Cargojet Inc.

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

Good morning, everyone, and thank you for joining us on the call today. With me on the call today are A.J. Vermani, our President and Chief Executive Officer, Jamie Cordius, our Chief Strategy Officer, and Sanjeev Mani, our Interim Financial Officer. After opening remarks about the quarter, we will open the lines for questions. I would like to point out that certain statements made on this call, such as those relating to our forecasted revenues, costs, and strategic plans, are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDA. Please refer to our most recent press release and MD&A for more important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP income. I'll now turn the call over to AJ.

Thank you, Pauline, and thank you, everyone, for joining us this morning. When I spoke to you in November 2021, there was a lot of optimism in the air about the reopening of the economy. But in December, we reversed course, and Omnicom forced yet another wave of lockdowns and the challenges that came with that. Once again, we are seeing some signs of hope. and this time I truly hope that the reopening can be sustainable. Before I jump into the quarterly results, I wanted to share a few observations about the macro trends affecting our business. Number one, digitization. Be it educational, work, or shopping, the digital adoption has gone through a dramatic shift in virtually every industry. We believe that it is no longer an emerging trend, rather it is becoming the new normal. The trend has profound implications for every business, but for CargoDebt, we see this trend to be a net positive. Number two, hybrid. I talked about hybrid everything on our last investor call. This may be the lasting legacy of COVID and workplaces may have to adopt a new culture. Among many other benefits, we see hybrid work allowing for a better work-life balance, potentially reduced number of vehicles on the road, create more leisure travel and activities, which would require online shopping for more categories of goods. E-commerce. While this trend was already showing strong growth Pre-COVID, the last two years have brought forward at least five years of growth. Even the hardest opponents of online shopping have now accepted the reality of e-commerce. Many companies who did not ramp up their e-commerce and did not believe in it have now started to do so. In this new world order, instead of opening a new store in a shopping mall, entrepreneurs now open their new stores on online portals. This is a secular shift, and we expect this trend to continue to be a tailwind in the medium term. Number four, passenger airlines and cargo. A prolonged pandemic has triggered structural changes in the aviation industry. With a dramatic reduction in cross-border passenger air travel, a significant belly cargo capacity has been taken out of the global supply chain. At the same time, the pandemic has accelerated e-commerce at an unprecedented rate, creating even more demand for air cargo services. While dedicated air cargo operators have tried to step up in the short term, there remains a significant gap in the worldwide airlift capacity versus the demand that is expected to persist in the medium term. As major passenger airlines shed their larger wide-body fleets, 747s and A380s, in favor of smaller, more fuel-efficient narrow-body aircraft, the reduction in resulting belly cargo capacity will likely become a longer-term structural shift. CargoJet is very closely watching these trends and positioning its business to continue to capture emerging growth opportunities. Now let me get into the fourth quarter results. Q4 revenue growth of 26.1% for the quarter compared to the prior year reflected the results of our previously announced diversification strategy that is helping deliver a balanced portfolio growth. Each line of business was a strong contributor during Q4. Domestic network posted a growth of 18.2%. ACMI posted 26.7% and the charter business both posted the largest of all, 54.6% growth compared to the same period last year. Overall, the full year growth averaged 13.4% despite extremely difficult comparison to prior years. The adjusted EBITDA for the full year stands at 293.1 million compared to 281.7 million for the same period in 2020 an increase of 4%. This result must be viewed in the context that the cargo jet flew an extraordinary number of charter flights to Asia during quarter two of 2020 to bring PPE supplies to Canada. It is worth mentioning that we remain a disciplined operator and have used our strong results to invest in growth, reduce debt, pay down aircraft leases, and build balance sheets to fund future growth. Given the structural shifts noted earlier in my remarks, we are planning to enter a higher capital expenditure phase over the next three to four years. This will be to take advantage of the long-term growth opportunities, and we believe we have sufficient liquidity to fund this growth. Our balance sheet remains strong, the leverage ratio at 1.36 times adjusted EBITDA. On the operational side, volume growth remains strong. Average daily volume is up 25.4% in quarter four versus prior year and is up 24.3% for full year compared to last year. We grew our fleet size to 31 aircraft. Our on-time performance remains 98% and this is a critical deliverable given the importance placed on the target by our customer. We did face some on-time performance challenges in the month of December and January, especially with the book-offs because of the COVID situation. We remain focused on cost, expense, and expense management, and full-year SG&A cost is down 9.6%. One area that remains challenged obviously from our numbers is the cost of cruise. The crew costs have been impacted by a combination of factors, including the recently implemented new cargo fatigue rules by Transport Canada that discriminate Canadian air cargo carriers against the US and other international cargo carriers. We are also investing in pilot training to prepare for growth in our fleet. This has added short-term costs in the quarter. We are focused on finding cost-effective solutions to address this handwritten and over the coming quarters. In order to take advantage of the new digital and global aviation realities, we are investing heavily in acquiring and retaining talent. We have now built a strong, experienced, and seasoned international cargo team that nicely complements our core talent that continues to successfully manage our growing domestic network business. Once again, thank you for joining us this morning. We'll now open the call to the questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star followed by one. That is star one to queue for a question. We'll move to our first question. Conor Gupta of Social Capital. Please go ahead. Your line is open.

