Cargojet’s diversified business model is showing its durability amid signs of a pending recession and declining consumer confidence. While many airlines have reported marginally lower third-quarter cargo revenues, Canada’s largest all-cargo carrier this week said profit margins reached 35% as financial performance improved from a year ago.
Executives said they don’t expect a fourth-quarter decline, a stark contrast from the anemic shipping season — which usually peaks ahead of the holidays — that most freight transportation companies are experiencing. Instead, Cargojet (TSX: CJT) predicted fourth-quarter performance will be in line with prior seasonal patterns because large customers have secured additional capacity.
Driving the Ontario-based shipping contractor’s growth, and heavily insulating it from broader economic forces, is the relentless growth of e-commerce and consumer expectations for fast delivery. That business is the result of long-term strategic partnerships with customers such as Amazon (NASDAQ: AMZN) Canada Post, Purolator, DHL Express and UPS, which require continuous shuttle service to maintain express service commitments irrespective of whether planes are fully loaded or not.
Last spring, Cargojet entered a seven-year capacity agreement with DHL worth up to $1.8 billion.
“Cargojet is not immune to softness and consumer spending should a recessionary scenario become real. However … by aligning our long-term commercial interests, we expect a greater stickiness of volumes with our strategic customers, even if global volumes soften during a recessionary period. Therefore, we remain cautiously optimistic that the strength of our business model would allow us to manage the volatility better,” said President and CEO Ajay Virmani on Monday’s earnings call.
Nobody has indicated they want their contracts reduced. If the economy gets really bad, those long-term contracts offer protection because Cargojet would be the last to lose routes if a partner like DHL opted to cut back, he added.
“Despite the short-term volatility in e-commerce volumes, we remain bullish in our view on the long-term growth cycle of online shopping,” the Cargojet chief said. “We also believe that any reductions in retail consumer spending will be impacted more severely in the bricks-and-mortar retail outlets, compared to the sophisticated systems used by e-commerce retailers. In a recession, consumers tend to be more price-sensitive. It is our belief that e-commerce retailers are better positioned to meet the expectations of end consumers.”
Cargojet is treating the traditional busy shipping season for retailers as a “controlled peak” with steady volumes as opposed to the spikes of the last two years, CFO Scott Calver said.
The company posted a 22.7% revenue gain to $171 million for the September period, boosted 7 points by cost-plus fuel surcharges, and adjusted earnings of $60.2 million, up 15.5%. Investors were pleased by the performance, pushing shares up 13% this week.
Canada network anchors business
The airline’s domestic overnight network between 16 major Canadian cities, which co-loads packages from integrated express carriers and international airlines, is the largest revenue producer and grew 21% during the third quarter. Domestic revenue year to date is running about 15% ahead of last year and surprised management to the upside in the third quarter. Chief Strategy Officer Jamie Porteous said the business’ growth rate will likely slow to high single digits or low double digits next year.
The long-term charter segment, in which airlines or logistics companies rent aircraft and pay a fixed hourly amount to operate flights, performed the best with a 47% jump in revenue.
Management said the aircraft, crew, maintenance and insurance (ACMI) business is benefiting from a shift to dedicated cargo jets by freight forwarders that want more reliable service and guaranteed capacity than available by sharing space on passenger aircraft. To meet that demand, Cargojet added a Boeing 767 in July to fly a new route to Brazil and recently took delivery of two Boeing 757s for regional flying that will free up 767s for long-haul international lanes.
Cargojet’s confidence that ACMI business won’t experience any softness going into 2023 stems from getting the full-year effect from the recently added routes, primarily the one to Brazil and a new route being launched this week for DHL between Leipzig, Germany, Halifax, Canada, and Los Angeles with one of the repurposed 767s, as well as other aircraft the company will receive next year, said Chief Strategy Officer Jamie Porteous.
The network change involves rerouting an existing aircraft that operates between DHL’s Leipzig and Cincinnati hubs and crisscrossing the two new freighters. On the return leg from Los Angeles, the freighters will stop at DHL’s East Midlands hub in the United Kingdom. The higher number of block hours involved should translate into $15 million in annual revenue for a single aircraft, he said.
Carojet now has 35 freighters and plans to add another 767-300 in January before stepping up a level and receiving one of the first 777s ever converted for full-time freight operations in late 2023.
Ad hoc charter business, the one segment susceptible to inflation and slower spending, saw revenues cut in half. It is being impacted by lower yields for the general airfreight market and the fall in value of the euro.
Cost levers available
Cargojet has an option to defer two 767 aircraft deliveries in 2023 — either shift them to 2024 or cancel the order — if sales slow considerably because of a global economic downturn, Virmani said. That would save more than $73 million in capital expenditures. The airline has also deferred delivery of one 777-300, to be converted by Israel Aircraft Industries, from 2026 until 2027.
It can also protect profit margins by combining flights or adjusting schedules to align capacity with volumes on the domestic express network, said Calver. The upcoming increases in ACMI flying will help margins by further spreading fixed costs over a greater revenue base. A hiring and travel freeze is already in place.
Other cost savings will come from reduced need to pay pilots for overtime when 60 to 70 pilots now in training enter the ranks and from reduced travel days to Miami or Vancouver because Cargojet now has its own flight simulator, said Virmani.
Cargojet’s CEO said the deployment of the 757s in the Canadian network will further improve service levels because they will allow direct flights to more destinations, with later departures and earlier arrivals. With 18 aircraft now in service, the carrier, for example, can offer direct service from its hub in Hamilton to every major city without stopping in Winnipeg.
“We can give our customers a little later cutoff time so they can continue to pick up even till 8 o’clock at night and still bring it to us at midnight, and then we can ship it direct. Direct shipments also improve service because they’re not transiting, there’s no de-icing delays in Winnipeg or Calgary. So those are some of the advantages of direct ship flying,” Virmani said.
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