Cargojet Inc.

Hello and welcome to CargoJet conference call third quarter 2022. My name is Priscilla and I'll be your coordinator for today's event. Please note this call is being recorded and your lines will be on listen only. However, you will have the opportunity to ask questions at the end during the Q&A session. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over you to your host, Ms. Pauline Dillon, to begin today's conference. Thank you.

Good morning, everyone, and thank you for joining us on this call today. Our apologies for the slight delay. The service provider was having a few technical issues. With me on the call today are A.J. Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Strategy Officer, Scott Calver, our Chief Financial Officer, and Sanjeev Mani, our Vice President of Finance. After opening remarks about the corridor, we will open the call 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 references to non-GAAP measures, like adjusted EBITDA and adjusted earnings per share and return on invested capital. 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 gap and measures to gap income. I will turn the call over to A.J. Vermani.

A.J. Thank you, Pauline. Good morning, everyone, and thank you for joining us this morning for the third quarter earnings call. I'd like to thank all those who attended our inaugural investor day on September 27th. One of the objectives of this event was to showcase the passion for the entire CargoJet team. we were successful in demonstrating our culture, our leadership team, and how our various functions come together each business day, each business night, to deliver excellence to our customers. Despite the risks and volatility expressed in the business news, Cargadget continues to demonstrate growth of revenue, our ability to manage costs, and the continued high level of customer service as measured by our industry-leading on-time performance. Forkajet has lived through two down cycles. We lived preparing for a downside scenario back in January 2021 when we strengthened our balance sheet with the $365 million equity issue. And it was not just the balance sheet. We also focused on strengthening our business model. We diversified our business model with a significant expansion of our ACMI and CMI business that is underwritten by strong customer contracts that provide certainty revenue with incentives for additional growth. We have a strong balance with several risk mitigation opportunities to manage revenue, operating costs, and capital expenditures. An example of how we manage our CapEx would be the most recent decision to exercise an option to defer the last of our Boeing 777 that was planned for 2026 and until most likely 2027. If things change over the next 12 to 18 months, we believe that CargoJet will still be in a position to acquire the 8777 as originally planned in late 2026. CargoJet is not immune to softness in consumer spending should a recessionary scenario become real. However, it is worth noting that Cargadget has evolved its business model that is increasingly based on strategic partnership with its customers. By aligning our long-term commercial interests, we expect a greater stickiness of volumes with our strategic customers, even if global volumes soften during the recessionary period. Therefore, we remain cautiously optimistic that the strength of our business model would allow us to manage the volatility better. One of the concerns that we often hear is what happens to air cargo when the passenger aircraft belly capacity returns to pre-COVID levels. Concerns that shippers will revert to usually using belly space as opposed to dedicated air freighters. Recent data in the U.S. shows that TSA checkpoint numbers are approximately 5% of pre-pandemic levels. European flights are within approximately 10% of the pre-pandemic levels. As I explained at our investor day, there are many more factors that will determine the utilization of belly space than simple return of flights. Many airlines are bringing narrow-body aircraft instead of cargo-friendly wide bodies. The route's predictability and the speed of service all play a role in decision-making. Therefore, despite the capacity created by the return of the belly space in passenger aircraft, shippers continue to move their freight in the dedicated air cargo freighters because they can depend on the service. We are pleased to report that in third quarter, cargo jets domestic revenue increased 21% compared to previous years, and our ACMI revenue increased by 47% compared to last year. We remain confident in our business model and the ability of our leadership team to continue to navigate expected volatile times, and we remain squarely focused on our long-term strategy. I will now pass on the call to our CFO, Scott Calver, for an update on the business.

