foreign countries, routes with flights departing from
or arriving in foreign countries or aircraft maintenance and modification services performed in foreign countries. All
revenues from the CMI agreement with DHL and the ATSA agreement with AFI are attributed to U.S. operations. As
of December 31, 2017 and 2016, the Company had 16 and 12 aircraft, respectively, deployed outside of the United
States. CAM's revenues included $19.5 million, $17.4 million and $12.6 million for 2017, 2016 and 2015, respectively,
for engine and other maintenance related payments from customers. The Company's external customer revenues from
its aircraft maintenance, modifications, conversions and part sales within other activities for the years ended December
31, 2017, 2016 and 2015 were $106.8 million, $40.8 million, and $33.7 million, respectively.

NOTE O—DISCONTINUED OPERATIONS

The Company's results of discontinued operations consist primarily of pension benefits, adjustments to workers
compensation liabilities and other benefits for former employees previously associated with ABX's former freight
sorting and aircraft fueling services provided to DHL. The Company may incur expenses and cash outlays in the future
related to pension obligations, self -insurance reserves for medical expenses and wage loss for former employees.
Carrying amounts of significant assets and liabilities of the discontinued operations are below (in thousands):

Liabilities

Employee compensation and benefits
Post-retirement

Total Liabilities

December 31

2017

2016

17,880
4,652
22,532

19,885
5,663
25,548

During 2017, pre-tax losses from discontinued operations were $5.1 million. Pre-tax earnings from discontinued

operations were $3.8 million and $3.2 million during 2016 and 2015, respectively.

NOTE P—QUARTERLY RESULTS (Unaudited)

The following is a summary of quarterly results of operations (in thousands, except per share amounts):

2017 (1)
Revenues from continuing operations

Operating income from continuing operations

Net earnings (loss) from continuing operations (2)

Net earnings from discontinued operations
Weighted average shares:

Basic

Diluted

Earnings per share from continuing operations

Basic
Diluted

2016 (3)
Revenues from continuing operations

Operating income from continuing operations

Net earnings from continuing operations
Net earnings from discontinued operations

Weighted average shares:

Basic

Diluted

Earnings per share from continuing operations

Basic

Diluted

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

237,917

253,211

254,101

$ 322,971

17,753

9,796

192

59,133

64,949

0.17
0.13

177,385

15,351

8,171

63,636

65,057

$
$

22,948
(53,918)
192

18,923
(28,229)
(4,655)

59,035

58,733

33,671

94,091

1,026

58,733

68,987

(0.91) $
(0.91) $

(0.48) $
(0.48) $

1.60
1.11

176,549

193,261

$ 221,675

15,801

11,528

63,267

66,763

14,456

2,116

59,379

60,283

18,140
(755)
2,287

59,083

0.13

0.18

0.12

0.04

(0.01)
(0.01)

$
$

1. During 2017, the Company recorded a $1.9 million gain, a $67.6 million loss, a $34.4 million loss and a $20.4 million
gain on the remeasurement of financial instruments, primarily related to the warrants issued to Amazon for the quarters
ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017, respectively.

2. During 2017, the Company recorded a $59.9 million deferred tax gain during the quarter ended December 31, 2017 due

to the enactment of lower U.S. federal corporate tax rates.

3. During 2016, the Company recorded a 0.5 million loss, a 5.6 million gain, a 8.5 million loss and a 14.7 million loss on
the remeasurement of financial instruments, primarily related to the warrants issued to Amazon for the quarters ended
March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2017, the Company carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and
Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.

(b) Changes in Internal Controls

There were no changes in internal control over financial reporting during the most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial
reporting.

Management’s Annual Report on Internal Controls over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with
generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).

Based on management’s assessment of those criteria, management believes that, as of December 31, 2017, the

Company’s internal control over financial reporting was effective.

March 1, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Air Transport Services Group, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Air Transport Services Group, Inc. and subsidiaries
(the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2017, of the Company and our report dated March 1, 2018, expressed an unqualified opinion on those
financial statements and financial statement schedule and includes an explanatory paragraph regarding the Company’s
three principal customers.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

/s/ DELOITTE & TOUCHE LLP

Cincinnati, Ohio
March 1, 2018

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2018 Annual
Meeting of Stockholders under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” and “Corporate Governance and Board Matters.”

Executive Officers

The following table sets forth information about the Company’s executive officers. The executive officers serve at

the pleasure of the Company’s Board of Directors.