Thank you, Alfred. Good morning, everyone. So my first question is on the fleet. I think looking at the fleet table in the MD&A versus what you disclosed in Q3, it seems like there is an additional five Boeing 757s which are coming in 2022, and there are now eight Boeing 777s coming between 2023 and 2026 instead of four that you were anticipating before. So I wanted to ask you, what is the purpose of investing in incremental aircraft at this point here? Are you seeing any, you know, kind of, you know, intentions from your existing or new customers in the sense that they want to secure more capacity or just purely on spec basis that you anticipate demand in the future?

You know, we never go out and gamble and spec on these things. We should look at our 21-year track record on these. First of all, three aircraft are needed badly to 767s are needed badly for our maintenance and spare aircraft because every time we do have one, you know, customers have requested that we fly ACMI or in our charters and deploy it any which way we can because of the shortage of capacity. So those three aircraft are needed for our in-house needs to cover our operational and maintenance needs on a daily basis. The 757 strategy is an interesting one that we need to, the domestic network is at the present time a combination of 7-6 and 7-5-7 networks. So our strategy is to use more 7-5-7s domestically and take the 7-6-7s out for ACMI business. So this strategy is obviously based on the demand and what I hear from the customers and what we have been told and what the requests are. So the 7-5-7 also provides our customer with better service as they can be more nonstop flights from Hamilton to Western Canada and Eastern Canada, and similarly from Montreal as well and the way back. So the 767s are bigger aircraft. They are more challenging to handle. The stopover flights from Winnipeg or Calgary and continuing on to Vancouver certainly takes more time. So this also improves our service. It also... improves more capacity that we need for growth. And second, thirdly, it also frees up 767s for international and ACMI demand, which seems to be continuously high. So 777s have been added based on our discussion, ongoing discussion with customers. We look at the ongoing demand that's going on. And the backup is like, if we have two or four extra planes, there's sufficient demand to even dry lease these if we needed to. So we have backup plans after backup plans. These are not just back aircraft.

Okay, now that's good clarity. Thank you. And so for the aircraft that you are expecting this year, including the 757s you mentioned, and that will release some 767s for ACMI opportunities, When do you expect to formally sign those ACMI opportunities for further 767?

We'll announce them as soon as we sign them. There's ongoing discussions. We also have opportunities that are beyond ACMI, like those are for our own international growth and similar to what we do domestically. We also have opportunities to sign longer-term block space agreements, even on some of the international lanes that we service ad hoc or on charter basis. So we have choices. We can either go that route or we can go ACMI route. We don't like to form up things and tie up until we know that the aircraft is on its way at least three to four months before. So the opportunities are there. We just haven't signed them. you know, as I said, on both block space agreements, just like there were domestic network and also on ACMI. I would imagine that probably I'm hoping that next quarter we'll have more to announce on those.

That's good. Thank you. Lots of information. Sanjeev, if you have any, you know, guidance on CapEx for this year and the next year, given the, you know, increase in fleet size, you have this great thing.

Hi, Konak. The CapEx plan for this year definitely move up with this new addition. We will be in the range of 525 to 550 million. That includes my maintenance CapEx as well. So that will be the range which we will be looking for in 2022. In 2023, it will be in the range of 300 to 350 million.

We're looking at $120 million for maintenance CapEx, and the balance is growth. We also have two simulators, 767 and 777, that we will be doing our own pilot training in-house in Hamilton, which would also, you know, longer term, this would also bring the cost down and increase our training and efficiency and safety as well. So, but the... An important part here, Konar, to note is that we plan to fund this growth mostly from our internal cash flows. And secondly, we do have a line of credit of $700 million that's underutilized. So we have sufficient liquidity to fund this growth going forward.

That makes perfect sense. Thanks for the time.

