Q2 2021 Cargojet Inc Earnings Call
Good day and welcome to the cargo Jet Conference call. Today's conference is being recorded and this time I'd like to turn the conference over to Pauline Dhillon, Chief Corporate Officer. Please go ahead.
Thank you operator, and good morning, everyone and thank you for joining us on the call today with me on the call are H, everybody, our president and Chief Executive Officer, Jamie Porteous, Our Chief commercial officer, and Sanjeev Manny our interim financial officer. After opening remarks about the quarter, we will open the call for questions.
I would however, like to point out that certain statements made on this call such as those relating to our forecasted revenues costs and strategic plans are forward looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDA. Please refer to our most recent press release and M D and April.
Horton and assumptions and cautionary statements relating to forward looking information and for reconciliations of non-GAAP measures to GAAP income I will now turn over the call to a J.
Thank you everybody for joining us this morning.
After a long 18 months dark shadow of Covid and there is some sunshine and emerging as more and more Canadians gets fully vaccinated.
No question that the past 18 months have been challenging for businesses and governments health care worker employees and students and countries like ours.
But what I was most impressed with is the human spirit and its ability to adapt and adjust and thrive.
While the initial shock of shutdowns forest and incredible hardships on businesses you saw many businesses quickly adopted the new digital reality.
Carpet is no different.
After being declared as an essential service sorry forget employees demonstrated heroic effort to keep over a business going.
Alright, and unprecedented price and volumes and a very short period.
We also want to think of our customers who trusted us.
And trusted and routine with their deliveries at this critical care.
Like many other companies Carpenter is also adopting which new realities and why.
And we don't.
Got to know what the new norm.
And it looked like you do know that we are not going to go back to the old.
1 word that we're hearing most often is hybrid.
And it turned to Opex schools universities and even shopping.
People are dropping.
Hybrid approach to their lives.
And as economies reopen and people are eager to step aside outside and enjoy.
What they missed the most.
Restaurants, and moving to shopping and travel.
At the same time, they have discovered that many of their routine tax can be handled.
More efficiently through digital channels.
And for Staples Daily household goods and.
And good for kids and their own house are much simpler to get delivered to your door.
In terms of her business environment, thousands up new business. It got started.
Early on and digital basis, because its not wanted to take the risk of investing large capital and real estate okay.
These structural changes and art.
Driving a whole new digital economy.
We are still not seeing the full recovery and b to B business segment.
And as you're aware businesses were largely shut down for the most part of Q2, we expect this segment to pick up in Q3 and Q4.
And accordingly.
While there are many signs of hope and domestic air travel most experts do not expect day International Air travel to return to pre COVID-19 levels until 'twenty, 3 'twenty 4 or even maybe 25.
This will keep the belly cargo capacity constrained for the next few years.
This means the international air cargo markets will remain tight.
And we will continue to present opportunities for cargo get to growth.
Some of these trends.
Are bound to become permanent because of the level of services.
Companies like cargo jet for white.
Or this market.
Now turning on where 2 of our second quarter results.
We are pleased to see strong momentum.
Momentum and virtually all of our lines of business.
Revenue growth, excluding charter and line of business was a solid 30%.
As you know probably guess charter revenue reflect a significant onetime benefit from dedicated charter flights to bring PPE from China and other parts of the world to Canada.
Going forward, we expect a more normalized revenue growth.
And our charter business.
It is worth.
Mining everyone on the cargo jet ended the full pre COVID-19 year of 2019 with EBITDA of only 156 million.
The EBITDA for the first 6 months of 2021 and stands at 131.6 million.
Compared to $124.8.002 million 20, and increase of 5.4% in spite of the fact that we had a significant 1 time benefit from the charter business in 2020.
I share these numbers to explain the size of structural change and we have gone to and the past 18 months.
1 noticeable cost increase.
Is.
The cost increase of 49% and.
And our crew costs.
And the implementation of new transport, Canada pilot fatigue rules, which clearly disadvantage, Canada based cargo airlines against the U S. Based cargo Airlines, we are seeing.
The higher initial cost trend.
Cargo jet team is focused on finding cost effective solutions to address this issue and deal with it with <unk>.
Highest priority to find solutions to offset these costs and gain effectiveness.
On the balance sheet front, we have been extremely prudent and utilizing our strong free cash flows.
Generation by the business over the past 5 quarters.
We have brought down the leverage our debt to EBITA ratio to below 1 times EBITDA.
You may recall, the cargo debt leverage stood at nearly 5 times.
4 years ago.
Number 2 we clearly retired we early retired.
Aircraft leases and now on 83% offer fleet.
<unk> 5 out of 30 aircraft are fully owned.
We have paid down the revolver and full.
We have 600 million and undrawn revolver, providing strong liquidity.
Should we pursue growth ideas.
Our net debt stands at 273 million.
Which is below our trailing 12 months EBITDA levels.
We have also resumed over annual dividend growth.
As.
Previously announced to return cash to the shareholders.
Cargo jet now enjoys 1 of the strongest balance sheet and the North American Airlines industry and.
And it was a deliberate decision.
We wanted to be prepared for a potential inflationary environment.
Why is there is a great debate about how long the inflation might last.
Wage inflation is permanent and it's here to stay.
Economists agreed that central banks will have to raise interest rates eventually.
Cargo jet is now well positioned to deliver shareholder value, regardless of the direction and bear interest rates goes.
Let me touch on the operational side, we're continuing to see strong volume growth as I mentioned earlier.
And this new hybrid world, we expect the baseline for almost every aspect of our business to move up.
We grew our fleet size by 2 additional planes and.
And it now stands at 30.
This compares to 26 aircrafts.
Of Q2 last year.
Our on time performance remains at over 90, and 98, 5%. Despite a significant change and the block hours flown profile on for a company.
