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Cargojet moving cheaper e-commerce goods, overstocked retail inventory

CEO says consumers buying down to lower price point but still need next-day air

Cargojet has 20 Boeing 767 converted freighters (pictured) in its fleet. (Photo: Flickr/Alan Wilson)

Continued e-commerce momentum along with businesses favoring dedicated airlift for goods because of unreliable passenger airline service make Cargojet relatively insulated from a potential economic downturn, executives at the Canadian freighter company said.

Cargojet (TSX: CJT) operates an air cargo network between major Canadian cities carrying shipments for Amazon, Canada Post, DHL, Purolator and UPS. It also offers fully crewed leased aircraft on international routes for dedicated customers and short-term charters. 

Consumers are changing what they buy online in response to inflation, but that hasn’t slowed Cargojet’s package volumes. People are cutting back on expensive luxury items and buying daily necessities instead, said CEO Ajay Virmani.

“Certainly the mix of traffic has changed. For us, it doesn’t matter whether you’ve got a nice pair of Nikes in it or you’ve got a bottle of oil in it, it’s a shipment for us,” Virmani told analysts during a Wednesday call about the company’s second-quarter results.

“Whether they want a toothbrush or toothpaste, we see a lot of those shipments we never saw in e-commerce. People are not going out and buying that product off the stores, they just know the prices and they order it and they have it delivered to their home. So that convenience factor is the shift that we did not see in the past.”

E-commerce is the biggest driver of Cargojet’s growth, especially for the domestic network, where online sales as a percentage of overall retail sales are rapidly catching up to the U.S. and Europe since the pandemic.

Canada is the 10th-largest market for e-commerce, with revenue of $35.5 billion in 2021, according to data firm Statista. The e-commerce market in Canada grew 14% last year and is expected to grow annually at 6% through mid-decade.

Cargojet, however, is not immune to macroeconomic headwinds. 

Seasonally adjusted retail e-commerce sales in Canada declined 2.9% in May, according to the government. On an unadjusted basis, retail e-commerce sales declined 23.5% year over year to $2.7 billion, accounting for 4.9% of total retail trade. The share of e-commerce sales out of total retail sales fell 2.5 points.

Intra-Canada flying represents Cargojet’s largest business line, but efforts to diversify the business have lowered dependence on the domestic network to 35% of total revenue. E-commerce and express companies require daily, overnight flights to feed their networks and have guaranteed space and weight allocations they pay for no matter how many packages they have to move.

Last year, Cargojet began operating in Canada two 767 freighters owned by Amazon (NASDAQ: AMZN) for the online retailer.

Toronto-based Cargojet even expects to benefit from major retailers deeply discounting certain categories of merchandise and offering them online or through secondary channels to offload excess inventory. Walmart (NYSE: WMT) and Target (NYSE: TGT), for example, posted weak first-quarter profits due in part to inventory overstocking as demand fell short of forecasts. 

“As these retailers clear their overstock, we expect many of these items to float through the e-commerce channel. Furthermore, despite the short term volatility in e-commerce volumes, we remain bullish in our view on the long-term growth cycle of online shopping. Many shopping malls are being redeveloped for residential and commercial use. These stores are gone forever,” new CFO Scott Calver said.

Cargojet posted adjusted earnings before interest, taxes, depreciation and amortization of CA$81.1 million ($63 million), a 20.3% gain from a year ago and slightly ahead of market expectations. Total revenue climbed 43.3% to $192 million. During the first half, revenue and adjusted EBITDA grew nearly 25% and 45%, respectively.

Domestic network revenue grew 2.7% from the first quarter despite a decline in flight hours because Cargojet was able to fill its aircraft better. Sequentially, revenue was softer than the typical improvement of 5% or more, a sign that demand is beginning to ease, BMO Capital Markets said in a customer note.

But Virmani said top- and bottom-line growth is sustainable because e-commerce is so entrenched in the economy. Consumers and businesses have gotten used to fast delivery and will want airfreight even if supply chain disruptions are eventually eliminated, he said.

“People have learned to live with next-day delivery on most of the stuff and cost is not an object. … If you order something, you don’t want it to be sitting in transit for six days,” Virmani explained.

