Cargojet Inc.

Good day and welcome to the CargoJet conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Pauline Dillon, Chief Corporate Officer. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us on the call today. With me on the call are Aja Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Commercial Officer, and Sanjeev Mani, our Interim Financial Officer. After opening remarks about the quarter, we will open the call for questions. I would, however, 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 adjusted EBITDA. Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP incomes. I will now turn over the call to A.J.

Thank you, everybody, for joining us this morning. After a long 18-month dark shadow of COVID, there is some sunshine emerging as more and more Canadians get fully vaccinated. There is no question that the past 18 months have been challenging for businesses, governments, healthcare workers, employees and students, and companies like ours. But what I was most impressed which is the human spirit and its ability to adapt, adjust, and thrive. While the initial shock of shutdowns forced incredible hardships on businesses, we saw many businesses quickly adapt to the new digital reality. CargoJet is no different. After being declared as an essential service, CargoJet employees demonstrated heroic effort to keep their business going despite an unprecedented rise in volumes in a very short period. We also want to thank our customers who trusted us and trusted our team with their deliveries at this critical period. Like many other companies, CargoJet is also adapting to its new realities. While we don't yet know what the new norm may look like, we do know that we are not going to go back to the old. One word that we are hearing most often is hybrid. Return to office, schools, universities, and even shopping. People are adopting a hybrid approach to their lives. As economies reopen, people are eager to step outside and enjoy what they miss the most, the restaurants, the movies, the shopping, and the travel. At the same time, they have discovered that many of their routine tasks can be handled more efficiently through digital channels. Shopping for staples, daily household goods, and goods for kids and around house are much simpler to get delivered to your door. In terms of our business environment, thousands of new businesses have started purely on a digital basis because they do not want to take the risk of investing large capital in real estate or rent. These structural changes are driving a whole new digital economy. We are still not seeing the full recovery in B2B business segment. As you're aware, businesses were largely shut down for the most part of Q2. We expect the segment to pick up in Q3 and Q4, according to While there are many signs of hope in domestic air travel, most experts do not expect the international air travel to return to pre-COVID levels until 2023, 2024, or even maybe 2025. This will keep the belly cargo capacity constrained for the next few years. This means the international air cargo market will remain tight and will continue to present opportunities for cargo jets to grow. Some of these trends are bound to become permanent because of the level of services companies like CargoJet provide for this market. Now turning to our second quarter results, we are pleased to see strong momentum in virtually all of our lines of business. Revenue growth excluding chartered line of business was a solid 30%. As you know, prior years charter revenue reflect a significant one-time benefit from dedicated charter flights to bring PPE from China and other parts of the world to Canada. Going forward, we expect a more normalized revenue growth in our charter business. It is worth reminding everyone that CargoJet ended the full pre-COVID campaign year of 2019 with an EBITDA of only $156 million. The EBITDA for the first six months of 2021 stands at $131.6 million, compared to $124.8 million in 2020, an increase of 5.4%, in spite of the fact that we had a significant one-time benefit from the charter business in 2020. I share these numbers to explain the size of structural change we have gone through in the past 18 months. One noticeable cost increase is a cost increase of 49% in our crew costs. With the implementation of new Transport Canada pilot fatigue rules, which clearly disadvantage Canada-based cargo airlines against the U.S.-based cargo airlines, we are seeing a higher initial cost trend. CargoJet team is focused on finding cost-effective solutions to address this issue and deal with it with highest priority to find solutions to offset these costs and gain effectiveness. On the balance sheet front, we have been extremely prudent in utilizing strong free cash flows generated by the business over the past five quarters. We have brought down the leverage of our debt-to-EBITDA ratio to below one times EBITDA. You may recall the cargo debt leverage stood at nearly five times four years ago. Number two, we early retired aircraft leases and now own 83% of our fleet. 25 out of 30 aircraft are fully owned. We have paid down the revolver in full. We have $600 million in undrawn revolver, providing strong liquidity should we pursue growth ideas. Our net debt stands at $273 million, which is below our trailing 12-month EBITDA levels. We have also resumed our annual dividend growth as previously announced to return cash to the shareholders. Cargojet now enjoys one of the strongest balance sheet in the North American airline industry, and it was a deliberate decision. We wanted to be prepared for a potential inflationary environment. While there is a great debate about how long the inflation might last, wage inflation is permanent and it's here to stay. Economists agree that central banks will have to raise interest rates eventually. Cargadget is now well positioned to deliver shareholder value regardless of the direction the interest rates go. Let me touch on the operational side. We are continuing to see strong volume growth, as I mentioned earlier. In this new hybrid world, we expect the baseline for almost every aspect of our business to move up. We grew our fleet size by two additional planes, and it now stands at 30. This compares to 26 aircraft of Q2 last year. Our on-time performance remains at over 98.5% despite a significant change in the block hours loan profile of our company. This remains a critical deliverable given the importance placed on this by our customer. We are adding key talent and management in several parts of the company to reflect over size and complexity of this new baseline. Another significant focus for us is ESV. The board and the management team have been devoting a considerable effort to outline our policies, targets, and a framework where we can all play a role in helping the environment, and reducing our carbon footprint. While we continue to report on progress against the targets set by our board for each of the ESG component. An update on the international and ACMI growth strategy. We continue to make progress in both these areas. Having demonstrated the added value of dedicated air cargo service to our customers who initially signed up for shorter-term commitments, we are starting to see greater stickiness for certain international segments despite the reopening of certain passenger air routes. The international air cargo demand still remains very high and continues to present opportunities for our ACMI and charter businesses. Once again, some of these trends are becoming long-term and permanent as the customers get spoiled with the service they receive with dedicated cargo airlines. I once again thank you all for joining this morning, and we are now open for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star one to ask a question. We'll take our first question from Konark Gupta with Kosha Bank.