This remains a critical deliverable given the importance placed on.
On this.
By our customers.
We are adding key talent.
And management and several parts of the company to reflect over size and complexity of this new baseline.
Another significant focus for us is ESG.
The board and the management team have been devoting a considerable effort to outline of our policies targets and a framework, where we can all play and role and helping the environment and reducing our carbon footprint.
While we continue to report on progress against the targets set by our board.
Each of the ESG.
Components.
And update on the internationals and <unk> growth strategy.
We continue to make progress.
And both these areas having demonstrated the added value of dedicated air cargo service to our customers, who initially signed up for shorter and shorter term commitments.
We are starting to see greater.
Stickiness for certain international segment, despite the reopening of certain passenger air route.
The international Air cargo demand still remains very high and continues to present opportunities for AC and Mike and charter businesses.
Once again some of these trends are becoming long term and permanent as the customers get spoiled with the service they receive a dedicated cargo airlines.
And once again thanks.
Thank you all for joining this morning and were now open for questions.
Thank you and we would like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure you're on mute function is turned off to allow your signal today total Portland again press star 1 to ask a question, we'll take our first question from Kunal <unk> with Scotiabank.
Please go ahead.
Thank you.
Good morning, everyone.
Maybe the first 1 on money.
You talked about the first.
First half EBITDA being up but what's this last year and that has come out of but I guess, given the second quarter of last year was pretty strong.
Are you thinking about the growth heading into the second half of this year versus last year and I used to have a somewhat tougher comps and second half.
But you have new AC and minor I'll say gets and then you have the new CMI contracts with Amazon and domestic <unk> hopefully would be balance sheet at some point. So how do you feel about taking on.
Well, we are feeling pretty good we have made significant progress as you know we have.
And the next 18 to 24 months, we're taking delivery of.
7 new 760 Sevens and.
And 2023, we have plans to get.
2 triple Sevens, and then 2 and 24, we have an option for those ones.
We feel pretty good at that.
Demand for those aircraft are weird and discussions with number of customers, we have a lot of choices and.
And let's put it this way without saying that we have signed contract and we feel pretty confident that the aircraft will be placed as soon as.
As soon as they arrive and both of those.
Segments, whether it's international or whether it's a <unk>.
<unk>. So those are those would be nice choices for us to have on the domestic front as I've mentioned that the business continues to our customers are telling us that the forecasts are quite robust and quarter 3 and 4 are with that.
I know the economy, and Canada is open up somewhat and the Lockdowns are paying and the past I think there will be a thing and the path and.
And in every country not only just from Canada, but we feel that the hybrid trend will settle somewhere in between at the highest what they were in 2020.2 and what they were in 2000.2019.
So overall, we see a net positive increase on those as well.
Whereas the 2 CMI aircraft. They have started a couple of weeks ago.
This will require some study for the next 3 to 6 weeks or even 8 weeks as to what.
And you know what demand is required to fill those aircraft at the same time, we operated network for the rest of the traffic. So some of the adjustments will have to take place as we mentioned and the last call that this would take at least a quarter or 2 to make sure that the demand and the and the.
Net worth is fine tuned together, so this would be a bit of a learning.
Forecast on.
On a on our part on our customers' part and we will continue to make tweaks on a daily basis as the capacity and demand to match the best needs that produced the results for both parties. So we find that generally we are optimistic that our.
E Commerce.
Not only domestically, but internationally and cross border continue.
<unk> continues to grow.
And the duty free limits of $150 now.
It's coming into effect and I think we will see a lot more international activity on the E Commerce front as well as as well as domestic.
That's great color, Thanks, Ajay and.
And then talking about <unk>.
And we saw a slight.
Colin Downtick and.
<unk> revenue quarter over quarter.
And you just started a new contract I guess and cheer on returns.
Stan or HDMI contracts and what do you expect a massive and.
And we call this business line going forward.
So we've added 2 additional routes for 1 of our largest customers starting in August.
So we and we are also and discussion with a bunch of other.
Parties, who are interested in doing some more AC and my work.
Our issue right now if I had 5 extra planes they would be all committed to some ACM I route so as the new aircraft come in and.
October there's 1 October November then we have 1 in March and every 4 months, we are getting a new aircrafts and at this rate I can tell you that.
And nothing assigned and I don't want to.
Jump ahead of myself here, but we have a great demand for those and as a matter of fact.
And we are in discussion and alkylation and those aircrafts going forward. So we find that the ECM my segment of our business.
Is going to be a significant portion.
Offer for business going forward and I.
And customers are who are using us for ace you might use to use commercial airlines who are mostly.
Shifting their cargo and knowledge, we have switched to their own.
Aircraft AC and my although the flights are fully full but the basic advantage of.
But you see my versus commercial is that the customers are finding that they can fine tune their delivery schedule, it's better and they have better service they have better control of their times and they have better overall synergies using a CMI versus commercial so it's a matter of them getting spoiled and these guys I can tell you.
On our debt.
Feedback we have is that a lot of this.
Is here to stay as Bourbon and trends.
And that makes sense, thanks, and last 1 from me before I turn it over so we are hearing.
And the guys on the U S.
I was saying.
Delivery model will be on ground delivery model is expanding to 7 days a week I think Fedex, what's making an announcement there.
And do you see something like that coming into Canada pretty shortly as well where your customers are asking you to fly more or incomplete or and Fridays and Sundays on Saturdays.
Yes, good morning, culinary and it's Jamie I cannot I can take that 1 yes, absolutely. We see we started to see that trend really.
Starting a couple of years ago, when we added a Sunday flight initially for Amazon.
But we've grown that since and I would say that all of our all of our customers that are and the BDC space are now offering 7 day, either are or will shortly be offering 7 day, a week delivery to their customers.