Thanks. We'll move on to our next question from Chris Murray of ATB Capital Markets. Please go ahead. Your line is open.

Thanks, folks. Just one of the questions I have, unfortunate situation, but with what's going on in Russia, there's been a lot of discussion around a lot of Russian cargo carriers moving out of the market. I'm just wondering if you have any commentary around how this is changing, what you're seeing for demand even on short-term charter, and if there's any longer-term opportunities for you to pick up other lift that may have been dislocated.

Yeah, so, you know, there is a number of Russian carriers that have been grounded with Antonovs, you know, at least 20 to 25 747 cargo planes, a few 777s, and a few 757s that are operated by the Russian carriers. So, yes, short-term, we have had a lot of inquiries. We have had a lot of demands. you know, wherever we can plug it over the weekend, we have done it, and we will continue to do so, take advantage of those ad hoc opportunities. But most importantly, we do not have presently the fleet to deploy, which we had 20 aircraft, which we could advance these three years and have these aircraft today, and they will all be working. But, you know, these are opportunities, you know, about Four months ago, we had opportunities when the B.C. highways had the flooding. So these short-term opportunities do start to keep popping in, and wherever we can plug, we can. A lot of requests have come in even for charters to Poland for relief goods as well, besides the normal trading, besides the normal – you know, day-to-day charters that we are being requested for. We will, you know, we are obviously weighing each one of them. We do not want to take on additional work to disrupt our day-to-day normal long-term customers. But if there are opportunities, we continue to use those.

Okay. And that kind of goes to my next question because, I mean, one of the questions that we always get is the, You know, the question about, you know, all this capital spending and bringing in these new aircraft, is it fair to think that, you know, and I think you alluded to it maybe in the earlier question about the fact that, you know, you've got the opportunities, you really won't decide until three to four months before you get the aircraft. But is it fair to think that those aircraft will be fully utilized pretty much when they arrive and we should see kind of a margin profile similar to what we've been seeing over the last couple of years?

Yeah, absolutely. I mean, we wouldn't be investing if we didn't believe in our business plan and what we've done and have a track record. So there is not going to be an aircraft, you know, that we feel today certainly that is not going to be utilized or going to be underutilized. So, yes, we have a lot of openings. We have a lot of requests. We even have requests from people who – you know, today cannot get conversion slots. You know, we could even sell those conversion slots if we wanted and make a short-term profit. Or we could also dry lease them. So there's many, many opportunities that this capital is not just going to be sitting there collecting dust. So they will be fully utilized one way or the other.

All right. That's helpful. Thanks, folks.

We'll move on to our next question from Numan Tati of Lorientian Bank. Please go ahead. Your line is open.

Hi. Good morning, everyone. So my first question is more on the high fuel cost. I know that the bulk of fuel costs, you can pass that on, but I'm just trying to get a better sense of If the fuel prices remain at these elevated levels, would you expect some sort of demand destruction to happen in the air cargo business? Maybe if there are some learnings from the last time when oil prices had gone that much higher because you're adding a lot of capacity, but you're still confident that all of that will get absorbed even if there is some sort of demand destruction from higher oil prices?

Yeah, because simply, you know, whenever we had higher fuel prices, yes, the demand did come down in the previous experiences, and maybe Jimmy can shed a little more light on it. But just keep in mind that today the supply chains are very disrupted, and there is no end in sight for these. So there is a little bit of a tailwind we get when ocean and, you know, rail and trucking isn't. performing to what they should be. Even the rail, like, you know, with the CP rail strike in sight. So when you look at all the factors that are happening today, I believe that, yes, the fuel is high, all-time high, but also, you know, people do need the goods and people do need the supply chain and people do need the e-commerce and daily necessities. And when you can't depend on surface transportation, air becomes the choice. especially when a belly capacity doesn't exist in the market that used to exist. So combining all these factors and higher fuel price, you can look at it this way that, yes, the fuel prices are going to be higher, and that's where everybody's finding the inflationary pressures in various industries. But generally, we feel that it should not affect the air cargo business as people, the demand is certainly much higher than the supply today in every logistics business. Jimmy, you want to add some color to that?

Yeah, no, AJ, I was just going to say, you know, historically when we saw fuel prices rise, you know, 10 or so years ago, the one fundamental difference is, as AJ suggested, you know, demand is at an all-time high and capacity is probably pretty close to an all-time low. So with the, you know, continued demand delays, global supply chains, demand for global air cargo services, we feel is going to continue to be very strong regardless of the increase in price of fuel, particularly when customers pass.

