Q2 2023 Cargojet Inc Earnings Call
Speaker 1: This conference is being recorded. This conference is being recorded.
Speaker 3: All participants please stand by, your conference is ready to begin. Good morning ladies and gentlemen and welcome to the cargo jet conference call. I would now like to turn the meeting over to Pauline Dillon. Please go ahead Pauline.
Speaker 4: Thank you operator. Good morning everyone and thank you for joining us on this call today. With me on the call today are AJ Vermani, President and Chief Executive Officer, Jamie Porteous, Chief Strategy Officer, Scott Calvert, Chief Financial Officer, Sanjeev Mani, Vice President, Finance.
Speaker 4: After opening remarks about the quarter, we will open the call for questions. I would 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 other measures that are not
Speaker 4: adjusted earning per share, and return on invested capital. Please refer to our most recent press release and MD&A for important assumptions and cautionary statements related to forward-looking information and for reconciliations of non-GAAP measures to GAAP income. I will now turn the call over to Ajay Varmani, CEO of Cargochet.
Speaker 5: Good morning, everybody. Thank you, Pauline.
Speaker 5: And thank you everybody for joining the second quarter cargo jet earnings call.
Speaker 5: As we entered 2023, it was very clear to us that the transportation industry was entering a slower economic cycle.
Speaker 5: In my 40 years in the industry, I know for sure that booms follow busts and busts follow a loop.
Speaker 5: Thank you.
Speaker 5: and very
Speaker 5: capital intensive industry.
Speaker 5: We have always seen stronger players.
Speaker 5: with lower deaths, fair bettered through these economic cycles.
Speaker 5: But what sets Cargoget apart is our ability to react and adapt rapidly to the changing environment.
Speaker 5: Right from the start of the year, we have been focused on preserving cash, curtailing capex.
Speaker 5: managing costs
Speaker 5: and sustaining profitability.
Speaker 5: It is worth noting that the
Speaker 5: that well before the current cycle of high interest rates kicked in.
Speaker 5: We solidified our balance sheet, reduced that, and drove all-time low average ratio.
Speaker 5: We have dramatically cut our growth cap-ex plans.
Speaker 5: and right side the network.
Speaker 5: and focus.
Speaker 5: on driving our cars down in every area.
Speaker 5: to ride out the current economic cycle.
Speaker 5: Following my remarks, Scott will share more details about our cost management program.
Speaker 5: Thank you.
Speaker 5: efficiency, and discipline.
Speaker 5: we expect to emerge even stronger on the other side of the economic cycle.
Speaker 5: Our strong financial position allows us to
Speaker 5: the advantage of being able to maintain a slightly larger fleet than the current network requirements.
Speaker 5: This makes us a unique player that can take advantage of not only the opportunist charter, but also the player that can take advantage of not only the opportunist charter, but also
Speaker 5: market.
Speaker 5: ready to grab new growth opportunities as the market turns.
Speaker 5: We believe this will create the right conditions for cargo jet to further strengthen its leadership position. We believe this will create the right conditions for cargo jet to further strengthen its leadership
Speaker 5: Our long-term customer relationships, along with minimum volume guarantees, provide us a unique opportunity to maintain a strong network.
Speaker 6: as well.
Speaker 5: With the addition of new customers over the past few years, our run rate revenues have
Speaker 5: and even talk
Speaker 5: are twice the size what we had.
Speaker 5: before the start of the pandemic.
Speaker 5: On the macro front, consumer spending on goods is down.
Speaker 5: There is no doubt that consumers are prioritizing travel, entertainment, or buying goods over the past years.
Speaker 5: But we expect this imbalance to return back normal by the end of the year.
Speaker 5: Inflation seems to be trending downwards, and employment remains all-time high.
Speaker 5: The market is increasingly talking about a soft landing.
Speaker 5: It was great to see one of our customers and one of the biggest retailers, Amazon, reported positive growth.
Speaker 5: one of our customers and one of the biggest e-tailers, Amazon, reported positive growth in COVID-2.
