Cargojet, the largest all-cargo airline in Canada, said core transportation revenue increased 11.5% in the second quarter from the prior year as the company taps into the booming international e-commerce logistics sector.
Growth in e-commerce was the primary factor behind Cargojet’s improved earnings and positive outlook for the second half of the year.
Revenue from the domestic overnight network, dedicated contract flying in which transportation service is priced per flight hour and international charter service totaled CA$191.3 million, or US$139.3 million, according to Cargojet (TSX: CJT) results issued after Tuesday’s market close. The company generated an additional $32.3 million from fuel surcharges. Adjusted earnings before interest, taxes, depreciation and amortization were $57.6 million, up 6.5%, year over year, slightly ahead of consensus expectations.
Cargojet in late May began providing scheduled trans-Pacific charter service for Chinese e-commerce platforms under a three-year agreement with logistics provider Great Vision HK Express. In its earnings report, management said cooling inflation and continued interest rate reductions are giving consumers more room for discretionary purchases, especially through online retailers. The company was able to adjust its schedule to free up Boeing 767-300 converted freighters to support the Great Vision charter program without having to invest in new aircraft.
“The Canadian consumer is very price-conscious. They’re shopping for more value. So this China business is basically fulfilling that gap, [giving them a] better shopping environment than what was just available in e-commerce within Canada,” said co-CEO Pauline Dhillon on a briefing call with analysts Wednesday morning.
E-commerce is expected to top $82 billion in Canada and account for 12% of Canada’s retail sales this year, according to eMarketer. The growth rate, however, is flattening out at about 5% per year. E-commerce penetration of sales is still below the U.S. and other countries.
Revenue for all three business segments grew during the quarter, with the charter business reaching a quarterly record of $20.3 million.
Flight activity increased 4.8% year over year during the second quarter and showed how demand is picking up again after contracting 5.2% last year and 2.9% in the first quarter. The improved volumes at a time of weak consumer confidence in Canada bode well for future growth when the domestic economy picks up.
Increased demand has enabled Cargojet to put its entire fleet of Boeing 757 converted freighters back to work. In late 2023, when the air cargo market was still in the early stage of recovering from a pronounced downturn, executives listed four 757s as surplus and announced plans to sell or lease them.
Domestic volumes are benefiting from new last-mile delivery customers tendering shipments to support growing business from online retailers in Canada and strong Amazon sales, said co-CEO James Porteous. Co-load customers that contract for blocks of space in the domestic network include Amazon, FedEx, UPS and Canada Post.
Amazon had its best Prime Days promotion in Canada during July, has reserved several Cargojet freighters for a four-to-five-day period in mid-October to support fulfillment during the next big sale, and has asked to increase its charter capacity for the peak season compared to last year, he said. The airline operated some 757 freighters for Amazon during the 2023 peak shipping season, but the retailer has asked for 767s this year – which offer 50% more capacity. Cargojet also currently operates two Amazon-supplied 767-300s for Amazon in Canada.
Two Cargojet freighters – a 767 provided by Amazon and a 757 – received a significant amount of damage during a hailstorm that hit Calgary International Airport on Aug. 5. Management said it has moved the planes to its main base in Hamilton, Ontario, for repairs and expects the 757 to return to service fairly quickly. The 767 will take another week or more to complete repairs, but the airline is using backup aircraft to make sure Amazon can serve customers on time.
After operating 17 or 18 dedicated freighters under long-term leases during the busy period last year, “it’s entirely realistic to expect that we’ll operate more than that in peak season because of that demand,” Porteous added.
Demand was strong across the board. DHL Express, which contracts with Cargojet to fly packages in its parcel network, is also seeing higher demand out of China and Europe, and the charter segment conducted an “unprecedented” 31 flights in June, the Cargojet chief executive said.
Management indicated the ability to add another 5% to 10% in volume growth during the second half without having to add aircraft, especially as two more aircraft will come out of heavy maintenance by November to help with the higher loads.
The contract with Great Vision HK Express came together in a couple of months, “a lot quicker than a normal contract of that magnitude and size,” Porteous said, reflecting the spike in direct-to-consumer fulfillment from China to North America in the past year. The full impact of the new business will be felt in the third and fourth quarters.
Cargojet is providing three flights per week out of Hangzhou to Vancouver, British Columbia, and its ability to feed 15 other major cities in Canada through its domestic network appealed to the Chinese logistics company, he said. Great Vision HK Express, which analysts suspect is moving shipments for Shein and Temu, also controls two Boeing 777 flights per week from Shanghai to Toronto that are operated by a Chinese carrier.
Porteous said the $116 million estimated value of the Great Vision HK Express contract doesn’t include potential incremental revenue if the shipments are tendered for further distribution into Canada or for additional frequencies from China as Great Vision’s business grows.
Fleet strategy
Cargojet has a fleet of 41 Boeing 757 and 767 freighter aircraft. The company said it accelerated conversion plans for two Boeing 767 passenger jets because of the rebound in demand, with deliveries expected in the first and second quarters of 2025. One of those aircraft will replace a 767-200 with a lease that expires in February. Porteous said the company is confident about the fleet additions, considering the reductions at other Canadian airlines and the limited global availability of freighter capacity during a rising market. Last week, Air Canada disclosed that it has parked two Boeing 767-300 cargo jets because it doesn’t have enough business to justify the expense of operating them.
The updated 2024 budget includes $33 million in capital expenditures for fleet growth – a sharp reduction from recent years but more than the $18 million originally budgeted at the start of the year. Cargojet recently acquired two Boeing 767-300s as feedstock for future passenger-to-freighter conversions. Management, however, is emphasizing increased cash flow to reward investors with dividend growth and share buybacks. The conservative approach is a reversal from two years ago when management admittedly overreached on fleet growth on the assumption that superheated cargo demand would continue after the pandemic. Cargojet in the past year backed out of investments for eight Boeing 777 converted freighters and sold four aircraft it had already acquired.
“Cargojet is well positioned to capture growth opportunities that will provide the returns required to support the current level of invested capital,” the company said in an addendum to the financial statement, adding that early signs point to a potential strong finish for the year.
