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. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company," "we," "our" or "us" from time to time. The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited financial statements and the related notes contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2008.

BACKGROUND

Air Transport Services Group, Inc. ("ATSG") is a holding company whose principal subsidiaries include three independently certificated airlines, ABX Air, Inc. ("ABX"), Capital Cargo International Airlines, Inc. ("CCIA") and Air Transport International, LLC ("ATI") and an aircraft leasing company, Cargo Aircraft Management, Inc. ("CAM"). When the context requires, we may also use the terms "Company" and "ATSG" in this report to refer to the business of ATSG and its subsidiaries on a consolidated basis. The Company has three reportable segments:
DHL, ACMI Services, and CAM which are discussed below.

DHL

In 2008, DHL began to restructure its U.S. operations, which significantly impacted ABX's operations. Pursuant to its 2008 restructuring plans, DHL discontinued intra-U.S. domestic pickup and delivery services in January 2009. DHL now provides only international services to and from the U.S. Under a Hub Services agreement, ABX provided, package handling, and other cargo related services to DHL Express (USA), Inc. The Hub Services agreement expired on August 15, 2009 and the results of these operations are now reported as discontinued operations. ABX currently has an aircraft, crew, maintenance and insurance agreement ("ACMI agreement") with DHL Network Operations (USA), Inc. ("DHL") to provide airlift in the U.S. On August 7, 2009, DHL notified ABX that it will not be renewing the ACMI agreement when its initial term expires on August 15, 2010, however, DHL has expressed interest in contracting with the Company separately for aircraft leases and airline services under competitive commercial terms upon the expiration of the ACMI agreement.

A summarized chronology of DHL's restructuring actions in 2009 and their effects on ABX's operations follows:

• In January 2009, the regional sorting hubs staffed by ABX were closed, the sort operations in Wilmington, Ohio were downsized to process only international shipments and all of ABX's remaining 32 DC-9 aircraft were terminated from the DHL ACMI agreement.

• In March 2009, DHL gave ABX notice to remove five Pratt & Whitney powered Boeing 767 aircraft having a net book value of approximately $24.0 million, from the DHL network.

• On March 16, 2009, DHL agreed to restructure an unsecured promissory note and assume financial responsibility for the capital leases associated with five Boeing 767 aircraft guaranteed by DHL. The promissory note was subsequently amended in May 2009 and a Lease Assumption and Option Agreement was executed in June 2009.

• On April 17, 2009 DHL, announced that it planned to relocate its package sorting and aircraft hub operations from the DHL Air Park in Wilmington, Ohio to the Cincinnati/Northern Kentucky International Airport in Hebron, Kentucky ("CVG").

• On May 12, 2009, DHL notified ABX that DHL would not be renewing the Hub Services agreement when its term expired on August 15, 2009.

• On July 24, 2009, sort operations in Wilmington ceased and the sorting and hub operations were transferred to CVG. ABX assisted DHL with the transition to CVG by providing temporary staffing for the CVG operations through early September 2009. Revenues from the Hub Services agreement were $54.4 million and $145.0 million for the third quarter and first nine months of 2009, respectively. Pre-tax earnings from the Hub Services agreement were $1.4 million, or 23% of consolidated pre-tax earnings, for the third quarter of 2009 and $8.0 million, or 22% of consolidated pre-tax earnings, for the first nine months of 2009.

• In conjunction with the transfer of the hub operations to CVG in July 2009, DHL assumed management of fueling services for its U.S. network previously provided by ABX. ABX ceased providing aircraft fuel and related services for its aircraft that remain in the DHL network. Revenues from fuel were $2.3 million and $28.5 million for the third quarter and first nine months of 2009, respectively. ABX did not earn a mark-up on fuel used within the DHL network. The Hub Services operations and the aircraft fueling operations are now reported as discontinued operations.

