Q3 2024 Cargojet Inc Earnings Call
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Speaker Change: Good morning, ladies and gentlemen. Welcome to the CargoJet conference call. I would now like to turn the meeting over to Martin Herman, General Counsel and Corporate Secretary. Please go ahead. Good morning, everyone, and thank you for joining us this morning on this call.
Martin Herman: With me on the call this morning are Ajay Virmani, Carver Just Executive Chairman, Pauline Dhillon and Jamie Porteous, our Co-Chief Executive Officers, Scott Calver, our Chief Financial Officer and Sanjeev Mani, our Vice President Finance.
Martin Herman: After opening remarks about the quarter, we will open the call for questions.
This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earnings per share, and return on invested capital.
Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliation of any non-GAAP measures to GAAP income. I will now turn the call over to Jamie.
Jamie: Thanks, Marty. Good morning, everyone. And thank you for joining us on the call today.
Jamie Porteous: As we've done in the prior quarters, Pauline and I will share our prepared remarks before we pass the call over to our CFO, Scott, to give you a little bit more color on the financial drivers this quarter.
Jamie Porteous: Let me start by contrasting the Macro Transportation sector with Cargojet's recent performance.
Jamie Porteous: The transportation sector across North America continues to be challenged with weak domestic volumes and the industry has been slow to recover from the ongoing freight recession.
Jamie: However, when you look at Cargojet's results, you will notice that we are successfully turning challenges into opportunities.
Let me give you a few examples that differentiate cargo jet from the norm.
Jamie: One, with the recent high inflation and an economic slowdown in North America, consumers embraced ultra-low-cost products from China-based direct-to-consumer merchants using new platforms like Timu and Shen.
Jamie: This dampened the domestic e-commerce volumes but created a new stream of China to North America air cargo opportunity for Cargojet.
Jamie: We were on the forefront of this shift and secured a long-term scheduled charter opportunity that we announced earlier this year between China and Canada.
Jamie: The frequencies flown per week on this route have continued to rise over the past few months to meet demand.
Jamie: Thank you.
Jamie: Two, the geopolitical tensions in the Middle East and Ukraine have created supply chain opportunities and an increased need for air cargo services.
Jamie: More recently, the threat of a port worker strike at the East Coast also forced large retailers and manufacturers to think about alternative plans.
Jamie: These disruptions have created new ad-hoc charter opportunities on several global routes.
Jamie: With available aircraft capacity, we have been proactive in identifying key commodities that need to fly and adding to our ad hoc charter volumes.
Jamie: We have consistently been diversifying our business from both the product offering point of view as well as from geographic coverage.
Jamie: This combination has provided us with a solid foundation to create predictable earnings and cash flows for our shareholders.
Jamie: In the quarter, domestic revenues grew by 5.2%, ACMI posted a 12% gain, and all in charters posted a record 60.2% growth versus the third quarter of 2023.
Jamie: Overall, we posted a 14.8% increase in revenues for the quarter as compared to the previous year.
Jamie: The improving interest rate environment and controlled inflation are fostering a more stable and optimistic economic outlook for Canada, which we believe bodes well for future domestic volumes.
Jamie: I talked about our decision to accelerate growth investment in 2767-300 aircraft during our last quarter remarks.
Jamie: Based on our current growth rate and opportunities we see emerging in 2025, we are confident in our fleet expansion strategy, particularly in the context of reductions in other Canadian freight operators, aircraft freighter fleets, and available air cargo capacity, and the emerging long-range charter opportunities.
Jamie: We are also pleased to note that our growth capex was well within our stated goals on capital allocation and we are very happy with the progress we are making in our capital allocation strategy.
Jamie: We remain disciplined on optimizing CapEx and generating free cash flow, including a framework on how we will allocate capital through dividends, share buybacks, and debt reduction.
Jamie: Although I should point out that we are not immune to the cost headwinds facing the aviation and overall supply chain sectors relating specifically to wages and other cost increases which may impact future margins.
Jamie: However, this will not deter us from our capital allocation priorities.
Speaker Change: Scott will provide more color on how we are progressing against these objectives.
Jamie: We are also encouraged to see stronger peak season volume forecasts from the majority of our customers, and we are well positioned to serve our customers through this most important shopping season of the year.
Jamie: Pauline and I continue to work together on building growth opportunities, attracting the best talent, and staying focused on operational and cost efficiency.
Jamie: We have recently and will continue to strengthen the talent in information technology, cyber security, finance and flight operations areas to meet our growing business requirements.
Jamie: We are very excited and confident about the continued growth opportunities that lie ahead for CargoJet, its employees, and our shareholders.