Name
Joseph C. Hete

Age
63

Quint O. Turner

Richard F. Corrado

W. Joseph Payne

Information
President and Chief Executive Officer, Air Transport Services Group,
Inc., since December 2007 and Chief Executive Officer, ABX Air, Inc.,
since August 2003.

Mr. Hete was President of ABX Air, Inc. from January 2000 to February
2008. Mr. Hete was Chief Operating Officer of ABX Air, Inc. from
January 2000 to August 2003. From 1997 until January 2000, Mr. Hete
held the position of Senior Vice President and Chief Operating Officer
of ABX Air, Inc. Mr. Hete served as Senior Vice President,
Administration of ABX Air, Inc. from 1991 to 1997 and Vice President,
Administration of ABX Air, Inc. from 1986 to 1991. Mr. Hete joined
ABX Air, Inc. in 1980.

Chief Financial Officer, Air Transport Services Group, Inc., since
February 2008 and Chief Financial Officer, ABX Air, Inc. since
December 2004.

Mr. Turner was Vice President of Administration of ABX Air, Inc. from
February 2002 to December 2004. Mr. Turner was Corporate Director
of Financial Planning and Accounting of ABX Air, Inc. from 1997 to
2002. Prior to 1997, Mr. Turner held positions of Manager of Planning
and Director of Financial Planning of ABX Air, Inc. Mr. Turner joined
ABX Air, Inc. in 1988.

Chief Operating Officer, Air Transport Services Group, Inc., since
September 2017. President of Cargo Aircraft Management Inc., since
April 2010. President of Airborne Global Solutions, Inc. since July
2010. Mr. Corrado was Chief Commercial Officer, Air Transport
Services Group, Inc., from April 2010 to September 2017

Before joining ATSG, Mr. Corrado was President of Transform
Consulting Group from July 2006 through March 2010 and Chief
Operating Officer of AFMS Logistics Management from February
2008 through March 2010. He was Executive Vice President of Air
Services and Business Development for DHL Express from September
2003 through June of 2006; and Senior Vice President of Marketing
for Airborne Express from August 2000 through August 2003.

Chief Legal Officer & Secretary, Air Transport Services Group, Inc.,
since May 2016; Senior Vice President, Corporate General Counsel
and Secretary, Air Transport Services Group, Inc., since February
2008; and Vice President, General Counsel and Secretary, ABX Air,
Inc. since January 2004.

Mr. Payne was Corporate Secretary/Counsel of ABX Air, Inc. from
January 1999 to January 2004, and Assistant Corporate Secretary from
July 1996 to January 1999. Mr. Payne joined ABX Air, Inc. in April
1995.

The executive officers of the Company are appointed annually at the Board of Directors meeting held in conjunction
with the annual meeting of stockholders. There are no family relationships between any directors or executive officers
of the Company.

ITEM 11. EXECUTIVE COMPENSATION

The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2018 Annual

Meeting of Stockholders under the captions “Executive Compensation” and “Director Compensation.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The responses to this Item are incorporated herein by reference to the definitive Proxy Statement for the 2018
Annual Meeting of Stockholders under the captions “Equity Compensation Plan Information,” “Voting at the Meeting,”
“Stock Ownership of Management” and “Common Stock Ownership of Certain Beneficial Owners.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2018 Annual

Meeting of Stockholders under the captions “Related Person Transactions” and “Independence.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2018 Annual

Meeting of Stockholders under the caption “Fees of the Independent Registered Public Accounting Firm.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

List of Documents filed as part of this report:

(1)

Consolidated Financial Statements

The following are filed in Part II, item 8 of this Form 10-K Annual Report:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules

Description
Accounts receivable reserve:

Year ended:

December 31, 2017
December 31, 2016
December 31, 2015

Schedule II—Valuation and Qualifying Account

Balance at
beginning
of period

Additions
charged to
cost and expenses

Deductions

Balance at end
of period

1,264,211
415,336
811,875

1,184,099
1,006,307
138,310

3,000
157,432
534,849

2,445,310
1,264,211
415,336

All other schedules are omitted because they are not applicable or are not required, or because the required

information is included in the consolidated financial statements or notes thereto.

(3)

Exhibits

The following exhibits are filed with or incorporated by reference into this report.

Exhibit No.