Speaker 5: We remain confident in our business model and its resilience.
Speaker 5: In the meantime, we are squarely focused on serving our customers while driving efficiencies.
Speaker 5: One way to ensure success is to look after our customers through these tough times.
Speaker 5: I want to thank my entire team.
Speaker 5: For rising to the occasion and addressing costs, just ask the roles to manage the rapid growth we saw during 21 and 22.
Speaker 5: I also want to thank the team.
Speaker 5: for a record on-time performance of 99.6% for Quarter 2.
Speaker 5: That concludes my personal comments, and I will turn it over to Scott Calvert for an update on the business. Thank you.
Speaker 7: Thank you, Ajay, and good morning, everyone. I will focus my remarks on three topics today, the first one being the strength of our balance sheet.
Speaker 7: followed by the progress made on our cost management initiatives. And I'll close with a couple comments on the resiliency of our business model.
Speaker 7: Our leverage or our debt as defined by our lenders in our credit agreement closed the quarter at 1.28 times, which is well below the maximum covenant of 4.75 times.
Speaker 7: When you include the hybrid debentures for total debt, we close the quarter at 2.3 times leverage.
Speaker 7: which is slightly higher than our internal target.
Speaker 7: The primary reason for this slight increase was an unforeseen delay in the second quarter for selling two 777 feedstock which you will find in the $81.2 million that is reported in our assets held for sale in our current assets.
Speaker 7: Had we not experienced hail damage that required repairs which postponed the closing date for these sale proceeds, the leverage would have closed the quarter at 2.05 times.
Speaker 7: Cargojet has unused committed borrowing capacity of $800 million, which is more than sufficient to support our long-term strategic plan that includes both our capital expenditures and the refinancing of the hybrid to ventures.
Speaker 7: The Capital Expenditure Program is unchanged from when we released our results in the first quarter.
Speaker 7: We expect the current year to come in between $200 and $225 million for combined maintenance and growth capex.
Speaker 7: Our estimate for 2024 in total is approximately 300 to 350 million dollars.
Speaker 7: The total deferral opportunity of $350 million for general growth is still a lever that Cargojet can pull if the growth capex part of our strategic plan needs to be adjusted.
Speaker 7: thus allowing cargo jet to pull forward the point of inflection to normalize to free cash flow.
Speaker 7: At this time, Cargojet has retained all conversion rights that have been previously disclosed.
Speaker 7: Cargojet continues to generate strong operational cash flow as defined by the $74 million in Nipet DA.
Speaker 7: or the adjusted free cash flow of $52.3 million in the second quarter.
Speaker 7: For the second point, let me touch on cost management and cost optimization.
Speaker 7: For cost optimization, there were two changes made in the quarter.
Speaker 7: Early in the quarter, we were able to rationalize a direct flight between Hamilton and Edmonton.
Speaker 7: Late in the second quarter, we were also able to consolidate volumes and temporarily eliminate one of the direct flights between Calgary and Vancouver.
Speaker 7: In both cases, we rationalized a direct flight and replaced a lane with a triangulated route by adding an additional stop. Both these changes should be viewed as temporary, and they will be reversed once the volumes return.
Speaker 7: Another nuance with the cargo jet strategy is the fungibility of our fleet for both the Boeing 757 and the wide-body Boeing 767.
Speaker 7: We have often commented on the flexibility of our pilots being trained to fly both the 757 and the 767.
Speaker 7: This is critical so that we can substitute aircraft to optimize costs. And it goes both ways for all the right reasons.
Speaker 7: On a given lane, if the volume is reduced to a certain level, we will replace a widebody 767 with the smaller 757.
Speaker 7: In other cases, we may need to upgrade from a 757 to a 767 to handle an increase in aggregate volume as we pivot from a direct flight to a triangulated route.
Speaker 7: We review our network plan daily to ensure that we optimize these costs.