Jamie: Let me now pass the microphone over to my colleague, Pauline. Thank you, Jamie.
Pauline Dhillon: The growth opportunities that Jamie mentioned require a capital light execution strategy. In other words, grow our block hours without adding aircraft capex. And that being our biggest priority.
Pauline Dhillon: We have been focused on carefully orchestrating various pieces of our operations to allow us to maximize our fleet utilization, particularly given the complexity of serving Asia routes and the global reach of our ad hoc charter activity.
Pauline Dhillon: We have a very predictable requirement for our aircraft fleet to support our Canadian Overnight Network and our ACMI business.
Pauline Dhillon: Utilizing spare aircraft availability for charter opportunities is key to creating additional shareholder value. We are pleased to see that many of these pieces came together nicely during this quarter.
Pauline Dhillon: To execute this strategy, we are still scaling up some cost areas and expect to reach a more normalized run rate in the first half of 2025.
Pauline Dhillon: We continued our efforts to build strong talent and capabilities in our information technology functions.
Pauline Dhillon: Our peak planning will be more robust and complex this year, given both the domestic as well as Asian networks. We have dedicated teams that work with key customers to ensure we deliver every single package on time for the holiday peak season.
Pauline Dhillon: Our operations and safety teams are focused on preparing for all weather conditions. Our maintenance teams are focused on making sure that our aircraft as well as our ground handling equipment are fully serviceable at each base.
Pauline Dhillon: Once again, in Q3, we delivered leading, best-in-class, on-time performance of 98.7%. This is the single most important metric that our customers judge us by.
Pauline Dhillon: We want to acknowledge and thank every member of the CargoJet team for their commitment to delivering the best customer experience and for their continued dedication.
Pauline Dhillon: Jamie and I transitioned into our new roles at the start of this year. It has been an exciting and, I might add, exhilarating year of growth and opportunity.
Pauline Dhillon: We are thrilled with the progress that we have made, both on the financial and operating performances of the company, but we do recognize much work still needs to be done.
Pauline Dhillon: One thing has become very clear to us, there is no shortage of opportunities. We need to build capabilities that can profitably capture those opportunities and continue to provide our customers and our shareholders value.
Pauline Dhillon: This now concludes my prepared comments and I will turn the call over to Scott Calver.
Scott Calver: Thank you, Pauline, and good morning, everyone.
Scott Calver: As a result of a strong quarter for revenue before fuel surcharges and other pass-throughs,
Scott Calver: Free cash flow continued to support the investment and growth opportunities that Jamie referred to in his prepared comments, and CargoJet continued to create value for our shareholders. In the quarter, CargoJet continued to strengthen its balance sheet with a reduction in leverage as defined by debt compared to IFADA.
Scott Calver: Adjusted earnings per share closed the quarter at $1.48 compared to $0.15 per share in the same period in the prior year.
Scott Calver: Cargo Jet's strong third quarter has contributed to year-to-date adjusted earnings per share of $3.59 compared to $1.71 for the prior year.
Scott Calver: A few comments regarding our capital allocation.
Pauline Dhillon: A total of $157 million has been returned to shareholders to repurchase and cancel common shares since the current shareback program started in November 2023.
Pauline Dhillon: with $38 million taking place in the third quarter of this year.
Pauline Dhillon: Approximately $22 million of capital was allocated for investment in growth capex in the third quarter for the two Boeing 767s that are currently going through the passenger to freighter conversion process.
Pauline Dhillon: At this time, we anticipate that CargoJet will close off the 2024 fiscal year with $70-$80 million in growth capex. This range is slightly higher than what has been communicated earlier in the year due to growth revenue coming on at a faster pace than what was originally anticipated.
Pauline Dhillon: When you consider total CapEx, which includes both maintenance CapEx and proceeds from disposal, management anticipates we will finish the year with net capital expenditures between $80 and $90 million.
Pauline Dhillon: We started the year at 2.6 times.
Pauline Dhillon: This reduction was made possible with both an increase in 12-month trailing EBITDA of approximately $20 million and a $70 million reduction in debt.
Pauline Dhillon: I will now touch on the third quarter financial statements.
Pauline Dhillon: A couple of comments about revenue.
Pauline Dhillon: With a 60% increase in the charter business, the company has experienced a mixed change in our revenue.
Pauline Dhillon: The charter business is made up of two types of charters and the mix between the two have been consistent prior to the third quarter.
Pauline Dhillon: The first type of charter revenue is our ad hoc charter business.
Pauline Dhillon: These opportunities typically present themselves only with a few days notice.
Pauline Dhillon: Given the urgency and the non-routine nature, these charters typically have a more attractive revenue per block hour, which is required due to the higher operating costs.
