Q3 2021 Cargojet Inc Earnings Call
[music].
Today's conference is being recorded at.
At this time it is my pleasure to turn the conference over to MS. Pauline Dhillon Ma'am. Please begin.
Thank you very much good morning, everyone and thank you for joining us on this call today with me on the call are.
Hey, Jade Rahmani, our president and Chief Executive Officer, Jamie Porteous, our Chief strategy Officer, and Sanjeev Manny our interim financial officer. After the opening remarks about the quarter. We will open the call for questions I would like to point out that certain statements made on the call such as those related to our forecasted revenues costs and strategic plans.
Our forward looking within the meaning of the applicable securities laws. This call also includes references to non-GAAP measures and <unk>.
<unk> adjusted EBITDA and adjusted EBITA. Please refer to our most recent press release and M. DNA for important assumptions and cautionary statements relating to forward looking information and for reconciliations of non-GAAP measures to GAAP income I will now turn the call over to a J.
Thank you Pauline and thank you everyone for joining this morning.
Q3 was somewhere off reopening after a long hard road vaccinated Canadians were able to step out of their homes once again.
We saw a gradual reopening of shopping malls restaurants gyms sporting events.
There's no question that there was a pent up demand for all of these services.
The impact of this new freedom was clearly visible in July and August retail sales data published by Statistics, Canada.
But one of the most interesting data point for US is new baseline of Canadians ecommerce sales.
Fight the reopening the ecommerce sales are maintaining the new high baseline.
We believe the massive digital adult patients that took place over the past year and a half has fundamentally shifted behaviors for consumers.
As I noted in my last quarter remarks hybrid is the new normal.
Beat schools offices and universities are shopping.
People are adopting a hybrid approach to their lives.
We continue to.
Believe that shopping will move to two types of experiences.
Of course, we'll call. It Joy shopping this would include items that qualify as retail therapy luxury goods impulse shopping and fun experiences.
These are mostly likely to be enjoyed in person.
Second.
14 day to day needs. This includes household items that are needed on a regular basis office supplies groceries appliances electronics books back to school holiday gifts and many more.
We believe consumers have discovered that they can efficiently or these items and free it.
Time in their lives to do other things.
Aggregate is very closely watching these trends, but yes positioning its business continued to capture these emerging growth opportunities.
Now turning to third quarter results.
I'm pleased to see that over business diversification strategy is yielding strong results.
Our Q3 revenue growth of 16, 8% was led by the EC in my line of business.
The other lines of business such as domestic network.
E CMI and all in charters have taken turns to lead a given quarter.
Adjusted EBITA for the first nine months of 2020, one stands at $2 5 million.
<unk> $294 6 million for the same period in 2020, an increase of 4%.
Our balance sheet is strong with the leverage ratio now standing at one time adjusted EBITA compared to over three times a couple of years ago.
We have used over strong results to reduce debt paydown aircraft leases and build balance sheet capacity to fund future growth.
All signs point towards monetary policy moving towards higher interest rates.
Argo didn't cargo jet is now well positioned to navigate the next economic cycle.
This was an important priority for us and I'm pleased with our decisions and progress we have made.
Business environment, and macro economics remained strong for growth opportunities, let me share a few observations.
A much higher number of entrepreneurs are now starting online only business as compared to pre COVID-19 levels. This is visible on platform, such as shopify and others.
Traditional large retailers and big box stores have fundamentally increase the share of their online sales and are now putting new capex only towards online channel.
Number three.
New business models, such as recently announced partnership between Spotify and Shopify.
Enabled music artists to sell their branded merchandize on Shopify stores.
Will significantly expand the total addressable market.
Or e-commerce, there are many more examples of such partnerships.
Number four.
We do business at <unk> is starting to behave more like <unk> to see and is expected to contribute new growth.
So the overnight shipping market.
Number five.
The big retail giant Amazon continues to expand its offering and according to recent media reports. It is now 46 warehouses logistics and delivery facilities in Canada compared to 30 in mid 2020.
This is more than 50% growth in one year.
Number six.
While there are early signs of hope in the domestic air travel most experts do not expect the international air travel to return to pre Covid levels.
Until 'twenty, two 'twenty, three or maybe even 24.
This will keep the belly cargo capacity constrained for the next few years. This means the internationally a cargo by cargo markets will remain tight and we will continue to present the opportunity for cargo game.
This will also.
Result in.
Stripping patterns and shipping.
The expectations are.
To be different than what they are first as people get you used through the better level of service with cargo aircraft rather than belly cargo.
