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.

Thank you, Operator. Good morning, everyone, and thank you for joining us on this call today. With me on the call today are A.J. Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Strategy Officer, and Sanjeev Mani, our Interim Chief 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 the applicable securities laws. This call also includes reference 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 income. I would now like to turn the call over to AHA.

Thank you, Pauline, and thank you, everybody, for joining us this morning. It has been a really busy quarter for us, but we are very excited about these developments' mean for our future. As you know, the following. First, on March 29th, we announced new strategic partnership with DHL. This $2.3 billion deal over seven years is one of the largest single transactions in our history so far. We are very excited about the opportunity because it allows us to scale our business to the next level. And as we scale up, the economies of larger scale will benefit all of our customers. Number two, we are excited to announce a share purchase program under NCIB. Number three, we are also announcing a dividend increase of 10% effective our usual cycle starting June 2022 for all of our shareholders. And number four, we are also very pleased with our Q1 performance, which I will talk about later. Before I talk about Q1 results, I would like to share a few thoughts on how Carbidens positioned for the current environment. We are fully aware that there are a lot of uncertainties on the horizon. high inflation, high oil prices, rising interest rates, and lingering effects of COVID. However, at the same time, global supply chains remain very disrupted, and the future of passenger air travel and belly capacity on international lanes remains uncertain. These factors, on the other hand, have created a tailwind in opportunities for cargo jets. We have prudently diversified our business that does not rely on a single line of business. Our ACMI and all in-charter business are performing strongly. And our domestic network continues to support Canadian e-commerce growth. While there may be short-term volatility in the e-commerce trends, we believe the structural shift towards digitization will continue to be a tailwind for e-commerce in the longer term. Traditionally, the number one headwind for the airline industry has been the cost of servicing debt. Airlines are a highly capital-intensive business, so debt is part of the business model. But anticipating the inflationary pressures and the interest rate risk, we took a proactive step in January 2021 and made a strategic decision to de-risk our balance sheet. We did an equity raise and used the proceeds to pay down the majority of our debt. As a result, we have been maintaining a very low leverage and are now better protected against the cost of rising interest rates. Cargojet owns 93% of its fleet that has a fair market value of over $1 billion. These are unencumbered assets that are highly sought after given today's supply chain demands. Even our previously announced CapEx program, we do not expect our leverage debt to EBITDA ratio to exceed 2.5 times. This business continues to generate strong cash flows which are using to invest in our growth. We continue to manage our business prudently and are very aware of the uncertainties ahead. We are ensuring that all CapEx and OpEx is justified and well supported with real opportunities. Our ability to react to the changing environment was tested at the start of pandemic in early 2020. And as a nimble entrepreneurial company, we will continue to adapt to the changing environment. I make these points because we believe that in order to be competitive, we must have a strong balance. In the long run, only stronger companies will be able to maintain their leadership position. Now I'll turn the meeting over to Jamie Podias, our Chief Strategy Officer, to talk about Q1.

Good morning, everybody, and thanks, AJ. We're starting the year with yet another strong quarter with revenue growth of 45.7% compared to the prior year. While we are pleased with the double-digit growth in all lines of our business, we benefited from very strong demand in our all-in charter business that grew 298% versus the prior year. This was primarily driven by strong demand for transportation from China. Our diversification strategy continues to allow us to leverage our various offerings that are meeting a diverse set of customer requirements. The adjusted EBITDA for the quarter came in strong at $83 million, compared to 64.2 million for the same period in 2021, an increase of 29.3%. This also reflected tighter cost management for both direct as well as indirect expenses. We are starting to make progress in bringing the crew costs down, but more work is needed to bring it back to our expected run rate. With our continued focus on finding efficiencies, our SG&A cost was down 32.5% for the quarter, compared to the prior year. The strong top and bottom line performance reflect the resiliency of our business model that is taking advantage of growth opportunities as supply chains remain disrupted and unpredictable. On the operational side, volume growth remains very strong. Average daily volume is up 21% in Q1 versus the prior year. As planned, we grew our fleet to 32 aircraft at the end of Q1 2022, and our on-time performance remains in excess of 98%. This is a critical deliverable given the importance placed on this target by our customers. As we continue to grow, our focus is shifting to building a strong management team in each of our growth segments. We previously announced the formation of our international cargo team that will aggressively pursue opportunities to build complementary international business around our domestic network. We are also continuing to invest in talent to further strengthen our domestic network business. Our human resources team is very skilled at attracting and retaining talent at all of our key airport locations. This is allowing us to maintain high customer satisfaction levels despite strong volumes being carried. We have significantly enhanced our investments in technology, cybersecurity, and business analytics to support the next phase of our growth. Cargojet has always believed in the power of great people working together. To achieve strong results quarter after quarter requires a discipline that can be repeated over and over again. This can only be achieved with a talented workforce. We are very proud of the Cargojet team for delivering yet another strong quarter for Cargojet. This concludes our opening remarks and we will now open the call to questions.