Pauline Dhillon: The second type of charter revenue is what we refer to as scheduled charters. The recent e-commerce growth where merchants are shipping to consumers directly out of China is a long-term commitment that is high volume with a consistent schedule.
Pauline Dhillon: This type of charter revenue has a lower revenue per block hour compared to the other end of the spectrum with the ad hoc charters.
Pauline Dhillon: Given the different cost structure, both types of charter business meet CargoJet's margin requirements.
Pauline Dhillon: for a deeper dive into our cost structure.
Pauline Dhillon: At a high level, we manage direct expenses on a cost-per-block-hour basis.
Pauline Dhillon: For direct expenses, we exclude non-cash depreciation due to the long-term strategic nature of this expense, and we exclude fuel expense as we are kept whole on fuel expense with our revenue.
Pauline Dhillon: With this redefined definition of direct expenses per block hour, cargo jet experienced a slight reduction in the third quarter compared to prior years.
Pauline Dhillon: Under normal circumstances, operating leverage from the 15% increase in revenue would result in a more significant improvement to margin.
Pauline Dhillon: To the credit of the entire CargoJet team, the organization can move quickly to support long-term growth opportunities.
Pauline Dhillon: Cargojet has experienced one-time startup costs to onboard this accelerated growth. The best example would be the training and overtime for pilots. It can take as long as six months to attract, train, and release a fully trained pilot to the line.
Pauline Dhillon: Cargo Jet is currently approximately 50 pilots short of an optimized flight crew resourcing level.
Pauline Dhillon: Our engaged workforce is equally as passionate to support our customers with a temporary overtime to backfill for these vacant positions.
Pauline Dhillon: There are two specific variances in direct expenses I would like to address.
Pauline Dhillon: Depreciation closed the quarter at $31.2 million compared to $42 million for the same period last year. The reduction was driven by two different reasons.
Pauline Dhillon: The first reason is that certain assets have become fully depreciated in the last 12 months.
Pauline Dhillon: It is coming up on one year since the last time that cargo jet added a freighter to our fleet.
Pauline Dhillon: If you go back 12 months ago, we had indicated that we had four Boeing 757s listed for sale. With the growth in revenue, these four aircraft are booked to capacity, which has made it possible to grow revenue without adding aircraft and new depreciation.
Pauline Dhillon: The second reason for the change in depreciation is a change in estimate for the useful life of our engines.
Pauline Dhillon: You will notice that Cargo Jet's maintenance capex has been reduced for the last 18 months. Part of the reason was a reduction in spare engine inventory, and part of the reason is the fact that our engine's estimated life is longer than what was previously estimated.
Pauline Dhillon: Telling General and Administrative Expenses closed the quarter at $24.3 million compared to $15.2 million last year, an increase of $9 million.
Pauline Dhillon: Approximately 1 million of this increase is due to a foreign exchange gain in the previous year.
Pauline Dhillon: Other SG&A costs have increased by $3 million, mostly due to an increase in operating costs related to IT for software and for outside professional service providers.
Pauline Dhillon: Salaries have increased due to the 2023 inflation.
Pauline Dhillon: The third quarter in 2024 had one less operating day. The number of operating days impacts the majority of our revenue. With the current run rate of revenue per operating day, one less operating day compared to the prior year can impact EBITDA over $1 million.
Pauline Dhillon: With the increase in revenue and with our current cost structure, CargoJet closed the third quarter with $47.8 million in free cash flow compared to $29.8 million in the same period for prior year, for an increase of approximately $20 million.
Pauline Dhillon: CargoJet's long-term capital allocation strategy continues to deliver consistent dividend growth.
Pauline Dhillon: We're investing in growth opportunities that meet our margin requirements. We've maintained a conservative balance sheet as measured by debt to EBITDA, and we're opportunistically buying back shares.
Pauline Dhillon: We are pleased with the progress we have made on each of these pillars.
Speaker Change: I will now pass it back to Jamie and Pauline and Ajay for any questions.
Speaker Change: Tim James, David Ocampo, David Ocampo, David Ocampo,
Speaker Change: Operator, would you like to...
Speaker Change: Yes, thank you. So we will now take questions from the telephone line. If you have a question, please press star 1. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question.
Speaker Change: There will be a brief pause while the participants register for questions. Thank you for your patience
Speaker Change: The first question is from Matthew Lee from CannaCork. Please go ahead.
Matthew Lee: Hey, morning guys. Thanks for taking my question. On the domestic side, you know, revenue growth this quarter is maybe a bit slower than Q2. Can you just maybe talk about what trends you're seeing that give you some confidence and further acceleration for Q4 and any colors you're getting from customers around the holiday season?
