Story updated 11/42019, 2:45 p.m.
Canadian overnight air cargo provider Cargojet [TSE: CGJTF] increased its third-quarter adjusted pretax earnings by 24% to C$39.1 million ($29.7 million) compared to the same period in 2018, consistent with the nine-month growth rate.
Revenues, excluding fuel surcharges, increased 2.4% to $85.4 million, powered by a 5.5% increase in domestic network revenue based on strong e-commerce activity and a 33% gain in turnkey leasing of aircraft and operating services to other airlines, the company reported Monday (Nov. 4).
Cargojet primarily focuses on the domestic Canadian market with a network of 14 cities, which partially insulates it from some headwinds bringing down the international airfreight market this year. A major customer is Amazon.com [NASDAQ: AMZN], which in August struck an agreement to eventually acquire 15% of Cargojet. It is similar to ownership arrangements it has with larger U.S. carriers, Atlas Air Worldwide Holdings and Air Transport Services Group. Business is usually busiest in the fourth quarter due to holiday retail demand, although a significant portion of domestic network revenues come from guaranteed space and weight allocations.
However, Cargojet also provides aircraft to other airlines, with crew, maintenance and insurance (ACMI) included, between points in North America and flies scheduled charter routes for customers to a handful of international destinations with a fleet of 26 aircraft, all but two of which are Boeing 767s and 757s. Interline traffic from international carriers also helps fill planes on its domestic network.
Earlier this year, the cargo airline suspended routes to Lima, Peru, and Bogata, Colombia, that were unprofitable due to the airfreight downturn, as well as reducing one frequency to Cologne, Germany, and redeployed the planes to more profitable opportunities, which is expected to improve margins.
“Will only enter new charter routes if we can meet our margin targets,” Chief Executive Ajay Virmani told analysts on an earnings call.
During the quarter, Cargojet began operating a new scheduled ACMI route between Mexico and Cincinnati, Ohio, for express carrier DHL that is expected to boost revenue by about $11 million per year. Under the arrangement, Cargojet operates six flights per week with a dedicated Boeing 767-300 aircraft.
DHL last week said it would spend C$100 million to quadruple the size of its main Canadian gateway near Toronto. Virmani said the decision will likely result in more business for Cargojet, which already provides maintenance and ground handling in Hamilton for the package delivery giant, in addition to flying aircraft for it domestically.
“It solidifies our alliance with DHL in Hamilton where we can do a lot of things together now that they have permanently selected that as a big hub,” rather than relocate to Toronto International Airport, the Cargojet chief said.
The company’s average amount of cargo carried per day grew 2.4% to 1.31 million pounds. Gross sales margin increased 12% to $29.8 million. On a nine-month basis, revenues increased 7.6% to $347 million.
Virmani said that e-commerce is rapidly growing as Canadians warm up to online shopping, especially as e-tailers increase product selection. Cargojet is generating more cargo volume and weekend traffic on its network as online retailers accelerate their direct-to-consumer models and introduce faster delivery standards to keep up with Amazon’s one-day shipping guarantee for Prime members, Virmani said.
Cargojet is helping with 99.3% on-time reliability, Virmani added. It expects to see more volume during this peak season from its domestic network because last year a strike by Canada Post workers led to fewer online purchases and retailers are forecasting double-digit increases in online sales.
Last week, the transport company redeemed a class of junior debt by converting it to shares of common stock in an effort to strengthen its balance sheet.