Thank you. Ladies and gentlemen, 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 our equipment. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question today comes from Fadi Shamoun of BMO. Please go ahead.

Yes, good morning. Thank you. I don't want to kind of minimize your performance in Q1 on the growth side year on year was quite spectacular, obviously. And just wanted to get your thoughts on how you're seeing the demand going forward. A number of your customers said, have reported slowing volume in the first quarter and a little bit more cautious on the volume growth story going into the second quarter and the rest of the year. And I noticed in your own volume in a domestic network or kind of quarter over quarter, the performance in Q1 versus Q4 was quite weaker than we would typically see on a quarter over quarter basis. So maybe you can just give us some whether your customer is providing you in terms of forecast going forward.

Well, I'll take it and Jamie can tweak my answer. We have been in touch with most of our customers that ship large volumes with us today. We have not any forecast that we have seen from them for the rest of the year. they have not certainly shown the slowness that people are talking about. Now, even if we were to take their volumes and their forecasts and take the market factors in advance, we still believe that we'll have tremendous growth going forward. But that's one of the reasons the company has always, for the past three years, had a target of diversifying our business so we're not just dependent on one line of business. So if there is a bit of a slowness in the e-commerce, we also have the ECMI program and the charter program going. And now we are also expanding to the international not to be dependent on one line of business. Yes, we are aware of certain slowness in the e-commerce sector that are being forecasted. But keep in mind, Canada, especially, was 5% to 10% behind on e-commerce growth compared to the U.S. and compared to Europe and Asia. So there's still a lot of catching up, and we still remain behind in terms of growth in e-commerce. So even some of our U.S.-based customers who do a lot of shipping in Canada have pointed that out, that although they've seen some slowness in U.S., Canada's e-commerce has not slowed down to the level which U.S. has. Amy, you want to add to that?

Yeah, thanks, AJ. Good morning, Fabio. Yeah, no, I would concur with AJ. I think in all three segments of our business, we're seeing strong year-over-year demand continuing into Q2. Our Q1 results overall, one of our strongest quarters ever year-over-year and almost equivalent in total revenue to Q4, which is significant. Obviously, driven by the tremendous demand for all-in charter. We did a number of charters from China bringing rapid test kits back into Canada. The demand for that is somewhat slowed, but for the rapid test kits, the demand out of China hasn't slowed at all. It was somewhat muted in the latter part of Q1 and the first part of Q2 only because of shutdowns because of COVID outbreaks in Shanghai. But the demand for ad hoc charters remains extremely strong, and so does pricing. As AJ said, our domestic business We continue to see strong demand going into Q2. We've also seen in Q1 some shift of some traditional ground volumes, particularly with Canada Post that moved some volume. Because of the lack of ground transportation, either trucks or drivers and the shortages that are there, we're seeing an uptick in volumes. And then, of course, as we add more ACMI flying, we see tremendous growth opportunities for the balance of the year.

Okay, thanks. That's very helpful information. the charter revenue that we saw in the first quarter were quite strong. And you mentioned some kind of slower demand now from China, maybe because of this shutdown we're seeing. What's kind of the right range for the charter going into Q2 based on what you're now expecting?

Yeah, so... So I think it's not the demand that's low out of China. It's the logistics because of the Shanghai factor. For the first six weeks, there was no... Actually, first four weeks, probably, we just started operating back into Shanghai. So as a matter of fact, the demand from there, if we could do three flights a day into China, we would be able to sell all of those. So actually, for the four weeks that the shipping didn't happen out of Shanghai, especially... you know, there's even more tremendous demand, which obviously not one carrier or not ourselves can fulfill. So factories are just busting out at the seams right now. You know, there's a shortage of airlift and shortage of people at Shanghai airport. It's not a matter of how much demand there is, it's a matter of how much we can handle. So we believe that quarter two, would have strong international charters or all-in charters, but obviously the China part was slow for the first four weeks.

Thanks. I appreciate it.

We will now take a question from David Ocampo of Cormac Securities. Please go ahead.

Thanks. Good morning, everyone. Good morning. I guess in your MD&A, you guys talked about strategic initiatives, particularly in the outlook section, and I think M&A was also flagged in there. Can you walk us through how we should be thinking about those initiatives in light of your big CapEx plan and the corresponding increase in leverage? Yeah, go ahead, Jamie.

Yeah, good morning, David. In terms of the outlook, I think we indicated that continued very strong demand in all business segments, both our domestic business, driven by high e-commerce demand, certainly our all-in and international business, continuing to, as Aja just articulated, continued very strong demand. We just don't have enough aircraft to meet the demand that exists globally, as well as our international expansion projects, and then, of course, the previously announced initiatives with Our ACMI business, particularly with DHL, that has aircraft come in this year and next year, we may have talked a little bit in the outlook, I don't have it in front of me, about our continued investment in 21 Air. And we continue to try, as we've said in previous quarters, we continue to try to download and instill some of the operational and financial excellence that we've brought to cargo jet in 21 Air and certainly leverage our relationship with our customers, particularly DHL, to help grow that side of the business.