Speaker Change: Yeah, good morning, Matthew. It's Jamie. Thanks for joining us this morning. Yeah, it was a little, it was kind of in line with what we had predicted back at the beginning of the year in terms of revenue growth. I think a couple of factors that impacted it. One, as Scott mentioned, one less operating day in the quarter certainly had an impact.
Speaker Change: Domestic revenue that includes a fuel surcharge component and with lower fuel costs we had lower fuel surcharge revenue included
Speaker Change: in that base domestic revenue. I think that was one factor. But the
Speaker Change: The indications from domestic customers for peak season going into Q4 and what we've already seen in the month of October.
Speaker Change: remain strong, as I noted before.
Speaker Change: That's fair. And then maybe on fleet, you know, 15% block hour growth this quarter on new aircraft. So it's very impressive. And I think the fleet plan only has one net additional aircraft next year.
Speaker Change: Q4 kind of shakes up the way you're expecting and, you know, it seems like signs of that demand is pretty buoyant. Should we be expecting guys to look at adding to your fleet? Or is there kind of still more ISVs to run out of your current aircraft?
Speaker Change: We have flexibility in the fleet, and you're right, 15% is impressive, and I think that coincides with what we said at the beginning of the year, that we were confident that we could grow our business 15 to 20%.
Speaker Change: with the existing fleet of aircraft, and we've, in the first three quarters, we've demonstrated that we have that capability.
Speaker Change: Plus, a little bit more. We do have two aircraft.
Speaker Change: coming into the fleet in 2025, 2767-300s. You're correct that it's net one if we return the leased aircraft, our only leased aircraft, it's term ends in the end of February. But we still have some flexibility on whether we keep that aircraft to meet our growing needs or not.
Speaker Change: Well, one of the things that, Ajay, you know, the more we fly, the less maintenance time we have on the existing fleet.
Speaker Change: And Cargojet's key success factor has been on-time performance. And when you have maintenance...
Speaker Change: That cannot be performed because aircraft are always flying. You will always be behind on your maintenance, which we don't like. And that affects our runtime performance.
Speaker Change: So, although it's good to get a utilization, max utilization of any aircraft, but we want to make sure that we have enough aircraft in our fleet that
Speaker Change: and go into maintenance while the other ones are flying. So it's a balancing act and as Jamie said, we do have an option to bring on.
Speaker Change: Next aircraft in the new year, early new year.
Speaker Change: And anytime we have taken these aircraft for maintenance, they end up being both aircraft. So we're not too worried if we add an aircraft. I'm sure it'll be gone. But I think our biggest concern right now is to make sure that it's...
Speaker Change: Working Environment, and also that our on-time performance stays where it should be.
Speaker Change: Thanks guys, I'll pass it along.
Speaker Change: Thank you. The next question is from Cameron Dorksen from NDF. Please go ahead.
Speaker Change: Yeah, good morning, Cameron. As you know, when we started that program back in May, initially, the revenue forecast related to that business was about 55 to 60 million dollars per year based on three frequencies per week. We have seen an increase in those frequencies up to five or six frequencies per week in in the fourth quarter, but that will return back. Our expectation is that's peak demand and will return back to the
Speaker Change: the contractual minimum of three flights per week going into 2025.
Cameron: Okay, no, that's helpful. And then maybe my second question is just around, I guess, the optimization of some of the controllable costs. It's something you mentioned in the prepared remarks as well. Can you just maybe detail a little bit about what measures that are yet to be done here that will, I guess, optimize your cost structure in the next few quarters?
Speaker Change: It's a strange situation. While we try to manage the internal costs and get efficiencies,
Cameron: You know, we're not immune to the cost settlements and the rate settlements are going on in the industry.
Speaker Change: WestJet did a maintenance contract. They did a pilot contract. Air Canada did a pilot contract. Across the border, there are pilot contracts. A lot of our spare parts come from the U.S. where the LEED settlements have been.
Speaker Change: All of these are going to start reflecting in a lot of the requirements we have.
Speaker Change: So why we do
Speaker Change: certainly manage it very efficiently and we don't spend the dollar when we don't need to.
Speaker Change: But the industry, as you can see that how many strikes have happened and how many, when you look at Canada Post almost ready to strike and the federal workers and everybody else, the pressures continue on cargo data as well.
Cameron: And we are also part of the whole logistics chain and supply chain and in the detractors as well.
Speaker Change: Okay, but are there any specific measures you can point to on the cost side that are elevated right now but you have some ability to to reduce those to offset some of the other escalating costs? Not very much from the industry standpoint, but gaining efficiency through extra flying and
Speaker Change: and, you know, doing consolidation of some of the routes, re-routing the aircraft, you know, those are the kind of things that we always look at, how we can.