Capacities.
So the picture here is while there may be some short term volatility due to pent up demand for in person shopping longer term trends are moving off some choppiness firmly intact.
On the operational side volume growth remains strong.
Average daily volume is up.
82% for the first nine months of 2020, one compared to the same period last year.
We grew over fleet size by another aircraft and its now stands at 31 aircraft.
Our on time performance remains at 98% plus this is a crucial deliver it will given the importance placed on this target by our customers.
While we remain disciplined in most.
Cost and expense management and year to date SG&A cost is down 4.5, 0.4%, but one area that remains challenging as the cost of our crews.
Crew cost have been impacted by a combination of factors, including the recently implemented new pilot fatigue rules by transport Canada.
Discriminate Canadian all car cargo carriers against U S and other international all cargo carriers.
We are also investing in pilot training.
Fair for growth in our fleet.
Which added short term costs through the court.
We are focused on finding cost effective solutions and work with all stakeholders to address this headwind over the next.
The coming quarter.
That is also make a few observations on supply chain bottlenecks much has been written and talked about supply chain recently shortage of truck drivers and congestion as shopping ports. In addition, the return of full passenger capacity on international routes.
There's still a couple of years away.
Therefore, we continue to believe that cargo.
International markets.
As a growth opportunity and we are seeing some of these trends play out in our easy my business as well.
Cargo jet is focusing to ensure that our diversification strategy. The main focus and we intend to use future.
767, and Triple seven deliveries part of our international.
He might grow the business.
We are carefully investing in talent infrastructure facilities, and aircrafts necessary to build a strong diversified business and they are beginning to see some early encouraging results.
Once again, thanks for joining us. This morning, we'll now open the calls for questions.
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Hi, This is Kevin Kevin Chiang CIBC. Good morning, everybody hope everyone have a good week.
Yeah.
Good morning, how are you good I'm doing good a J. Thank you.
Maybe if I could ask just as we think about the peak season into Q4, and if I could just focus my question on the all in charter.
I guess the sequential pattern, we should be thinking I think in the past and if I recall last year.
You had suggested that you typically devote more capacity to your domestic network to service your long standing customers are and we typically see Oh should expect a sequential decline in that all in charter number in the fourth quarter, but just just given.
The Amazon CMI contracts some of the capacity you've added if you could just maybe speak to your ability to maybe continue to take advantage of of what seems to be very hot.
Charter market today for air cargo carriers, even into the fourth quarter.
Yeah, So Kevin our strategy has always been to focus on long term views.
Views in this matter fourth quarter is expected to be extremely heavy as forecasted by our customers' domestic and some AC of my customers as well so all in charters, while it is an attractive proposition for a shoulder.
Or a short term situation, we need to service our existing customers and that's what we're focused phase as it works to existing customers have a lot of extra peak demand and capacity requirement. You can certainly expect to decline in all in charters for the month of November and December definitely.
Okay. That's helpful.
And then I think just looking at your MD&A. It looks like you picked up another a CMI contract and.
In August there so congrats on that it looks like it's in U S. Well I just wanted to get a little bit more color or if you could provide more color on on that new AC on my contract and I think your JV in the U S play a role here in winning that business.
Could provide some color in terms of kind of where the cargo is being flow to and from.
Yeah. So we.
We did pick up a smaller issue my route but that was on a temporary basis and that road has now been discontinued but we are in negotiations do.
Police that aircrafts on another route so.
I can't give you any more information that I don't have but.
The Bottomline is that was a short term route in and hopefully that.
That aircraft is.
It is flying today on various routes and will.
I'll have some apartment and answers from a customer shortly on that.
Okay.
Helpful. And then just last one for me just if you can give us an update on on the Amazon CMI integration here going into the peak season in.
And maybe how that ebbs and flows through your domestic network.
Yes. So CMI are as you know we fly to aircraft so that are going to be in strong demand obviously.
In the coming months we.
We will also complement our requirements with some AC my flying and also on the daily network as well so all.
All three modes daily network flight <unk> and CMI.
And some charters do in domestic we'll probably fulfill the need of all of our customers.
The coming months.
Thank you that's it for me.
Alright, thank you.
Again that is all I wanted to ask a question. If you find that your question has already been answered you May press star two yourself from the queue.
Our next question.
Yeah.
Your line is open to ask your question.
Okay. Thank you.
Everyone.
Quick question on the.
The fleet plan just reading through it looks like you are.
Signed an LOI for three.
3757, but the timing.
The delivery was not stated, but can you give us an idea of what what what the idea here whether it be for.