Thank you, Ajay. Good morning, everyone. Before I get into the third quarter results, I would also like to thank everyone that either attended in person or dialed into our inaugural investor day on September 27th. For those that were not able to attend, I would encourage you to visit the CargoJet website where you'll find all the material for this event. I would now like to share a few thoughts on the business. In past quarters, we've gone to great lengths outlining the post-pandemic era and what that means to Cargojet. The third quarter revenues that AJ just mentioned once again confirm that our business model of a more diversified portfolio is proving resilient. For this update, I would like to add more color on the impact of a possible recession on our business. Cargojet is prepared for our peak season. CargoJet's largest customers have secured additional capacity for the fourth quarter. Our customers are calling this year a controlled peak as opposed to all the uncertainty in the two previous years. CargoJet is continuing to add capacity to meet customer requirements. In July, we added a 767 to support revenue growth with a lane into Brazil. The company just took delivery of two 757s to free up 767 capacities for additional revenue growth. One of these 767s will be used for a new route between Halifax and Los Angeles. The second 767 will be deployed to manage peak season volumes. The company will take its next delivery of a 767-300 in January 2023, and it'll be put to work immediately. The core business is and remains strong. Despite the short-term volatility in e-commerce volumes, we remain bullish in our view on the long-term growth cycle of online shopping. We also believe that any reductions in retail consumer spending will be impacted more severely in the bricks and mortar retail outlets compared to the sophisticated systems used by e-commerce retailers. In a recession, consumers tend to be more price sensitive. It is our belief that e-commerce retailers are better positioned to meet the expectations of end consumers. That is why we are excited and feel confident in our long-term growth strategy. Now turning to third quarter results. We posted another strong quarter with revenue growth of 22.8% compared to prior year. While we are pleased with a 21.2% increase in domestic business and a 47% increase in the ACMI business compared to prior year, The softness in our all-in charter revenue is primarily due to the extraordinarily high volumes carried in 2021 due to COVID-related supplies being imported from Asia. The adjusted EBITDA for the quarter came in strong at $82.1 million, or 35.3% of revenue, compared to $70.9 million for the same period in 2021, an increase of 15.8%. Adjusted free cash flow for the quarter stood at $47.9 million, a decrease of $3.2 million compared to prior year, primarily due to increase in capital expenditures to support our secured growth. Total capital expenditures in the quarter were $118.9 million compared to $58.9 million in the same period in the prior year. Return on invested capital for the quarter was 9.7%. At our investor day, I mentioned that this would be a bit bumpy at times as we wait for annualized revenue and profitability to catch up with the capital expenditures and the related increase in our invested capital. As at September 30th, Cargojet has invested $292 million in capital expenditures that have not been put into service. If you adjust for this equipment under development, the return on invested capital would have closed the quarter at 12.7%. On the operational side, block hours increased 21.6% compared to prior year. The revenue per block hour is consistent to this increase in revenue. The slight increase in direct costs per block hour is primarily due to fuel costs and the reduction in all in-charter revenue. As planned, we grew our air cargo fleet size to 34 aircraft at the end of Q3 2022, an increase of three freighters in the quarter and an increase of five freighters compared to this time last year. Our on-time performance remains strong at approximately 99.7%. While we feel confident about the long-term growth opportunities, Cargojet will continue to watch all of our key metrics very closely. We will find the right balance between investing in growth, managing costs, and maintaining a strong balance sheet. This concludes our opening remarks, and we will now open the call to any questions.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star two. We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll now take our first question from Cameron Doxon from National Bank. Please go ahead. Your line is open.

Thanks very much. Good morning. I guess just a question early on the outlook. It sounds like Q4, your customers are still pretty optimistic about the volumes. But I'm wondering if there's any indications as we look into Q1, or is it really too early for some of your customers to kind of look that far ahead?