DHL continues to express interest in the Company's Boeing 767 aircraft. ABX currently remains the primary provider of airlift capacity for DHL's U.S. based international delivery network through its fleet of Boeing 767 aircraft. In addition to Boeing 767 aircraft provided under the primary ACMI agreement, ABX is also supplying DHL with six Boeing 767 standard freighters under supplemental, short-term, ACMI arrangements. In June 2009, ABX and DHL executed a lease option agreement, in which DHL may lease up to four ABX Boeing 767 standard freighter aircraft under 64.5 month lease terms, commencing August 15, 2010. DHL has expressed interest to contract with the Company for aircraft dry lease and airline services under competitive, commercial terms after the current ACMI agreement expires. ATSG and its subsidiaries are currently discussing with DHL long-term leases for eight to ten other Boeing 767 aircraft as they are converted to standard freighter configuration

ABX has been negotiating with designated representatives of ABX's pilots' union on amendments to their collective bargaining agreement ("CBA"). On November 6, 2009, the Company and negotiators for the ABX pilots' union reached a tentative agreement which is being submitted to the ABX pilots' union members for ratification at large. ABX is seeking to achieve lower wages and benefits and more favorable work rules so that it may effectively compete in the ACMI air cargo markets with lower cost carriers. If ABX can secure a more competitive cost structure, it may be able to obtain contracts to provide crews and other airline services to DHL. The amended CBA, if ratified, is effective only if ABX wins contracts to provide crews and airline services to DHL after the current ACMI terminates. If ABX is unsuccessful at achieving a more competitive CBA in the near future, or winning airline service contracts with DHL, management will consider other business alternatives. Those alternatives may include reducing or discontinuing ABX's ACMI operations and pursuing more opportunities to place aircraft under leasing arrangements.

In September 2008, ATSG's CAM subsidiary entered into an agreement with Israel Aerospace Industries Ltd. ("IAI") for the conversion of up to 14 Boeing 767-200 aircraft to full freighter configuration. The decision by DHL to terminate the ACMI agreement adds impetus to management's strategy of modifying ABX's non-standard Boeing 767 aircraft into standard freighter configuration. Interest in efficient, reliable Boeing 767 aircraft remains strong from DHL and other carriers. As the modified Boeing 767 aircraft become available for service, management anticipates that some portion of them will be leased to other airlines, while some may be operated by an ATSG airline. Management will make the decision to redeploy each modified aircraft either into airline operations or into leasing arrangements, depending on which alternative will generate the higher return on capital.

In 2008, ABX and DHL executed a severance and retention agreement ("S&R agreement") which specifies employee severance, retention and other benefits that DHL reimburses ABX for payment to its employees that are displaced in conjunction with DHL's U.S. restructuring plan. DHL reimburses ABX for the cost of employee severance, retention, productivity bonuses and vacation benefits paid in accordance with the agreement. Through September 30, 2009, ABX has terminated approximately 8,600 employee positions since DHL's people since DHL's restructuring began in mid-2008. Employees receive severance, retention and other benefits under the S&R agreement executed between ABX and DHL. The S&R agreement includes provisions to pay ABX for crewmember benefits if ABX and its pilots' union can reach an agreement in regards to the use of those funds for severance, retention and/or other issues arising from DHL's U.S. restructuring plan. The tentative agreement reached on November 6, 2009, includes an allocation of the funds, which will be distributed accordingly if the tentative agreement is ratified by the pilots union membership.

Our pre-tax earnings from the ACMI agreement decreased by $0.4 million in the third quarter and increased by $8.0 million for the first nine months of 2009 compared to the corresponding periods of 2008. Our pre-tax earnings from the ACMI agreement includes approximately $1.8 million and $9.0 million of mark-up above our cost incurred under the ACMI agreement for the third quarter and for the first nine months of 2009 compared to approximately $2.3 million and $7.3 million of mark-up above our costs for the corresponding periods of 2008.

Our pre-tax earnings from the ACMI agreement for the first nine months of 2009 also includes $4.5 million for the reimbursement of employee vacation benefits that ABX paid to terminated employees. ABX is reimbursed employee severance, retention, vacation and other benefits under the S&R agreement that ABX and DHL executed in 2008 to facilitate the restructuring and wind-down of DHL's U.S. operations. The difference between our 2009 and 2008 pre-tax earnings is impacted by charges recorded in the second and third quarters of 2008 to reserve $2.9 million of DHL revenues related to a dispute over arbitration expenses. This matter was resolved favorably later in 2008.

Our pre-tax earnings from discontinued DHL operations increased by $5.0 million for the first nine months of 2009 compared to the corresponding periods of 2008. Our pre-tax earnings from the discontinued DHL operations for the first nine months of 2009 includes $2.6 million for the reimbursement of employee vacation benefits that ABX paid to terminated employees under the S&R agreement.