So I guess, Jamie, should I be thinking about the growth capex that you guys laid out? There could be some incremental to that, or are you guys kind of fully laid out all your plans here today?

No, I think we're pretty comfortable with the growth capex that we've already articulated and announced.

And I guess... just follow on to that in my last one here, Sanjeev. Do you guys have any update on your CapEx plans? I know you guys provided some pretty wide ranges for 23 and 24. Have you zeroed in on what that looks like today?

It will be same as what we had projected earlier. At present, there is no additions to our plan. We are still on target for what we had declared in our Q4 outlook.

Okay, thanks, guys. That's it for me.

We will now take a question from Chris Murray of ATB Capital Markets. Please go ahead.

Yeah, thanks, folks. Good morning. My first question is just on the domestic network and the addition of the 757s. Just wondering if you have any additional color or commentary to talk about, you know, how those have been working into the network and your expectations as you bring in the additional 757s into the network later this year. And if you could maybe give us an idea how you're thinking about releasing some of the 767s.

We haven't started the program yet because we don't have the aircraft available, but we plan to start probably earliest would be end of Q2. This would be a phased-in approach. It's not just like you take all of a sudden and change the whole thing. It'll be three major routes that would see those changes, and those changes would happen end of quarter two. and beginning of quarter one next year and then quarter two next year as well. So, yes, they will free up some 767s, which are highly in demand. You know, there will be some rejigging of the network. We are in continuous discussion with our customers as to planning for those. You know, if, for example, a 767 is flying a certain route with a stop in, let's say, Winnipeg, 1767 could go directly serving that city let's say to Edmonton we could go fly directly Hamilton Edmonton and avoiding the stop in Winnipeg for one of the 757 which improves the service tremendously and also eliminates the risk of stopping in Winnipeg for all of your freight so all those things initiatives are under discussion with the customers you know we don't make changes unless all of our major customers are on board and they can see that we have actually improved the service. So that's a phased-in approach, and it'll be about 12 months before we do that strategy because all the aircraft 757s are being converted right now, and out of the seven we are expecting, we only have one so far. So it's going to be a bit of a road, but it's a promising road for sure.

Okay, that's helpful. And then just on cost, a couple of different questions here. I mean, first of all, on fuel, can you just remind us how the pass-through mechanisms work? I mean, certainly fuel prices are up pretty substantially. And I'm just wondering, you know, if there's any concern about some timing differences that could impact you. And then, you know, you talked a little bit about labor costs. How much more do you think is available to be able to be gained just with your labor efficiencies?

Well, the fuel, basically, you know, our policy has always been we don't make money on fuel, we don't like to lose money on fuel. But having said that, you know, we also have to look at competitive factors in the marketplace. That being the goal, we always pass on, but there is a bit of a lag, which is about a month, I would say, before, you know, we get the previous product. months, or current month's price that would go into effect the next month. So it's not a huge lag, but there is at least a month's lag in that, but we'd have covered it the following month. And this is how the mechanism has worked for the past 20 years for us. Every customer has contractually a fuel escalation formula that we supply to them. Some are based on cancer index, some are based on market pricing. So Depending on the contract, they're applied a month into the lag, and that's how the fuel formula works. As far as the labor efficiency is concerned, every company is facing headwinds today in terms of labor. I don't think the labor costs are coming down anytime soon. As a matter of fact, they are on the rise. We all read papers. We all know that It's hard to find people. The workforce, especially today, they not only are used to the hybrid model of working out of the house, but there's also been certain increases in wages throughout the country or throughout North America, I would say. So what do we do to counter that is absolute efficiencies, like we have established departments of transformation and operational excellence. And, you know, this is where the key comes in, that how do we fine-tune to get the best utilization and best utilization of labor and all resources. So I wouldn't have any expectations that the wage rates will come down, but certainly CargoJet is positioned and positioning itself to operate more efficiently and not lose anything, you know, not lose any loose ends or anything on the table that we can gain efficiencies on. So this department was specially established to make sure that we are effectively and efficiently using all of our resources.

Okay, that's helpful. Thank you.

We will now move to a question from Walter Spraglin. of RBC Capital Markets.

Yeah, thanks very much, operator. Good morning, everyone. So I just noticed, well, first starting with the competitive landscape, you know, obviously international is the only one area where you do have real competition, and Air Canada has now started deploying its dedicated freighters. WestJet has announced a new partnership with GTA. Anything that has come from that that's unexpected to you, AJ, in terms of how they're where they're deploying that aircraft and the manner they're doing it?