Hey, good morning, Cameron. It's Jamie. Just on the three segments of the business, I would say, you know, certainly on the ACMI side, we're not expecting any softness in Q4 and going into 2023, as Scott pointed out during his opening remarks. You know, we have significant, we'll see the full year effect next year of a few significant ACMI routes that we started in 2022, primarily the one to Brazil that we started in July and a new route that we start between Europe, Halifax and Los Angeles this week. as well as the other aircraft that we're taking delivery of next year that will go into service. So that will remain strong. The domestic business, a little stronger results in Q3 than we were expecting. The trend year to date for the first six months, we were running about 15% ahead of year over year on the domestic revenue. A little surprised at the increase in Q3. Our forecast from our domestic customers, as Scott said, is for a more controlled peak period, but certainly we expect a significant increase, continued year-over-year increase. Going into 2023, as you said, I think it may be a little premature to expect. I don't think we'll continue to grow at the same 15% to 20% level year-over-year in 2023. I expect we'll see some softness But again, as I think we've said before, softness is not negative growth. Instead of 15% to 20% growth, maybe we see high single-digit or low double-digit growth. The one area that we're seeing some, although we've seen a nice bounce back in Q4, the early part of Q4 has been on our charter business. We were running in Q3 sort of in the range of $15 million to $20 million per quarter that we had indicated would be sort of a normal run rate. We were above that in the first two quarters, kind of in that range in the third quarter. primarily because of some softness we saw globally, especially out of Asia. But we're seeing some strong demand right now, although the international, which is also part of that segment, is impacted by lower yields, particularly out of Europe, because of the value of the euro against the U.S. dollar and inflation in Europe. So that's the one area where we're seeing some softness.

Okay, that's very helpful. The second question I had was on the ad hoc, so you answered that. Thanks very much.

Thank you. We'll now move on to our next question from David Ocumtel from Corma Securities. Please go ahead. Your line is open.

Thanks. Good morning, everyone. AJ, you talked a little bit about your flexibility in terms of deferring CapEx, which is a few years out. But maybe you guys can speak a little bit about your flexibility in the near term in the event that you guys do see a slowdown. And then maybe layering onto that, maybe for Scott, can margins still hold at these levels if volumes do fall by, call it 5% or 10% into next year?

Yeah, so our fleet plan, as you probably have seen on the investor day and some of the other communications, are basically adding 767s, 300s to our fleet. And those are primarily committed to ACMI work. So We do have an option of two aircraft deferrals for 2023 as well. So if things were to slow down, there's two aircrafts that we can either shift to 2024 or cancel them altogether. So we do have, and that's almost $100 million or slightly even more. So there is some flexibility in the two 767s that we can exercise in the next year to postpone it, defer it, or cancel it. So that's, and also on the 777, we also mentioned that we have already deferred one, and we have the option to defer another one. So we could be, you know, if things got really bad out there, we certainly have at least, we mentioned that they invested $150 to $200 million that we can defer. But I think after coming back and looking at it, we also made other contingency plans And we can certainly defer maybe twice as much as we said we could. So we're still looking at it, working at it. But yes, we have some flexibility in that area.

Okay. Yeah, good morning, David. Just on the margins. And yes, we do believe we can maintain these margins. And really, there's three main reasons. On the direct cost side, we do have ability to manage those block hours. And we do it daily already. But obviously, in a recession, we'd have to to potentially execute more frequently, and that's combining flights, rationalizing flights, getting a little bit more creative with triangulated flights, but just to manage our block hours accordingly if there is any change. In the SG&A, we've already made decisions. We've got a hiring freeze rate now. We're not much different than any company right now that's really looking at what they can manage, and we're not traveling. We're doing all those things just to manage our costs in anticipation. But really the third thing that's most critical in terms of us maintaining margins is this growth revenue that we're bringing on is spreading our fixed costs over a greater revenue base. So we have that fixed cost absorption benefit that as long as we keep adding this growth revenue that we've secured, it's going to dilute those fixed costs over greater revenue. And that's really going to help us maintain our margins.

Got it. That makes sense. And then on the target revenue, Jamie, you talked a little bit about this, but is the $15 million quarterly run right here now the new normal? I think before you guys were talking about something in the kind of closer to $20 million range.

Yeah, I think going forward in 2023, $15 to $20 million is still the sort of normal run rate for the charter business. Q4 is always a little bit different. Not that the demand is not there. The demand is usually all very strong in the fourth quarter for ad hoc charter revenues. And the only thing that restricts us from making or achieving those revenue levels is the availability of aircraft and crews because we normally have those dedicated to the domestic and the ACMI peak volume needs. So that would be the only question in the fourth quarter.