Please go ahead. Thank you. Good morning, everyone. Good morning. So let me just ask you one question. So you talked about the first half of EBDA being up towards this last year. and that is commendable, I guess, given the second quarter last year was pretty strong. How are you feeling about the growth heading into the second half this year versus last year? I mean, you still have somewhat of tough comms in second half, but you have new ACMI routes, I guess, and then you have the new CMI contract with Amazon, and domestic B2B hopefully will be bouncy at some point. So how do you feel about second half?

Well, we're feeling pretty good. We have made significant progress. As you know, we have in the next 18 to 24 months, we are taking delivery of seven new 767s. And in 2023, we have plans to get two 777s and then two in 24. We have an option for those ones. We feel pretty good at the demand for those aircraft. We are in discussions with a number of customers. We have a lot of choices. And let's put it this way, without saying that we have signed contract, we feel pretty confident that the aircraft will be placed as soon as they arrive in both those segments, whether it's international or whether it's ATMI. So those would be nice choices for us to have. On the domestic front, as I mentioned, that the business continues to, our customers are telling us that the forecasts are quite robust in quarter three and four. I know the economy in Canada has opened up somewhat. The lockdowns are a thing in the past. I think they will be a thing in the past in every country, not only just in Canada. But we feel that hybrid trends will settle somewhere in between at the highest what they were in 2022 and what they were in 2019. So overall, we see a net positive increase on those as well. As for the two CMI aircraft they have started a couple of weeks ago, this will require some study for the next three to six weeks or even eight weeks as to what, you know, what demand is required to fill those aircraft at the same time we operate and network for the rest of the traffic. So some of the adjustments will have to take place, as we mentioned in the last call, that this would take at least a quarter or two to make sure that the demand and the network is fine-tuned together. So this would be a bit of a learning forecast on our part, on our customers' part, and we will continue to make tweaks on a daily basis as capacity and demand to match the best needs that produce the results for both parties. So we find that Generally, we are optimistic that, you know, e-commerce not only domestically but internationally and transporter continues to grow. The duty-free limits of $150 now is coming into effect, and I think we'll see a lot more international activity on the e-commerce front as well as domestic.

That's very cool. Thank you, Jay. And then talking about ACMI, we saw a slight, you know, call it down tick in ACMI revenue quarter over quarter. And you just started a new contract, I guess, in June. Where do we stand on ACMI contracts and what do you expect as a runway for this line going forward?

So we've added two additional routes for one of our largest customers starting in August. So we, and we are also in discussion with a bunch of other parties who are interested in doing some more ACMI work. Our issue right now, if I had five extra planes, they would be all committed to some ACMI route. So as the new aircraft come in in October, there's one October, November, then we have one in March, and every four months we are getting a new aircraft. And At this rate, I can tell you that nothing is signed, and I don't want to jump ahead of myself here, but we have a great demand for those, and as a matter of fact, you know, we are in discussion of placing those aircrafts going forward. So we find that the ECMI segment of our business is going to be a significant portion of our business going forward, and it's customers who are using us for ACMI used to use commercial airlines who are mostly shipping their cargo, and now they've switched to their own aircraft ACMI. Although the flights are fully full, but the basic advantage of the ACMI versus commercial is that the customers are finding that they can fine-tune their delivery schedules better, they have better service, they have better control of their times, and they have better overall synergies using ACMI versus commercial. So it's a matter of them getting spoiled, and these guys, I can tell you, Konark, that the feedback we have is that a lot of this is here to stay as permanent trends.

Makes sense. Thanks. And last one for me before I turn it over. So we're hearing that guys in the U.S., saying the delivery model, the on-ground delivery model is expanding to seven days a week. I think FedEx was making an announcement there. Do you see something like that coming into Canada pretty shortly as well, where your customers are asking you to fly more or incrementally on Fridays, Sundays, and Saturdays?

Yeah, good morning, Konark. It's Jamie. I can take that one. Yeah, absolutely. We started to see that trend really starting a couple of years ago when we added a Sunday flight initially for Amazon. But we've grown that since, and I would say that all of our customers that are in the B2C space are now offering seven-day, either are or will shortly be offering seven-day-a-week delivery to their customer. Thanks, Jamie.

Thank you. We'll take our next question from David O'Connor with Foremark Securities. Please go ahead.

Hey, good morning, everyone. I just wanted to circle back on the CMI route contract that you guys are talking about with Amazon. When you guys think about that side of the business, do you just, I guess, in the early innings, are you starting to see deterioration of volumes that shift from, say, the domestic overnight network into the CMI basis, or? Or should we look at that as all incremental volume?