Okay. Thanks, Jamie.
Thank you we'll take our next question from David Ocampo with Cormack Securities. Please go ahead.
Hey, good morning, everyone.
I just wanted to circle back on on the CMI route contracts that you guys are talking about with Amazon.
You guys think about that side of the business day.
Just I guess from the early innings or are you, starting and steep deterioration and volumes that shift from sales to domestic overnight network into the CMI basis, or where should we look at that as all incremental volumes.
No I think David we've been it's Jamie again good morning.
We've been pretty clear and the last couple of calls that we expected that when the CMI aircraft first started there could be a little.
Bit of and impact on the domestic volumes that otherwise were being carried on our domestic network, but you have to appreciate that.
And from Amazon standpoint, it's a growth story, there, adding dedicated capacity on a CMI basis.
2 to provide capacity for their expected growth, which is over the last several years, we've seen obviously significant impact and significant growth on our network. So as J J.
Noted in his and his previous remarks, we will take the next probably 4 to 6 weeks to evaluate what that impact is certainly expected as we get into Q4, we will see that any impact will start to flow back up with demand for peak.
And then have you heard any commentary from your other customers that may.
Take on Amazon volumes as part of it and network, particularly Canada post apparel.
No we haven't seen any equal concern on some of our other customers parts that are that are providing capacity to Amazon, but similar to what Amazon started dealing directly with cargo jet 5 or 6 years ago. There was no. There was a concern about dilution to other customers that were that were carrying packages for Amazon and those have continued.
And at similar if not increased levels to what they were previously so we don't anticipate any dilution there.
Alright.
Then shifting gears to BBB volumes here.
Closer to pre pandemic levels and.
Where do you see that ultimately settling and that as we enter this new normal.
Yeah.
I think I think we're getting close I think and expected if everything the economy stays stays and growing the way. It has been over the last couple of quarters, particularly as we go through Q3 and into Q4, I think we would return to normal volume. So that we would expect on from on the <unk> side of things and 1 sort of barometer that we use as our.
Our non what we call on non contract customers, which is a mix it would be to see but it's primarily b to b customers and if I looked at Q2 revenues year over year I think we were up 20%, which is a good reflection of the strength of the return to the <unk> volumes.
And also all depends on how quickly things open up a lot of your work by some of the retail areas and a lot of stores are still not open and a lot of retail outlets are still closed.
And depending on how and if we if we got a fourth waived and obviously.
It'll be a different story so.
It all depends on how quickly things can open up.
Okay. That's my questions I'll hop back and Keith Thank you. Thanks.
Thank you we'll take our next question.
And from Chris Murray with <unk>.
<unk> capital markets. Please go ahead.
Yes, thanks folks good morning.
And just maybe turning back to your comment around.
The cost associated with the fatigue rules.
Sure.
Well I think we were led to believe though that part of your infrastructure. Your contract is that you can put through surcharges to offset some of those costs. So your net neutral.
Any commentary around around that and.
What sort of measures do you think you can take to actually offset those costs.
Well first of all the surcharges, we did have surcharges for certain non contract customers that.
We have long term contracts and obviously some of these costs cannot be passed so.
Total contract spot expires, we will then be negotiating new contracts with the customers. So unfortunately, we have to eat those costs and that's why you see a big big Bulge there.
Part of it is that the government of Canada. We have tried for 3 years to 4 years to highlight 1 thing and.
And this regulations, which is.
And the rules for passenger and cargo airlines at the same whereas at U S. After 3 and congressional studies, they decided that cargo was a separate business.
And not related to passenger because of the timing of the flights.
Unfortunately, we could not explain to our government and regulatory authorities that was the case and they decided to go their own way, which has caused a lot of.
Hurt to cargo companies and.
We have hired a lot of crews to offset that cost so.
We continue to talk to the government, but as everybody else knows what happens when you keep talking to the government we don't.
We can't depend on them and we can't depend on any other.
Solutions from them, and especially with them, they're all preparing for elections more than anything else.
So where does that leave us and what offsets.
We are going to do.
In terms of that.
There's not a whole lot we can do in terms of.
We're looking at some computer.
Assistant programs, where we can gain efficiencies more.
We are looking at a certain ways of structuring our crew schedules that work out the best.
There is there is not much we are going to be able to do in terms of that.
We are also looking at certain.
At the end of the day, we have to be competitive and we have to make sure that we are.
We have something leftover after all these additional crew.
Crew costs so.
And it's it's a learning experience. We are also learning the new rules.
Apply where we can and it would take us at least another quarter before we settled down and say, okay. We have now optimized according to the new so even the programs that we have they're learning as well how crews can be utilized more effectively so we will gain some efficiency with that stuff, but I think some of the trends would be permanent.
But we are looking for.
Some permanent solutions to this issue as well and speak and.
I would be updating and the next tranche.
Conference call on those issues.
And that sounds fair.
And then my next question is just thinking about growth and it sounds like from your commentary there is enough opportunities out there that at least everything you have in terms of aircrafts.
It sounds like.
There's a couple of options, but there is definitely a plan for putting those aircraft as they come into service.
On.
You will be able to generate some pretty good revenue on.
Do you have any opportunity to accelerate any of that.
Fleet additions and are there other opportunities to maybe go in and maybe accelerate additional aircraft or or is the bottleneck and the conversions and inc.
And also on whether or not you can you can do anything on the near term to kind of capture some of this opportunity that's out there.
Yes, so we.
We did we were able to get a $7.57, a couple of months ago, which was.
And the being converted at that time, and we were offered.
<unk> to get that.
Aircraft and our service we also picked up another 757, which we from a Mexican.
Residential fleet.
And was up for sale and we're gonna be converting that and the next couple of months. So the size of the aircraft is somewhat smaller but it fills a need for a certain a.