And then just as a modeling question for the 15% growth that you guys saw in your domestic business, What was the breakdown between volumes and price in there?

It was 21% in the quarters. I think it's 17.5% year-to-date for the first three quarters. Most of all, that is volume-related. As you know, most of the domestic revenues are contractual, so there's some CPI increases throughout the year on the anniversary date of those major agreements, but the majority would be volume.

Got it. Okay. Thanks so much. I'll hand the line over.

Thank you, David. We'll now move on to our next participant, Chris Murray from ATB Capital Markets. Please go ahead. Your line is open.

Yeah, thanks, folks. Good morning. A couple things just on the ACMI contract. So just maybe trying to understand that new contract. Historically, except for a 767 contract, you're somewhere in the neighborhood of 11 or 12 million US. Is that about the right way to think about that contract?

Yeah, I think this one, you're talking about the one we're starting this week, Chris? Yeah, exactly. Yeah, it's probably a little higher than that because it's a much longer range. It's actually rerouting an existing aircraft that we're flying from Europe to to Cincinnati and adding the new aircraft and crisscrossing the two, and they fly from Leipzig in Germany, DHL's hub, into Halifax and then on to Los Angeles, and then from Los Angeles back to East Midlands in the UK, and then on to Leipzig. So it's a significant, I think it's just over 7,000 block hours per year for two aircraft, which would be a little higher than the average. So it'd be probably more... more in the mid $15 million range in terms of revenue.

Okay. U.S.

That's correct.

Canadian. Okay, cool. And then you also mentioned that, you know, you've got an additional six, seven, you think that'll free up early next year. Should we also assume that that will take a route similar to that? And again, for DHL?

Well, I think the best way to do it, if you averaged out $12 million, because some routes are longer, some are shorter, we average them out. And I think that's a good average to go with, around $12 million.

All right. That's helpful. Thank you. And then maybe to ask the question in a slightly different way, thinking about demand forecasts into 2023, how much visibility do you have right now from your partners about their 2023 plans? Um, you know, even, even on a, on a scheduling basis, um, you know, that gives you some confidence that 23 is at least shaping up to be okay at this point.

Well, you know, all I can tell you is nobody's requested any downgrades to space or said, uh, we're going to be down or we're going to be lower. So we publish our schedules. Um, you know, we just published them for the peak and, We just put publishing and all indications. So far, we have met people on the peak side of things, but nobody has indicated any sort of that they want their contract reduced or for that matter, you know, any kind of reduction has not been requested. So we will get into some planning sessions because everybody's kind of now concerned about the peak right now to get that out of the way. I think early January we regroup with some of our customers and look at it. But normally they give us an indication, but we haven't seen anything from anybody yet. Our schedule is as is, so.

Okay, that's helpful. Thank you. We'll pass the line.

Thank you. We'll now move on to Matthew Lee from Kennacart. Please go ahead. Your line is open.

Hi, good morning, guys. Maybe we can just start with something on the cost side. I noticed that ground handling was up substantially in Q3 year-over-year. Is that more to do with increased wages or maybe labor shortages? And how do you see that impacting Q4, if at all?

Yeah, it's up a bit, but revenue is also up as well because we have one revenue stream that is providing this service. Amazon would be the best example. So even though it's up, there's revenue that's up as well that gets quoted in our domestic revenue.

Right, but maybe from the perspective of hiring people for the Christmas holiday period, are you seeing any trouble from that perspective?

Yeah, so there is some part-time supplementation of labor, which is a bit higher than a normal cost. We also have some wage increases that are more in line with what the industry has done So, yeah, that always plays a part.

All right, thanks. I'll pass on.