No, I think, David, we've been – Jamie, again, good morning. I think we've been pretty clear in the last couple of calls that we expected that when the CMI aircraft first started, there could be a little bit of an impact on the domestic volumes that otherwise were being carried on our domestic network. But you have to appreciate that, you know, from Amazon's standpoint, it's a growth story. They're adding dedicated capacity on a CMI basis. to provide capacity for their expected growth, which has, over the last several years, we've seen, obviously, significant impact and significant growth on our network. So, as AJ noted in his previous remarks, you know, we'll take the next probably four to six weeks to evaluate, you know, what that impact is. Certainly expect that as we get into Q4, we'll see that any impact we'll start to fill back up with demand for peak.

And have you heard any commentary from your other customers that may they fill on Amazon volumes as part of their network, particularly Canada Post, generally?

No, we haven't seen any equal concern on some of our other customers' parts that are providing capacity to Amazon. But similar to when Amazon started dealing directly with CargoJet five or six years ago, there was a concern about dilution to other customers that were carrying packages for Amazon. Those have continued dilution. at similar if not increased levels to what they were previously. So we don't anticipate any dilution there.

All right. And then shifting gears to B2B volume here, how close are we to pre-pandemic levels and where do you see that ultimately settling in as we, you know, enter the new normal?

I think we're getting close. I think I'd expect that if everything, the economy stays stable, stays growing the way it has been over the last couple of quarters, particularly as we go through Q3 and into Q4, I think we would return to normal volumes that we would expect from the B2B side of things. One sort of barometer that we use is our non, what we call our non-contract customers, which is a mix of B2C, but it's primarily B2B customers. And if I looked at Q2 revenues year over year, I think we were up 20%, which is a good reflection of the strength of the return of the B2B volumes.

It also all depends on how quickly things open up. A lot of, you know, you walk by some of the retail areas and a lot of stores are still not open and a lot of retail outlets are still closed. You know, depending on how, if we got a fourth wave, then obviously it'll be a different story. So it all depends on how quickly things can open up.

Okay, that's my question, Tom. I'll talk to you soon. Thank you. Thanks.

Thank you. We'll take our next question from Chris Murray with ATB Capital Markets. Please go ahead.

Yeah, thanks, Rose. Good morning. Just maybe turning back to your comment around the cost associated with the fatigue rules, I think we were led to believe, though, that part of the structure of your contract is that you can put through surcharges to offset some of those costs, so you're net neutral. You know, any commentary around that? And, you know, what sort of measures do you think you can take to actually offset those costs?

Well, first of all, the surcharges, we did have surcharges for certain non-contract customers that, you know, we have long-term contracts, and obviously some of these costs cannot be passed. So, Until the contract expires, we will then be negotiating new contracts with the customer. So, unfortunately, we have to meet those costs. That's why you see a big, big pause there. Part of it is that the Government of Canada, we have tried for three to four years to highlight one thing in this regulation, which is the rules for passenger and cargo airlines are the same, whereas the U.S., after three congressional studies, they decided that cargo was a separate business. not related to passengers because of the timing of the flight. Unfortunately, we could not explain to our government and regulatory authorities that was the case, and they decided to go their own way, which has caused a lot of hurt to cargo companies, and we have hired a lot of crews to offset that cost. We continue to talk to the government, but as everybody else knows what happens when you keep talking to the government, we can't depend on them and we can't depend on any other solutions from them, especially if they're all preparing for elections more than anything else. So where does that leave us and what offsets we are going to do in terms of that? There's not a whole lot we can do in terms of we are looking at some computer-assisted programs where we can gain crew efficiencies more. We are looking at certain ways of structuring our crew schedules that work out the best. There is not much we are going to be able to do in terms of that. We are also looking at certain – At the end of the day, we have to be competitive, and we have to make sure that we have something left over after all these additional crew costs. So it's a learning experience. We are also learning the new rules to apply where we can, and it would take us at least another quarter before we settle down and say, okay, we have now optimized according to the news. So even the programs that we have, they're learning as well that how crews can be utilized more effectively. So we will gain some efficiency with that stuff, but I think some of the trends would be permanent. But we are looking for some permanent solutions to this issue as well as we speak. And I would be updating in the next conference call on those issues.

Okay, that sounds fair. You know, my next question is just thinking about growth, and it sounds like, you know, from your commentary, there's enough opportunities out there that at least everything you have in terms of aircraft, you know, sounds like, you know, there's a couple options, but there is definitely a plan for putting those aircraft as they come into service, you know, you'll be able to generate some pretty good revenue off of. Do you have any opportunity to accelerate any of that, the fleet additions, and are there other opportunities to maybe, you know, go and maybe accelerate additional aircraft or is the bottleneck in the conversions? Like any thoughts on whether or not you can do anything in the near term to kind of capture some of this opportunity that's out there?

Yeah, so we did. We were able to get a 757 a couple of months ago, which was being converted at that time, and we were offered an opportunity to get that aircraft in our service. We also picked up another 757 from a Mexican residential fleet, which was up for sale, and we're going to be converting that in the next couple of months. So the size of the aircraft is somewhat smaller, but it fills a need for a certain market. So 767s are concerned. The conversion slots are tight. Right now, if we were to apply for a slot right now, we would be looking at towards the end of 2024. However, we do continue to look for aircraft that might be already converted, and if anything comes in the market, we have our eyes open. But we can't speed it up, certainly, but we are hopeful that right now the delivery schedules are on time, and anything that we can do to enhance, we continue to ask the the vendors, but right now it doesn't look that we will be able to advance it. But we do take on opportunities that are presented from time to time like we did with 2757. So those would be coming in much faster. The second one has already started service, the 757, and the second one will be expected to be in February, which is kind of beating it up in our world.