Okay, now that's fair. And maybe just on the same thought process, when historically for some of your customers that the costs have gone up, but you guys have generally your margins are still pretty high. Like, do the conversations start to move in the direction where they sort of ask you to share some of the burden, or generally it's just a small component of their cost and those discussions don't come up?

No, I mean, generally they don't, Noman. You know, we have – You're right. I mean, we make a concerted effort to manage our, you know, the rest of the reason we maintain the margins is obviously we pass on the fuel, the increase in fuel as a surcharge to our customers. And we continue to manage the rest of our operating costs very diligently every day. And I would say, no, normally that doesn't happen.

Okay. No, that's good. Great color. And just one last one from my end. I think In Q4, you've mentioned that you had some additional relief charter flights for the U.S. and Canadian government, and it's going to continue in the first half. Just trying to get a sense of is the sequential improvement in all in-charter businesses primarily from that one, and we should expect a similar run rate for the coming quarters?

Well, that's kind of hard to say, but it's certainly, you know, it depends on where we were last quarter. Last quarter, we also had some charters from the BC Highway situation. We also had some relief charters as well. And time around right now, it's a different kind of charters that are going on. So what our experience tells us that there's something or the other that is happening that encourages charters in various directions. We are strictly... These are opportunities that we take. You know what people call it, retties. We call it ACMI, obviously. So we take the retties opportunities very seriously from a standpoint that we want to service our regular customers and also focus on some ad hoc opportunities if our system and our people and our aircraft can accommodate those. But certainly... At this stage, I can tell you that, you know, if we wanted to book six months ahead of charters from even our regular customers, we could. It's not just the ad hoc opportunities. It's our regular customers looking for more lift. You know, that's where the opportunities come in.

Okay, that's great. Thanks for taking my questions, and congrats on the quarter.

Thank you. We'll take our next question from Walter Sprocklin of RBC Capital Markets. Please go ahead. Your line is open.

Great. Thank you very much, Robert. Good morning, everyone. So starting on your CapEx plan, could you perhaps give us, Sanjay, the 2024, 2025, like the years where before you get down to the 120 in maintenance, what those CapEx numbers just for visibility purpose for investors going forward that they can appropriately model. And then, you know, our job is to now kind of calculate returns on that new invested capital going forward. So understanding the CapEx spend through your entire fleet plan additions would be helpful. So I don't know if you have those numbers for 24 and 25.

Yeah. As of now, I can just give you a rough estimate because things will change as the year passes, right? But whatever fleet plan we have in place, we expect our maintenance capex will be in the range of 120 to 125 in coming years per year. But gross capex, like I said, for 22 and 23, I have already given the figures, 24 and 25, We expect, based on the year in which our 777 supply will come in, our growth capex will be in the range of $225 to $250 million for 2024 and around $175 to $200 million in 2025. Yeah, and that's growth only, you said, right?

Yeah. Okay.

And, Walter, just so you know that planes do need facilities and ground support equipment and investment in training for pilots and maintenance people in spare parts. So this is all sort of inclusive that goes with it. You just can't get 777s and not grow your facilities. So this has hangers attached to it. This has simulators attached to it. This has training attached to it, spare parts. So there's a lot of – moving parts on all this.

And then my next question, and that's helpful. Yeah, that's a good consideration. And my next question then is, once you have this fleet in place, even if we were to only assume ACMI, and I know, AJ, you were talking about upside if you did block our flying internationally, but if we were to only assume ACMI goes into the aircraft that come out from this, I don't know if you have, you know, what we're going to be looking for is what is your total revenue dollar capacity. And then, you know, if looked differently, if I go in my model and use the $10 million U.S. revenue per aircraft per year for ACMI, is that a good number to use now or is this inflationary environment made that $10 million U.S. per year per aircraft, you know? maybe 12 million or something, something, you know, even higher.

You know, we roughly, the ACMI can do about, you know, anywhere between 200 to 300 hours a month. So, just one second, I can give you some kind of idea on what this is per aircraft. So, Yeah, $10 to $11 million is a good number for revenue for ACMI on 767 probably.

And that's just the base, you know, that's you do everything ACMI, and if you do your block hour business, then that's pure upside, right? Is the best way to look at that? Sorry, was that a yes? Yes, yes. Okay, perfect. Okay. All right. And then under your existing contracts, can you update us as to when you expect your current long-term contracts with your major domestic customers to be renewed? And what flexibility do you have in your current contract to move your pricing higher with cost inflation, or is that something that we're gonna have to wait for and might we see a big lift in your pricing to capture some of the higher inflation that we're seeing today, or can you do it under your existing contract?