Speaker Change: You know, get the work of 15 hours of flying at 12 hours. Those are the kind of things we internally always looking at daily basis.
Speaker Change: And if I could just add to Ajay's comments, Cameron, you know, a couple of things, you know, in terms of overtime with the pilots, that'll, that'll level out as we add more crew to our to our line. But as Ajay said, we're facing some headwinds.
Speaker Change: In the future, not just with the pilot group, but with a number of different employee groups in terms of wage increases.
Speaker Change: We've had some significant and long overdue permanent headcount additions, particularly to the senior and executive management team that we're lacking in certain areas.
Speaker Change: Right. Okay. No, that's very helpful. Thanks very much.
Speaker Change: Thank you. The next question is from Chris Murray from ATB Capital Markets. Please go ahead.
Chris Murray: You did mention that there was sort of some one-time costs.
Chris Murray: around the the increase in the in the in the block hours. Can you maybe try to help us quantify exactly how much that was in the quarter? I know there's some puts and takes and I know you called out some items but you know any additional color would be helpful.
Speaker Change: Well, you know, the additional costs mostly come from, as you know, we have 70 pilots. We are, you know, looking at the market condition, just take the pilots for example.
Chris Murray: should have about 450 pilots, which is our ideal cost.
Chris Murray: but you know the market is such that there's a pilot shortage. The bottom hundred is the one that rotate and every time a pilot would rotate there's a fifty to seventy thousand dollars in training cost.
Chris Murray: because these guys take three to four months. By the time they're hired, they come online, they get trained, they get released. It's five, six, seven months.
Chris Murray: And since there's a backlog of training, that even adds further to a cost. So these are kind of the one-time costs where a pilot is not productive.
Chris Murray: because they have the trainings to go through and secondly you know these guys are hard to find right now because there is a shortage.
Chris Murray: So we continue to work and manage because we can't turn down any business, so a lot of business that you see today, you know, we have to carry it on over time. And that costs us a lot of money.
Chris Murray: So, this is a kind of example that one-time costs, we always call it one-time costs, but if every year you've got 50, 60, 70 pilots leave, they become permanent costs until the market stabilizes that there is plenty of pilots in the marketplace.
Chris Murray: So some of these challenges, Chris, are definitely industry challenges, just not ours, but we try to manage it as much as we can.
Speaker Change: Okay, thank you.
Speaker Change: And then the other question I had is just in terms of, you know, with the existing fleet, you know, Jamie made the comment about kind of 15 to 20 percent kind of growth on utility, on utilization.
Chris Murray: you know, which kind of almost puts you at the at the far end.
Chris Murray: You know, as you sort of took the fleet out to, I guess, maybe what you would be thinking about would have been your max. Are there any other opportunities?
Chris Murray: Good morning Chris, it's Jamie.
Chris Murray: and obviously they're checked out on both aircraft types equally, so we don't have specific crews for specific aircraft that makes us or aircraft types that makes us very efficient and we manage that, you know, on a literally on a daily basis, particularly with the domestic network, you know, we have more control over the domestic flying and the volumes are more, more,
Chris Murray: We control the volume, not we control the volumes, but we control the capacity and can match the capacity to the volumes more closely than we would look at on the ACMI or the charter as an example.
Chris Murray: Okay, I'll be with you there. Thanks, folks.
Speaker Change: Thanks Chris.
Speaker Change: Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead.
Konark Gupta: I'm thinking like if you normalize for these, you know, the upfront costs, we talked about that normalizes probably in the first half of 2025. What's the margin on a normalized rate looking like, you know, like, are we close to 35% or are we close to 34%?
Chris Murray: are only
Chris Murray: Unknown Speaker 1-1-1
Chris Murray: You know the demand for the pilots come down or there's plenty of them.
Chris Murray: You know other opportunities that they don't want to fly cargo or they don't fly at night they go into other operations
Chris Murray: It's very difficult that we can say, we always call it one-time cost for now.
Chris Murray: But if market in 2025.
Chris Murray: The passage of the way that's grown, continues to grow.
Chris Murray: That's an industry issue that we, not us, but every airline is facing.
Chris Murray: So I just wanted to make that clear.
Speaker Change: And just to add to Ajay's comments, Kornak, I think...
Chris Murray: to generate for this business.
Chris Murray: But I think the point is that we believe that those are being more than offset by other permanent increases, you know, whether it's, you know, facing the wage increases that we talked about with various parts of our organization, various employee groups.