Actually, not really. I mean, they have, you know, from what we have seen in the marketplace and our own market survey and intelligence of the customers, you know, the routes that they have deployed on do not interfere with our routes in any which way, you know. Am I going to lose 1,000 or 2,000-pound shipment here and there? Probably we do. But also keep in mind, with our expanding network, we'd also gain some shipments. We have, you know, obviously we provide service to 16 domestic cities between the hours of 12 at night and 5 in the morning. And that network is our key network that performs at 98%. So they announced a flight into Halifax at, I think, around 3 in the morning, getting into Halifax at 5.30, 6 o'clock. But just keep in mind, some of these things go to Toronto Airport, which, you know, if you are de-icing, you could be half an hour more than that. Even the requirements of tendering freight are an hour or two hours before where, in our case, you can bring it in 20 minutes before the flight and it'll get on. So there's a lot of competitive advantages in cargo pedigree and discipline that cargo jet has. So we don't anticipate from the present announcement there is anything that we are concerned about, you know, that would affect us today. But, again, this is where our operational excellence department is looking at how do we keep our performance up over 98%, 99%. you know, introduction of the new 757 program, direct services into every major city. I mean, within 12 months, we will have every major city out of Ontario and Quebec service directly without non-stops. So these are some of the advantages that competitive edges that we have, and we are focusing on those to fine-tune more. So not at the moment we don't see any impact on Ontario, on our service. We fly twice a week into Cologne, for example. They've applied for rights for one flight into Cologne. There's so much business out of Germany. And to be honest with you, CargJet's announced and is seeking rights into Frankfurt. So there is a lot of international backlog. There's a lot of international business. There's a lot of carriers flying it. The yields are still very high, and we are confident that we can pull through this.

Great. Okay. And moving on to the e-commerce discussion about potential downturns. And even if your customers are saying strong demand, let's use the hypothetical that it turns the other way unexpected to them. Can you describe how that would affect your contracts given that there's a lot of pre-purchase space by those customers? Can you talk a bit about How much of that space is your backstop space that they are required to purchase even if we do see a downturn this year?

Well, if we see a bit of downturn, there is probably, I would say, we turn three nights out of five we operate or we are actually operating seven nights all these. But, you know, skeleton schedules on Saturday and Sunday. But let's say, you know, the prime demand days, Monday to Thursday, we probably turn away a fair bit of business every day that we can't accommodate. So even if there was a bit of a slowdown, we anticipate that we would carry volumes we are carrying today. Yes, there will be some slowness in the customers. And to be honest with you, with the new network that we are planning domestically would give us the flexibility to that we can scale up to a 767-300. If the need requires on a route, we can scale down to the middle, which is a 767-200. We have that asset. And we also have 757, which is a further downgrade. So, you know, if your costs are going to go up because your volumes are up, great. But if your volumes are down, we also have the ability, you know, as we take delivery to have more flexibility to divert the aircraft either where there's higher volume, higher gauge aircraft, and lower if they're lower. And also, again, as you talk about e-commerce, and this is exactly, Walter, our strategy was to diversify. So we're not, you know, 80% or 90% of our business is dependent on the domestic e-commerce. So this is where, you know, the strong ECMI charters and international would kick in as well.

Okay, and then final question here is on the ACMI, and you talked about diversification. Just curious, you know, you've got a lot in with DHL right now. Are there other customers that you continue to look at on an ACMI basis, or do you feel like DHL encompasses the largest amount of what you want to apportion to ACMI and looking at block hour for any other capacity that you're bringing on that's not been dedicated to DHL?

Yeah, so... Yeah, so DHL, although it's a very strong customer of ours and one of the biggest users of ACMI services for us, but keep in mind, we have a distinct advantage with DHL, which a lot of other operators don't. We're the only company and the first company DHL has given a long-term five-year with a two-year option deal to. So we believe that we have a strong case for staying with what DHL is using today, but also we have a couple of other customers. With Amazon, we fly two CMI aircraft, and there's two other customers that we are in discussion with some ACMI business as well, which obviously we can't reveal at this stage. But, yes, we are trying to expand that ACMI business overall and not just be reliant on DHL, although DHL is one of the strongest partners we have. So, yes, there are discussions with others as well. So stay tuned. Awesome.

Okay, well, that's all my questions. Congratulations. That was a great quarter.

Thank you for the order.

Our next question comes from Connor Kupter of Deutsche Bank. Please go ahead.

Thanks, and good morning. It's actually from Deutsche Bank. Just echoing my congrats on the quarter. The first question is on the fleet. So I kind of noticed, you know, in the fleet table you provided versus the last quarter, this is a slight change. I think it seems like some of the aircraft might have pushed to the right. I just wanted to understand, it seems like the high level, the fleet plan remains intact over the next three, four years. But what's causing that shift, you know, like a quarter or two shift between 2022, 2023, 2024, if you can provide any comments? Jamie?

Yeah, good morning, Conor. Part of the cause has just been some delays in the conversion of the aircraft, either COVID-related delays at the facilities that are converting the aircraft that we experienced in 2021 and certainly continue to experience a little bit of that in 2022, and then combined with supply chain delays in parts that are used for the conversion of the aircraft. That's really the only reasons that have pushed any of the deliveries to the right.