Okay, that sounds good. And then just kind of a housekeeping question, so CapEx – You had originally thought about this year, you know, somewhere in the $225 to $250 million range. Is that still a good number to think of?

Yeah, that still holds good, but due to additions of this 757, and this was like an opportunity which we availed, so it will be slightly in the range of $270, $280 for this year.

Because we've been able to cash in on this aircraft availability.

Perfect. All right. Thank you very much.

Thank you.

Thank you. We'll take our next question from Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much, Shafir. Good morning, everyone. Good morning. So starting with, you know, some of the commentary you mentioned in the back half, looking at excluding some of the second quarter revenue from PPE last year, every quarter you've seen sequential improvement seasonally through the year. both in revenue and EBITDA. Have you set the – is that – I know there's some moving parts here with Amazon, but is that fair to look at now in terms of the seasonality, the same seasonality holding in 2021 where you build EBITDA sequential improvement each quarter through the year?

We normally would do that, Walter, but I think this is the year we are operating two CMI aircraft and – you know, with all the other stuff happening in the marketplace, I think we will have to next, as we mentioned in the last quarter, once we're operating those two aircraft, we have to see does it really free up two additional aircraft for us to go deploy it somewhere else on more profitable routes. That is yet to be seen because we have not seen a change much in terms of the shipping pattern in spite of the two adding two additional aircraft. So I think in about it will take us at least this quarter or half of next quarter to get really – and then the peak starts. So it will get distorted again. So we just want to make sure that, yes, we want to see improvements and that's our target. But at this stage, we want to make sure that we assess our network cost and network capacity to what the real demand is going to be at the end of the day. So this is a learning experience. It will take a quarter or a quarter and a half to settle down, and we continue to monitor it on a daily basis. But the target is to continue to improve, but it will, with this new addition of new services, it certainly is something that we have to continue to monitor and adjust upwards or downwards as we go along. Fair enough.

Okay. And then going back to the international, you gave us a little bit of insight, AJ, on how international contracts would be signed. You've indicated you have a degree of optionality. So presumably that's with your existing customers who are saying, hey, look, if you have that aircraft available for international use, we'd like to take it out on an ACMI basis. But you're continuing to monitor – How soon will you know that? I mean, you mentioned you're talking to customers now. Will you look to sign on customers? Could you put one 777 toward kind of your own at-risk flying and then the other one to ACMI and then – eventually, you know, perhaps convert both over to your own at-risk? Or what's your strategy essentially with your – mainly with the 777s on the international routes as you start to come closer to those delivery dates?

So the 777s, I mean, we are still at least two years away from the first one, but our first brush looks like that a combination flight from the Far East into, let's say, Vancouver, which is our western base, The flight continues on to eastern Canada, let's say to Hamilton, our base there. That portion becomes like a domestic type of portion, which kind of eats some overhead because of the domestic issue. We take advantage of the domestic opportunity, which is full, which frees up certain 757 to deploy it to other places, and then continuing on to Europe. And then we deploy some 767s and 757s to South America, Mexico, and some of those markets, which kind of continue with give us the feed from the 777 from all over international places. So it's kind of a network design that will happen that would incorporate, you know, our first two 777s would incorporate some element of domestic already that exists today with some new international opportunities. The 767s, again, it can change. It's two years away, so we'll see what the market is, but that's what we are hoping to do. And as for the 767 international growth strategy, our first two or three aircraft, at least minimum three aircraft, are committed to going into some kind of an ACMI service initially. But keep in mind, we have at least six or seven aircraft that are available to us over the weekend, Friday, Saturday, Sunday, Monday, as a matter of what, four days, some of them, in each part of the country where we plan to use that capacity to go internationally to build up to 777 in the next couple of years when the 777 comes. So we are going to deploy our international strategy in third, fourth quarter of this year starting with six sevens to be used when they are available on the weekends or during the days that can do a round trip and come back. That would be sort of our first phase of international growth. On selected basis, where we feel the yields warrant it, we're not just going to be everything to everybody, but we will take the niche and selected market where the demand is far greater, the yields are better. and then build those into the 777 program. So start with 6767s, wherever it's available, plug them in, and then move on to 777 certain areas, and also take advantage of putting these aircraft on an ECMI basis, the first three at least, that are coming out.

So it sounds like this is something you can ease into and check demand and pricing as it evolves rather than You know, it's not like you're going to be flooding the market with new capacity the minute you take delivery. It's something you can judiciously enter where the opportunity offers itself with some good optionality.

Yeah, absolutely. We will use the 767 to build the business. And those 767s are going to be more incremental, as you know, because they're already working in domestic or some ACMI. So we'll have the opportunity to use those aircrafts. to start building the international marketplace slowly and gradually. Because if we threw a 777 capacity in our international market, obviously then the price gets diluted for everybody. So we want to start slowly, fill those up, and then move into the 777 phase. So you're exactly right. You called it right totally.

That makes sense. Okay, that's everything for me. Thanks very much. Great quarter. Thank you.

Thank you. We'll take our next question from Kevin Chiang with CIBC.