Description of Exhibit
Articles of Incorporation

3.1

3.2

4.1

4.2

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

Amended and Restated Certificate of Incorporation of Air Transport Services Group, Inc.
reflecting corrections and amendments through August 16, 2013. [This document represents the
Amended and Restated Certificate of Incorporation of Air Transport Services Group, Inc. in
compiled form, incorporating all corrections and amendments. This compiled document has not
been filed with the Delaware Secretary of State.] (26)

Amended and Restated Bylaws of Air Transport Services Group, Inc., reflecting amendments
through May 10, 2013. (16)

Instruments defining the rights of security holders

Indenture, dated September 29, 2017, by and between Air Transport Services Group, Inc. and
U.S. Bank National Association. (29)

Form of 1.125% Convertible Senior Note due 2024 (included in Exhibit 4.1). (29)

Material Contracts

Director compensation fee summary. (8)

Aircraft Loan and Security Agreement and related promissory note, dated August 24, 2006, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (2)

Aircraft Loan and Security Agreement and related promissory note, dated October 10, 2006, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (3)

Aircraft Loan and Security Agreement and related promissory note, dated February 16, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (4)

Aircraft Loan and Security Agreement and related promissory note, dated April 25, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (5)

Aircraft Loan and Security Agreement and related promissory note, dated October 26, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (7)

Aircraft Loan and Security Agreement and related promissory note, dated December 19, 2007,
by and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (7)

Guaranty by Air Transport Services Group, Inc. in favor of DHL Express (USA), Inc., dated
May 8, 2009 (6), as amended by Amendment to the Guaranty dated as of January 14, 2015 (20)

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

10.25

Form of Time-Based Restricted Stock Award Agreement under Air Transport Services Group, Inc.
2005 Amended and Restated Long-Term Incentive Plan. (9)

Form of Performance-Based Stock Unit Award Agreement under Air Transport Services Group,
Inc. 2005 Amended and Restated Long-Term Incentive Plan. (9)

Form of Restricted Stock Unit Award Agreement under Air Transport Services Group, Inc. 2005
Amended and Restated Long-Term Incentive Plan. (18)

Conversion Agreement dated August 3, 2010, between Cargo Aircraft Management, Inc., M&B
Conversions Limited and Israel Aerospace Industries Ltd. (10)

Credit Agreement, dated as of May 9, 2011, among Cargo Aircraft Management, Inc., as
Borrower, Air Transport Services Group, Inc., the Lenders from time to time party thereto,
SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank, N.A., as
Syndication Agents, and Bank of America, N.A., as Documentation Agent. (11)

Guarantee and Collateral Agreement, dated as of May 9, 2011, made by Cargo Aircraft
Management, Inc. and certain of its Affiliates in favor of SunTrust Bank, as Administrative
Agent. (11)

Amendment to Confidentiality and Standstill Agreement, dated as of June 11, 2012, between
Air Transport Services Group, Inc. and Red Mountain Capital Partners LLC. (12)

Form of amended and restated change-in-control agreement in effect between Air Transport
Services Group, Inc. and its executive officers. (14)

Amendment to the Credit Agreement, dated July 20, 2012, among Cargo Aircraft Management,
Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to time party
thereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank,
N.A., as Syndication Agents, and Bank of America, N.A., as Documentation Agent. (13)

Amended and Restated Lease Agreement, dated December 27, 2012, between Clinton County
Port Authority and Air Transport Services Group, Inc. (15)

Loan Agreement, Chapter 166, Ohio Revised Code, dated December 1, 2012, between the
Director of Development Services Agency of Ohio and Clinton County Port Authority. (15)

Guaranty Agreement, dated December 1, 2012, among Air Transport Services Group, Inc.,
Airborne Maintenance and Engineering Services, Inc., Air Transport International, LLC,
Clinton County Port Authority, the Directory of Development Services Agency of Ohio, and the
Huntington National Bank. (15)

Lease Agreement for the Jump Hangar Facility, dated December 1, 2012, between Clinton
County Port Authority and Air Transport International, LLC. (15)

Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Financing
Statement, dated December 1, 2012, among Air Transport International, LLC and the Director
of Development Services Agency of Ohio. (15)

Bond Purchase Agreement, dated December 13, 2012, among the State of Ohio, acting by and
through its Treasurer of State, the Development Services Agency of Ohio, acting by and through
a duly authorized representative, Clinton County Port Authority, Air Transport International,
LLC and Stifel, Niolaus & Company, Inc. (15)

Air Transport Services Group, Inc. Nonqualified Deferred Compensation Plan, dated October
31, 2013. (17)

Second Amendment to the Credit Agreement, dated October 22, 2013, among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to
time party thereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan
Chase Bank, N.A., as Syndication Agents, and Bank of America, N.A., as Documentation
Agents. (17)