That's going to make sense, and I think that's expected. Does that change the CapEx cadence you provided last for sending?

No, that will stay the same. Only thing is CapEx will just move from one quarter to other. Cash outflow will be still the same.

Makes sense. Thanks. And then last one for me, AJ, you talked about, you know, the international airline wide body capacity and belly capacity, you know, how it's structurally impaired, maybe perhaps not going to come back to the levels that we had pre-pandemic. It's pretty high level discussion, I guess. But just want to understand, like, in terms of your own kind of thought process on that, Are you seeing, like we know obviously, right, airlines are wrapping up capacity back to where they want it to be. Obviously, it's not still back to normal. In your sort of analysis, do you see major airlines, international airlines across transatlantic, are they not deploying the wide-body aircraft that they were once deploying, or are they not – carrying as much cargo in those belly capacity. I'm like, well, what are you seeing out there? Because obviously airlines are telling us that they are wrapping up capacity, and most of the airlines are saying they're going back to, you know, pre-pandemic levels of revenues this summer. So we just try to kind of connect the dots here.

So, Kunak, a number of opinions on that. So what are we seeing out there? We're seeing that, number one, the belly capacity is not fully back. So we all agree with that. We also know that the 747s and 380s that used to fly globally, internationally, a lot of them have been taken out of service. So the biggest aircraft right now that is serving is either A350, A330, Airbus, or 777 aircraft. But we are seeing a lot of less frequency, as you probably know and read that, you know, most of these airlines have been relying on business travel. Business travel is not coming back anytime soon and is not picking up the way leisure travel is. So when leisure travel happens, there is a lot of people on a flight and there's a lot of baggage, the room for cargo declines. So we are seeing that trend. We are also seeing that the frequency of these flights is a lot less than You know, there used to be eight or ten flights a day into London, and there are probably half of them now. We are also seeing that down gauges of aircraft. And when you talk about down gauges, it's not just, you know, 737 can do, you know, Toronto to Europe these days. So we are seeing some of that trend in the markets. But also the down gauges are done sometimes – you know, at the spur of the moment when airlines realize they don't have a certain capacity or certain load factor, they down gauge aircraft consistently. And when down gauges happen, it also reduces the reliability of that carrier. So these down gauges certainly are being done because of the passenger demand. So all the cargo operators or the cargo freight forwarders cannot live with that kind of uncertain environment. But in the long term, what the last two years have done is that, you know, carriers like DHL who relied heavily on, you know, passenger belly capacity are now used to a different method of operating. They have adjusted their hubs and networks to a very different model because, you know, Let's say, for example, if a shipment came in from London to Toronto on four different flights, now it's coming on one flight. So they have adjusted their hubs and network with that better service, and they can be more competitive with integrators that are out there in the market. So there has been a market shift, and some of the shifts are very permanent, that the belly capacity, even if it came back, these shifts are not just going to say, okay, we're going to change our business model that has made them competitive and more effective and more efficient, that they will just go back to the old belly model. So I'm not disagreeing that the belly will come back to some degree, but to be honest with you, you look at a lot of companies today that are getting into the air freight business. I mean, just because they feel the demand A lot of people are now shifting towards air freight from surface transport. The challenges of the truck drivers or trucks, challenges in the ocean freight business. The ocean freight rates are about three times what they used to be. The differential is not that much with the air freight now. So companies even like Maersk Ocean Lines have now bought three airplanes to go into the air cargo businesses. So we anticipate some capacity coming back at some point as life normalizes, but some shifts are permanent and some shifts we feel are stronger for us and will continue to be stronger. That's great, Kala. Thanks and congrats again.

Thank you.

We will now move to a question from Tim James of TD Securities.

Thanks very much. Good morning. Congratulations. Good morning. I'm sorry to return to sort of the domestic network and the 10% plus year-over-year growth there. It's a tough question to answer, but can you tell if that now represents kind of a normalized, and I say normalized meaning the next year or two years, growth in e-commerce and in You know, or do you think there's still a residual benefit from kind of the pandemic, maybe some of the lockdowns or the restrictions that were still fairly significant in Q1? Or do you think that's kind of getting back to a more normalized kind of growth rate that reflects what you were talking about earlier, AJ, about, you know, Canada being behind the U.S., etc.? ?