Please go ahead. Good morning, everybody. Thanks for taking my question here. Maybe I could ask Walter's question on seasonality a little bit differently. When I look at your pre-pandemic EBITDA seasonality, you know, like let's say 43%, 44% of that you would generate in the first half of the year and the remainder in the back half of the year. just wondering how you think about maybe that broader seasonality in 2021, and then just given the change in the mix of your business, you know, any comments or any insight on how you think that seasonality might trend, you know, as you bring on these new aircraft and as you build up the CMI and your ACMI international charter business over time?

Good morning, Kevin. This is Jamie. Good morning. I mean, as AJ said, I don't think there's any real fundamental change in our seasonality other than, as he indicated, that with the introduction of the two CMI aircraft that we just started operating in July, it's probably going to take us close to a good quarter to understand what impact, if any, that has on the normal domestic volumes on our scheduled overnight network. And other than that, I don't see any real change in the seasonality. I expect Q4 to be a very strong quarter, as it was in previous years.

Okay, that's helpful. And maybe just a second one for me, just on pilots, and thank you for all the color in terms of kind of what you're seeing today, but just wondering, you know, as passenger air traffic comes back and presumably pilots are furloughed, start reentering that, you know, reentering the passenger airline industry again, is that having any impact on the ability to recruit pilots? Is that creating any Any incremental cost pressures that you didn't see a quarter or two ago? And is there anything that you do on your end if you are seeing any bottleneck issues that you think you need to put into place in order to recruit to the levels you need to recruit to to have the pilots for all these planes you have coming in?

So we have no issue with recruitment of pilots. There's a whole lot of expats that went to Middle East and Southeast Asia to fly When these pilots were young, they had families. The majority of them want to come back. We've hired at least 50 of them from that lot over the past one year. These are people from Etihad, Emirates, Cathay Pacific, Korean Airlines. These are Canadians who went with young families. Now the families are ready to come back and they could never find white bodies or being captains in any other Canadian airline, so they were kind of stuck. So this is a great opportunity for these guys to return home to a decent job, and they are. So there's a big pool of those pilots available. We don't have any shortage at this time, but, again, a year, year and a half ago, there was a big shortage of pilots. So from what we've been told by the major carriers, that there is a small recall going on, but they don't expect that any major recall is going to happen for at least two to three years. You know, there will be some recalls. It might go up to 75, 80% of the 2019 level. We, you know, we went through a crazy period of hiring over 100 pilots in the past one year. Number one, to offset the fatigue regulations and secondly, increase demand. A lot of, as you know, it takes 50, 60, 70 grand to get a pilot training and getting them type rated and getting them online. So there was a lot of training costs that we incurred, and that's why we see a big line item over on our expenses. And as far as the market is concerned, we are not concerned at this stage about having a shortage because we have hired more than what we need at this stage. And I know there will be some attrition when the passenger airlines do call back. And we are fully prepared for that sort of contingency as we have some extra pilots on board for that.

That's helpful. Actually, can I ask one more? Just as I think out longer term and you bring on these triple sevens and you kind of build out or extend out your network further internationally, just how do you think about the interline partnerships you've developed over time just You know, strategically, how do you look at that in a world where maybe you can source more cargo from further places that might have otherwise flown on an interline or on an airline they get an interline partnership with? And do you think that might jeopardize some of those relationships if they think you're siphoning some of the volumes that otherwise might have been on the belly of their planes when they're flying passenger traffic to, like, Vancouver or Toronto or Montreal?

As a matter of fact, it's a very good question, Kevin, and we've looked at that issue. And in terms of whether it would be dilution to our revenue because if we're applying direct to certain places, keep in mind that there's a lot of capacity that doesn't exist that used to exist in those days. So if we are – if you're seeing European carriers that used to fly to South America and Latin America directly, the flights have discontinued or they've gone to narrower body aircraft in certain places. So when they bring their stuff into Canada, that's where we used to pick up and go to other places. I think domestically, We will never – whatever the capacity for interline was required, we don't anticipate that would change. As a matter of fact, when we start flying international, we will have more opportunities to sign up more interline agreements with carriers that need that capacity. Let's say, for example, a company like Cathay Pacific that comes into Vancouver and now – Instead of just selling Vancouver, they can also be selling, if you're flying to Mexico or, let's say, you know, a Caribbean or some of the other, or Colombia, we could now carry China's product not only within Canada, but also to the South American and Latin American destinations. We also would have South American and Latin American carriers feeding us for European freight. So I think we see more opportunity internationally with Interline with the selected expanded routes that we are thinking of. So we don't feel that would jeopardize or dilute any of that revenue.

That's very helpful, Khaled. Thank you very much. Thank you, Kevin.

Thank you. We'll take our next question from Matthew Lee with Conaccord. Please go ahead.

Hi, guys. Congrats on the solid quarter. Hi. Thank you. Can you maybe expand on the U.S. strategy in terms of are you seeing good partnership opportunities in the market? And maybe talk about what your ideal partner looks like for the U.S.

Can you repeat that question? Sorry, you broke up a little bit.

Yeah, I'm just thinking about the U.S. strategy in terms of partnership opportunities in the market and, you know, what your ideal partner looks like in the U.S.