First of all, we just renewed two medium-sized contracts last quarter. And we have two major ones coming up, but they're not due for another 36 months or even a bit longer. So, you know, we have certainly kind of had a discussion with our customers of longer term sort of extending them. But as you can know, three years in this business is to eternity. Certainly between this year and before it reaches 24 months, We certainly plan to have those serious discussions in the next quarter and quarter two and quarter three with them. But, you know, also customers and we are both nervous as many of our suppliers have, we've asked for long-term contracts and we have said, you know, okay, we're not taking these contracts right now because, you know, those contracts are being quoted on what's happening today. So there is some kind of a nervousness on parts of suppliers and customers as we have been in similar situations that to hold off and see things stabilize. If we were to lock in an agreement today with a customer, our nervousness is that we could be faced with even higher cost increases. So that is a bit of a challenge both on a supplier and a customer side for us. but also keep in mind that we feel confident about the renewals. In our track record, we have never had a situation where we haven't renewed a contract. Yes, there are a few small competitors knocking on the door. We all know that. But what we have, Walter, the cause for renewal, which is our infrastructure, 20 years of cargo pedigree, our on-time performance, our people, our investment. We have 6,000 to 7,000 ground support equipment in handling. We have 250 maintenance engineers that work on it. We have over 350 pilots. So we have a lot of infrastructure. We have spares. We can read outplanes. There is so much flexibility we give our customers. And with the 757 introduction of more non-stops to aircraft, Hamilton and Montreal will be able to serve seven cities nonstop in Canada in both directions is a major plus. And, you know, the combination of the network, the combination of the discipline, the cargo culture that we have developed prior to cargo jet coming in, as you remember, there were 15 cargo airlines who tried and gone from 1985 to 2005. And, you know, we are well-funded. We are well-capitalized. We've got a great team. We've got all the assets that we need to make this work. And I'm pretty confident those renewals are going to happen. Can I give you in writing and in guarantee, nothing is there forever. Nobody expected that Russia would be at war today. So given what I know, given the circumstances we have, given the assets we have, given the performance we have done, there's no reason why we wouldn't get it at a fair price. Now, would we be able to capture every cent? I don't know what the situation will be when we sit down at the table, but certainly it's not lost on us, and we will start those discussions. We have had informal discussions, but we have exchanged notes. We have talked about what is, but I think we will only get serious between, I would say, when we have you know, closer to 30 months rather than 36 months renewal.

Makes sense. And you mentioned trepidation about locking in too long. Is that to, are we to interpret, therefore, AJ, that you'll be looking at similar structured agreements that would be seven to 10 years in nature upon renewal?

As a minimum, yeah, as a minimum, our guideline always has been to get a five, between five and 10 years renewal. agreement. So if you've got, let's say, two years left on an agreement, we'll certainly like to add a minimum of three with renewal options for one or two years as we go along.

Got it. Okay, that's all my questions. Thanks very much, Ajay.

Okay.

We'll move on to our next question from Kevin Chang of CIBS. Please go ahead. Your line is open.

Thanks. Thanks for taking my question. Congrats on a good Q4 there. I'm just wondering, is there a way to frame, I don't know if it's by block hours or another metric, just maybe how much demand you're living on the table today given the size of your fleet, just to kind of level set how much of the growth that you're planning for the next few years is to backfill existing demand that you see versus maybe having to chase demand? or making a call on what demand looks like, you know, two to four years from now.

David?

I think, Kevin, a good indicator of that would be, you know, the comment that we've made before, that not only looking at the dedicated air cargo demand for freighter aircraft around the world, but pre-COVID, over 50% of the world's air cargo moved in the belly of passenger aircraft, particularly aircraft long-haul intercontinental flights flying between Asia and North America, North America and Europe, and Europe and Asia. And with most of that capacity still, it will never come back to pre-COVID levels at a time when demand globally driven by the surge in e-commerce growth, the supply chain issues globally in terms of logistics, we're very confident that the demand is going to continue to be very strong for at least the next five to ten year period. It's one of the reasons why we're making the investments in aircraft now. And as AJ indicated, we have an extremely strong 21-year track record of being very successful and being very prudent when it comes to CAPEX and ensuring that we only enter into agreements to get aircraft when we know there's a certainty that we're going to put those aircraft into use, whether it's whether it's an ACMI basis, whether it's enhancing our domestic network or continuing to grow our international and charter business.