The increase in incremental revenues in 2009 reflects amendments to our ACMI and Hub services agreements with DHL. ABX and DHL amended the pricing provisions of the ACMI and Hub services agreements ("revenue amendments") which effectively fixed ABX's pre-tax earnings from the DHL agreements for the first, second and third quarters of 2009. Prior to the revenue amendments, expenses incurred under the commercial agreements were generally marked-up by 1.75% and included in revenues. Both agreements also allowed ABX to earn incremental revenues calculated on mark-ups above the 1.75% base mark-up (up to an additional 1.60% under the ACMI agreement and an additional 2.10% under the Hub Services agreement) from the achievement of certain cost-related and service goals specified in the two agreements. Under the revenue amendments, annual goals were not set for 2009, nor was a quarterly cost goal. Instead, the agreed revenue for the first and second quarters of 2009 includes amounts to replace these incremental revenues. The Company's revenues for the first, second and third quarters of 2009 include reimbursement for all expenses incurred under the commercial agreements, as well as, all of the incremental revenues set by the revenue amendments. ABX and DHL are currently discussing revenue mark-up revenue arrangements for the fourth quarter of 2009 and through the remaining term of the ACMI agreement.

ACMI Services

Through its three airline subsidiaries, the Company provides airlift to other airlines, freight forwarders and the U.S. military, typically through ACMI agreements. The airlines serve a variety of customers in the air cargo industry by flying in North America, South America, Central America, Europe and Asia. CCIA and ATI each have contracts to provide airlift to BAX Global, Inc. ("BAX") under ACMI agreements. BAX provides freight transportation and supply chain management services, specializing in the heavy freight market for business-to-business shipping. ATI also provides passenger transportation primarily to the U.S. military using its DC-8 combi aircraft that are certified to carry passengers as well as cargo on the main flight deck. At September 30, 2009, ACMI Services included 47 in-service aircraft, three more than in September 2008. ABX operated 13 Boeing 767-200 freighter aircraft that were not under the DHL ACMI agreement, while CCIA and ATI operated 16 aircraft and 18 aircraft, respectively.

Customers are usually charged based on the number of block hours flown, and typical agreements specify a minimum number of block hours to be charged monthly. ACMI Services also includes revenues from block space agreements, in which customers contract for specific amounts of space on certain flights. In these agreements, customers are typically charged by the weight carried on the aircraft during a flight, or based on the number of aircraft load positions purchased.

ACMI Services revenues, excluding directly reimbursed fuel expenses, were $70.3 million and $208.1 million for the third quarter and first nine months of 2009, decreasing 12% and 1%, respectively, compared to the corresponding periods of 2008. Block hours increased 12% and 8% for the third quarter and first nine months of 2009, respectively, reflecting additional Boeing 767 and Boeing 757 aircraft placed into service since mid 2008. The decline in revenues is due to the lower cost of aviation fuel for those ACMI, block space and charter contracts that include fuel in their price. The price per gallon of aviation fuel in 2009 declined approximately 50% compared to 2008. Excluding those contracts that include fuel, revenues per block hour declined 4% and remained unchanged for the third quarter and first nine months of 2009, respectively, compared to the corresponding 2008 periods. ACMI Services results included revenues of $5.6 million from Boeing 767 freighter aircraft that ABX supplied to DHL during the first nine months of 2009 under short-term supplemental agreements.

Pre-tax earnings for the ACMI Services segment decreased $1.8 million and increased $0.3 million for the third quarter and first nine months of 2009 as compared to the corresponding 2008 periods. Our 2009 results for ACMI Services were negatively impacted by lower than expected cargo volumes for a Boeing 767 transatlantic scheduled service which ABX commenced in January 2009. Additionally, the cost of ABX flight crews were high during 2009 due to scheduling changes caused when senior DC-9 flight crew members were retrained for the Boeing 767. High levels of sick occurrences among crew members in the third quarter of 2009 resulted in higher pay premiums for unscheduled pilots who flew open routes. Additionally, pre-tax earnings were negatively impacted by the timing of scheduled maintenance checks. ABX, which expenses aircraft maintenance as it is incurred, completed six scheduled maintenance checks during the first nine months of 2009, compared to three maintenance checks during the same period in 2008.

CAM Segment

The Company offers aircraft leasing through its CAM subsidiary. Aircraft leases normally cover a term of several years. In a typical leasing agreement, customers pay rent and a maintenance deposit on a monthly basis. CAM had 41 aircraft that were under lease as of September 30, 2009, 38 of them to ABX, ATI and CCIA.