Chris Murray: Unknown Executive, Pauline Dhillon, Ajay Virmani, Scott Calverni, Pauline Dhillon, Ajay Virmani,
Chris Murray: to meet our short and long-term CapEx requirements and certainly to continue our priorities of dividend payments to shareholders and share buybacks and continuing to keep our debt level at two to 2.2 times EBITDA.
Chris Murray: This is an industry issue and we are part of the industry and that is our biggest challenge today is the creeping costs.
Speaker Change: Okay, well, that makes sense. Thanks, guys.
Speaker Change: In terms of capacity, I think, Jamie, you know, you pointed out earlier on that, you know, initially you guys were looking at 15-20% sort of, you know, increase in block hours without adding the fleet. Now, Q3, you had 15% growth in block hours on the same fleet, essentially.
Speaker Change: You know, that will increase the capacity maybe, but on the currency.
Speaker Change: Can you squeak out more block hours?
Speaker Change: Well, we will in the fourth quarter for peak season and I think you know it's consistent with what we said at the beginning of the year that we felt very confident that we could grow
Speaker Change: revenues by 15-20% with the existing fleet that we have and I think growing it to 15% in the last quarter.
Speaker Change: Unknown.
Speaker Change: We have the flexibility going in, as I mentioned earlier, going into 2025 with two additional aircraft.
Speaker Change: coming sometime towards the end of the second or first quarter, second quarter of the year and providing the flexibility to whether we keep the leased aircraft or not keep the leased aircraft. We still have some time. We'll make that decision before the end of the year, but we're very confident that that, you know, we'll have enough capacity to continue to grow at that level if demand is there.
Speaker Change: Thanks. And last one for me before I turn over, you know, maybe I don't know if AJ you'd like to comment on that, but, you know, Canada Post has been going through obviously these issues, which are very public, you know, obviously, and their employees are, I think, looking like they're against the weekend.
Speaker Change: Deliveries and all that. How do you see all these issues shaping up and how does it impact, you know, your existing contractual agreements with Canada Post, any talks with?
Speaker Change: Yeah, so, you know, we do have a long-term contract with Canada Post and, you know, we don't see any of the labour issues.
Speaker Change: And, you know, the same Doing Good Tank. Yeah. You know, it's it's amazing how this has, you know, impacting our kind of business that they do with us because a lot of its parcel
Speaker Change: not the letter mail and all that stuff they do with us. You know, the key thing is that if you're looking at, they don't want to do seven days delivery and they don't want to do this. You know, what we will find is that if Canada Post.
Speaker Change: want to be profitable or even break even.
Speaker Change: Thank you for joining us. We look forward to seeing you again soon.
Speaker Change: you know, being the customers, I can't, I can't give them advice or be, I'm just giving you this as a general reader that in order for them to meet the wage demands that they're being asked of.
Speaker Change: They will have to increase productivity to become profitable. You cannot give wage increases to any group of people when productivity is being asked to be reduced.
Speaker Change: So, if their mandate is truly that they have to be self-sufficient and they cannot get financing from the government purses, then something has to give.
Speaker Change: The other option is that if they don't want to do that, maybe they should go to, you know, two days of delivering a mail or three days or, you know, cut back in services.
Speaker Change: So some of these things need to happen, otherwise Canada Post, it's in all of our interest to see that Canada Post makes some kind of money that is not dependent on public purses.
Speaker Change: That's a great color. I appreciate the time, as always. Thank you.
Speaker Change: Thank you. The next question is from Walter Sprackling from RBC Capital Market. Please go ahead. Yeah, thanks very much, operator. Good morning, everyone. I want to start on the charter run rate now. And I know there's always some fluctuations in charter as sometimes domestic or where ACMI borrows some capacity from your charter opportunity during
Speaker Change: what the run rate now is on the charter. It's lifted a lot this year and is now
Speaker Change: It'd be appreciated here.
Speaker Change: Good morning, Walter. I think the expectation would be exactly as you described it there, even though we have increased frequencies with our scheduled chart, and just to clarify, we, we group the both the scheduled what we call scheduled charter, which is mostly the China flying that we're doing, and our ad hoc charter revenue together in the same same bucket.
Speaker Change: But you're correct in the fourth quarter, you know, we see an increase in Scheduled frequencies per week that we're doing to and from China as I mentioned earlier
Speaker Change: We have seen very strong ad hoc charter in the month of October, but as we get towards the end of the fourth quarter, particularly in December,
Speaker Change: you know, the availability of aircraft and crew for continued ad hoc charter flying.
Speaker Change: will probably be muted a little bit. So I think that the fourth quarter will be similar to the third quarter, but going into 2025.
Speaker Change: Again, we'll see a reduction in our expectation right now as it will go back to the normal three frequencies per week on the scheduled charter flying and ad hoc charter demand will be a little lower than we've seen in Q3 and Q4 going into the beginning of the year.