Speaker 7: We are also pleased with the performance of overtime, training costs, the reduction in headcount by not filling vacant positions, and the reduction in the use of temporary employees.
Speaker 7: These initiatives are well underway.
Speaker 7: Direct expenses excluding fuel and depreciation and amortization are down $5.4 million in the quarter compared to the prior year, or a reduction of 6.1%, which compares favorably compared to the revenue before fuel surcharges.
Speaker 7: And this is the primary reason for the increased Ip
Speaker 7: We are confident that these cost reductions are sustainable and that there are further opportunities that have not fully settled into our run rate on a quarterly basis.
Speaker 7: Other opportunities are in the early stages of implementation for the third quarter impact.
Speaker 7: The third topic
Speaker 7: While we have frequently talked about the resiliency of our business model, it becomes extremely relevant during economic times like today.
Speaker 7: Approximately 75% of our revenues are reoccurring.
Speaker 7: Our customer base is Blue Chip who themselves are motivated to drive growth.
Speaker 7: We do not take fuel price risk as this is a pass-through cost, and our strategic contracts have minimum volume guarantees.
Speaker 7: This makes Cargojet an integral part of our customers' network and value chain.
Speaker 7: While demand remains soft, the combination of our business model and the cost optimization initiatives will allow us to continue and maintain margins and profitability.
Speaker 7: With all these initiatives, Cargojet will be better positioned to come out of the other end of this economic cycle.
Speaker 7: This concludes our prepared remarks and I will hand the call over to AJ for Q&A.
Speaker 4: Operator, we'll take questions now.
Speaker 3: Thank you. We will now take questions from the telephone lines. If you have a question and you are using your speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2.
Speaker 3: Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience.
Speaker 3: Our first question is from Matthew Lee from Canaccord. Please go ahead.
Speaker 8: Hi, can we maybe talk a little bit about charter revenues? You know, it was higher than we expected this quarter and how it offset some of the weakness in domestic. Just let me talk about what drove that strength and whether you can continue to find opportunities to strengthen charter if domestic remains challenged.
Speaker 9: I can answer that. Most of it is directly a result. Ad hoc charter demand remains strong. A more recent this past week and we are on our third flight for FEMA to provide relief to Hawaii for wildfires in Maui. Overall demand has been very significant. We have seen a lot of changes in the economy. We have seen a lot of changes in the economy. We have seen
Speaker 9: stayed strong throughout the past quarter, combined with the availability of aircraft. Typically, and I think we'd indicated that a normal run rate per quarter for ad hoc charter and international would be about 15, in the 15 to $20 million range. We're well above that, I think at 27 million in Q2.
Speaker 9: And a big contributor to that is the availability of aircraft and crews. Traditionally, we restrict ad hoc charter business to weekend. We don't have any dedicated aircraft that are exclusively purchased for that revenue segment and typically uses aircraft that are part of our domestic network or part of our ACMI flying.
Speaker 9: when those aircraft are available during downtimes, either during the day or on weekends. But with additional aircraft that we have in our fleet, we really have availability 24 hours, seven days a week, and that's what's led to the growth in the quarter, and we expect that demand to continue in Q3 and Q4.
Speaker 8: All right, that's helpful. Then in terms of domestic revenues, can you maybe delve into a bit between rate growth and volume decline that dropped that 3% decrease this quarter?
Speaker 9: It's Jamie again, Matthew.
Speaker 9: On the domestic, if taking into consideration a couple of things, obviously fuel surcharge revenue is significantly lower overall quarter to quarter. I think our average fuel price was about a buck a litre in Q2 of this year versus $1.50 last year. And then last year, there was an indirect impact on our domestic revenues with an increase in ad hoc. So, ten years later, the energy Chooseote 44 came by approximately seven months in June ,
Speaker 9: business that was related to international charters that we were doing particularly out of Vancouver to China both ourselves and with our ACMI partner DHL and we were feeding those flights on our domestic network and that portion of the revenue was associated with the domestic so if you took that off.