Pre-tax segment earnings for CAM were $6.1 million and $16.7 million for the third quarter and first nine months of 2009 compared to $4.0 million and $13.2 million for the corresponding 2008 periods. The increase in pre-tax earnings reflects six additional aircraft that CAM has placed in service since September 2008. CAM's results reflect an allocation of interest expense based on prevailing interest rates and the carrying value of its operating assets. CAM's revenues for the three and nine month period ended September 30, 2009 include $12.9 million and $36.1 million for the leasing of aircraft to ATI, CCIA and ABX. During the first nine months of 2009, CAM leased four additional aircraft to ATSG airlines.

In February 2009, CAM finalized a lease agreement to provide two Boeing 767 aircraft to a Miami, Florida based operator. The lease agreement is expected to begin in the fourth quarter of 2009 and includes the option to lease up to three additional Boeing 767 aircraft.

CAM has contracted with IAI for the conversion of up to 14 non-standard Boeing 767 aircraft to full freighter configuration. The conversion primarily consists of the installation of a standard cargo door and loading system, replacing the passenger door and loading system currently in the aircraft. Three Boeing 767 aircraft were undergoing freighter modification as of September 30, 2009. ATSG plans to modify up to 10 Boeing 767 aircraft that are currently under contract to DHL under the ACMI agreement to a standard freighter configuration as the aircraft are removed from the DHL ACMI contract. In October 2009, CAM purchased another Boeing 767-200 freighter for approximately $17.8 million, completing a purchase commitment made in 2007 when the Company acquired Cargo Holdings International, Inc.

Other Activities

Through separate subsidiaries, the Company sells aircraft parts and provides aircraft maintenance and modification services to other airlines. The Company also operates three U.S. Postal Service ("USPS") sorting facilities. The Company also provides equipment leasing and facility maintenance, as well as specialized services for aircraft fuel management and freight logistics. These other business activities do not constitute reportable segments. Other activities include general and administrative expenses not associated with the DHL commercial agreements, including an allocation of ABX's overhead expenses, starting January 1, 2008.

In May 2009, the aircraft maintenance and engineering business operations of ABX were transferred to a newly formed ATSG subsidiary, Airborne Maintenance and Engineering Services, Inc. ("AMES"). Organizing the aircraft maintenance and engineering capabilities separately from ABX facilitates a cost structure and marketing organization which can better compete in the aircraft maintenance industry. AMES operates as a Federal Aviation Administration ("FAA") certificated 145 repair station, utilizing the Wilmington, Ohio facilities, including hangars and a component shop leased by ABX from DHL. ABX is AMES's primary customer at this time. AMES leverages the Company's existing engineering skills and technical experience to perform airframe maintenance, component repairs, part sales, line maintenance and avionics modifications for other ATSG airlines, as well as external customers.

Revenues from all other activities increased $2.1 million and $8.0 million in the third quarter and first nine months of 2009 compared to the corresponding 2008 periods. Increased revenues were primarily a result of an increase in aircraft and facility maintenance services when compared to 2008. Pre-tax earnings from all other activities were $0.1 million and $2.9 million during the third quarter and first nine months of 2009 compared to a $0.2 million loss and a $2.2 million loss in the corresponding 2008 periods. Improved pre-tax earnings for the third quarter of 2009 compared to the third quarter of 2008 were driven by higher maintenance and postal revenues. These improvements were partially offset by an increase in the proportion of overhead cost that the Company does not recover through its DHL ACMI and Hub services agreements, the latter of which expired on August 15, 2009 offset. Improved earnings for the first nine months of 2009 reflected increased sales of surplus aircraft and aircraft parts compared to 2008. Additionally, our pre-tax loss for the 2008 year included a one-time charge of $2.5 million stemming from an arbitration ruling in 2008. Internal sales and earnings were eliminated from the consolidated results.

A summary of our revenues and segment earnings for continuing operations is shown below (in thousands):

                                                   Three Months Ended               Nine Months Ended
                                                      September 30                    September 30
                                                  2009            2008            2009            2008
Revenues:
DHL
ACMI
Reimbursed Expenses                             $  58,293       $ 110,948       $ 215,749       $ 335,403
Mark-ups                                            1,800           2,322           9,033           7,334
Reimbursable wind-down payments                     9,708              -           48,913              -

Total ACMI                                         69,801         113,270         273,695         342,737
Reimbursement reserve                                  -             (464 )            -           (1,787 )

Total DHL                                          69,801         112,806         273,695         340,950
ACMI Services
Charter and ACMI                                   70,296          79,434         208,105         210,691
Other Reimbursable                                 20,195          37,442          53,054         106,189