So we are expecting our first quarter.
'twenty.
Two for the first plane and then every quarter.
For those three planes.
The idea of these triple seven says that they.
They would be but mostly in the domestic network to free up to 767 for <unk> and other charters and international flying.
Okay. So youre cascading some of this 767 into ACI My international.
Hum.
Do you do you have kind of visibility into pipe I know, where these things are where what does the 706 of them are going to be operating for is there more a CMI.
Well I think that you can talk about.
<unk> Slash international at this stage, we can't we're in discussions with at least two customers.
And we don't have exact details that we can share with you.
But once they are finalized we will be press, releasing those but there's a lot of demand for as you know 767 aircraft.
So $75 seven.
It's a good aircraft for domestic.
Provides more nonstop domestically improves the service on a lotta liens. So it's a strategic fit to take the 760 sevens and put them.
At alternate uses where the demand is much higher and where the yields are much higher.
And it's a growing business for us fits in with our diversification strategy.
And puts the asset to us.
A little more yield.
Yield wise.
Okay.
Second question on the Amazon.
All lines have to do.
The CMI aircraft, so I'm guessing at this point.
Have a good visibility into how these two aircraft are rolling into.
You know and impacting your domestic network.
Would you think kind of Q4.
We would see normal seasonality versus the third quarter at this point like what can you tell us about.
How do we see them.
The CMI aircraft are performing well with the customers are still the customer who is operating we're still testing out various issues with their own logistics requirements daily movements and all of that by any by no means we expect the fourth quarter to reflect anything normal.
Because the volumes are.
Our forecast and demand is going to be so high that some of that might be doing double turned some of them doing ACO. My flight, we have the right to use those aircraft to on certain AC might requirements that might we might have.
And to be honest with you I don't think four quarters would be anything like anything normal that you have seen so if all of the forecast Miss mature of various customers they've given us a you know it would be.
It would be a chaotic.
So the fourth quarter to you now.
To make sure that all of the demands are met for all the customer so I don't think.
By any means you can expect a normal fourth quarter.
Any kind of numbers or visibility.
Okay.
And maybe one last just follow up quickly you talked about kind of the steps or initiatives, we're trying to make to control costs improve cost a little bit but.
Expenses have been growing faster than revenue.
For the last couple.
Couple of quarters at least.
Is there a pricing opportunity at some point, where you can start to.
And pass through some of these crew cost increases in reserves or is that going to be a cost.
Side improvement and not really pricing.
Well you know.
For example, as you can see that last year and a half has been very taxing on the people of this organization in terms of.
Workload in terms of all the enhancements improvements to network a number of flights number of aircraft. We have not increased any management for the past five years to six years actually.
So.
We need to really expand overcame number one you need to expand over facilities as the facilities are absolutely operating at 150% of capacity right now so.
There is a lot of investment that the cartilage it needs to make to continue with this growth pattern, because we don't want the system to collapse, while we're growing so the costs will increase somewhat from where they are we.
We are watching them, we are making sure that they don't they don't go out of proportion.
Everybody understands that labor shortages that exist.
You know we had no different we are competing with.
Some of our own customers, who are hiring labor and offering signing bonuses and various places the hardest part to find right. Now is as labor for example of loading and unloading and we have 400 to 500 people that strictly do that.
In order to maintain them.
Greed is offering signing bonuses increases in double to triple digits, not triple digits, but double digit double digit increases to these people so and increase in benefits. So it is a bit chaotic at.
It is a bit hectic and to be honest with you.
We were no different than any other people in terms of cost of labor for example.
Whereas a crew costs are concerned they are a direct result of the government legislation as I had mentioned in my call.
Because American a cargo crews are operating at different levels. So their cost remains lower compared to ours, which puts us in that.
Uncompetitive situation somewhat and then we got to find the savings somewhere else.
Some of the cost.
You know our customers realize that they're.
They are facing similar cost increases so sympathize with us, but we have annual contracts with them as well.
So the phenomenon, so new but we have not sort of floated at this time of.
Getting big increases pass through of our customers, but at some point, we will definitely after the fourth quarter sit down and take a look at what's possible and what's not possible, but we as I said. This this is the new norm in and.
We are in the same boat as our customers and the whole marketplace and this will all have to be studied to make sure that we are not.
We're not absorbing all the costs.
And if whatever it is possible we will definitely.
We'll look at it.
Okay, great. Thank you.
Thank you.
Our next question.
Hey, good morning, guys. It's Walter Spracklen here How're, you doing how're you doing everywhere.