And as I said, as a risk management, we also have a backup plan because these aircraft and slots are so much in demand that we could even dry lease them. So there's opportunities even in that, Kevin.

Right. I mean, it does help that these are fungible assets and obviously the market is very tight now in the foreseeable future. Just on your 777 strategy, you are adding more aircraft here. You note that in your updated fleet plan. It does feel like you're starting to shake how you see these larger aircraft, or what role these larger aircraft might play in your network, given you're adding this bigger aircraft type. Is that something you can share with us? Is it Did you see more international opportunities as you kind of tested out the market? Is this primarily, you know, AJ talked about using 757s domestically. Do you think you need more 777s for maybe some of the trunk routes between Vancouver to Hamilton? Do you need a bigger aircraft? Just wondering how you see that 777 strategy evolving here, given you're adding more of those aircraft.

Yeah, so, you know, our strategy on 777s is a combination of, like I said, wet lease ACMI operation and also, you know, some of the routes that are always in the past 30 years, if I looked at it, they are always in demand, like, you know, flights from Hong Kong or China or Seoul, Korea or some of these far east places today. You know, to reduce the dependence on the Chinese market, there's a lot of flights coming in from Vietnam and even Thailand. So our customers are branching into some of those Asian countries where the lift is not as much. So, you know, we have an opportunity on this 777s to operate from the Far East. Any of those destinations today, even if you fly to one destination, you can always connect from other destinations on an interline basis feeding into that. So we would look at probably, you know, Far East. Our initial plans call in flights going as far as Far East, coming back into Vancouver, then going over to Europe and maybe to India. And then the 767 network would probably be more suitable to bring in the Europe feed to connect in with, again, to connect in with our 777s to Europe and also 767s to South and Latin America as well. So, you know, Carbujet plans to be a truly global airline serving all five continents. So, you know, 777s would be long hauls and 767s would be medium hauls. And You know, again, as I said, 777s, we have opportunities in discussion, which I'm not – I can't say right now because there's nothing concluded, but there is definite interest in terms of, you know, some ACMI operation of these and then a few for commercial, just like we do with the domestic network on block space agreements with certain users. Okay. I think that as we move forward, you will see a lot more clarity on our business plan, you know, because of competitive factors and some of the stuff that we haven't finalized, so we can't totally come out on that as well. But all I can assure you is ArgoTet does not go out and put money if you didn't believe in ourselves and didn't believe in the business plan. And on top of it, we have backup plans, so...

Right, and you always have a strong track record there. Maybe just the last one for me, just again on the fleet. Do you have any intentions? Do you see the need to add aircraft that are smaller than the 757 payload? I mean, I think a number of OEMs have started to push through freighter conversions of some of the larger narrow-body aircraft. I think like Embraer is doing something in Airbus with the A321. Are those things that you think need to be Do you think that's an asset that needs to be utilized or could be utilized within your fleet, or is the 757 kind of the line in the sand in terms of how small you want to go?

Jimmy?

Yeah, Kevin, we always have entertained looking at other aircraft types. You know, there are some markets that a smaller aircraft might be more more suitable, but really the benefits that we have with the 767 and the 757 with the common cockpit, the same flight crews can interchange between aircraft, provides us a lot of both operational efficiencies and cost efficiencies. So, you know, I think it would, you know, our intent would be more into entering into the agreements in the wide body, the 777 aircraft, because we feel there's certainly global opportunities driven by the increased demand, the lack of belly cargo capacity. As AJ said, 767 is an ideally suited aircraft for certain lanes, but when we talk about long-range intercontinental from Asia to Canada, a 777 is more conducive to operating on those lanes. We continue to look at it, but it's not something that, you know, on the short-term horizon that we're looking at smaller aircraft.

Excellent. Thank you very much. That's all for me.

Next question from David Acampo of Cormac Securities. Please go ahead. Your line is open.

Thank you. Good morning, everyone. I just wanted to circle back on the fleet, and maybe, Jamie, you can answer this. But the 757s that are coming in, you mentioned that it's going to free up some 767s. Is that going to be on a one-for-one basis, or should we think about the five aircraft that's maybe freeing up three 767s for ACMI?

For every two 757s, you free up one 767. So that's the kind of formula.

Jimmy, you want to add something to that? Yeah, I was going to say, it's not a one-to-one. If you look at it in terms of capacity, the 757 is approximately an 80,000-pound gross payload aircraft, where the 767-300 is 125,000. So it's certainly not a one-to-one. It's more, as AJ suggested, two-to-one. There are some times where we could, you know, add three 757s and potentially free up two 757s.