Well, you know, what we are seeing is that in the e-commerce, you know, people are flocking to the stores definitely, right? So we've seen announcements by Amazon and others saying, you know, they're finding certain slowness. But we're also seeing that people are not flocking to the stores to buy daily supplies. Like I always use the word toothpaste and toothbrushes going in e-commerce, right? Because people are, yes, they're going to the stores. They want to go fresh in the open air and breathe some air that they're not being used to. But the habits of the customers that we are seeing is that they're buying their daily essentials and supplies more on e-commerce than they're used to. And that trend, I think, will continue on. Is the domestic going to continue at 10% every year? No. if Canada needs to catch up with U.S. and Europe and Asia in e-commerce and also as the shift towards e-commerce for daily essentials rises or continues, we can certainly see that trend to be continuing on. But there could be some impact on the buying power of the people as interest rates goes up, as inflation goes up. So there could be certain slow menaces. And we recognize that. And that's why, you know, we can upscale, downscale, downgage. We can adjust our costs, you know, quarter, every quarter or into going into the next quarter if we find there is slowness. We can also redirect the aircraft into other segments that have a high demand. So, you know, the e-commerce is interesting. As you asked this question about the 10% growth, I can assure you that if I look at my top two, three e-commerce customers, they tell us that they're going to grow by 30, 40, 50% in the next couple of years. But again, we are well equipped if that growth doesn't materialize to shift assets around to where there is demand. That's all I can tell you right now. But our customers have not told us that they have any plans of scaling down anytime soon on the e-commerce side.

Okay, that's helpful. Thank you. And my second question, just returning to the charter business and the charter opportunity, you provided some great detail on the demand environment there and kind of the moving parts and how strong demand is. And I'm wondering, does your fleet plan and your capacity allow you to keep 40 million? It's a great problem to have, but does your capacity and planes coming in and out of the fleet or being moved around allow you to kind of keep this run rate of charter revenue going forward, at least in the short term? Or are you going to lose access to some of those aircraft because they have to be deployed into other commitments? Or maybe it's, you know, depending on sort of the timing, the weekly timing of those charters, maybe you can just kind of fit in that type of revenue run rate based on the low demand periods for the aircraft.

So actually our charter revenue, what we see is obviously been handled very, very carefully and especially with the shortage of aircraft. So yeah, If we had three more aircraft today, and I can assure you that there will not be day where they won't be chartered or they won't be flying ACMI. So with actually the new aircraft coming in, it will free up some 767s for that kind of charter work and ACMI work. But also, I think we had also mentioned in the previous conference calls that we will be using at least two to three aircraft as spare and backup aircraft. And those backup and spare aircraft also have the charter capability in non-peak days and non-peak hours. So with the addition of the capital plan we announced, we will increase our charter capabilities many folds as opposed to shrinking them down.

Okay, that's helpful. Thank you very much. Yeah, thank you.

Our next question today comes from Kevin Chang of CIBC. Please go ahead.

Okay, thanks for taking my question, everybody. Maybe I wanted to touch on, you know, AJ, you mentioned, you know, you're kind of in a unique position maybe versus some other freight companies because, you know, you have a demand situation that outstrips the capacity put into the market so that, you know, that air pocket provides you with a buffer here, right? in the event the economy turns, as some people are fearing. I'm wondering, is there a way to measure that dislocation, whether it's volume or block hours? If you were to take advantage of all the demand in front of you, do you have a sense of what that would mean in terms of maximum block hours you'd have to put into the market or whatever metric you want to And then maybe what that looked like, say, a year ago, you know, at the height of a lot of this online shopping, like how much that dislocation would have looked like, let's say, yeah, like nine to 12 months ago.

Well, Kevin, I mean, the key thing is it's kind of hard to look at what, you know, what the demand will be and what the block hours would be. But, you know, the greatest strength we have is the flexibility, right? I mean, I'll give you an example. We were contracted by DHL to fly six flights a week into China as of April 1. And because China closed down, they said, okay, take this aircraft and go to Europe. So we didn't miss a beat. And this is where we talked about the flexibility of the whole organization that we can quickly ramp up to any challenge that's thrown at us. And You know, we didn't fly into China, but we did six flights a week into Europe. So, I mean, those are the kind of examples that we have. And we also, at this stage, if we had three or four more aircraft, believe me, we can't get them fast enough. As a matter of fact, you know, the next phase of our four or five aircraft that are coming in are all committed. And, you know, they're running a few months late because of the conversion factors. So... I mean, it's hard to quantify, but all we know is that, look, if we notice the trend that, you know, for a week or two weeks or three weeks that, you know, and after consultation with the customers that we're not seeing the volumes on a certain lane, we can quickly down gauge those aircraft. And we can even rejig our network to avoid certain stops or eliminate certain routes at certain points. that will bring in the cost efficiencies, which will be sort of matching capacity with demand. So, you know, we've been doing this for 20 years, Kevin, and, you know, there's not a day goes by where, you know, our whole team, Jamie especially, in terms of, you know, the capacity management and fleet management, we don't look at those things. So, you know, we make decisions sometimes on a daily basis of, Oh, yes, today's Thursday. We're not expecting much from the customers, so let's try this out. And we end up saving block hours, fuel, and all the costs associated with it. So this is a key thing for us that has been a key factor for our success and will continue to match capacity and demand together.