Certain markets so we.
760 Sevens are concerned the conversion slots are tight.
Right now if we were to apply for a slot right now we would be looking at towards the end of 2020.4.
However, we do continue to look for aircraft that might be already converted and if anything comes and the market. We have our eyes open, but we can't speed it up certainly but.
We are hopeful that if the right now the delivery schedules are on time and.
Anything that.
But we can do to enhance we continue to have the vendors and but right now it doesn't look that we will be able to advance it.
And we do take on opportunities that are presented.
From time to time like we did with $2.75.7.
So those would be coming and much faster and the second 1 is already started service the 757 and the second 1 and we expect it to be in February so, which is kind of speeding it up and our our world.
And personal care and.
And then just just kind of a housekeeping question, but so capex.
You had originally thought about this year somewhere and the 225% to $250 million range and Thats still a good number to think of.
Yes that still holds good but due to additions of 787 and this was like.
And opportunity, which we have it so it will be slightly in the range of $2.70 to 80.
And for this year.
We haven't been able to cash and on this aircraft availability.
Perfect Alright, thank you very much.
Thank you. Thank you and we'll take our next question from Walter Brooklyn, with RBC capital markets. Please go ahead.
And thanks very much operator, good morning, everyone.
Good morning, Joe.
And so starting with.
Some of the commentary you mentioned and the back half looking.
And looking excluding some of the second quarter.
Revenue from PPE last year every quarter, you've seen sequential improvement seasonally through the year, both on revenue and EBITDA.
Have you said is that I know, there's some moving parts here with Amazon, but is that fair to look at now in terms of the seasonality and the same seasonality holding in <unk> and 'twenty, 1 where you you build EBITDA sequential improvement each quarter through the year.
And we normally would do that Walter but I think this year, we are operating to CMI aircraft and.
With all the other stuff happening in the marketplace I think we will have to next.
As we mentioned and the last quarter once we are operating.
Those 2 aircraft we have to see does it really free up 2 additional aircraft for us to go deploy it somewhere else on on more profitable route.
That is yet to be seen because we are not seeing that change much in terms of the shipping patterns.
In spite of the 2 added 2 additional aircraft, so I think and about.
It will take us at least this quarter or next half of next quarter to get really and then the peak start So inc.
Get distorted again, so we just want to make sure that.
Yes, we want to see improvement and Thats, our target, but at this stage, we want to make sure that we assess our network.
Cost and network capacity to what the real demand is going to be at the end of the day. So this is this is a learning experience and it will take it quarter over quarter and a half to settle down.
And we continue to monitor it on a daily basis.
Okay, Yes.
The target is to continue to improve and and but it will.
This new addition of new services.
Certainly.
Is something that we have to continue to monitor and adjust upwards or downwards as we go along.
Fair enough, Okay, and then going back to the international you gave us a little bit and insight a J on how international contracts will be signed.
You've indicated you have a degree of optionality, so presumably presumably that with your existing customers, who are saying Hey look if you have that aircraft.
Mailable for international use wed like to take it out on and ACI My basis, but you are you are continuing to monitor.
How soon will you know that.
You mentioned and Youre talking to customers now will you look to sign on customers.
Could you put 1 triple 700 toward kind of your own at risk flying and then the other 1 day CMI and then eventually perhaps convert both over to your own at risk or.
What's your strategy essentially with your mainly with the Triple Sevens on the international routes as you start to come closer to those delivery dates.
So the Triple Sevens I mean, we're still at least 2 years away from the first 1 but were first brush looks like that a combination a flight from the far east into let's say, Vancouver, which and the arrest and base. The flight continues on to <unk>.
Eastern Canada, let's say to Hamilton, our case here that.
And that portion becomes like and domestic type of portion.
Which kind of eat some overhead because of the domestic.
We get take advantage of the domestic opportunity which is full.
Which frees up certain and $75.7 to deploy it and other places.
And then continuing on to Europe, and then we deploy some 75.767 750 Sevens to South America, Mexico, and some of those markets, which kind of continue with give us the freed from the triple 7 from all over International places. So so it's kind of a network design that will happen.
And that would incorporate.
Our first 2 triple Sevens would incorporate some element of domestic already that we exit that exist today with some new international opportunities.
The 767 and again it can change its 2 years of waves and you'll see what the market is but that's what we were hoping to do and as for the 767.
International growth strategy is.
Our first 2 or 3 aircraft at least minimum 3 aircrafts are committed to going into some kind of and ACM My <unk>.
Service initially, but keep in mind, we have at least 6 or 7 aircrafts that are available to us over the weekend Friday Saturday Sunday and Monday as a matter of fact, 4 day some of them and each part of the country, where we plan to use those that capacity to grow internationally to build up.
And as Triple Sevens.
And the next couple of years, so and Thats Triple 7 comps. So we are going to deploy over international strategy, and and third and fourth quarter of this year.
And with 767 to be used when they are available on the weekend or are during the days that can do a round trip and come back that would be sort of our first phase of international growth on selected based on where we feel the yields warranted.
We're not just going to be everything to everybody, but we will take that niche and selected market, where the demand is far greater user better and.
And then build and build those into the Triple 7 program. So let's start with 760 sevens wherever it's available plug demand and then move on to Triple 7 and certain areas and also take advantage of putting these aircraft on.
On a on a <unk> basis. The first 3 at least that are coming out.
So it sounds like this is something you can ease into and check demand and pricing as it as it evolves rather than.
Like youre going to be flooding the market with new capacity. The minute you take delivery and something you can you can judiciously enter we're opportunistic on where the opportunity offered itself with some good optionality yes.
Yes, absolutely we will use the 760 sevens to build the business and those 767 and theyre going to be more incremental as you know because they are already working and domestic there are some ACI.