Walter how are you good good.
Sure. So you know when you first announced your your aircraft.
<unk> there was a little bit of trepidation about whether there was too much capacity coming on at a time when pasture airlines, we're going to bring back the belly space, but.
I think there's been some interesting developments since then.
That addresses that risk and I was wondering if you could speak to them first of all.
<unk> been contracting.
Fairly quickly.
The new aircraft that Youre, having come in and even pre contracting them somewhat where you've got agreements either in place or about to be in place well ahead of the delivery.
If you can if you can give some thought on that and then the second point.
I I thought was pretty interesting was dhl's facility adjacent to yours in Hamilton.
Four times the size of the one they had there before suggest to me that they're aligning with dedicated freighter aircraft providers like yourself and away from belly space in the future.
Do you have the same read on that.
Yeah. So just to take your last question, Yes, My read is that integrators like DHL.
I have certainly shifted away from a lot of commercial lift into their own a network off.
Aircraft, which are providing them with much better service and competitive pricing.
And in the marketplace. So.
If they were using three flights from London to Toronto, or London to JFK before now they're consolidating everything into into one flight and using their own flight, yes. It is a bit costly.
Exercise for them, but also keep in mind that what they are experiencing is that the service now is much better in the marketplace and has made them a lot more competitive. So those habits are being formed and to go back to the commercial lift and having your freight split over three or four different floor.
It is not that attractive an option anymore. So you know once you've tried Uber I guess, you don't want to get into normal cat. So that's the kind of a trend.
Trend, we are seeing that not only DHL, but other customers who were using commercial belly left and now the chartering or they're doing issue might be.
We find that the market.
We'll have a slight shift or a major shift.
It might settle somewhere in the middle but the key routes.
Would probably in our opinion would stay with that.
With this ACM I'd, rather than going back to the commercial lives.
And then on.
On the contracting yes.
So Congress yet you know we have a seven 760 sevens lined up for the next starting this.
Come in January and then one aircraft every quarter roughly we have.
The commitment of.
Floors Triple Sevens in the next.
'twenty three and then a.
A couple in 'twenty four.
We already have expressions of interest from at least a couple of customers on triple Sevens.
And as I mentioned in my call before that as far as the Triple Sevens are concerned Ah.
It's good to have options on <unk>, which is kind of a little lower margin.
But.
No risk.
So that's one option in the second option is to.
Fly commercially in and take the commercial glass.
At this stage if we were to apply those in today's market. There is no commercial rights because the pricing and yield is much better than <unk> and we could get longer term BSA type contracts on those planes. So it's nice to have those choices on those two type of aircraft will obviously have studied these closer to the market.
Nobody's going to assign these aircraft two years in advance, but certainly theres a lot of interest when I say a lot of I literally mean, it and that's where the 760 sevens are concerned as you know congregate as aggressive plans to start the international.
Markets as soon as these aircraft become available so we.
We would have a dedicated service to some strategic international point as we start getting these aircrafts. So there is a lot of demand it.
It won't be.
Contracts like we have block space agreement like you know longer term contracts on the international market, but certainly.
With our connections in Canada for example.
We can cover all of Canada and feed it into a gateway flight out of Vancouver internationally or Hamilton.
Certainly gives us a great advantage.
Any of the international markets in this country. So.
You are going to use leverage or.
Domestic.
Network to feed over international flights.
Already as you know flight couple of flights a week into Germany. So that's a perfect example of extending one of those flights into South America.
And connect having also connections to far east to Vancouver, and feeding that into the network as well. So we do have plans to expand that as we get our aircraft, but Ah contract wise.
We do have options to place at home. These aircrafts on HCA mine so.
So we might do a bit of a hybrid which kind of protects the risks, but also the idea is to grow the international brand of cargoes yet at the same time and the opportunity is right at this time.
That's great.
And then your block hour agreements with U P S purely or they are coming up in 2008, 2025, Thats still a ways away, but you you do tend to negotiate these early any sense of when negotiations will will start and when you might have.
A extension on those.
I think Walter as you know four years, three and a half.
Four years still left on that that's a bit early to start talking.
You know I would say that you can expect that any.
Any discussions with these you know you obviously cash we casually and we.
We certainly talk about those but any serious negotiations would not start 24 months, but prior to that space.
Okay and just back on the crew cost highlight you mentioned you do have within the scope of your current agreement the ability to pass on crew cost is that right.
Oh, yes, we do to a certain point.
You know, which which we are trying.
But not on all contract alright.