“The big difference is that e-commerce is driven by small businesses as well as major brands, such as Amazon, Walmart and Best Buy. This is much larger than the last mail order cycle. The transportation winners of this cycle will be air cargo for the middle mile and trucking. This is why we are excited about the new economy and we feel confident in our long-term growth strategy.”

A recent survey by PYMTS seems to reinforce Virmani’s conclusion about e-commerce shifts. It found that a more Americans made online purchases in May than November and that a significant number of them had low incomes.

Cargojet operates 34 aircraft, including 20 Boeing 767 medium widebody and 10 757 freighters. The fleet is scheduled to reach 40 aircraft by the end of the year and 50 by 2025. Four used 757s are expected to be delivered in the second half of the year after being converted to cargo configuration by Precision Aircraft Solutions. Cargojet is also investing in eight large 777 converted freighters over the next three years.

The 757s, ideal for regional routes, are freeing up larger 767s for more international long-term charter arrangements. On Wednesday, DHL Express announced a new dedicated freighter route from Miami to Sao Paulo operated six times per week by Cargojet.

Cargo flees passenger airlines

Executives said shipper concerns about reliability and consistent capacity at passenger airlines is permanently shifting more business toward all-cargo carriers. Airlines and airports have not been able to bring back staff fast enough to cope with a surge of pent-up travel demand this year, resulting in widespread flight delays, cancellations and schedule reductions

“Large passenger airlines focused on fixing their passenger side of the business. Many of the resources that typically focus on cargo, including people, are being deployed on the passenger side to help stabilize their core business,” Virmani said. “Hence, the cargo business is just an orphan at the present time with these kinds of carriers.”

He singled out Westjet, without referring to it by name, as an example of a passenger airline deemphasizing cargo. Calgary-based Westjet last month said it will pause further investment in additional long-range 787 Dreamliners and focus the existing widebody fleet on Western Canada.

Chief Strategy Officer James Porteous said the scheduled, long-term lease business — consisting of a dedicated aircraft, crew, maintenance and insurance (ACMI) — is benefiting from a strategic shift by DHL from partial dependence on passenger jets to exclusive use of own-controlled freighters, as well as cross-border e-commerce. DHL, for example, previously relied on commercial airlift to connect to Brazil from the U.S.

The shortage of cargo capacity at passenger airlines — down 32% from 2019, according to consultancy Seabury — flight disruptions and increased shipping demand are also driving ad hoc charter rentals, said Porteous. 

Cargojet is selectively moving aircraft around to capture opportunities for unscheduled charter flights. The domestic network has plenty of spare daytime capacity because aircraft are only committed for four and a half to five hours each night, according to management.

Virmani said the company is giving preference to existing customers that need extra service because of turmoil in the general air cargo market.

“I think it solidified more relationships,” he said. “We have not taken advantage of gouging at this time and charging them an arm and a leg because they are stuck. I think with helping those customers they see clearly the benefit of switching things over to us in the longer term.”

All three business segments — domestic network, ACMI and charter — achieved double-digit revenue growth during the second quarter. High utilization rates saw dedicated, scheduled activity grow sequentially by 14.6% to $47 million.

As for its own staffing levels, Virmani said Cargojet is short about 20 to 40 people who load and unload aircraft, but has been able to maintain a 98% on-time performance by juggling shifts and increasing overtime. 

Cargojet generated net income of $160.9 million in the quarter ended June 30 compared with a net loss of $11 million a year ago. 

(Correction: An earlier version of this story had a typo showing an incorrect figure for EBITDA in Canadian dollars.)

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.


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Eric Kulisch

Eric is the Supply Chain and Air Cargo Editor at FreightWaves. An award-winning business journalist with extensive experience covering the logistics sector, Eric spent nearly two years as the Washington, D.C., correspondent for Automotive News, where he focused on regulatory and policy issues surrounding autonomous vehicles, mobility, fuel economy and safety. He has won two regional Gold Medals from the American Society of Business Publication Editors for government coverage and news analysis, and was voted best for feature writing and commentary in the Trade/Newsletter category by the D.C. Chapter of the Society of Professional Journalists. As associate editor at American Shipper Magazine for more than a decade, he wrote about trade, freight transportation and supply chains. Eric is based in Portland, Oregon. He can be reached for comments and tips at [email protected]