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40

Third Amendment to Credit Agreement and First Amendment to Guarantee and Collateral
Agreement, dated May 6, 2014, by and among Cargo Aircraft Management, Inc., as Borrower,
Air Transport Services Group, Inc., each of the Guarantors party thereto, each of the financial
institutions party thereto as "Lenders", and SunTrust Bank as Administrative Agent. (19)

Amended and Restated Air Transportation Services Agreement between DHL Network
Operations (USA), Inc., ABX Air, Inc. and Cargo Aircraft Management, Inc., dated January 14,
2015. Those portions of the Agreement marked with an [*] have been omitted pursuant to a
request for confidential treatment and have been filed separately with the SEC. (20)

Fifth Amendment to Credit Agreement, dated May 8, 2015, by and among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., each of the Guarantors
party thereto, each of the financial institutions party thereto as "Lenders" and SunTrust Bank, in
its capacity as Administrative Agent. (21)

Air Transportation Services Agreement, dated as of March 8, 2016, by and between Airborne
Global Solutions, Inc. and Amazon Fulfillment Services Inc. Those portions of the Agreement
marked with an [*] have been omitted pursuant to a request for confidential treatment and have
been filed separately with the SEC. (22)

Investment Agreement, dated as of March 8, 2016, by and between Air Transport Services
Group, Inc., and Amazon.com, Inc. Those portions of the Agreement marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)

Warrant to Purchase Common Stock, issued March 8, 2016, by and between Air Transport
Services Group, Inc. and Amazon.com. Those portions of the Warrant marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)

Stockholders Agreement, dated as of March 8, 2016, by and between Air Transport Services
Group, Inc., and Amazon.com, Inc. Those portions of the Agreement marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)

Amended and Restated Credit Agreement, dated as of May 31, 2016, among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to
time party hereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase
Bank, N.A., as Syndication Agents and Bank of America, N.A., as Documentation Agent. (23)

Guarantee and Collateral Agreement made by Cargo Aircraft Management, Inc. and certain of
its Affiliates in favor of SunTrust Bank, as Administrative Agent, dated as of May 31, 2016.
(23)

Air Transport Services Group, Inc. Executive Incentive Compensation Plan, last modified
August 5, 2016. (23)

Form of Time-Based Restricted Stock Award Agreement under Air Transport Services Group,
Inc. 2015 Amended and Restated Long-Term Incentive Plan. (24)

Form of Performance-Based Stock Unit Award Agreement under Air Transport Services Group,
Inc. 2015 Amended and Restated Long-Term Incentive Plan. (24)

Form of Restricted Stock Unit Award Agreement under Air Transport Services Group, Inc. 2015
Amended and Restated Long-Term Incentive Plan. (24)

Stock Purchase Agreement, dated June 21, 2016, between Air Transport Services Group, Inc.
and Red Mountain Partners, L.P. (25)

First Amendment to the Amended and Restated Credit Agreement, dated as of March 31, 2017,
among Cargo Aircraft Management, Inc., as Borrower, Air Transport Services Group, Inc., the
Lenders from time to time party hereto, SunTrust Bank, as Administrative Agent, Regions Bank
and JPMorgan Chase Bank, N.A., as Syndication Agents and Bank of America, N.A., as
Documentation Agent. (27)

10.41

10.42

10.43

10.44

10.45

10.46

10.47

10.48

10.49

10.50

10.51

10.52

10.53

10.54

10.55

10.56

10.57

10.58

10.59

10.60

10.61

Underwriting Agreement, dated May 31, 2017, by and among Air Transport Services Group,
Inc., Red Mountain Partners, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (28)

Second Amendment to the Amended and Restated Credit Agreement, entered into on September
25, 2017, by and among Air Transport Services Group, Inc., Cargo Aircraft Management, Inc.,
as borrower, the guarantors party thereto, the lenders party thereto and SunTrust Bank, as
Administrative Agent. (30)

Purchase Agreement, dated September 25, 2017, by and among Air Transport Services Group,
Inc. and Goldman Sachs & Co. LLC and SunTrust Robinson Humphrey, Inc., as representatives
of the initial purchasers named therein. (29)

Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Goldman Sachs & Co. LLC. (29)

Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Bank of America, N.A. (29)

Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (29)

Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Bank of Montreal. (29)

Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (29)

Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Bank of America, N.A. (29)

Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London
Branch. (29)

Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Bank of Montreal. (29)

Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Goldman Sachs & Co. LLC. (29)

Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Bank of America, N.A. (29)

Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and JPMorgan Chase Bank, National Association, London Branch. (29)

Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Bank of Montreal. (29)

Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Goldman Sachs & Co. LLC. (29)

Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Bank of America, N.A. (29)

Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (29)

Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Bank of Montreal. (29)

Air Transport Services Group, Inc. Severance Plan for Senior Management. (31)

Confirmation Agreement, dated August 23, 2017, between Mutual of America Life Insurance
Company and ABX Air, Inc., relating to the ABX Air Retirement Income Plan. (31)

14.1

21.1

23.1

31.1

31.2

32.1

32.2

Code of Ethics

Code of Ethics—CEO and CFO. (1)

List of Significant Subsidiaries

List of Significant Subsidiaries of Air Transport Services Group, Inc., filed within.

Consent of experts and counsel

Consent of independent registered public accounting firm, filed herewith.

Certifications

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.

101.INS

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Labels Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

____________________
(1)
(2)

The Company's Code of Ethics can be accessed from the Company's Internet website at www.atsginc.com.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on November 9, 2006.
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed on August 14, 2007 with
the Securities and Exchange Commission.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed with the Securities and
Exchange Commission on August 14, 2007.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 14, 2007.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 10, 2009.
Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 17, 2008 with the
Securities and Exchange Commission.
Incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Stockholders,
Corporate Governance and Board Matters, filed March 23, 2017 with the Securities and Exchange Commission.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 10, 2010.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 3, 2010. Those portions of the Agreement marked with an [*] have been
omitted pursuant to a request for confidential treatment and have been filed separately with the SEC.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 3, 2011.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 18, 2012.

(3)

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(31)

Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on July 24, 2012.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 2, 2012.
Incorporated by reference to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 4, 2013. Those portions of the Agreement marked with an [*] have been
omitted pursuant to a request for confidential treatment and have been filed separately with the SEC.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2013.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 6, 2013.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 12, 2014.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 5, 2014.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 8, 2015, as amended by the Company's Quarterly Report on Form 10-Q/A
filed with the Securities and Exchange Commission on August 7, 2015.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 7, 2015.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 10, 2016.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2016.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on March 15, 2016.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 27, 2016.
Incorporated by reference to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 8, 2017.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 8, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 2, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on September 29, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on September 25, 2017.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 9, 2017.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly

caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Air Transport Services Group, Inc.

Signature

/S/ JOSEPH C. HETE

Joseph C. Hete

Title
President and Chief Executive Officer (Principal
Executive Officer)

Date

March 1, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons in the capacities and on the date indicated:

Signature

/S/ RANDY D. RADEMACHER
Randy D. Rademacher

Director and Chairman of the Board

March 1, 2018

Title

Date

/S/ RICHARD M. BAUDOUIN
Richard M. Baudouin

Director

/S/ JOSEPH C. HETE
Joseph C. Hete

/S/ RAYMOND E. JOHNS JR.
Raymond E. Johns, Jr.

/S/ J. CHRISTOPHER TEETS
J. Christopher Teets

/S/ JEFFREY J. VORHOLT
Jeffrey J. Vorholt

/S/ QUINT O. TURNER
Quint O. Turner

Director, President and Chief Executive Officer
(Principal Executive Officer)

Director

March 1, 2018

Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)

March 1, 2018

[This page intentionally left blank]

Air Transport Services Group 2017 Annual Report

To Our Shareholders

Investor Information

Your company ended 2017 with substantial

the warrants, was $95.7 million in 2017. The other

increases in revenues and earnings on the strength

principal item affecting our GAAP results was a

of very good performances by all of our businesses.

$59.9 million tax benefit from the tax-law changes

On a consolidated basis, fourth-quarter

enacted in December.

revenues increased by more than $100 million

to $323 million, and by nearly $300 million

2017’s solid performance was aided by

across-the-board growth in each of our businesses

for the year to $1.1 billion. Those are record totals

and a solid peak season of airline service for our

for us since our business model changed in 2010.

customers. In August, we completed our

We earned $21.7 million, or 36 cents per share

commitment to supply Amazon with twenty

diluted in 2017, up from $21.1 million, or 33 cents

leased 767s to serve as the backbone of its new

per share diluted in 2016, as recorded under

Generally Accepted Accounting Principles.