Okay. That's all my questions, thanks, very much great quarter.
Thanks, Thank you.
Our next question.
Hi, Thanks, operator.
Got it from Scotia Bank good morning, everyone.
Good morning.
Plenty of headroom.
No.
I wanted to kind of start with the domestic stand you you called out.
Q4 is the is going to be pretty strong there based on what you are hearing from your customers. So.
I wanted to confirm with you I think people are came out recently, saying they expect this peak season to be up 10% in terms of their packages.
That's the latest SAR have you heard anything different now and does that reflect.
Fully reflect what Amazon also plans to do in Canada.
So corner of just one two liter and suddenly they say, they're going to have 10% more parcels. That's the information they're getting from their customers. So obviously.
Yeah, that's what we read and Thats, what we thought but that also includes a lot of ground.
As well not just all air.
So there was an air component, which probably is a lot less of them to ground component adobe's. The shipment. So that's number one number two yes, we are expecting that peak volumes from our customers.
You know we are planning for whatever capacity.
They have requested and.
You know, we'll see how much of it is matures.
We are prepared to handle it.
We cannot give you exact as to how much of this would come.
This is kind of a very abnormal year for predicting anything.
You know we have no idea in terms of this is <unk>.
Things are opening up a little bit.
Would that mean more.
Shopping at brick and mortar and less online.
Or is it going to be that some of the habits that have formed over the past 18 months, we will continue on and as I said in spite of heavy heavy demand of shipping.
We expect that as I said, it might've March a bit of a hybrid situation.
Sounds of online shipping versus.
Personal shopping by people. So this is a very unique situation a lockout to being lifted Canada.
Canada is good in good shape with vaccinations. So there will be some spillover that people would go to like to do personal shopping so.
We'll have to wait and see how a but as far as cargo that is.
A concern we are prepared if those demands mature that we can absorb it and handle it and not let our customers down.
That's good color. Thanks.
And then perhaps talking about you are one of the fastest growing customer that's Amazon.
I mean, these guys were recently, saying they want to grow their Canadian employee base by 16%.
That's pretty huge I guess and then they were also kind of I think is reportedly looking into.
Our Boeing Triple seven freighter market.
To get their own product from Asia directly.
I mean from your perspective, you know Amazon is obviously, our domestic customer primarily.
What kind of opportunities do you can you suggest you can explore with these guys can they go international with you as soon as you have triple Sevens or is it all can point to domestic went out.
No our agreement is.
With Amazon as a share.
Shipping it doesn't entail domestic we have opportunities with them to grow in North America, and international as well and we continue to have those discussions with them and other customers as well so our growth strategy and our growth discussions with them, but not just limited to domestic only.
Okay. Thanks, and then on the AD hoc charter.
I think.
Like this was a pretty strong quarter.
$24 million in revenue.
Has to be above your 15 to 20 kind of range that you're anticipating.
Wondering.
You mentioned that Q4, typically is seasonally weaker than Q3 on that.
But I'm just wondering how much of the recent supply chain constraints in ground and then ocean shipping has played into that strength in Q3, and how much is still continuing in Q4.
So our Q3 is definitely a great quarter from a standpoint of the fallen charters and I. If we wanted to under normal circumstances, we would have taken probably a similar type of business in quarter, four but because of the demand for our existing customers.
And also the service to the existing customers is important as you do more charters will get less maintenance times on the planes. So we want to make sure that quarter four reflects.
Not only have capacity that we want to make available to our existing customers, but also have proper.
Proper time to maintain the planes to make sure that they are especially in the cold weather that they operate on our on time performance that over 98%. So we have the opportunities for those charters headquarter for which we have.
Elected not to take in order to make sure that we take a long term vision with our customers of serving their needs in quarter, four which is the most important for them and not sort of letting them down in terms of.
Delays are in terms of service and in terms of the availability of space in aircraft. So that's a conscious decision made by management to make sure that.
The charter activity is very limited.
In quarter four to make sure that the demand of our customers is kept in mind.
Okay.
But you don't want to get greedy with that and.
Sacrifice of service over existing customers.
That makes sense, okay. Thanks, and last one for me quite that at all.
And with the recent.
The changes that you announced and it seems like there's been a few.
Minor pushout or when that sounds it sounds in terms of timing by a quarter or so.
Maybe perhaps that due to parts and supply chain issues, that's happening all over.
What kind of Capex.
Can we expect for this year and next year.
Yeah.
Thanks Sanjay here.
Yeah.
We are expecting that our capex forecast for current year will be in the tune of 242 50.