Speaker 9: But really, as Ajay mentioned, with the growth, we don't obviously report individual customers' revenues, but with the news that you saw with Amazon's growth in the quarter, that's reflected well for – and we look at it – the domestic was – where we expected it, somewhat flat, maybe down a single percentage point.
Speaker 8: Okay, that's helpful. So in terms of your guidance that you previously provided on domestic being gowns, so low single digits, that's the way you feel comfortable.
Speaker 9: Yeah, we think so. I mean certainly for the third quarter and although we've had some customers that have expected or forecast that the second half of the year should be a little stronger than the first half of the year, we don't expect the year Q4 we expect to be you know similar to the peak season last year which was a very muted peak season compared to the previous years.
Speaker 8: Okay, thanks. I'll pass the line.
Speaker 3: Thank you. The following question is from Konark Gupta from Schuschbrink.
Speaker 5: Please go ahead. Thanks, Avir. Good morning, everyone. Good morning. Good morning. Good to see the margin expansion, after almost, I think, two years of year-over-year decline we have seen. My question is, what can you do more on a cost side here?
Speaker 10: Well, you know,
Speaker 10: cost side what we have achieved is not a destination it's a journey
Speaker 10: There's not a day goes by where we're not looking at what expenses.
Speaker 10: And these are not expenses that affect the service. As you can see, our service was all-time high at 99.6.
Speaker 10: So, on-time performance. So our service, anything other than the service, we're looking at every expense, whether...
Speaker 10: We are cutting back on
Speaker 10: temporary labor, whether we are shipping our parts.
Speaker 10: or whether we are using ground services more, you name it, there's not an area that we, give you a small example, we are fine tuning our deicing operations, our GSEs, our narrow pipsix and all project providers must go through basic
Speaker 10: and COVID demand, it was basically getting the job done at any cost because we didn't have the time.
Speaker 10: So now we are sitting back and reflecting that all these things can be fine-tuned, costs can be reduced,
Speaker 10: without impacting the service, bringing more efficiencies.
Speaker 10: So when we do enter a good economic cycle, hopefully in the next few months or the fourth quarter or after, we'll come out a much stronger, leaner, and more profitable organization at the end of it.
Speaker 5: Yeah, that makes sense. Thanks.
Speaker 5: In terms of potential rebound, I think one of the points you made in the press release was you expect some normalization to happen in the consumer spending behavior by the end of this year. So if the business rebounds in 2024, how do we prepare?
Speaker 10: with the cost management going on, how would you prepare to support that rebound? So, we're not cutting where it comes to service. So, we're not reducing, for example, we are still hiring pilots. So, we're still not reducing the maintenance personnel. We're not reducing where it comes to the growth areas.
Speaker 10: Where we are gaining efficiencies is cost management, better negotiations with the suppliers, and getting better credit terms.
Speaker 10: you know
Speaker 10: stuff that is not required and better. One of the things we have undertaken is, you know, we used to have $92 million worth of spare parts inventory, and we have got at least 10-15 million out of it.
Speaker 10: So we.
Speaker 10: We are managing efficiencies, as I said, and not sort of taking away that if the volumes came up tomorrow, that we would be suffering. So all operating people, all operating systems, all operating.
Speaker 10: costs and everything are still in place so that we don't show up change ourselves because let's say you had less pilots, less maintenance people, or less dispatchers, you know, it wouldn't make any sense because there's six months to eight months to a year lag and a lot of training costs.
Speaker 10: So, you know, we are aware of those. So basically, I hate to use the word, but we're getting rid of, you know, overspending that was done to meet the COVID demands, which would be considered in today's terms of waste.
Speaker 10: So the waste portion is going because there is no panic about COVID, but the cost still remains. And sometimes it takes a while because of the commitments and certain other market considerations to do it slowly.
Speaker 10: So.
Speaker 10: is to assure you guys, like we're not here to cut so deep that our growth gets impacted. As a matter of fact, as I mentioned, if the growth happens within today's cost structure, we'd come out much better ahead than we were a year ago.