So we will have the opportunity to use those aircraft to start building the international marketplace slowly and gradually because you're free to a triple 7 capacity and international market. Obviously, the price gets diluted for everybody. So we want to start slowly fill those up and then move into the triple 7 phase So you're exactly right.
You called it right totally.
That makes sense, okay. That's everything from me, thanks, very much great quarter.
Yes.
Thank you.
Thank you we'll take our next question is from Kevin Chiang with CIBC. Please go ahead.
Good morning, everybody, Thanks, and thanks for taking my question here.
Ask Walter's question on seasonality, a little bit differently, when I look at your pre pandemic.
EBIT seasonality loans like with a 43, 44% of that you would you would generate and the first half of the year and the remainder of the back half of the year.
Just wondering how you think about moving that broader seasonality.
<unk> 21, and then just given the change and the mix of group business.
Any comments on it and said how do you think that seasonality might trend as you bring on these new aircraft and as you as.
As you build up the CMI and you and your <unk>.
And my International charter business over time.
Yes, good morning, Kevin and Jamie.
And as J J said, I don't think Theres any real fundamental change and our seasonality other than as he indicated that with the introduction of the 2 CMI aircraft that we just started operating in July it's probably going to take us close to a good quarter to understand what impact if any that has on the normal domestic volumes on our scheduled overnight network and other than that.
I don't see any real change and the seasonality you expect Q4 to be a very strong quarter as it wasn't previous years.
Okay.
That's helpful and interest.
A second 1 from me just on pilots and Thats for all the color in terms of.
And what Youre seeing today, but just wondering.
As passenger air traffic comes back and presumably higher.
Pilots that are furloughed start start reentry that.
And <unk>.
The passenger airlines industry again and is that having any impact on the ability to recruit pilots does that is that creating any and.
The incremental cost pressures that you didn't see a quarter or 2 ago and is there anything left to do on your and if.
And you are seeing any any bottleneck issues.
And we need to put into place and noticed.
Crude to the levels, we need to recruit to.
To have the pilots for his closing on coming in.
So we have no issue with the recruitment of pilots.
A whole lot of expats that went to middle East and Southeast Asia to fly and these pilots are young and they were had families.
Majority of them want to come back we have hired at least 50 of them from that lot.
Over the past 1 year. These are people from Matthew hard Emirates, Cathay Pacific Korean Airlines, the Canadians, who went with young families and all of the families are ready to come back and they could never find.
Flying wide bodies are.
Being captains and any other Canadian airlines. So they were kind of stock. So this is <unk>.
Great opportunity for these guys to return home to a decent job.
And they are so there is a big pool of those pilots available. We don't have any shortage at this time, but again a year year and a half ago. There was a big shortage of pilots so.
From what we've been told by the major carriers that there is a small recall going on but they don't expect that any major recall is going to happen for at least 2 to 3 years.
There will be some recall it might it might go up to 75% 80% of the 2019 level.
We are we went through a crazy period of hiring.
Over 100 and over 100 pilots.
In the past 1 year.
Number 1 to offset the crew fatigue regulations, and secondly increased demand.
A lot of as you know it takes $50.60.70 Grant do you get a pilot training and.
And getting them type rated and getting them online. So there was a lot of training costs that we incurred and that's why we see a big line item over on non of our expenses.
And.
As far as the market is concerned.
We are not concerned at this stage about having a shortage because we acquired.
More than what we need at this stage and I know there'll be some attrition when the passenger airlines do call back and we are fully prepared for that sort of contingency as we have some extra pilots on board for that.
Okay. That's helpful..1 more just as I think.
And so thinking.
And out longer term and you bring on these triple settles and you kind of build out or extend out and your network.
Yes.
Further.
And internationally.
And just how do you think about the interline partnerships, we've developed over time.
On the strategically how do you look at that and a world where maybe you can source more cargo from further places that might otherwise.
And on the Interline on and Airlines Interline partnership with and I do think that that might jeopardize some of those relationships. If they think you're cycling some of there.
Volume that otherwise might have growth on the Belo wellbore poles with offline passenger traffic till like Vancouver, or Toronto Montreal.
And as a matter of fact.
And so very good question, Kevin and we've looked at that issue and in terms of weather.
And whether it would we dilution due over revenue and because if we're flying direct to certain places keeping.
Keep in mind that there is a lot of capacity and.
That doesn't exist that used to exist and those days. So if we are.
If we are seeing European carriers that used to fly to South America and in Latin America directly the flights of discontinued or they've gone too narrow body aircraft and certain.
Places so when they bring their stuff into Canada, that's where we used to pick up and go to other places.
I think.
Domestically.
We will never whatever the capacity and and for.
And our line was required and.
We don't anticipate that would change as a matter of fact, when we start flying international we will have more opportunities to sign up more interline agreements with carriers that need that capacity, let's say for example, a company like Cathay Pacific that comes into Vancouver and now.
Instead of just selling Vancouver, and they can also be selling if we are flying to Mexico or let's say.
You know our Caribbean or some of the other.
Colombia.
And now Carrie.
China's products not only within Canada, but also the South American and Latin American destinations.
Also would have.
South America, and Latin American carriers feeding us.
And for European free So I think we see more opportunity internationally with interline.
And selected expanded routes that we are thinking on.
So we don't feel that would jeopardize or dilute any of that revenues.
That's very helpful color. Thank you very much.
Thank you Kevin.
Thank you we'll take our next question from Matthew Li with Canaccord. Please go ahead.
Hi, guys congrats on the solid quarter.
Thank you and can you maybe expand on the U S strategy in terms of are you seeing good partnership opportunities in the market and maybe talk about what your ideal partner looks like for the U S.
Can you repeat that question, sorry, you broke up a little bit.