Next year it will be.
In the range of $280 million that primarily because of the seven seven which are coming up so accurate and package the levels, which we aren't expecting me happened that Oh.
Items, maybe delayed a bit so.
Actual amounts may be quite different from what we are forecasting at present.
That's great. Thanks, so much thanks Pat.
Okay. Thank you.
Thank you.
Our next question.
Good morning folks, it's Chris Moore for me to be capital markets.
My first question is really around labor and specifically pilot labor.
Just wondering how you guys are finding.
Availability of pilots and crews in the second part of this is thinking about you know some of the comments from some of the U S carriers about shortage, it's down in the U S does that create an additional opportunity for you on <unk> to be able to take Canadian crudes and operate through your joint venture.
No actually.
The pilot situation in the labor situation is such that specifically that although you read a lot of pilots are out of work, but we honestly do as you notice a lot of flights.
By Canadian carriers are being canceled because of the lack of crews.
It's when you hire pilots youre looking at three to four months before they're injected two flying after training in line checks. So it takes a while so while there is a lot of pilots unemployed yet there is a shortage of pilots on the other hand, and we're facing that.
Hired a number of pilots from.
Passenger airlines and some of them are deciding to go back to passenger airlines. So yes, there is a shortage.
And real real.
Numbers when it comes to pilot as far as the opportunities are being taken at vantage by ever affiliates in U S 21 error.
They have four aircrafts now operating and they to be honest with you their hands full with.
Their own customers, so while there would be opportunities in the future.
That they plan to grow their business.
We can certainly pass on some of the business that we can't handle.
To them.
Provided they can handle under their licensing requirements, we can handle our own.
On our licensing.
Arrangements, but.
Correctly at this stage they don't have the capacity to do it.
And those opportunities are.
Not yes, they are pilot driven somewhat but theyre also driven aircraft driven so right now.
Both are in short supply there is no aircraft that theres not enough pilots so.
That's why you assumed the demand and the pricing so high on that market because of those two factors.
Okay Fair enough and then it kind of brings me to my next question is that you do have I believe.
Your first 76 or 767 coming in December.
What's the intent for that one aircraft that were pretty close to it now as that can get you to the domestic market maybe for maintenance spares relief or do you have any ATM I contract that you think that you'll be able to place it with immediately.
Jamie.
Yeah, Hey, Chris it's Jamie.
That aircraft that it'll be delivered at the end of December really is going to become a maintenance spare it replaces.
Aircrafts that we took out of the fleet to take on previous New AC My commitments are there this year.
Okay.
And then along those lines should we be thinking that there'll be a step up with maintenance costs. I know you did call it out a little bit isn't that big so far but should we be thinking about higher maintenance costs as we go into 2022.
Maintenance cost at present is in the range of.
$80 million to $90 million.
And as a new aircraft comes in in our fleet definitely as we said in Alberta.
Yes.
We expect $3 million.
Expense for each aircraft, which is added to the fleet. So next year, probably it's equally a golf comes it will be in the tune of $90 million.
Okay. That's helpful. Thanks folks I'll turn it over the line.
Thanks, Chris.
Your next question.
Hi, it's <unk> from Canaccord.
I just wanted to kind of ask in terms of <unk> revenue can you kind of talk about the trends youre seeing in each segment.
Probably fair to assume that <unk> revenue growth has kind of slowed down a bit and maybe <unk> is accelerating.
Okay.
Yeah, Good morning, Matt.
Yeah, I would agree I mean definitely during the quarter as a J.
<unk> articulated in his opening remarks, we saw softening of the BDC volumes probably related to the <unk>.
The reopening of the economies and people began being able to get out of bricks and mortar stores.
And as I.
So to you before it's a little bit difficult for us to have direct visibility to whats b to b and what's b to C with our customers because the vast majority of them with the exception of perhaps Amazon, obviously being strictly in the BDC space. The others all participate in both of them, we don't have direct visibility to which.
Portion of Purolator's volume that Theyre, giving us as b to b or B to C. Certainly to be the portion of its growing at a much more accelerated pace with each of them.
Great and then maybe you know on the fuel side margins on fuel remain in the mid teens I know that historically, it's been kind of closer to 20 is that because of the volume based fee model and is there any chance that you know that.
Margin strength going into Q4, given the prices right now.
Yeah, I mean as you know.
The fuel or fuel surcharge recovery is based on weight. So typically you would see during a quarter. When we have heavier volume if fuel prices are going up our fuel surcharge goes up accordingly, and the revenue that we collect as a fuel surcharge goes up again proportionately if it's during the season like Q4, where the weights are higher so you should expect to see higher fuel surcharge.
