Cargojet Inc.

All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the CargoJet conference call. I would now like to turn the meeting over to Martin Herman, General Counsel and Corporate Secretary. Please go ahead.

Good morning, everyone, and thank you for joining us this morning on this call. With me on the call this morning are A.J. Vermani, CargoJet's Executive Chairman, Pauline Dillon and Jamie Porteus, our Co-Chief Executive Officers, Scott Calver, our Chief Financial Officer, and Sanjeev Meni, our Vice President of Finance. After opening remarks about the quarter, 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 applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, 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 reconciliation of any non-GAAP measures to GAAP income. I will now turn the call over to Jamie.

Thanks, Marty. Good morning, everyone. And thank you for joining us on the call today. As we've done in the prior quarters, Pauline and I will share our prepared remarks before we pass the call over to our CFO, Scott, to give you a little bit more color on the financial drivers this quarter. Let me start by contrasting the macro transportation sector with cargo jets recent performance. The transportation sector across North America continues to be challenged with weak domestic volumes and the industry has been slow to recover from the ongoing freight recession. However, when you look at cargo jets results, you will notice that we are successfully turning challenges into opportunities. Let me give you a few examples that differentiate cargo jet from the norm. One, with the recent high inflation and an economic slowdown in North America, consumers embraced ultra-low-cost products from China-based direct-to-consumer merchants using new platforms like Timu and Shen. This dampened the domestic e-commerce volumes but created a new stream of China-to-North America air cargo opportunity for cargo jet. We were on the forefront of this shift and secured a long-term scheduled charter opportunity that we announced earlier this year between China and Canada. The frequencies flown per week on this route have continued to rise over the past few months to meet demand. Two, the geopolitical tensions in the Middle East and Ukraine have created supply chain opportunities and an increased need for air cargo services. More recently, the threat of a port worker strike at the East Coast also forced large retailers and manufacturers to think about alternative plans. These disruptions have created new ad hoc charter opportunities on several global routes With available aircraft capacity, we have been proactive in identifying key commodities that need to fly and adding to our ad hoc charter volumes. As a result, we posted very strong 15% growth in overall revenues and a 17% growth in adjusted EBITDA for the quarter. This was despite one less operating day in Q3 2024 versus Q3 of the prior year. We have consistently been diversifying our business from both the product offering point of view as well as from geographic coverage. This combination has provided us with a solid foundation to create predictable earnings and cash flows for our shareholders. In the quarter, domestic revenues grew by 5.2%, ACMI posted a 12% gain, and all-in charters posted a record 60.2% growth versus the third quarter of 2023. Overall, we posted a 14.8% increase in revenues for the quarter as compared to the previous year. The improving interest rate environment and controlled inflation are fostering a more stable and optimistic economic outlook for Canada, which we believe bodes well for future domestic volumes. I talked about our decision to accelerate growth investment in 2767-300 aircraft during our last quarter remarks. Based on our current growth rate and opportunities, we see emerging in 2025, we are confident in our fleet expansion strategy, particularly in the context of reductions in other Canadian freight operators, aircraft freighter fleets, and available air cargo capacity, and the emerging long-range charter opportunities. We are also pleased to note that our growth capex was well within our stated goals on capital allocation, and we are very happy with the progress we are making in our capital allocation strategy. We remain disciplined on optimizing capex and generating free cash flow, including a framework on how we will allocate capital through dividends, share buybacks and debt reduction. Although I should point out that we are not immune to the cost headwinds facing the aviation and overall supply chain sectors relating specifically to wages and other cost increases, which may impact future margins. However, this will not deter us from our capital allocation priorities. Scott will provide more color on how we are progressing against these objectives. We are also encouraged to see stronger peak season volume forecasts from the majority of our customers, and we are well positioned to serve our customers through this most important shopping season of the year. Pauline and I continue to work together on building growth opportunities, attracting the best talent, and staying focused on operational and cost efficiency. We have recently and will continue to strengthen the talent in information technology, cybersecurity, finance, and flight operations areas to meet our growing business requirements. We are very excited and confident about the continued growth opportunities that lie ahead for CargoJet, its employees, and our shareholders. Let me now pass the microphone over to my colleague, Pauline.