Speaker 5: That's good color, Ajay. Thanks. And last one for me. Stocks kind of come off, I think even below where it started the pandemic. And I know you guys pointed out the business has kind of still doubled despite all the kind of volatility we have seen over the last two, three years.
Speaker 5: Any strategic actions or plans in the works to take advantage of a strong sweetness?
Speaker 10: Look, we are always thinking, I mean, you know, how can we do the best for our shareholders and take advantage of the low stock price, whether it could be buying back stock, whether it could be not so smart and what another investment synergies with paying Bast lie and
Speaker 10: doing some strategic stuff. There's never a dull day.
Speaker 10: We consulted with three or four main bankers as to what is the best strategy going forward. And although we don't have a defined or agreed upon strategy, but there's not a day goes by where we don't think about it and not in the boat room thinking about what do we need to do.
Speaker 10: As far as the stock price is concerned, you can imagine that in 2019 we had 150 million EBITDA and now we have over 300 million run rate. The revenues have doubled but the stock price has remained the same. So the macro trends probably or the fear of recession.
Speaker 10: general cargo trends when you see United Airlines, American or other Delta reporting 25-30% less cargo revenue. That's it for today. Thank you for watching. We'll see you next time.
Speaker 10: But I think I want to remind everybody that we're not in the same market.
Speaker 10: I think there's some nervousness about cargo markets. And we are not in the, we are a well-diversified company that has an overnight network on pay-or-play contracts, number one, with built-in escalations for CPI. And number two, we also diversified into ACMI and charters.
Speaker 10: So, you know, I think that painting everybody, every cart with the same brush with all the results going on is a bit...
Speaker 10: unfair and a bit uncalled for, but hey, look, we understand this is a market. We are not short-term organization. We look for longer-term planning. If we didn't have the longer-term planning, I'll tell you, we would not have had the revenues and profitability.
Speaker 10: We were carrying three or four extra planes for growth and they worked out great for COVID Until On 1st May 2016
Speaker 10: So we are always prepared for these things and I can assure you that we are always thinking strategic options on the financial side when the stock breaks is concerned.
Speaker 5: Fair enough. Thanks for the time. Appreciate it.
Speaker 3: Thank you. Our following question is from Chris Murray from ATB Capital Markets. Please go ahead.
Speaker 8: Yeah, thanks folks. I'm thinking going back to kind of the revenue and the revenue outlook a little bit. It sounds like you talked a little bit about the trend and domestic is going to be kind of negative, but it sounds like charter is doing a little bit better. A couple of questions on this one. First of all, how is ACMI doing right now? Maybe a different way to think of it.
Speaker 8: parts materialized.
Speaker 9: Hey Chris, this is Jamie. Good morning. I would say the domestic revenue is probably flat to a little bit down, but it sort of tempered that with, as Ajay noted and I mentioned before, Amazon's report is fairly healthy growth in the quarter globally overall. We've seen some increase and we'll continue to see some increase in Canada. We recently...
Speaker 9: one of the CMI aircraft that we operate out of Hamilton direct to Vancouver. So both aircraft operate into Vancouver now, which adds volume and adds block hours to the CMI flying. That will continue to trend positively in Q3 and Q4.
Speaker 9: and contribute to the overall domestic revenues. ACMI is up a little, up what we expected a few percentage points in the second quarter. As we indicated before, the aircraft that we're operating primarily for DHL, we added three aircraft in 2022, as you recall, so we're getting the full annualized impact of the additional aircraft this year.
Speaker 9: monthly block hours on average when we were flying out of Cincinnati to Vancouver and Shanghai for eight or nine months in 2022 where when demand fell out of China in the latter part of the fourth quarter they had a shift those aircraft in North America operating between either Cincinnati and Central or South America so the
Speaker 9: Although the overall hours are still above the minimums, the actual hours are below what we experienced in 2022. So we should see, you know, sort of the similar growth levels, flat to single digit percentage for the balance of the year in Q3 and Q4.