<unk>.
Revenue in Q4.
And in terms of margin.
Revenue for steel cost.
The revenue per fuel cost stay as Uh huh.
Like as we have said earlier right. So.
Other fuel surcharges dependent on volume so, whereas actual fuel cost is what the price fall since our volumes goes up in.
In different quarters, although fuel surcharge revenue will always surplus of our fuel cost.
Okay. Thanks, that's it for me.
Great. Thanks, Matt.
Our next question.
Yes.
Hi, Good morning, It's Cameron Derksen from National Bank financial.
Alright, good morning.
So just want to come back to the Capex question.
Again, you mentioned 2022 expectations of around $280 million or are you, including any initial capex related to the triple sevens in that number or is that more going to be concentrated into 2023.
US Triple seven mostly will come in 2023.
Maybe initial deposits.
It will flow in 2022.
Okay.
And then just a second quick question coming back to the questions around our crew costs and in pilots I know that.
Some of the pilots maybe you've hired in the last last couple of years here we're.
Maybe on the on kind of leave from from some of the major airlines.
Are you seeing some of those pilots kind of go back as they get recalled and is that impacting your ability to defined enough pilots is there any are there any issues around that.
Yes, some of them are going back.
Some of them are staying.
We are attracting a lot of pilots from overseas.
Expats, who.
Last 10, 15 years ago and have kids now they want to come back to Canada.
Places like Emirates at the Hot Cathay Pacific Korean Airlines, a lot of Canadian pilot work with those kind of airlines.
<unk>.
And we are attracting a lot of that crop.
People, who wanted to return to Canada.
No.
In some way yes.
You know we are.
Facing some kind of pressure on that side and we are continuing to hire people.
To make up for them.
So one of the reasons that crew costs go higher is obviously because of the overtime.
Being offered.
To keep up with the demand at the same time.
Even even if.
Theres not a month ago, we're not hiring 15 20 pilots but.
Some of them do continue to go back, but thats the way the whole industry work differently.
So but as far as operations are concerned we are managing to make sure that our operations.
Certainly, it's keeping up with the demand.
Okay, Alright, that's helpful that was all I had thanks very much.
Thank you.
Our next question.
Yeah.
Hi, Good morning, it's a gnomon from Laurentian Bank.
Good morning.
So going back to the labor shortage questions. I was just wondering if you could provide some color around it.
How big a compensation differences between what you guys did it or what a typical promotion on air language.
In terms permit.
There are two big labor groups of pilots, we will be comparable to what commercial airline like Air Canada Rouge, particularly would pay in terms of warehouse and and ramp staff or entry level jobs, we would be comparable to what anybody else in the industry and the service industry would be paying you know whether it's pure later, whether it's Amazon whether it's.
Whether it's Canada post or trucking companies for that matter any general warehousing companies.
Gone up significantly because of a labor shortage in the last couple of years, particularly related to Covid. So.
Entry level salaries are probably higher than $20 an hour in most cases, including benefits.
Okay, that's fair.
So any reason that some of the pilots want to go back to the commercial airlines, even though you guys still.
Or at par with the compensation front.
Well, it's a type of flying you know a majority of the people go back for various reasons that could be they want to fly passengers. They don't want to fly cargo a lot of cargo flying is at night.
So and there is certain.
I'll have to refer night flying and they don't mind flying cargo Theres certain pilots who don't.
Like flying cargo and they want to stay only on the passenger side of things. So it's a personal preference.
Really no reason why they go back except that they prefer that kind of flying so.
But then we have carnival pilots who'll be nuts for 25 years and they will ever go back to the passenger side of things.
Okay. No. That's good color. Thank you and just one last one from my end you just mentioned that pricing in the Canadian market. You guys are at a disadvantage with the U S or other players and you just mentioned that with Amazon you can actually grow with them not just domestically, but in North America as well I'm. Just wondering if you guys have engaged the policymakers or if there was any conversation.
You are having with them around around this.
A competitive disadvantage that you guys are and maybe down the line that can get changed.
We are always hopeful that at somewhere along the line win.
You know when the pricing becomes too high of these prices get passed on to the consumers.
When things get a little bit.
The shipping costs are factored into our cost of living.
You know it would certainly impact the Canadian consumers.
The second part is yes, we have engaged with the regulators over the past three to four years and unfortunately.
The disc.
We decided to follow there.
One.
Approach and not look at what happened in the international markets and U S markets and hoping that someday.