Yeah, just thinking about the U S strategy in terms of partnership opportunities and the market and what your ideal partner looks like and the U S.
So, yes, we have been pursuing that international and.
Growth, but also <unk>.
Seeking partnership and strategic alliances and the U S.
What are our ideal partner would look like.
That has obviously a fully licensed a what they call it 121, and certificate, which is equal to over 7% or 5 operating certificate.
Ideal partner would be a cargo carrier that has.
Proper licenses, they're well run and managed and organization.
And and we'll also be able to.
Fly aircraft if needed for us because certain routes we cannot do let's say for example.
If we go for a flight from Hamilton too.
<unk>.
Miami, and then Miami to L. A and then L a to Mexico City.
We cannot do the Miami La portion on our present route. So we that's where the international or the U S partner comes in to do certain routes and certain routes selectively that is.
Being offered to us by our customer, but lack of regulatory authorities and we as you know it is called cabotage, we cannot do certain route but with combining our U S and Canadian carrier could certainly filled those kind of neat and.
And that's what we're after.
And I mentioned that we.
We'll be.
Finalizing and and.
Some kind of an arrangement with an American carrier.
This quarter, we have a.
Number of them that we have had discussions with and it looks like that certainly will.
And B the case before the year and and also keep in mind that also gives us an opportunity to place aircraft with this carrier and.
And they're on a dry lease or it might basis, but getting the economic benefits.
And a win win situation for the American carrier and the Canadian carrier so weak.
And I'll watch the space for more on that.
Thanks, and then a bigger picture DHL announced today that its going to be investing and in electric cargo planes on order to reach the ambition goals.
And do you guys feel any pressure from them or any of your other partners to invest and similar technology.
As a matter of fact this is.
We have discussed this issue with DHL.
Quite a lot and these are small plane sales company.
Company called E creation.
Out of Seattle area. They are there are 2600 pounds.
And which can go up to 1 hour flight and these are electric planes DHL signed up for 12 planes.
Fully about it.
And.
Long time back and we might even look at some of our needs are regional like we can get 1 of those planes.
I think it would be great. So.
We don't those size of planes don't compete with US there is no pressure on us, but as a matter of fact, we are closely looking at.
There is some customers who have demand for that kind of we don't want to get into a full blown regional operation, but just to continue with our own feed for example, if we fly to rent.
Vancouver for example, and there is.
Demand for a small portion of that going into Nanaimo, or Victoria 2600 pound aircrafts electric would be perfect for dural drought. So if it enhances our network. We would also look at those planes, but unfortunately those planes don't come into service in 2024, but we are certainly very key.
<unk>.
And I do look at what DHL has done and we've asked DHL.
Give us some introduction so we could plan for those kind of flights for the future because they they aircraft looked quite maintenance Martin.
And they don't have any fuel that like electric so.
It really interest us to enhance our capability to our customers.
Alright, thanks, guys great quarter.
Thank you we'll take our next question from Tim.
And <unk> TD Securities. Please go ahead.
Thanks, and good morning, and I'm, just wondering if you could take a minute and characterize and the types of cargo.
That you are seeing those customers that are choosing and you expect in the future. We will choose to stay with dedicated services as opposed to planning to return to to passenger aircraft to the balance of those aircrafts.
Hey, good morning, Tim It's Jamie I can I can give you some color on that I don't think theres any 1 particular product.
That stands out I mean health care obviously.
Globally has has increased demands because of the COVID-19 pandemic, but literal.
Literally anything that requires time sensitive overnight.
Or cross Intercontinental.
Travel is shipped by air certainly manufactured goods and the whole logistics supply chain demands that that many different types of products, especially products that are in short supply from a manufacturing standpoint, but the product types themselves seem to change over the years, there's not any 1 single product that we're seeing is just a we're definitely seeing an increase.
And demand for air cargo services globally.
And also obviously because of the increase.
E Commerce and online shopping which is not just a phenomena here in Canada, but also globally and not just the actual retail side of it direct to the consumer but also the manufactured goods and that has to get us fulfillment centers around the world.
Causing increases and demand and at a time when.
Like I said, a couple of times on previous calls you know prior to COVID-19, more than 50% of the world's air cargo traveled and the belly of passenger aircraft, particularly on long haul intercontinental routes and with with I would think the consensus and the industry that that capacity is never going to come back to to pre COVID-19 levels at least at anytime I would say and the next.
And at least the next 10 years, so the demand for dedicated cargo services.
Subsequently increased dramatically.
Okay. That's very helpful. Thanks, Jim and then just 1 additional question on kind of the competitive environment.
With.
Western announcing dedicated cargo plans and your Canada, having already articulated its strategy.
And I realize they're not.
And a sort of clear cut competition, but I'm just wondering if you could talk about what your thoughts are on sort of implications and cargo jets and long term positioning.
And we don't take it as a significant threat to or certainly to our domestic overnight business. I think we're confident enough that we built deep enough moat around the domestic business over the last 20 years in terms of reliability, particularly because thats number 1 the most important criteria that our customers demand from a service standpoint, so they can compete effectively in their markets.
And secondly, the fact that we operate to 15 cities across Canada from coast to coast and have long with our major customers have long term agreements in place with all of which are several years, if not many years and and extension agreements.
Options as well and those agreements. So we don't see a threat from that standpoint, you're right, it's going to be a big Westjet and air Canada will be Canadian licensed air cargo operators that we haven't had.
We've enjoyed the benefit of not having any competition with dedicated cargo aircraft of any types are very significance anyways domestically here in Canada or internationally.
As you indicated and air Canada has articulated there.
The use of those aircraft is primarily for.
Additional capacity to 2.2.