Speaker 8: All right, and then overall, just sort of tying it together, is the block hours down about 6% in the quarter? Would you think that we'd start to see that come off, that minus six number as we go into Q3 then? Is it mixed or just maybe hold there? No, it should go down a little bit more because we're going to see, particularly on the domestic side.
Speaker 9: As Scott noted earlier, there were some additional block hour reductions in consolidations in the domestic schedule that took effect only at the beginning of July . So you'll see the impact of those compounded with the results that we saw here in Q2, in Q3, and Q4. As well, the HDMI hours you should also see coming down a little bit.
Speaker 8: reflecting the different flying that I just mentioned that we're doing particularly for DHL. All right that's helpful. Maybe it costs a little bit more, a couple maybe specific questions. At this point I think you talked a little bit about taking out some temp labor and I think AJ made the comment about maybe excess costs that were there to support the
Speaker 8: and you won't have that excess labor to absorb. And then the other question, just very quickly, we talked I think last call about having another simulator in place to help you with some training needs. That was supposed to arrive I think sometime in Q3. Is that still on schedule? And should we be expecting that to have an impact?
Speaker 7: Maybe the Q4 in 2024. Hi Chris, it's Scott. I'll get into some of those details on the direct expenses. And that is where most of our efficiencies have come from, obviously, to have our if a down margin increase. And really, if you look at the quarter, the crew is down $1.3 million compared to prior year.
Speaker 7: And that $1.3 million, most of that is the simulator. When you look at the training line in there and the travel, that's where we're seeing those efficiencies from having that simulator. And that's sustainable. And that's only going to improve as well when we add our second simulator later this year. We have ground services down 3.5 million compared to prior year.
Good morning.
Good morning, Scott Scott just a question on the two route consolidations during the quarter do you have an estimate handy for how much of each of those will save in terms of annual expense.
No really if you just look at our cost per block hour than you you can determine those block hours between those destinations and that that's a reasonably fair proxy.
Right. The reason I ask is the second was towards the end of the quarter. So we may not have seen the full benefit.
Q2, yeah.
Second what exactly that was the third week of June .
First I really July 1st so yeah, and that was relatively small as well right.
Oh, Okay, Yeah, Calgary to Vancouver, that's a very small lanes, so it's not nearly going to be as impactful.
Right.
And second question I noticed in the press release, there was this comment on the shift in consumer spending toward travel and leisure goods.
Sorry, travel and leisure versus goods is expected to normalize towards the end of this year.
Are your conversations with your customers, giving you a view as to how.
Q4 volumes might shape up or is it too early days for that.
Well, we're getting some grants from our customers, but we also saw the biggest trend was an Amazon you know when you saw their numbers come up very very nicely.
Yeah, that's a good market indications the biggest E Commerce company obviously.
The others, we talked to the customers you now are looking at some of the bank the boats and you know it's obviously.
It's obviously not a science it's an educated.
Gas that we feel in looking at the market trends in some of the others.
Feel that.
That's a shift is definitely.
Going to happen because there's a lot of people who have not probably for three years not seeing their families.
<unk> not had the holidays and I think we.
See that as a.
You know a great thing for travel business, where people are going to be maybe for another three to six months that trend will continue but also keep in mind with the tightening of you know.
Interest rates going up mortgages and all of that a lot of that travel is at some point that party is going to come to them.
Stable.
And so.
People will get that back out of their system in and start focusing on daily necessities are are some of the goods and goods that they have not been buying.
So.
Our our research does certainly tells us that.
You know there'll be a shift from a leisure traveling into more into a good.
Quarter four after.
Okay understood. Thanks for your comments.
Thank you.
Once again, please press star one at this time for any questions or comments.
Following question is from.
From BMO. Please go ahead.
Yeah good morning.
Scott all.
All of the puts and takes on the revenues and the cost side.
What are you thinking about the EBITDA quarter over quarter.