Okay, that's helpful for us. And then just a quick one for me, last one. On the B2B volumes, you guys noted that it picked up in the Q4. Where was that relative to pre-pandemic levels, and how do you see that trending throughout the year?

Yeah, it's hard to – Really hard to pinpoint, David, only because, as I think we've said before, we don't have clear transparency from all of our customers unless they're strictly in one space, either the B2C or B2C. Amazon, as an example, is strictly an e-commerce place, so we know 100% of their business is B2C, where a lot of our other customers have volume in both spaces. And then it'll differentiate between a container of B2C volume or B2B volume. We have very, very little business or very few customers that participate strictly in the B2B sector, although from dialogue and communication and conversations with them as more and more businesses and economies were reopening, they were indicating they were seeing the return of B2B business that they hadn't seen for a while. I still think it'll be, you know, I think certainly the last couple of years as a percentage of our overall domestic revenues, I would suggest that the B2C certainly is the majority now, and I think that's going to continue to be so going forward.

Okay, that's helpful. That's it for me. Thanks, guys. Thanks, David.

We'll take our next question from Matthew Lee of Concord. Please go ahead. Your line is open.

Hey, morning, guys. Just in terms of the varying economics per plane, I mean, it's part of the reason you're taking on those triple sevens because you're getting them at a relatively attractive price just given the number that are being shown in the international community. And then just similarly, you know, is the strategy of adding 757s related to your ability to get those at an affordable rate? Maybe again, 737?

Give me one. Yeah, no, I would say it's not necessarily driven by discounts on freighter aircraft. I mean, freighter aircraft are in extremely strong demand. There's certainly a large pool of available what we call feedstock where passenger aircraft that have been retired either early or prematurely. And there's this huge pool of feedstock sitting around the world. But pricing, we haven't seen pricing really drop on the feedstock yet, primarily because the demand to convert those aircraft into freighters remains extremely high globally, and there's a limited capacity to actually convert the aircraft. There's only a few facilities around the world that do freighter conversions. All of them are rapidly trying to expand their conversion capabilities, but even just expanding their facility is going to take them a couple of years. The demand is going to stay strong, and I think pricing is going to remain strong for the next several years. The second part of your question – sorry, repeat the second part of your question, Matthew. Okay.

Yeah, just in terms of the 757s, I mean, you know, is the smaller size, you know, just a more efficient way to transport? Or is it, you know, are you seeing feedstock there at a relatively affordable rate?

Again, it's really, you know, trying to fit the right aircraft to the right market. And we've realized over the last couple of years that we've made some adjustments and sort of reengineered some of our domestic network flying by adding a couple of direct routes with a 757. And it's had a significant impact on service to our domestic customers. So, you know, piggybacking on that, we looked – and it freed up some 767s out of our domestic network of us to utilize those aircraft to either take on additional new ACMI business in advance of taking delivery of a converted aircraft or to use as operational spares. And with the additional 757s that we found that came available – that we're acquiring this year, the intent, as AJ suggested earlier, was to continue to enhance our domestic network for our overall domestic customers by flying more direct points, and if that in turn frees up, which it likely will, some 767s, we think there's some opportunities to put those into either our spares to back up our domestic line or to put those into new ACMI flying potentially earlier than we otherwise would by waiting for the delivery of a converted aircraft.

Okay, great. And then in terms of your contract with DHL, as passenger cargo kind of comes back a little bit more, are you seeing any slowdown in terms of their desire to add room?