So, yes, we've been pursuing that international growth, but also seeking partnership and strategic alliances in the U.S. Whatever ideal partner would look like, someone that has obviously fully licensed what they call 121 certificate, which is equal to our 705 operating certificate. Ideal partner would be a cargo carrier that has proper licenses, they're well run and managed in the organization, and we'll also be able to fly aircraft if needed for us because certain routes we cannot do. Let's say, for example, if we go for a flight from Hamilton to Miami and then Miami to LA and then LA to Mexico City, we cannot do the Miami-LA portion on our present route. So we That's where the international or the U.S. partner comes in to do certain routes and certain routes selectively that is being offered to us by our customer, but lack of regulatory authorities. And as you know, it's called cabotage. We cannot do certain routes. But with combining U.S. and a Canadian carrier, it can certainly fill those kind of needs. And that's what we are after. As I mentioned that we will be finalizing and, you know, some kind of an arrangement with an American carrier. This quarter we have a number of them that we have had discussions with, and it looks like that certainly will be the case before the year end. And also keep in mind that also gives us an opportunity to place aircraft with this carrier in either on a dry lease or CMI basis, but getting the economic benefits and a win-win situation for the American carrier and the Canadian carrier. So watch the space for more on that.

Thanks. And then, you know, bigger picture, you know, DHL announced today that it's going to be investing in electric cargo planes in order to reach their mission goal. Do you guys feel any pressure from them or any of your other partners to invest in thermal technologies?

As a matter of fact, we have discussed this issue with DHL quite a lot. These are small planes coming called Evasion out of Seattle area. They are 2,600 pounds which can go up to one hour of flight. These are electric planes. DHL signed up for 12 planes. I knew fully about it a long time back and You know, we might even look at some of our needs are regional. Like if we can get one of those planes, I think it would be great. So we don't – those size of planes don't compete with us. There's no pressure on us. But as a matter of fact, we are closely looking at – there is some customers who have demands for that kind of – we don't want to get into a full-blown regional operation. But just to continue with our own feed – For example, if we fly into Vancouver, for example, and there is demand for a small portion of that going into Nanaimo or Victoria, a 2,600-pound aircraft electric would be perfect for those routes. So if it enhances our network, we would also look at those planes. But unfortunately, those planes don't come into service in 2024. But we are certainly very keen to to look at what DHL has done. And we've asked DHL to give us some introductions so we could plan for those kind of flights for the future because their staff look quite neat and smart and they don't have any fuel. They're like electric. So it really interests us to enhance our capability to our customers.

All right. Thanks, Ash. Great quarter.

Thank you. We'll take our next question from Tim James with TD Securities. Please go ahead.

Thanks. Good morning. I'm just wondering if you could take a minute and characterize the types of cargo that you're seeing, those customers that are choosing and you expect in the future will choose to stay with dedicated services as opposed to planning to return to passenger aircraft, to the bellies of those aircraft.

Good morning, Tim. It's Jamie. I can give you some color on that. I don't think there's any one particular product that stands out. I mean, healthcare obviously globally has increased demands because of the COVID-19 pandemic, but literally anything that requires time-sensitive overnight or cross-intercontinental travel is shipped by air. Certainly manufactured goods and the whole logistics supply chain demands that that many different types of products, especially products that are in short supply from a manufacturing standpoint, but the product types themselves seem to change over the years. It's not any one single product that we're seeing. It's just that we're definitely seeing an increase in demand for air cargo services globally, and also obviously because of the increase of e-commerce and online shopping, which is not just a phenomenon here in Canada, but also globally and not just the actual – retail side of it direct to the consumer, but also the manufactured goods that have to get to fulfillment centers around the world are causing increases in demand at a time when, as I think I said a couple of times on previous calls, prior to COVID-19, more than 50% of the world's air cargo traveled in the belly of passenger aircraft, particularly on long-haul intercontinental routes. And with, I would think, a consensus in the industry that that capacity is never going to come back to pre-COVID-19 levels. at least at any time, I would say, in the next – at least the next 10 years. So the demand for dedicated cargo services have subsequently increased dramatically.

Okay. That's very helpful. Thanks, Jamie. And then just one additional question on kind of the competitive environment with Western announcing dedicated cargo plans and Air Canada having already articulated its strategy. And I realize they're not – It's not a clear-cut competition, but I'm just wondering if you could talk about what your thoughts are on implications in cargo jets' long-term positioning.

We don't take it as a significant threat, certainly to our domestic overnight business. I think we're confident enough that we've built a deep enough moat around the domestic business over the last 20 years. in terms of reliability particularly, because that's, number one, the most important criteria that our customers demand from a service standpoint so they can compete effectively in their markets. Secondly, the fact that we operate to 15 cities across Canada from coast to coast and have long – but our major customers have long-term agreements in place, all of which have several years, if not many years, and extension agreements options as well in those agreements. So we don't see – a threat from that standpoint. You're right. It's going to be WestJet and Air Canada will be Canadian licensed air cargo operators that we haven't had. We've enjoyed the benefit of not having any competition with dedicated cargo aircraft of any type of very significance, anyways, domestically here in Canada or internationally. As you indicated, Air Canada has articulated their use of those aircraft is primarily to provide additional capacity to to provide service to their international commercial cargo customers that they've been servicing with using flying passenger planes over the last year and a half, carrying cargo only in the belly. So we don't see – that really doesn't compete with us on an international basis. It never has. WestJet, equally, we think it's more of a competitive threat to our Canada cargo on the international side. When you look at, again, WestJet, there's really no demand domestically for services, but there is capacity demands for international cargo, particularly feeding their wide-body 787 aircraft. So if they have an aircraft, they will have passengers 787 flying from Calgary to Amsterdam, as an example. Not a lot of cargo originating and terminating in Amsterdam to Calgary or vice versa, but a significant amount of cargo coming out of Europe, coming into Canada, and being able to feed to and from Canada. Those flights in and out of Calgary from other points in Canada, I assume, would be the use of those 737-800 that they've announced that they're going to convert. Again, I would say that, you know, neither, Air Canada certainly has a strong pedigree in the passenger belly cargo capacity or space. Conversely, WestJet, I would say, has, you know, very little cargo pedigree in the belly of their passenger aircraft, and we don't, don't really believe it's going to be a significant threat to us. It certainly doesn't change the way we look at building and growing our business, both either on the domestic, the international, or the ACMI side.