Thank you. We'll now move on to our next participant, Kevin Chang from CIBC. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. Good morning. Maybe, Scott, you mentioned hiring freeze, which makes sense to be prudent here given all the uncertainty. When I look at your headcount of just over 1,700, should I think of that being kind of a good run rate, I guess, for the next few quarters, or is there some seasonal lift here as you prepare for peak season? And if you could also share maybe how much of that labor is what I call unproductive, so pilots that are training that aren't yet

able to fly with you which i suspect provides a margin what does they you know get into the plane yeah so kevin right now we have about 60 to 70 pilots that are not productive they're in training uh and most of them are dedicated to uh you know the acmi contracts that we have pending and secondly we also you know by hiring uh more uh pilots we also get more flexibility Right now, we could be paying a lot of overtime for charters and some of the other stuff. So that comes back in line as well. We have our own simulator now, so that's going to save us a lot of travel days for the pilots. They were going to Miami or Vancouver to get on a simulator from other companies training. So we will gain some efficiencies in that area. But certainly, you know, as for the other things, employees are concerned the only people we will add is some part-timers in the peak time, which we always do every peak because the volumes are substantially higher than the normal period. So, yes, we will be adding some part-time labor, but we don't anticipate to add any full-time on the labor side. But there are a couple of open positions we have on the executive side that need to be filled. But generally, the higher increase is for growth right now that we're just being prudent for not hiring any permanent people at this time.

That's very helpful, Kolar. And then just my last question. A question I often get is, do you see a risk of modal shift in a downturn? We've seen significant declines in ground transportation costs. A lot of people point to the weakening truckload market. I know that's more of a U.S. phenomenon, but Do you see a risk there that some of your customers could shift volumes from air freight to ground as rates fall in the latter mode?

Kevin, I mean, there's always a risk when, you know, ground freight is cheaper and certain, you know, B2B stuff. But keep in mind, majority of our customer base is like time-sensitive stuff. So if you look at spare part market, if you look at the computer parts or computers or any chips or medical supplies or, you know, which is a lot of fresh produce and lobsters, no matter what price you can ground does, that business, fundamental business that flies does not shift. You know, there might be an odd 5,000, 10,000 pound shipment that normally went air and now it's gone ground. But we don't see that as a major shift from our base business because people use us when they need to use us. And that's, you know, nobody's going to risk going to a truck, number one, and nobody's going to go risk to a belly passenger on domestic because, you know, you could be 24 to 48 hours and the product will be audited by the time it got there. Or, you know, somebody could... be needing that product in an ER room in Vancouver or somebody's spare parts that are needed for, you know, cars and stuff like that. So, you know, we are in a very time sensitive market and we don't compete with those, you know, occasionally when we have space left over and we might take on a standby shipment that would have gone by truck and that kind of stuff. But that is not our primary business.

Thank you very much and best of luck as you get through peak season here.

Thank you, Kevin. We'll now move on to Conor Gupta from Scotiabank. Please go ahead. Your line is open.

Thank you, everyone. Good morning, everyone. Good morning. I just wanted to ask first on the fleet schedule. So I noticed in the fleet plan, there's been some pull forward of 757s and 767s. I'm like, it's probably one or two quarters of ship I'm talking here. Not much, but any sense why you have to get in these aircraft earlier? Is it because the customer pull or is it because of the supplier's push? Did they have prepared these aircraft earlier than expected?

No, the 757s, our plan was to get those as soon as possible. so they can free up the 767s. There's two advantages of putting the 757. Keep in mind that our goal is to improve on our domestic service, which already runs at a phenomenal 98.5% on-time performance. But now, with the introduction of 757s, we have more direct flights to more stations in west and east and returns than we ever had. So, for example, from Hamilton, now we can offer direct service to every major city without stopping in Winnipeg. Same thing going to the East Coast as well. So there is a lot of advantages to service enhancements where, you know, we can give our customers a little later cutoff time so they can continue to pick up even until 8 o'clock at night and still bring it to us at midnight. And then we can ship it direct now. Direct shipments also improve service because they're not transiting or there's no de-icing delays in Winnipeg or Calgary. So those are some of the advantages of direct ship flying. It's no different than when you're flying to Vancouver, going via Winnipeg or Calgary or stopping over, same thing the shipments have. So that's why we're replacing those aircraft. And second thing is we take the 767s that are going to be freed up and deploy it in the ACMI and the charters and some of the international markets we're thinking of. So it helps both ways. But what I mentioned on the fleet plan was that we do have the option to defer the two 767s that were scheduled to come in mid-year next year into either the following year or cancel them altogether.