air network, plus the flight crews, maintenance,

and logistics to support them. As a result, Amazon

Two non-cash items, however, had a major effect

became our largest customer in 2017, accounting

on those GAAP results. The largest was a net loss

for 44 percent of our total revenues. DHL revenues

for the year from revaluation of warrants we have

were 24 percent, and the U.S. Military 7 percent

issued to Amazon incrementally under commercial

of our total revenues.

agreements we signed with them in 2016. These

The principal factor for the airlines was expanded

revaluations occur quarterly, and reflect changes in

flying during a busy peak, which included operations

the size of our warrant liability from share-price

for our principal customers, DHL and Amazon,

changes and additional vested warrants. Unrealized

as well as some peak season flying for other

losses tied to increases in that liability are in part

good news for shareholders, as losses are driven

mainly by increases in our stock price.

customers. Taken together, our block hours exceeded

the prior year by 22 percent. Also contributing to

our airlines improved performance was a reduction

The Amazon warrant revaluation loss, plus non-

in year-over-year expense associated with scheduled

cash amortization of the lease incentives also tied to

airframe inspections.

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Stock Information
NASDAQ: ATSG.
Company documents electronically
filed with the SEC also may be
found at www.atsginc.com.

Registrar and Transfer Agent
Computershare Investor Services
(877) 581-5548 or (781) 575-2879
www.computershare.com/investor
P.O. Box 30170
221 Quality Circle, Ste 210
College Station, TX 77842

Independent Auditors
Deloitte & Touche LLP
Cincinnati, Ohio

Annual Meeting
The annual meeting of stockholders
will be May 10, 2018, at 11 a.m.
local time at The Roberts Centre,
123 Gano Road, Wilmington, Ohio.

Investor Relations
Telephone inquiries may be
directed to (937) 434-2700.

Board of Directors

Randy D. Rademacher
Sr. Vice President and Chief Financial Officer
for Reading Rock, Inc., a privately owned
manufacturer and distributor of concrete
products and other building materials,
since 2008. Mr. Rademacher has been a
Director of the Company since December
2006 and Chairman of the Board since May
2015. He is a member of both the Audit
Committee and the Nominating and
Governance Committee.

Richard M. Baudouin
Senior Advisor for Infinity Transportation, a
company owned by Global Atlantic Financial
Corp., since 2016. Prior to his current role at
Infinity Transportation, Mr. Baudouin was a
principal of Infinity Aviation Capital, LLC,
an investment firm involved in aircraft leasing,
from 2011 to 2016, and was a co-founder and
former managing director of Aviation Capital
Group, a commercial aircraft leasing company,
from 1989 to 2010. Mr. Baudouin has been a
Director of the Company since January 2013.
He is the Chairman of the Nominating and
Governance Committee and is a member of
the Audit Committee.

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Joseph C. Hete
President and Chief Executive Officer of
Air Transport Services Group, Inc. and
Chief Executive Officer of ABX Air, Inc.
Mr. Hete has been with the company
since 1980.

Raymond E. Johns, Jr. (General USAF Ret.)
Executive Vice President of FlightSafety
International Inc., a global provider of flight
training for commercial, business and military
aviation professionals and flight simulation
equipment, since 2014. Prior to his retirement
from the military, Mr. Johns led the U.S. Air Force
Air Mobility Command at Scott Air Force Base
in Illinois. Mr. Johns has been a Director of
the Company since October 2017. He is a
member of both the Audit Committee and
Nominating and Governance Committee.

J. Christopher Teets
Partner of Red Mountain Capital Partners LLC,
an investment management firm, since 2005.
Mr. Teets has been a Director of the Company
since February 2009. He is the Chairman of the
Compensation Committee and a member of the
Nominating and Governance Committee.

Jeffrey J. Vorholt
Independent consultant and private investor.
Mr. Vorholt was formerly a full-time faculty
member at Miami University (Ohio) and
concurrently an Adjunct Professor of Accountancy
at Xavier University (Ohio) from 2001 to 2006.
A CPA and attorney, he was the Chief Financial
Officer of Structural Dynamics Resource
Corporation from 1994 until its acquisition
by EDS in 2001. Mr. Vorholt has been a
Director of the Company since January 2004.
He is the Chairman of the Audit Committee and
is a member of the Compensation Committee.

INSIDE FRONT COVER

INSIDE BACK COVER

2017 Annual Report

Air Transport Services Group, Inc.
145 Hunter Drive
Wilmington, Ohio 45177
www.atsginc.com

OUTSIDE BACK COVER

OUTSIDE FRONT COVER