They will realize that.
Canadian cargo carriers.
Luiz.
Market share in.
And give it and lose their competitive edge.
But again, it's one of those things that.
You know, yes, there is an increased cost there is increased awareness.
We are constantly pointed out to all stakeholders about the situation and I think.
The idea for US is to work with all of them. We are open to working with all of them too.
Through a case that.
Look I mean.
We have two number be operated safely and number two we have to be competitive so I think at some stage.
All parties will come together and look at this as a common.
Cause rather than just a cargo debt costs.
Okay. That's it for me thank you.
Alright, thank you.
Our next question.
Hi, Thanks, Good morning, everyone. It's Tim James here from from TD Securities.
I'm just wondering if you could sort of give us an updated sort of long term view of the margin potential for cargo jet and specifically the kind of key.
Factors that will be biasing, it both lower and higher I mean, the volume outlook given e-commerce trends.
The success Youre, having with customers, obviously very positive I'm just interested more specifically on it seems like his belly capacity comes back if that as much of a margin impact other factors, you're changing product mix moving international if you can just kind of talk about.
The key considerations.
That we should think about on the margin profile of the business longer term.
Okay.
Hey, good morning, Tim as Jamie I think if you looked at.
The three segments of our business, obviously on the domestic I think margins are going to be driven by continued strong growth of e-commerce, particularly as we get into 2022 and 2023.
The Asia My business remaining very strong and margins will continue pretty steady margins and high margins on that as you're aware on that business and obviously as you know.
[noise] indicated by the fleet plans that we have over the next several years, we're very confident that we're going to be able to take advantage of entering into two numerous new AC my agreements with customers that will keep those margins at the levels that we've historically been able to to.
Two experienced particularly over the last couple of years, and then again the AD hoc charter margin, we still other.
Other than you know you just comments about Q4, we slow down a little bit just to protect our domestic business and our and our Asia a strong domestic demand and strong usually my demanded in the peak season.
Not because of a lack of demand globally for AD hoc or international scheduled services and as we add more aircraft will again take advantage of growing that sector of the business and improving those margins. So I think overall.
If you looked out the next two to three years, you should expect to see continued growth.
At least sustain and growth of the existing margins on each segments of our business.
That's great. That's that's the only question I had thank you very much.
Tim.
Our next question.
Hey, everyone, It's David Ocampo from <unk> Securities.
I just wanted to follow up on Tim's question about the margin profile going forward and just curious when you take a look at your margins from when the Canada Post contract was first negotiated and you're kind of in that 2013% range and now you're in.
Kind of that platform.
Third high Thirty's or low 40% margins or do you expect to have to give some of that back in negotiations because I know you mentioned that youre not going to get into discussions until 24 months out, but I imagine that's going to be a main point of contention.
And until those contracts.
Yeah, no. It's a good question David I mean, there's obviously always in negotiations with any customer when it comes to pricing discussions are sensitive.
You know certainly the margin increase that we've been able to.
Two two gain on the domestic business that you're talking about you know it was primarily related to the growth of all of our customers' business in a different service levels that we've been able to offer as we've grown from.
Primarily a business day Monday to Thursday, with a limited schedule on Friday to more seven days, a week, which we'll continue to do and I think E. Commerce is going to continue to drive demand for that not just from Amazon, but there's a there are other retailers increase there and improve their online platforms here in Canada, it's going to drive additional demand for volume seven days a week.
Can and not just overnight daytime flights, particularly during peak season. So I don't anticipate that you should see any dilution in those margins going forward.
The pricing when it comes to two to renewing any of our major agreements. Obviously, that's a sensitive discussion that we'll have but we all also provides significant value to our customers in terms of on time performance and reliability that shouldn't be forgotten.
Yeah.
That's perfect and then just a quick follow up on on the pilot cost differential beats.
Between you and international appears do you have an order of magnitude on how much that's impacting you whether its 28 or 30% up.
Yeah.
We don't have.
You know we haven't given.
Any guidance on what that total impact us, but as you can see our hourly cost of pilots is substantially up and that's all you do.
That's not only for domestic but all of our operations. So when you look at the cost increase of that magnitude.
From what it would have been that would give you an idea of the differentiator between us and international and U S carriers.
Okay. That's it for me thanks, guys.
Thanks.
And speakers at this time, we have no questions in the queue.
Hi.
Thank you everybody for joining and we appreciate it and we look forward to talking to you next quarter and have a great holiday season and everybody.
Thank you ladies and gentlemen. This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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