Makes sense. Thanks. And that's a good segue to my next question, actually. So you mentioned, AJ, Like at the end yesterday, you were saying, as you said, $150 to $200 million of CapEx that can be deferred or maybe, you know, canceled to some degree. And then you're saying that could be potentially double.

Yeah, we could easily go up to $300 million if things got, you know, if we hear bad news next year. You know, we are in a position to trim that.

Right, but is there any penalty associated with that deferral or cancellation?

In the whole scheme of things, it's not going to be material. I'm talking if I defer another $150 million or cancel, it could be in the neighborhood of $5 million. So it's not going to be material. I mean, I'd rather take the $5 million hit. If I don't need to spend $150 million, that's a no-brainer. So that's As I said, it's not a material number for those penalties.

Last one for me. Yesterday, you guys were talking about how you see the EBDA and revenues, etc., ramp up to EBDA 500-plus million in 2026 as you get more aircraft coming in. With respect to the bridge to that 2026 guidance you provided, Is there a way to kind of think about how you get there? Like, is it a linear curve to 2026, or you will see maybe some sort of a slower growth in the early years and then stronger growth in the later years?

Well, you know what, Konark, one of the things is that we read the papers, we talk to people, we see the industry, and we know that next year or the year after could be a bit rocky with headwinds and turbulence. coming in the shipping and cupping. So we know that our fleet plan, our workforce, we're solid in delivering when the need arises. So next year or two years, that's why we have the option to defer some of those expenses. If we defer some of the aircraft, obviously the revenue side also gets a little bit deferment. We feel that we have a strong enough balance sheet and our liquidity position is almost like a billion dollars. So we don't feel that we're going to go down totally if everybody went down. We are in the best position that anybody in the marketplace to weather those storms. So I think that your question, how the curve is going to follow, I think it's kind of a difficult one to answer. But whichever way it follows, we are prepared. I think that's the key thing. that you should take from this?

Perfect. Thanks for the answers. Thank you.

Thank you. We'll now move on to Walter Spraglin from RBC Capital Market. Please go ahead. Your line is open.

Yeah, thanks very much. Good morning, everyone. So I wanted to ask a little bit on ACMI and the potential evolution of your customer base there. AJ, you've been pretty focused on DHL. They've been buying a lot of your capacity. They've indicated that they'd like more and you've been happy to service them there. For anyone that would like to see a little bit more customer diversification, I know there's a lot out there that suggests others would be interested as well. Do you think you're going to see a more diverse customer base in your ACMI line over time or is DHL just you know, due to either contractual commitments you made with them in that agreement or other reasons, are you devoting most of your available capacity as it comes online to DHL?

So, you know, Walter, you know, I'm all about diversification, and that's why we went from domestic to charters to HMI to Baylor International, and same thing, I believe, in the customer base as well. We totally are open for diversification. Yes, we do a lot of and to be honest with you, we have commitments with DHL that because of our performance, we are always in the top couple of carriers for them and the strategic partnership we have. So right now, the aircraft we have coming in this year and early next year are committed to DHL. Now, we are also, you know, there's no... reason why we are coding for other customers as well. But to be honest with you, we can't at this stage go on and take a seriously one-year deal available in Europe or Far East. There's not a week goes by where we don't get an email. We've got 200 hours a month and flying from Hong Kong to Manila. And we're just not in a position to entertain some of that ACMI work. And that work, I must tell you, is not only profitable, it's good for us, gets our international presence going as well. But we're absolutely not in a position to take that on because of the pilot situation, because we've got so many of them in training. And second part is that we have commitments with DHL right now that we need to meet. But, you know, we have taken on work for a month or 68 days here and there just from other suppliers. other customers, and we'll continue to do that. But yes, our strategy would be that when the 777 comes in, we are only committed with four aircraft with DHL, and we have a lot of inquiries on those, and then that would be the diversification time to expand our ACMI business.