That makes sense. You mentioned some of the supply chain issues that were obviously acting as a tailwind for the air cargo market, and you've obviously been a beneficiary of that. Just wondering, just given, I guess, the spike we've seen in fuel costs, you know, at the margin, are you seeing any, you know, I guess any modal shift back to cheaper modes as shippers look to maybe manage the broader inflation and, you know, air cargo is more expensive than other modes of transportation. Are you seeing the rise in fuel costs potentially, or is that having any impact on kind of how some of your shippers are looking at using air cargo versus other modes of transportation?

Well, you know, the fuel is always a factor that people look at it long term, right? Fuel impacts not only cargo, it impacts passenger travel. When you look at an airline ticket, where when the fuel surcharges are more than the airfare, you know, there's obviously a concern. At this stage, you know, we have not seen or heard of any concerns because everybody's hoping that, you know, this fuel phenomenon is going to be a bit of short-term or medium-term, and nobody anticipated this to be a long-term because if this is a longer term, I guess everybody's in trouble then. But generally, at this stage, we have not had any sort of pushback. Yes, people are conscious about it. And people not only are conscious about just, you know, and their freight costs, but they are conscious about putting fuel in their cars, you know, as well. So, so far, we have not seen it. But generally, the fuel is a big factor. The other modes of transportation you asked have also gone up relatively much higher. In case of trucking, it's not just the fuel cost. It's the availability of trucks. I mean, a trailer that was a $35,000 trailer now costs $120,000 if you can just get it. You know, there are hardly truck drivers. So the other costs are also relatively higher. The ocean costs. A container that used to cost $10,000 from China, if you're lucky, you can get it for $50,000. So the other costs have relatively gone up much higher than the air freight costs. So, yes, there will be some adjustment of air freight costs and the pricing will eventually come down to some level. But I think, again, it's all a matter of what the relative costs are out there.

Okay, that's helpful. I may just last one for me. You announced an NCIB this morning for 155,000 shares. I guess under the automatic share purchase plan, am I to interpret that as you're committed to buying all those shares, so kind of the 0.89% of the shares outstanding, and you'll kind of buy that equally over the next year? And maybe just broadly speaking, how do you think about an NCIB purchase in the broader context of your cash flow priorities?

Yeah, so that's an opportunity. If the market was to go down, yes, the NCIB kicks in. And we heard from a whole bunch of investors and shareholders, institutional and others, that that would be a good strategy after consultation with our capital markets teams and various banks we deal with. You know, we obviously feel that if certain prices are, the share prices remain certain at certain times down, then there's an opportunity to trigger the NCIB for sure. So this is something that we feel if we feel our equity in stock is undervalued. So it's certainly one way of rewarding the shareholders is to buy that back, right? Yeah.

Right. No, that's helpful. That's it for me. Thanks. And congrats on a good start to the year here. Yeah. Thank you.

We will now take a question from Naum and Sati of Laurentian Bank. Please go ahead.

Hi. Good morning, everyone. Morning. Just going back to the domestic network, I know you don't specifically see the B2B volumes or B2C, but just wondering with your conversation with your customers, has any trend changed? Is there anything underlying within that business that you could share, any additional color, or is that pretty much similar to what you've been seeing in the last few quarters?

So what we are seeing and what our customers are saying that during the past few years there was a tremendous increase of B2C business delivery. But they're seeing slowly a return of B2B as well and less B2C as the pandemic is winding down or slowing down or at least not being impacted the way it was. So there's more increase of B2B business. You know, for us, it doesn't matter whether it's B2B or B2C. You know, we don't kind of, distinguish between the two in our sort of container. For us, it's a matter of freight, whether it's B2B or B2C. We do airport to airport. But our customers do tell us that they're seeing less of B2C for sure.

Okay. And is that a right way to think that B2B, when it was down from pre-pandemic levels, if that sort of comes back to the same levels, let's say pre-pandemic? and B2C is sort of the incremental revenue, so that's where the growth would come in. Is that a right way to think about it, or it's just that the threat is moving between the two segments and overall growth would be a little less than that?

It is somewhat right to think about it. I wouldn't dislike to say that B2B and whatever you see is entirely incremental. So some of the B2C that we will see has come out of the B2B sort of bucket, right? But the B2C that used traditional trucks or traditional modes of transportation are now being flown. So I think there'll be net incremental, but I wouldn't say that there's net incremental all the way. But yes, you're thinking it's definitely in the right direction.

Okay, that's great. And just on the cost side, Last year, I know you guys had sort of put in some costs relating to COVID-19. Has all of those costs sort of fallen off, or is there something that you can still take out of the system on the cost side?

Well, there was a lot of costs for, let's say, testing, PPE, precautions, and some of the things we made sure that our employees were safe. Yes, those costs have some have fallen off, but being replaced with some of the after effects of COVID, for example, some of the higher labor costs, you know, cost of landings and cost of navigation. So some of those costs triggered by certain third parties, you know, so...

about 65 or 64. Just wondering how much more of recruitment you still need to do on the pilot's front or has it sort of stabilized? I know some people leave and some come in, but how is that looking? Are you guys getting at a normalized level or there's more to be done there?