Hum.
Is it not a flattish Q3 versus Q2 I'm just trying to understand between all these cost puts and takes and what should we think about the sequential cadence on that number.
The second question on.
On pilots and inflation and all of that I mean, we've seen obviously.
Some attrition and some of the kind of carrier then kind of on a.
You know we've seen Westjet pilot agreement kind of get done recently, and obviously you have kind.
Kind of are in the process are you seeing attrition in a pilot or kind of churn rate go up a little bit or how you're thinking about this final this whole backdrop of.
Heightened inflationary issues and how you're dealing with doctor than your own organization.
So let's talk about the pilot a market situation right now with increased travel demand.
And a couple of new airlines, starting up in Canada. So obviously the demand for pilots not only in Canada, but also globally.
There is a shortage so when there's a shortage. There's a lot of attrition are what we are seeing is Ah. Our attrition is not in the top 80% of the pilots if the bottom 20% who has just joined US a year.
So we don't see that at senior level strictly.
The last 50 pilots that are that are leaving coming and going.
I don't think it has anything to do with you know divest Jack P is X dollars of Air Canada is going to pay X dollars, because the people who are leaving or more leaving to work because they didn't like the cargo flying or they didn't.
Want to fly at night or they find that it is more.
And they find the passenger business more interesting.
So we don't find that you.
We increased it over wages by 2030, 40% tomorrow that that is going to help with.
You know.
How blessed that friction so.
I think we do.
We keep discussing how do we improve things for pilots their lifestyle and we will continue to do those are we are in active discussions with a you know how how do we make everybody's lives better.
How do we stay competitive in that market.
And you know I think that we feel are the pilot market, although it's very.
It is in short supply, but we have a core set of pilots that.
I want to stay here and want to fly cargo and and.
Value the organization and the stability that cargo jet for white.
Because as you know in this industry fatty we have seen this movie too many times, where every 456 years, there's 5000 pilots looking for work and and so I think some of the pilots who are seasoned pilot certainly know that stability is very very important with the stable organization. So.
So that's the and we all we also have a you know agreement with schools and other three years, we don't have to do anything for the next three years to negotiate.
But you.
But we feel that the best way for attention is to work with them or whatever.
The pilot immediate unions and because everybody has a common goal here to.
To make sure that how do we reduce the attrition at the lower levels, but some of them have dreams of working with our passenger carriers and they come in and they get the experience and they go but that's that's the life when the market is hot but I think that with the with the new regulations out of <unk>.
Going in on in the U S. Increasing the retirement age from 65 to 67, although Canada does not have an age but we obviously retired pilot at 65 for example, because they can't fly over the U S. So that will open up some some doors that'll open up a sub markets and also.
The aggressive program by the Canadian government of offering a permanent status to a lot of aviation sector people, including pilot will also help with this situation as well.
Okay fatty and maybe I'll address your question in terms of what's it looking like for Q3 and Q4.
All things being equal we would expect to see an increase in EBITDA in the third quarter EBITDA margin as a percentage of revenue.
And again, because a lot of our initiatives, we haven't had it fully into our run rate yet in Q2, because some of them came partway into the quarter.
And then when you look at other initiatives like H I said, we're going through every line on the income statement.
Some of these initiatives haven't even started yet but like any any journey again, what a J describe the journey. We started this journey going after our largest opportunities first and now we've got to work a lot harder for smaller opportunities, but again, we're that's what we're doing we're doing it every day, so there'll be some improvement in the back half of the year for some of these <unk>.
Mauler initiatives like Hey, Dave is describing the deicing.
That's just one it's about a boy I won't even quantify it but it's relatively small in the Grand scheme of things, but still everything is being looked at and then I guess, the one thing I would caution about Q3.
And you've seen it in all the transportation companies its probably one of the most extreme.
<unk> and the price of fuel year over year in the second quarter for US. We went from about a $1 50, a leader for jet fuel down to one dollar a leader now we've all seen what's going on so far in Q3. These fuel prices are starting to creep up again, so I always like to warn people, but that lag we have a two month lag on recovering these costs. It works both ways we win win it.