Total ACMI Services                                90,491         116,876         261,159         316,880
CAM                                                16,046          11,964          43,715          33,677
Other Activities                                   17,838          15,708          42,829          34,789

Total Revenues                                    194,176         257,354         621,398         726,296
Eliminate internal revenues                       (19,974 )       (17,668 )       (48,425 )       (41,574 )

Customer Revenues                               $ 174,202       $ 239,686       $ 572,973       $ 684,722


Pre-tax Earnings:
DHL                                             $   1,929       $   2,326       $  13,776       $   5,728
ACMI Services                                        (926 )           879           1,502           1,195
CAM                                                 6,115           4,038          16,696          13,204
Other Activities                                      140            (219 )         2,939          (2,242 )
Net non-reimbursed interest income (expense)       (2,611 )        (2,385 )        (7,201 )        (8,812 )

Total Pre-tax Earnings                          $   4,647       $   4,639       $  27,712       $   9,073

Note: DHL revenues for 2009 reflect amendments to the ACMI and Hub Services agreements and the adoption of a Severance and Retention agreement between ABX and DHL. The purpose of these changes was to facilitate the wind-down and restructuring of DHL's U.S. operations. The wind-down revenues include revenues to manage the termination of employees and support the scale-down of DHL's U.S.
operations.

RESULTS OF OPERATIONS

Net earnings from continued operations decreased $1.3 million for the third quarter of 2009 compared to the corresponding period of 2008. For the third quarter of 2009, improved earnings generated by CAM from aircraft leases of $2.1 million was offset by losses from ACMI services and increased absorption of overhead costs that the Company did not recover through its DHL agreements.

Net earnings from continued operations improved $11.6 million for the first nine months of 2009 compared to the corresponding period of 2008. Improved earnings included increased revenues from the DHL ACMI agreement. Due to contractual amendments stemming from DHL's restructuring plans, revenues for the first nine months of 2009 included additional amounts in lieu of annual incremental revenues that ABX historically recorded only in the fourth quarter of each year. Additionally, 2009 included revenues specified by the S&R agreement to facilitate the wind-down of DHL's U.S. network. By comparison, operating results from continued operations for the first nine months of 2008 included one-time charges totaling $3.8 million stemming from an arbitration ruling in July 2008. During 2009, improved CAM earnings of $3.5 million, lower non reimbursed interest expense of $1.6 million and gains from the sale of surplus aircraft of $2.2 million were offset by higher income tax expenses of $7.1 million and increased non reimbursed overhead cost compared to the first nine months of 2008.

Salaries, wages and benefits expense decreased 25% and 9% during the three and nine month periods ended September 30, 2009, respectively, compared to the corresponding periods of 2008. Due primarily to the DHL restructuring, headcount declined approximately 75% as of September 30, 2009 compared to September 30, 2008.

Fuel expense decreased $27.4 million and $64.0 million during the three and nine month periods ended September 30, 2009, respectively, compared to the corresponding periods of 2008. The decrease reflects the reduction in aircraft in service for DHL. In addition, the average price of aviation fuel decreased significantly compared to the third quarter of 2008. The average price of a gallon of aviation fuel decreased 50% in the third quarter of 2009 compared to the third quarter of 2008.

Maintenance, materials and repairs decreased $5.5 million and $17.4 million during the three and nine month periods ended September 30, 2009, respectively, compared to the corresponding periods of 2008. The decrease is a result of DHL's removal of aircraft from service in conjunction with its U.S. restructuring plans.

Depreciation and amortization expense decreased $4.3 million and $6.0 million during the three and nine month periods ended September 30, 2009, respectively, compared to the corresponding periods of 2008. Depreciation expense decreased due to the removal of the ABX DC-9 fleet and eight Boeing 767 aircraft since DHL's restructuring announcement in May 2008. The depreciation expense for 2009 reflects the addition of one Boeing 757 aircraft and four Boeing 767 aircraft that the Company has placed in service since September 2008.

Landing and ramp expense, which includes the cost of deicing chemicals, decreased $0.8 million and $4.0 million during the three and nine month periods ended September 30, 2009, respectively, compared to the corresponding periods of 2008. The decrease is a result of DHL's removal of aircraft from service in conjunction with its U.S. restructuring plans.

Travel expense decreased $1.7 million and $7.0 million during the three and nine month periods ended September 30, 2009, respectively, compared to the . . .