Well, you know, with the kind of business plan we have, you know, we are running courses and have been running courses for pilots every month. And this month and next month is not going to be any different. I think we are about 330 pilots right now. We anticipate the year end with all the flying we are committed to doing and the demand out there, we are committed to anywhere between 75 to 125 pilots in the next 12 months, adding in and continuously doing that every month. Okay, that's it. Not 75 to 100 every month, but a total count increase from 330 by at least 100, I would say.

And if I remember correctly, you said it's 25 a quarter previously, right?

Yeah, about that. We target about 8 to 10 or 12 every month.

Okay. Thanks for taking my question, and congrats on a good quarter.

Thank you. Thank you. Appreciate it.

We will now take a question from Cameron Dirksen of National Bank Financial. Please go ahead.

Yeah, thanks. Good morning. Most of my questions have been asked and answered already, but I wanted to get just a better idea on the ACMI, sort of the ramp-up there, specifically with the DHL contract. Can you just remind us, I guess, how the incremental aircraft to that contract are coming in through the balance of this year and into 2023? I mean, I know you've got your aircraft deliveries shown in your MD&A here, but just wondering how quickly they go actually on to contract with DHL once they've been delivered to you.

So typically we get an aircraft. For example, we have a 757 that was going to go into domestic service. But, you know, we need a couple more aircraft sort of to complete the loop. So we'll have that aircraft early. So that aircraft arrived this weekend in Hamilton from being converted in China. And it is going to be placed in service within 15 days of arrival. So it takes about a week to 10 days to do the paperwork with deregistered from the old country where it came from. So re-registered in Canada. And there is a maintenance bridging gap, like it takes about eight or 10 days to make sure that the maintenance is brought up to date and also complies with Transport Canada regulations. So I would say that once the aircraft lands and it's already landed with at least eight to 10 days into paint, it comes in here and about 15 days after we put it in service. So there's not much of a lag. because there's a lot of advanced preparation done. So it's a fairly quick process once the aircraft gets in.

Okay, so if I read, I guess, the delivery schedule then for the 767s that are coming in this year, I think there's one in Q2, one in Q4. So we should assume that those basically go on to contract with the DHL and the ACMI in Q2 and Q4. Yeah, yeah.

And we also, as I said, in discussion with other customers as well. So, you know, I don't have exactly in front of me what aircraft is going where. But keep in mind, by the time some of the aircraft come, we'll have some peak requirements as well. So they don't necessarily mean that if July 1st an aircraft is coming, that July 15th it could be a DHL schedule. All I can tell you, they'll be gainfully employed by July 15th. And it might be DHL. It might be another customer. It might be just covering for a C-check for maintenance. So this is a complex fleet planning that we go through every year. And, you know, with all the extra flying we did during COVID, our airplanes do need some resting and some TLC. So we have a strong fleet plan for this year. because two things happen if the maintenance is good. Number one is your on-time performance, and number two is your safety. So both these things are critical, and sometimes it might take a month before we release the aircraft or exchange it with another aircraft or rotate it. It's a complex job that Jamie and his people do, as I said, almost on a daily basis to ensure that we get the maximum utilization, keeping safety and on-time performance in mind. Right.

No, absolutely makes sense. For me, thanks very much. Thank you, Cameron.

We will now take a question from Ahmed Saad of Beacon Securities.

Yeah, just a quick maybe house cleaning item here on just the Remind us of the price escalation related to inflation in the contracts. I think now is around the time that you guys pass those through. So maybe a little bit of discussion there, given the unprecedented times on inflation, any pushbacks on those, and how are they faring against your cost increases? Are they exceeding or matching some of the cost increases you guys are having?

Well, look, I mean, we do have cost escalations, annual CPIs, and, you know, either CPI plus one, CPS minus one, or CPI depending on the customer and the volumes. We also have ability to pass through fuel. We also have abilities to pass through certain government surcharges and all that unexpected increases that we have to take. You know, nobody's happy to take any increases, as you know. but, you know, we have very strong customer relationships and we do, we're not short-term thinkers in terms of it. You know, sometimes we do end up absorbing some of the charges, but not all of it for a period of time so they can ramp up with customers. And this is technically how we built relationships with our customers that, you know, sometimes you do, give them a little bit of a break for a period of time until they can recover from the customer. So there are some lags like that and special circumstances, but usually the lag catches up and we do get whatever actual cost increases are. But certainly costs like a general labor cost increase, they can't be addressed this time around, but You know, next time around there is a contract opening, we do address those issues. Those are some of the stuff that the general stuff we are seeing in the marketplace is not easy to recover right off the bat. But somewhere along the line, we catch up with it.

That's great. Thanks, AJ. That's it for me.

Thank you.

There are currently no further questions in the queue.

Okay. Thank you very much, everybody. That concludes CargoJet's Q1 quarterly call. Thank you. Thank you. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.