Speaker Change: Okay, and and in terms of your revenue per block hour, that was trending up and then took a dip. And I know Scott, you mentioned there's some mix in there.
Speaker Change: You know, you're in a pretty good competitive environment. To what extent can you just turn around now and say, look,
Speaker Change: Cost pressure is pretty high, you know, and we're going to have to pass it on to our own customers. How does how do those conversations go?
Speaker Change: So, Walter, let me take that quickly, you know, I don't know if you, we just talked about cost pressures this morning, Boeing settled for 38% increases.
Speaker Change: So this is the kind of industry that has been paying and it's been going on. So these pressures are definitely spread to, you know, from Boeing to airlines to aerospace industries to automobiles, so you can keep talking about that.
Speaker Change: If we were just competing for charters in Canada, I could agree with you that we would have the pricing power and we could probably get some better yields. But when the charters come in, 90% of our charters, we are competing with companies in the U.S.
Speaker Change: How do I put it? Because there is so much pressure and capacity, like UPS is chartering planes because they got too many, FedEx is chartering planes because they had too many. You know, DHL is always chartering planes when they have the extra capacity.
Speaker Change: ETSD, and Atlas there, and Kalita, they also charter flights. So we are not just competing on the Canadian landscape when it comes to any charter, whether it's Canada-US or US-to-other countries, or Canada-to-other countries.
Speaker Change: We always have three or four or five competitors on each of those charters, so we do not contain the breaking power, we have to be competitive with those companies.
Speaker Change: Well, Walter, the other thing too, for BlockHour is it's been a steady decline in the price of fuel ever since Q3 last year, right? We saw that big pop a year ago, and then it's been a very slow and steady decline ever since then.
Speaker Change: So a lot of our revenue does have fuel baked into that revenue as well, right? The fuel surcharge is just for domestic. So all that other revenue, you're going to see some noise there with the change of price of fuel.
Speaker Change: Okay, that's great. I really appreciate the time. That's all my questions. Thank you, Walter. Thank you for your optimism, always.
Speaker Change: Thank you. The next question is from Kevin Chiang from CIBC. Please go ahead.
Speaker Change: No, I don't think good morning, Kevin. I don't think it's, I don't think it's of that magnitude. You're definitely going to see sequentially an increase in block hours. You know, big part of it will be driven by the additional frequencies that we have flying to and from China, but
Speaker Change: and Kevin you will also see an increase in block hours because if you remember we had said that we have four 757s apart that are being utilized so when you can't find the 767 we pop flyer 2757 which increases the block hours a bit.
Speaker Change: So that number might not be fully...
Speaker Change: you know, up to speed because when we go turn down business, and if it's profitable, we will put two aircraft instead of one, so that does increase the block hours a bit.
Speaker Change: It feels like it's been pretty fluid, like things were tight, you know, a while ago and then we've had a few airlines here in Canada go under on the ultra low cost carrier side. That seemed to alleviate some of the...
Speaker Change: If some of the more recent headwinds in hiring, are you talking that up to some of the...
Speaker Change: recent I guess pilot contracts that have been signed effectively you know WestJet Air Canada total compensation has increased you know whatever the you know thirty forty percent over the term of the contract is that making it tougher to you know has that made it
Speaker Change: They're flying in the U.S., but they pay in U.S. dollars. Some of the single guys don't care where they fly. So there's a lot of pilots that are moving to the South. The second part of it is...
Speaker Change: While the wage increases have gone 35-40% or even more in some of the airlines,
Speaker Change: The work rules are not and the productivity hasn't kept up. So, you know, they're giving more money, but they're also hiring more pilots
Speaker Change: because some of the...
Speaker Change: Unknown Executive, Pauline Dhillon, Ajay Virmani, Scott Calver, Unknown Executive, Pauline Dhillon,
Speaker Change: If you needed 50 pilots to do a job, you might need 60 or 70 to do the job. So that those are some of the things that.
Speaker Change: that are today's reality and the other part of it, you should also keep in mind that when links
Speaker Change: went into CCAA or bankruptcy.
Speaker Change: They had a few hundred pilots that came on and they were absorbed within like a week. So we don't have an access pilot, especially when you have a number of Canadian carriers that have beefed up operations.
Speaker Change: In Canada it's got more flights today than WestJet, it's got a lot of flights. Sunwing, Porter Airline is a full-blown airline.
Speaker Change: The number of pilots have gone up 30, 40, 50% from where they used to be.
Speaker Change: The country is only producing so many pilots. There's no emphasis on producing pilots as a matter of fact.