Going down, but we have that leg when its going up so there could be a headwind on the on the leg for fuel recovery program.
What was that a few like Oh.
Second quarter.
I would say it was flat in the second quarter, but it was extreme are flat compared to Q1 extreme compared to prior year now not so much from a leg perspective cause if you look at our change in fuel.
Fuel surcharge revenue versus our change in fuel expense its very similar that number. So there was not that much of an impact for the lag in Q2.
Okay, and just to make sure I got this you're you're saying EBITDA margin improve in the third quarter.
The second quarter or EBITDA dollar as well.
I'm, saying margin right now.
Montana, Okay, yes.
Okay. That's helpful. Thank you.
Thank you.
Following question is from Walter <unk> from RBC capital markets. Please go ahead.
Hey, Good morning. This is James Mcgarrigle I'm on for Walter This morning, how is everyone.
Good good thank you.
Yeah. So I just had a question on your partnership with DHL.
I know, they're investing significantly down in Latin America it.
It seems like every few weeks are investing you know and its huge facilities in the U S over in Europe .
But you know I think what that says to me is that longer term.
They need more capacity and you know you're obviously, a very big partner with them. So can you kind of just talk about.
Some of the conversations that you might have been having with them recently.
Given all the expansion.
All of the investment dollars that they're putting into expansion and how you might see a your partnership with them evolve a little over the yard the.
The longer term.
Yeah.
Yeah excuse me good morning, James obviously, the relationship with DHL is very strong it's a long term relationship with the operating agreement and the and the warrant agreement that we have with them, which are based on long term growth, which we feel is still sustainable you're right the investments that they've been making around the world and most recently in the last couple of years, you know the $100 million.
Facility that they built in Hamilton are all contributing to the growth in in additional capacity required to meet their global network at the same time, you know, they're not immune from the slowdown in demand globally. As we saw last year when they shifted aircraft from Asia to North and South America, and I think we'll continue to see you know very.
Adjustments to that as is demand either goes up or goes down, but we're very happy with our relationship and partnership with DHL.
And then on margins in the quarter.
They came in very strong, especially considering you know the fixed cost. If you know of your business does that kind of change. How you are looking at margins longer term and you know I guess, you know as volumes recover call. It two to three or four years, however, long that takes.
Do you think that we could see kind of margins in line with 2021, although that was an extraordinary year you know the hydro all of the corporate cost, but as volumes recover longer term does the success you've had in managing margins in Q2 kind of changed that outlook on your margins you know over the next two or three or four.
Four years.
Yeah, I can take that one James.
What I didn't come back to is what we told the market pretty much last year at this time at our Investor day in terms of how we see margin longer term and a lot of it has to do with what you described it's our fixed costs were spreading it over a greater revenue base, but again back to <unk> comments here earlier in terms of managing our cost per block hour.
Is this a sustainable and it is going to make us stronger coming out of this that a lot of this will carry forward into the future that was an extreme time in 2021 and 2022 to onboard all that growth that came at a premium of one time costs as an investment to be able to capture all of that revenue. So quickly that that's behind us and now were no. This isn't new.
For cargo jet in terms of managing costs weak.
We've done that for 22 years. It was just an exceptional period of time, where the focus was on the revenue side and we're really getting back to what we did in 2019 and before that and a lot of the kpis are being measured back to that time, but to your point, yes grow the topline revenue and you spread those fixed costs over a greater revenue base. That's the primary reason for us to be able to.
To improve our EBITDA margins longer term.
I appreciate it and I'll turn the line over thank you.
Yeah.
Thank you.
I have no further questions registered at this time I would now like to turn the meeting back over to you.
Thank you everybody for joining us this morning I'm sincerely appreciate it I know it was an early morning call and thank you for your support.
We will continue to work.
Hard at and continue to deliver great results. Thank you.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.
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