That makes sense. Staying on the topic of customers, I assume, AJ, you're continuing your negotiations with your larger ones, the UPSs, Purolators, and so on. Is there anything that is contentious, anything that's a matter of debate? Does your customer want to kind of just see how the economy plays out before locking in something? What are the main... you know, sticking points, if any, uh, that you're having with either UPS, uh, Purolator or so on?

Uh, there's no sticking points. Uh, we've always successfully renewed with every customer. I mean, with Canada Post and Purolator Group, we had a three-year extension as you, if you remember, even to the, uh, seven-year deal that we signed. So that was a 10-year agreement. And I think that, uh, you know, I think everybody's kind of a little bit focused on peak, uh, We have had initial round of conversations. We always do. That's our normal procedure. But I just want to remind everybody, we're still like more than two and a half years away on all those contracts. So although preliminary discussions have had and both parties have expressed interest in working with each other, so there is no issues. There's no material issues that we know of or we've been told. You know, we just need to get focused on peak and after peak, we If something happens before peak, it'll be great, but everybody's kind of now starting for, you know, as of November and December, the only thing we focus on is the extra flights and how we're going to cover the peak. And to be honest with you, as I said, we've got still two and a half years. And to answer your question, again, there is no issues that we are aware of that are any contentious in renewals.

Fantastic. Okay. And then, Jamie, you mentioned growth still being solid, not double-digit, but obviously lapping. You're still able to get high single-digit for next year. I don't want to be too specific to fourth quarter, but I know you had a huge ramp in the fourth quarter last year, and I'm just curious as to whether that's a difficult compare. I mean, I had built in some negative growth on that because you were up You're up over 20% in block hour volume in the fourth quarter of 2021. Does that high single digit still apply to fourth quarter 2022, even on that difficult compare? Or should we look at it with a little bit more of a challenge, given that the growth was so high in the fourth quarter of 2021?

Yeah, I think it's going to be a little more challenging in fourth quarter 2022 than it was last year. You're right. We had a phenomenal fourth quarter last year. I think based on the trends that we're seeing in the first three quarters on the domestic revenue, I think it's going to be a good fourth quarter. But I think some of those macro economic factors are going to impact Q4 this year.

So instead of you're up 20 to 30 percent, can you still do double digit in the fourth quarter here this year?

Yeah, I think so, but I think it'll be below, it'll sort of be in the range of what we've experienced year-to-date in Q1 to 3.

Right. All right, that's all my questions. Thanks very much, and good luck on peak season. Thanks, Walter.

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Dear host, it appears there is no further questions at this time. I'd like to turn the conference back to you for any additional closing remarks. Thank you.

Thank you, everybody, for joining us. I appreciate it.

I am very sorry. I am very sorry. We have one participant who is waiting right now. It will be Kim James from PD Securities.

Okay.

Please go ahead, sir. Your line is open.

Okay. Thanks. Good morning. I'm sorry if you could talk a little bit about the domestic environment and just any, you know, I know you've addressed it regularly in the past, given what some of the competitors are doing in the domestic market, but any update on kind of what you're seeing in terms of their aggressiveness in pricing, in going after volumes, any changes on that front?

No, good morning, Tim. Jamie, no, nothing at all, actually. And if you look at, you know, certainly from WestJet's standpoint, they don't even have their two freighters certified or on their operating certificate in Canada and don't expect, I think, to have it until sometime next year. So no impact from them at all. And equally from Air Canada with the three freighters that they're operating, as we expected, and and suggested, you know, those are being flown mostly on international routes to supplement belly cargo capacity that they didn't have. So really no competitive threat to the domestic business. And I think, you know, a good indicator of that would have been, you know, the renewal that we did earlier at the beginning of 2022 on a long multi-year basis on both the TFI international contract and the Andalour healthcare contract, where both of them were just simple extensions of existing agreements that were ending in 2022. with really no consideration for what any other domestic player was doing in Canada.