Speaker Change: Not private, these flying clubs exist and they're not had any increase in output to get the pilots trained and out on the line.
Speaker Change: And whatever we are producing, we are losing a fair bit to.
Speaker Change: U.S. We are losing a fair bit to companies like Emirates overseas, Qatar, Airways, you know, Singapore Airlines, Cathay, Korean, so there's a lot of Canadian pilots who choose not to fly in this country.
Speaker Change: That's very helpful, Culler. Thank you very much and best of luck this peak season.
Culler: Thank you, Kevin.
Speaker Change: Thank you. The next question is from Scott Carlskallen from McKinsey and Winston. Please go ahead.
Scott Carlskallen: Good morning and thanks for taking my call.
Scott Carlskallen: In the event that we get a Trump presidency announcement tomorrow
Scott Carlskallen: and he embarks on what he says he's going to embark on with Terrace.
Scott Carlskallen: 10-20% tariffs on everything coming into the U.S. and 60% tariffs.
Scott Carlskallen: and all goods coming in from China. I'm just wondering, how do you see that kind of event impacting your businesses? I'm thinking in particular, ACMI and Charter. Thank you.
Jamie Porteous: Thanks, Scott. It's Jamie.
Scott Carlskallen: Give us some
Jamie Porteous: Some comments on that. I mean, we're well aware of that. I mean, the one thing that we're optimistic about and was very encouraging with our agreement with our Chinese customers, they're focused on the only the Canadian market and not the US market at all. So I think any, you know, any impact of Trump presidency with increased tariffs on, on imports into the US will have less of an impact on on our business that we're doing directly
Jamie Porteous: with with some of the Chinese e-commerce e-commerce companies that are that are focusing more on Canada.
Scott Carlskallen: Equally on the charter business, you know, our charter, our ad hoc charter business is certainly global. Most of the business is around the world. It's not specific to the US. It's not specific. It's certainly not specific to Canada at all. We do very little domestic ad hoc charters. Most of them are global to Europe, to other parts of Asia. Very little coming back into the US. It's usually between other, you know, third and fourth countries or between Canada and a third country.
Scott Carlskallen: We're not concerned of a major impact of that. On an ACMI basis, certainly with the
Scott Carlskallen: exposure that we have with DHL, at DHL we operate 17 or 18 aircraft on an ACMI basis for them. We're not currently operating any aircraft for them out of Asia into the U.S. So I don't think to be any impact there.
Speaker Change: Okay, that's helpful. Thank you.
Speaker Change: Thanks.
Speaker Change: Thank you. The next question is from Tim James from TD Collin. Please go ahead.
Tim James: Thanks, good morning. My first question, just wondering if you saw any signs of a pull forward of peak season or Q4 volumes into the third quarter from any of your customers or business lines?
Speaker Change: I'd say, you know, a little bit in at the tail end of the third quarter in September, we had a very, you know, had a very strong September year over year in terms of volume on all really on all three segments of the business, we saw increased activity increased flying on an ACMI basis, particularly for DHL during September, which continues into the fourth quarter.
Scott Carlskallen: Equally, we started to see a little bit of the ramp up of the Chinese flying, not quite at the level that it's at today in October, November, but a little bit, and certainly our ad hoc charter business in September started to pick up and was very strong in October.
Speaker Change: kind of slower revenue run rate in the first and second quarters. What about third quarter next year? Maybe the broader question is, is this Q3 now kind of a new baseline, do you think, for the third quarter? Putting aside, you know, any potential natural growth or economic influences, but is this kind of the starting point as you would see it for next year in Q3, or were there
Scott Carlskallen: Some particular headwinds or tailwinds that maybe not are not necessarily normal for future years.
Speaker Change: Yeah, I think it's maybe a little premature now, at this point, Tim, to be able to accurately predict what Q3 next year is going to look like. We did have
Scott Carlskallen: as I've mentioned in the prepared remarks.
Scott Carlskallen: by, you know, global sort of geopolitical impact of things in the Ukraine, things in the Middle East, different disasters around the world. It's hard to predict whether those will continue and that portion of it continue to drive ad hoc charter.
Scott Carlskallen: opportunities or growth next year. Equally, you know, the growth of e-commerce that we're seeing both on the domestic and on our international business, I think will continue, but I think it's a little early for us to be able to predict that accurately for a year from now.
Scott Carlskallen: Good.
Speaker Change: Fair enough, thanks very much.
Speaker Change: Thank you, sir. Thank you. Once again, please press star one if you have a question.
Speaker Change: There are no further questions registered at this time. This will conclude today's conference call. Please disconnect your line at this time and we thank you for your participation.
Speaker Change: Thank you. Thank you.
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