Provide service to their international divest their international cargo cut commercial cargo customers that it had been servicing with using plug and passenger planes over the last year and a half carrying cargo only and the bellies and so we don't see and that was really doesn't compete with us on an international basis and never has.
Westjet equally we think it's more of a.
Competitive threat to air Canada cargo on the international side.
When you look at it again.
There's really no demand domestically for services, but there is capacity demands for international cargo.
Particularly feeding their wide body 787, aircrafts, so if they have and aircrafts and they will have to pass through 707 flying from Calgary to Amsterdam. As an example, not a lot of cargo originating and terminating and Amsterdam.
Calgary or vice versa, but a significant amount of cargo coming out of Europe coming into Canada, and being able to feed to and from those flights in and out of Calgary from other points and Canada I assume would be the use of those 737 and 8 hundreds that they've announced that they're going to convert.
I would say that neither are fed and certainly has a strong pedigree of the passenger belly cargo capacity and speed.
Base.
Conversely, Westjet I would say it has very little cargo pedigree in the belly of their passenger aircraft and.
And we don't don't really believe it's going to be significant threat to us. It doesn't certainly doesn't change the way, we look at building and growing our business both either on the domestic and international or the semi side.
And and I might add that.
There is no passengers slash cargo airline and a combination that is capable of delivering a 98% to 99% performance.
At least it hasnt happened in the past 30 years or 40 years.
We have only 1 product is solid with just cargo.
We are focused on that and.
You will also find that.
Cargo for some of these carriers is going to be 5% to 7 or 8% of the total revenue and once the passenger comes back or if they do ever come back.
The focus is not just going to be on cargo and Thats what history has told us so thanks.
Sometimes change and we are not totally dependent on history and yes. We are aware that they are coming in with cargo jet has over a $1 billion invested and infrastructure ground support equipment and containers.
Repairs of ground support equipment.
You know loading and Offloading aircraft and 15 to 20 minutes turnarounds, our hub and Winnipeg and.
And we've given a seamless service from Victoria, we see in St. John's Newfoundland and on an overnight basis. So you got to there's a lot of.
Development over 20 years that this company has been built along with I would say a bulletproof fortified.
<unk> balance sheet that you know.
And is almost debt free with all of our assets pay it up.
There is there is a lot there.
There is a lot for these companies to overcome to compete with cargo jet and we were fully prepared if we are attacked and any which way or manner in terms of.
And taking 1 route then obviously the customers will have to make decisions that what happens to the other 60 and routes how do they get that.
And it's 1 of those markets that we.
We are fully prepared for competition, but based on our service alone and our infrastructure our cargo culture of required pedigree.
We don't anticipate that we're going to have any issues competing effectively.
With these carriers if they choose to compete with us.
Okay. That's really helpful. Thank you AJ zinc and Jamie.
Thank you.
Thank you once again, please press star 1 to ask a question we'll take our next question from Melbourne Sassy with Laurentian Bank. Please go ahead.
Hi, good morning, and congrats on a good quarter.
Yes. Thank you.
So the first question and it's really about when you mentioned that you expect on <unk> pick up in Q3, and Q4 I'm just wondering will that sort of dilute the beat and sea business or is that still going ahead and hold up and this is an additional thing that comes up.
No I think it's just it's additional incremental <unk> doesn't impact b to C or vice versa. I mean, BTC is really driven by the increase of E Commerce and online shopping by Canadians and the <unk> is really the traditional overnight Monday to Friday business to business Courier freight.
Straightforward or type.
Traffic was somewhat impacted on volumes during the shutdowns because of COVID-19.
Okay No that's good.
And just my second question I think it was in the last call.
You had mentioned that you had flying.
On slide for your pilots.
<unk> down because there was not availability of commercial lines at that point and time and I believe the 2 challenges that were there are you still saying does is thats 1 of the lowest cost elements that you can take out or do you think thats still going to continue because you have to deliver the results to customers.
Right now we do continue to fly those 2 shuttles to Cincinnati too.
<unk> board our pilots because of.
And again, it all ties down to the pilot regulations that we faced.
There is.
We can get additional use of the pilots work day, if we fly them day, 1 hour flight into Cincinnati, rather than putting them on commercial because commercial right now is like sometimes 2 or 3 flights to change.
And also.
Sometimes a flights get cancelled so the service is not dependable so.
We didn't have a choice other than to put our own challenges, which were meant for occasional use now it's being used almost daily as a man.
Matter of fact, we are supplementing some left from others.
Corporate jets to get our pilots into Cincinnati is yes that is and additional costs.
It's quite a bit of additional price, but it saves us a lot of pilot. These at this present time and continues to.
Improve over operations, because the fatigue rules certainly has hurt us.
And we that's 1 of the ways, we are offsetting by gaining more.
<unk> productivity by giving them and ours direct flight and they'd be able to continue on and some other flight tests and on the land so.
And what's going to happen and I think we plan to probably continue there's still at least Q4.
And towards the end of Q4 till we learned the new rules, we worked with the government on these regulations and over and over crews. So.
Ideally, yes, my wish would be to as commercial for commercial lift came back and there was an hour flight.
That would be great, but if it doesn't come back.
And then we might not have a choice so.
And that's something that we can continue this daily on and work on our mind to make sure that we are.
The first opportunity we get is to disconnect that and save that cost.
Okay, No that's great and maybe just last 1 from my end and this is just going back to Tim's question on competitive environment and I'm. Just wondering when you think of it cartilage its long term business.
Overnight domestic business that is there down the line do you think that you know.
The Canadian market has the capacity to have multiple players that are eventually profitable or do you think that you know.
This is a market where 1 large player.
And we'll continue to dominate and the economics are such that it's difficult to have multiple operators on the domestic overnight network.
Look I mean the.
Airbus off cargo jet when it started and around.