I just want to add, keep in mind that the domestic service, like I just mentioned to my earlier question that I was asked, that we are taking the 757s and deploying them domestically, which means direct service. So the kind of service that we offer is, the late departures and early arrivals, like you're talking, you know, any business that's given to us by midnight even or 1 o'clock before 4 o'clock at the destination, that's kind of hard to beat. We have 18 aircraft probably now, I would say, deployed in the domestic service. So anybody who needs to parallel that will have to come up with a network that gives late departures, early arrivals, and covers 18 cities every night, and supplemental lift at daytime if they need it. So the barriers that we have built around our business and strengthening of the network and on-time performance, people come to depend on that. It's like your utility, you know? You get up in the morning and switch your lamp on, it's there, the power is there. Similarly, you open your door and your packages are there. So you're not chasing anybody. And that is where the key to our business is. And I think you saw some of that yourself when you were there on the investor day. Okay, that's really helpful.

Thank you. My next question, just sticking with the domestic network, and you've talked, provided lots of good color on sort of your big customers and their intentions as far as the peak season goes. Anything notable you're seeing from that additional space that typically goes out to several hundred smaller customers? Anything you're seeing in terms of that demand or that capacity that's being called upon from those customers?

Probably it's a bit early, but I can tell you that If that demand, it's hard to think because the smaller customers also depend on their customers and their order books. But I can tell you that our plan is to have that capacity available. And if for any reason that capacity exceeds what we have, we have the ability to scale it up. And we also have the ability to scale it down to not spend that money if that capacity doesn't show up. So, we have the 767s, two spares available for peak. We also have 757s, so we can downscale it, we can upscale it, and we can cancel it. So, I think that that's anybody's guess whether all those smaller customers, where they're going to be and what they're going to show up with. All indications to us by our bigger customers are they expect, like, not the greatest, greatest peak or peak seasons. but they think they're going to be steady. And I think the similar trend can be assumed for the smaller customers.

Okay. And then if I could just squeeze in one more question, turning to ACMI and and the DHL agreement, the seven-year agreement, you know, when you announced that, I think it was $2.3 billion, if I'm not mistaken, in terms of total revenue potential from that. Could you talk through what, you know, the economic environment of next year means to that dollar figure? Does it sort of put it at risk or just by nature of the way that contract is established? Could, you know, volumes within that agreement... you know, move around without it having an impact on, on the dollars for cargo jet at the end of the day?

Look, I mean, uh, we, we always know that nothing is forever, right? And, you know, we, if the business, everybody's dropped 50%, we'll probably drop maybe 10 or 20% because we are, we have a strategic partner, we have a long-term agreement. So, you know, uh, from what our understanding with DHL has always been, because of the high level of performance and the competitive price we provide them, and we have the strategic agreement with them, that they would always try to give us the routes that we can handle, number one, effectively, efficiently, given our Canadian license and pilot situation, and number two, if there was a downturn, you know, we would be the last one out. So it's, we don't see that worst case scenario at this stage. Yes, every, you know, when you look at FedEx and UPS and DHL, everybody's going to be down proportionately at some point. But the nature of our strategic agreement helps us. And that's why we did what we did with them is because they will, if They cancel, let's say, Cincinnati-UK route with us, and they would probably replace us with an LA-2 Brussels route or something else. And we have been doing that all year long with them. They use us where they need the capacity. So I don't see anything different with them. But again, I can't guarantee that they're not going to cancel everybody out and do what they need to do if things got really bad. But I think the way our contract is structured gives us the comfort level that we would probably be one of the last carriers to be. A lot more would happen before we are asked to pack our bags. So that's the nature of the contract. And we are the only operator who has that kind of contract, by the way, with DHL. So just so you know that as well.

Okay. Thank you, AJ. That's very helpful.

Thank you, Kim. It appears there is no further questions at this time. I'd like to hand over to you. Thank you.

Thank you, everybody, for joining us. Sincerely appreciate it. While we prepare for a peak, wishing everybody a great holiday season and look forward to connecting very soon. Thank you.

Thank you, everyone. You may now disconnect.