And I might add that, you know, there is no passenger-slash-cargo airline combination that is capable of delivering a 98% to 99% performance. At least it hasn't happened in the past 30 or 40 years. you know, we have only one product to sell, which is cargo. We are focused on that. And, you know, you will also find that cargo for some of these carriers is going to be 5% to 7% or 8% of their total revenue. And once the passenger comes back, or if they do ever come back, you know, the focus is not just going to be on cargo. And that's what history has told us. So, Things sometimes change, and we are not totally dependent on history. Yes, we are aware that they are coming in, but CargoJet has over a billion dollars invested in infrastructure, ground support equipment, containers, repairs of ground support equipment, you know, loading and offloading aircraft in 15 to 20 minutes, turnarounds. Our hub in Winnipeg and Moncton, we're giving a seamless service from Victoria, BC into St. John's, Newfoundland on an overnight basis. So there's a lot of development over the 20 years that this company has been built along with, I would say, a bulletproof fortified balance sheet that is almost debt-free with all of our assets paid up. There is a lot for these companies companies to overcome to compete with cargo jet. And we are fully prepared. If we are attacked in any which way or manner in terms of taking one route, then obviously the customers will have to make decisions that what happens to the other 16 routes, how do they get that? You know, it's one of those markets that we have fully prepared for competition. But based on our service alone and our infrastructure, our cargo culture, our cargo pedigree, we don't anticipate that we're going to have any issues competing effectively with these carriers if they choose to compete with us.

Okay, that's really helpful. Thank you, AJ. Thank you, Jamie. Thank you.

Thank you. Once again, please, Mr. Starr wants to ask a question. We'll take our next question from Nauban Sassi with Lawrence and Bank. Please go ahead.

Hi, good morning, and congrats on a good quarter. Yeah, thank you. So my first question is really about when you mentioned that you expect some B2B pickup in Q3 and Q4. I'm just wondering, will that sort of dilute the B2C business, or is that still going to hold up and this is an additional thing that comes up?

No, I think it's just additional incremental B2B. The B2B doesn't impact B2C or vice versa. I mean, B2C is really driven by the increase of e-commerce and online shopping by Canadians. And the B2B is really the traditional overnight, Monday to Friday, business to business, courier, freight forwarder type traffic that was somewhat impacted on volumes during the shutdowns because of COVID-19.

Okay, that's a good color. And just my second question, I think it was in the last call. You had mentioned that you were flying some flights for your pilots to transport them because there was not availability of commercial airlines at that point in time. I believe the two challenges that were there. Are you still flying those? Is that one of those cost elements that you can take out, or do you think that's still going to continue because you have to deliver the results to customers?

Right now, we do continue to fly those two shuttles to Cincinnati to California. transport our pilots because of, again, it all ties down to the pilot regulations that we face. You know, there is, we can get additional use of the pilot's workday if we fly them to an hour flight into Cincinnati rather than putting them on commercial because commercial right now is like sometimes two or three flights to change. It also, sometimes the flights get canceled, so the service is not dependable. So we didn't have a choice other than to put our own challengers, which were meant for occasional use. Now it's being used almost daily. As a matter of fact, we're supplementing some lift from other corporate jets to get our pilots into Cincinnati. Yes, that is an additional cost. It's quite a bit of additional cost, but it saves us a lot of pilot days at this present time and continues to, you know, improve our operations because the fatigue rule certainly has hurt us, and that's one of the ways we are offsetting by gaining more crew productivity by giving them an hours direct flight, and they'll be able to continue on some other flights as soon as they land. what's going to happen, I think we plan to probably continue this till at least Q4, and to the end of Q4, till we learn the new rules, we work with the government on these regulations, and our crews, so ideally, yes, my wish would be to, if a commercial lift came back and it was an hour flight, that would be great, but if it doesn't come back, then we might not have a choice. So that's something that we could continue. It's daily on our minds to make sure that we, the first opportunity we get is to disconnect that and save that cost.

Okay. No, that's great. And maybe just the last one from my end, and this is just going back to Tim's question on competitive environment. I'm just wondering when you think of it, which is long-term business or the overnight domestic business that is there, Down the line, do you think that, you know, the Canadian market has the capacity to have multiple players that are, you know, eventually profitable? Or do you think that, you know, this is a market where one large player will continue to dominate and the economics are such that, you know, it's difficult to have multiple operators on the domestic overnight network?