Around 2000, 2001 was a product of many cargo airlines operating as a matter of fact, 15% to 16 cargo airlines sold or merged or went bankrupt. It's close their doors between $19.85, and 2000 and the result was that everybody was operating 1.
And 2 planes and $5.6 planes, they could not get the economies of scale they could not get the cost under control they could not deliver the performance.
So the model was created 1 sort of network that services all Canadians.
And who could have ever imagined that competitors like.
DHL.
<unk> zero later, all could be on 1 plane.
But they realize that look this model of everybody operating plans and didn't work and.
Because we were able to demonstrate number 1 well capitalized well run company with great cargo culture, delivering 90, 899% on time performance and not having any sort of risks associated with.
And 1 or 2 or 3 plan operation so.
What would be the future would it be 1 dominant carrier.
Canada is a very very difficult.
Place to service.
Flights between new for Atlanta, and Vancouver, a 7 hour flights, we have 3 times.
Owns in between.
The countries very very.
It's not dense at all of the population is very very spread out so.
A lot of product.
Also ships out from Ontario, and Quebec to Western Canada to Eastern Canada hardly anything coming back. So we have a lot of.
The way cargo jet has built is strictly to take.
Those kind of factors into account 1 way country different density of different products. So theres a lot has gone on over 20 years to best cargo jet to where it is and.
And I think new entrants.
And although it seems very nice and attractive to look at cargo yields yields and stock price and say well that's a market we should be into.
But at the end of the day.
You need to have the cargo culture to build what part of what day it is and.
And I can tell you that we feel pretty proud of our network our team.
And our.
Facilities over our over overall car.
Go pedigree and I think.
We feel that.
Our dominance is here to stay.
Okay, no that makes sense, that's it from my end and once again congrats on the quarter.
Thank you.
Thank you we'll take our next question is from comment on Dockson with National Bank Financial. Please go ahead.
Thanks, Good morning, and most of my questions have been answered, but I just wanted to follow up on the I guess the labor cost question, 1 more time and just looking at the overall head count for the company up 23% year over year I presume much of that is related to the hiring of your crude is it fatigue rules, but is there I guess other parts of the business where you are.
We're hiring ahead of growth that would inflate that head count number.
Yes.
That is partially true.
Most of it is due to the.
There is 2 areas that we had to every time and you'll get an aircraft you have to add some maintenance deemed do it.
Every time, you add and aircraft it needs to be loaded and Offloaded and so you are you hired the team to do that.
1 good thing is that our overhead backroom functions have not increased tremendously we have been able to absorb some of these whether it's records, whether it's finance, whether it's accounting or so we haven't been there we've been able to manage those within our existing cost.
So the direct variable cost with it I said lowering the planes and fixing the planes and flying the planes is cost that we cannot avoid as the size growth, but certainly there is a balloon you would see a bulge in the and the crew cost and that is what the fatigue rules.
Our results are.
So.
And I'll be hired enough for the future and Thats, probably helping yes, we do will start hiring some casual.
Work force for the peak flights.
Market is very very tight for anybody whether it's a restaurant, whether it's factories or whether it's loading planes, it's very very difficult to find people right now.
It's great for the government to hand out checks and.
But decided effect of a day is that our.
Companies like ourselves and restaurants and.
And general factories are not getting.
All of a sudden there is no unemployment, which is kind of hard to believe.
And so.
I think the market will correct itself once these incentives by the government are over.
To bring our cost down and to bring availability down.
Bring the availability and line with the demand.
So that's how we feel about the labor market.
Okay. No. That's very helpful that was all from me thanks very much.
Thanks.
Thank you we'll take our next question is on and then finally Lam.
Global advisors.
Please go ahead.
And gentlemen, and congratulations on a great quarter.
I have 1 question on ESG and many of your customers, especially BHL EPS and many of them are very keen on reducing non scope on <unk>.
2 and scope 3 emissions. So is there any pressure on cargo jets to commit on today and ESG standards and fast.
Would it requires some additional capital commitment share for cloud, which at the time.
Yes. So we are working with a couple of our large customers too because we fly for them. So they asked us to look at some ESG.
And as well and we are in at least 2 customers and we are looking at.
Getting over our policies and procedures and and.
And we're what we're gonna do and that area. So we are working with a couple of customers closely and we also as a company just put out the ESG policy.
We have set up some.
Mechanisms now too.
Take care taken to account.
The environment is a carbon emissions and how to reduce over fuel burn. So this is going to be a major major focus of us.
In the coming months and the next year.
As far as accounts GAAP as far as the capital required for it.
Can't give you any numbers because we just started to plan on it but I don't anticipate other than having some head counts right. Now initially ever first phase would be to reduce where we can in house and find procedures and policies that help us to reduce debt.
And of our footprint of the carbon and that would be remain.
Goal and.
And I'm sure with you.
What we've seen outside of that certainly is an achievable goal.
For us in the coming year.
Yeah, that's helpful and lastly, can you and if it's.
Possible can you give us some color on.
And ESG targets and timeline.
In fact on possible.
I can't give it to you right now, but we as I said, we have just started this whole process.
And internally and hopefully in the next quarter, we can give you some target dates and costs related to it.
And again, we just embarked on this project recently on over on previously we were doing it in conjunction with our customers. So as cargo jet we have started the process very aggressively.
And we give you a better update and the next quarter on this.
Yes, that's great to hear thank you very much.
Thanks. Thank you there are no further questions at this time I'd like to turn the call back to the host for any additional or closing remarks.
Thank you everybody for joining the cargo jet conference calls we appreciate your input feedback and comments, we look forward to speaking to you and the next quarter and somewhat you have individual calls and we look forward to start dissipating and those thank you very much for your support everybody.
Good day.
Okay.
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Yeah.
Yes.
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