Well, you know, as I've always said that, look, when passenger cargo comes back or belly cargo comes back, keep in mind that also, you know, the fuel prices paid by the passenger carriers are pretty well the same as what we pay. So even if the belly cargo comes back, would it be in the same form, what the pricing would be, and looking at the fuel prices and fuel surcharges, there's nobody afford, nobody can afford to give those away like they used to. So that's one thing. Second thing is also the size of the passenger aircraft coming back. A lot of 777s are being sold now. So a lot of A380s are not coming back. 747s are not coming back. So a 737 MAX can do Toronto, London, for example. So you'll see a lot more narrow body, less belly cargo, not palletized freight. You'll see some of those changes that are going to be in the marketplace. So we feel that there will be some erosion of demand with the belly cargo. It has to happen. But also a lot of our customers, including DHL and others, are now experiencing a higher levels of service, and they've built their own competitive situation in their marketplace based on the service they've been providing for a year and a half, two years. So to go back to if you are buying stuff on e-commerce today of daily necessities, would you go back to the store and buy your toothpaste from, you know, again, or would you keep ordering it? So similarly, our customers feel they've formed a certain habit, they've got a certain discipline of service through their dedicated capacity, which they're making them more competitive with their competitors. So yes, there will be a little bit, but we don't expect it to be huge to create any kind of imbalance that will be harmful. So there's always an adjustment period when things come back to totally normal. But we also got to be very aware of the fact that what's going to come back is passenger traffic, not necessarily belly associated with what it used to be. So if 100 777s are being taken out of the marketplace, that capacity is not being replaced by any other aircraft. Yes, there's 777X, but that's a $250-$300 million aircraft. And the demand of that aircraft is not going to be on boots with 737 Mexican service, for example. So we believe confident that any analysis we have done from Boeing and Airbus and some of the other industry pundits, we certainly believe that there will be some stuff going back to belly, but also keep in mind that service that we have provided and people have now adjusted their service levels, it will be extremely difficult now for these companies to go back. And that's the feedback we consistently get.

All right, thanks. That's a great caller.

We'll take our next question from Cameron Dorskin of National Bank Financial. Please go ahead. Your line is open.

Thanks very much. Good morning. I guess first question just on the ACMI contracts. In your sort of more recent discussions with potential ACMI customers, are you seeing a desire for longer-term ACMI contracts? And I'm just wondering how that might have compared to, say, three years ago on the kind of typical length of an ACMI contract. Are you seeing some desire for there to be a longer term for those contracts?

Yes, we are absolutely seeing that compared to what it used to be, definitely.

And is there any, I guess, sort of, detail you can provide around that? I mean, what would a typical ACMI contract be a few years ago versus the discussions that you're having today?

Well, they used to be more like 30, 60, 90-day contracts, and today they're at least, you know, we're talking anywhere from one to three years and even five-year contracts. So, there's a definite shift in that direction. We don't want to dwell on too much competitive information, but Yes, the trend is certainly for longer-term contracts.

Okay, no, fair enough. And just the second question for me, just with regards to the pilots and the cost, it certainly sounds like you're seeing some easing there just based on reading through the MD&A. Maybe you could just talk about your sort of expectation for, I guess, some of the higher costs you've seen on the pilots the last couple of years and whether you're still very confident in pilot availability as you grow your fleet.

In constantly hiring, there's not a month close by where we're not adding 15 to 20 pilots to the team. We'll continue to do that. Yes, there is some erosion. You know, some people love to fly cargo and some people hate to fly cargo. So people that love to fly cargo are the people who, you know, like to fly at night and they don't want to be bothered with all the going through airports and, you know, all the changes they go through. Cargo has better schedules. Their life is a lot better in cargo. And, yes, we did find that in the past three to four months that we had a number of people leave to go back to cargo carriers. And that, you know, puts a little bit of cost pressure and people pressure as well. But I think so far we have been able to attract a lot of expats who want to come back to Canada. And, you know, they find that CargoJet is a great home. They have white-body aircraft. Although there is a pressure, there is a shortage of every kind of trade today, whether it's maintenance, whether it's pilots, whether it's accountants, whether it's IT. Pilots are no different than other sectors that are facing shortfall, but CargoJet remains an attractive place for people to apply and work. So far, as I said, we've been having pilot training courses and new pilots about 15 to 20 every month, and we will continue to do that.

Okay, that's great. Thanks very much. It appears there are no further questions over the audio at this time. I'd like to turn the conference back for any additional or closing remarks.

Yeah, thank you everybody for joining us today. Our heart goes out to what's happening in Russia-Ukraine crisis when we see the images on TV and Carburetor is not handling any in line with the government guidelines and some of the mandates. We're not handling any or any of that stuff, which we never did anyway, but we're more cautious of it than we ever were. You know, our sympathies and our heart goes out to the people that are suffering, especially in Ukraine. and we will continue to help as a company and as good corporate citizens. We will also be doing some relief flights for all the refugees that are coming into Poland and some of the neighboring countries. We've had a number of requests. We obviously can't meet every request, but wherever we can, we will do its part, and it's always done. We did it during the Lebanon crisis. We did it during the India crisis. We've done it in many parts of the world. And CardWidget will do its fair share as a Canadian spirit to make sure that we do our part to help out. So thank you again for everybody who's joined us today and we appreciate the support that we get from you guys. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thanks for your participation. You may now disconnect.