Look, I mean, the purpose of CargoJet when it started in, around 2000, 2001, was a product of many cargo airlines operating. As a matter of fact, 15 to 16 cargo airlines sold or merged or went bankrupted, closed their doors between 1985 and 2000. The result was that everybody was operating one plane, two planes, five planes, six planes, They could not get the economies of scale. They could not get the costs under control. They could not deliver the performance. So the model was create one sort of network that services all Canadians. Who could have ever imagined that competitors like, you know, DHL, UPS, FedEx, Bureaucrat, all could be on one plane. But they realized that, look, this model of everybody operating planes didn't work. And because we were able to demonstrate, number one, a well-capitalized, well-run company with great cargo culture, delivering 98%, 99% on-time performance, and not having any sort of risks associated with, you know, one or two or three plane operations. So what would be the future? Would it be one dominant carrier? Canada is a very, very difficult place to service. You know, flights between Newfoundland and Vancouver are seven-hour flights. We have three time zones in between. The country is very, very – it's not dense at all. The population is very, very spread out. So a lot of product also – ships out from Ontario and Quebec to Western Canada or to Eastern Canada, hardly anything coming back. So we have a lot of, you know, the way cargo jet is built is strictly to take those kind of factors into account. One way country, different density of different products. So there's a lot has gone on of 20 years to build cargo jet to where it is. And I think new entrance, although it's, seems very nice and attractive to look at cargo yields and stock price and say, well, that's the market we should be into. But, you know, at the end of the day, you need to have the cargo culture to build what CargoJet is. And I can tell you that we feel pretty proud of our network, our team, and our facilities, our overall network. cargo pedigree, and I think we feel that our dominance is here to stay.

Okay, no, that makes sense. That's it from my end, and once again, congrats on the quarter. Thank you.

Thank you. We'll take our next question from Cameron Dorkson with National Bank Financial. Please go ahead.

Thanks. Good morning. Most of my questions have been answered, but I just wanted to follow up on the labor cost question one more time. And just looking at the overall headcount for the company up 23% year over year, I presume much of that is related to the hiring of aircrew to the T-grills. But is there, I guess, other parts of the business where you're hiring a head of growth that would inflate that headcount number?

Yeah. Yes, that is partially true. Most of it is due to the, there's two areas that we had to, every time you get an aircraft, you have to add some maintenance team to it. Every time you add an aircraft, it needs to be loaded and offloaded, so you hire the team to do that. You know, one good thing is that our overhead backroom functions have not increased tremendously. We have been able to absorb some of these whether it's records, whether it's finance, whether it's accounting. So we've been able to manage those within our existing costs. So the direct variable cost, I said loading the planes and fixing the planes and flying the planes, is cost that we cannot avoid as the size grows. But certainly there is a balloon you would see a bulge in the crew cost, and that is what the fatigue rules results are. So are we hired enough for the future? That's probably helping. Yes, we do. We'll start hiring some casual workforce for the peak flight. Market is very, very tight for anybody, whether it's a restaurant, whether it's factories, or whether it's loading planes. It's very, very difficult to find people right now. You know, it's great for the government to hand out checks and But the side effect of it is that, you know, companies like ourselves and restaurants and general factories are not getting, you know, all of a sudden there is no unemployment, which is kind of hard to believe. So I think the market will correct itself once these incentives by the government are over to bring our costs down and to bring availability down, bring the availability in line with the demand. So that's how we feel about the labor market.

Okay. No, that's very helpful. That was all for me. Thanks very much. Thanks.

Thank you. We'll take the next question from Ramsai Neelam with Streets Global Advisors. Please go ahead.

Hi. Good morning, gentlemen, and congratulations on a great quarter. I have one question on ESG. Many of your customers, especially DHL, UPS, and many others, are very keen on reducing Scope 2 and Scope 3 emissions. So is there any pressure on cargo jets to commit on certain ESG standards? Would it require some additional capital commitments for cargo jets over the time?

Yeah, so we are working with a couple of our large customers because we fly for them. So they asked us to look at some ESG requirements. as well, and we are, in these two customers, we are looking at getting our policies and procedures and what we're gonna do in that area. So we are working with a couple of customers closely, and we also, as a company, just put out the ESG policy. We have set up some mechanisms now to take into account the environment, the carbon emissions, and how to reduce our fuel burns. So this is going to be a major, major focus of us in the coming months and the next year. As far as the capital required for it, I can't give you any numbers because we just started to plan on it, but I don't anticipate other than having some headcounts right now. Initially, our first phase would be to reduce where we can in-house and find procedures and policies that help us reduce that sort of footprint of the carbon. That would be our main goal. And I'm sure with, you know, what we've seen outside, it certainly is an achievable goal for us in the coming year.

Yeah, that's helpful. Lastly, can you, I mean, if it's possible, can you give some color on for any ESG targets or timeline, if at all possible?

I can't give it to you right now, but as I said, we have just started this whole process internally, and hopefully in the next quarter we can give you some targets, dates, and costs related to it. Again, we've just embarked on this project recently on our own. Previously we were doing it in conjunction with our customers. So as CargoJet, we have started this process very aggressively. We can give you a better update in the next quarter on.

That's great to hear. Thank you very much. Thanks.

Thank you. There are no further questions, so this time I'd like to turn the call back to the host for any additional or closing remarks.

Thank you, everybody, for joining the CargoJet conference calls. We appreciate your input, feedback, and comments. We look forward to speaking to you in the next quarter, and some of you will have individual calls, and we look forward to participating in those. Thank you very much for your support, everybody. Good day.