Thank you, Jamie. The growth opportunities that Jamie mentioned require a capital light execution strategy. In other words, grow our block hours without adding aircraft capex. and that's been our biggest priority. We have been focused on carefully orchestrating various pieces of our operations to allow us to maximize our fleet utilization, particularly given the complexity of serving Asia routes and the global reach of our ad hoc charter activity. We have a very predictable requirement for our aircraft fleet to support our Canadian overnight network and our ACMI business. Utilizing spare aircraft availability for charter opportunities is key to creating additional shareholder value. We are pleased to see that many of these pieces came together nicely during this quarter. As a result, Q3 block hours grew 15% with the same size of aircraft fleet that we had last year. To execute this strategy, we are still scaling up some cost areas and expect to reach a more normalized run rate in the first half of 2025. We continued our efforts to build strong talent and capabilities in our information technology functions. This is an 18 to 24-month journey, but it is critical to manage scale and complexity of the business and to build a foundation for future growth. We continue to add talent in other key areas of the business as well. Our peak planning will be more robust and complex this year, given both the domestic as well as Asian networks. We have dedicated teams that work with key customers to ensure we deliver every single package on time for the holiday peak season. Our operations and safety teams are focused on preparing for all weather conditions Our maintenance teams are focused on making sure that our aircraft as well as our ground handling equipment are fully serviceable at each base. Once again, in Q3, we delivered leading, best-in-class, on-time performance of 98.7%. This is the single most important metric that our customers judge us by. We want to acknowledge and thank every member of the cargo jet team for their commitment to delivering the best customer experience, and for their continued dedication. Jamie and I transitioned into our new roles at the start of this year. It has been an exciting and, I might add, exhilarating year of growth and opportunity. We are thrilled with the progress that we have made, both on the financial and operating performances of the company. But we do recognize much work still needs to be done. One thing has become very clear to us, There is no shortage of opportunities. We need to build capabilities that can profitably capture those opportunities and continue to provide our customers and our shareholders value. This now concludes my prepared comments, and I will turn the call over to Scott Cowper.

Thank you, Pauline, and good morning, everyone. As a result of a strong corridor for revenue before fuel surcharges and other pass-throughs, Free cash flow continued to support the investment and growth opportunities that Jamie referred to in his prepared comments, and Cargojet continued to create value for our shareholders. In the quarter, Cargojet continued to strengthen its balance sheet with a reduction in leverage as defined by debt compared to IFDA. Adjusted earnings per share closed the quarter at $1.48 compared to $0.15 per share in the same period in the prior year. CargoJet's strong third quarter has contributed to year-to-date adjusted earnings per share of $3.59 compared to $1.71 for the prior year. A few comments regarding our capital allocation. A total of $157 million has been returned to shareholders to repurchase and cancel common shares since the current share back program started in November 2023, with $38 million taking place in the third quarter of this year. Approximately $22 million of capital was allocated for investment in growth CapEx in the third quarter for the two Boeing 767s that are currently going through the passenger-to-freighter conversion process. At this time, we anticipate that Cargojet will close off the 2024 fiscal year with $70 to $80 million in growth CapEx. This range is slightly higher than what has been communicated earlier in the year due to growth revenue coming on at a faster pace than what was originally anticipated. When you consider total CapEx, which includes both maintenance CapEx and proceeds from disposal, management anticipates we will finish the year with net capital expenditures between $80 and $90 million. To close off the capital allocation update, with all things considered, CargoJet was successful in lowering financial leverage to 2.2 times in the third quarter. We started the year at 2.6 times. This reduction was made possible with both an increase in 12-month trailing EBITDA of approximately $20 million and a $70 million reduction in debt. I will now touch on the third quarter financial statements. A couple comments about revenue. With a 60% increase in the charter business, the company has experienced a mixed change in our revenue. The charter business is made up with two types of charters, and the mix between the two have been consistent prior to the third quarter. The first type of charter revenue is our ad hoc charter business. These opportunities typically present themselves only with a few days' notice. Given the urgency and the non-routine nature, these charters typically have a more attractive revenue per block hour, which is required due to the higher operating costs. The second type of charter revenue is what we refer to as scheduled charters, The recent e-commerce growth where merchants are shipping to consumers directly out of China is a long-term commitment that is high volume with a consistent schedule. This type of charter revenue has a lower revenue per block hour compared to the other end of the spectrum with the ad hoc charters. Given the different cost structure, both types of charter business meet cargo jets margin requirements. For a deeper dive into our cost structure, At a high level, we manage direct expenses on a cost per block hour basis. For direct expenses, we exclude non-cash depreciation due to the long-term strategic nature of this expense, and we exclude fuel expense as we're kept whole on fuel expense with our revenue. With this redefined definition of direct expenses per block hour, Cargojet experienced a slight reduction in the third quarter compared to prior year. Under normal circumstances, operating leverage from the 15% increase in revenue would result in a more significant improvement to margin. To the credit of the entire Cargojet team, the organization can move quickly to support long-term growth opportunities. Cargojet has experienced one-time startup costs to onboard this accelerated growth. The best example would be the training and overtime for pilots. It can take as long as six months to attract, train and release a fully trained pilot to the line. CargoJet is currently approximately 50 pilots short of an optimized flight crew resourcing level. Our engaged workforce is equally as passionate to support our customers with a temporary overtime to backfill for these vacant positions. There are two specific variances and direct expenses I would like to address. Depreciation closed the quarter at $31.2 million compared to $42 million for the same period last year. The reduction was driven by two different reasons. The first reason is that certain assets have become fully depreciated in the last 12 months. It is coming up on one year since the last time that cargo jet added a freighter to our fleet. If you go back 12 months ago, we had indicated that we had four Boeing 757s listed for sale. With the growth in revenue, these four aircraft are booked to capacity, which has made it possible to grow revenue without adding aircraft and new depreciation. The second reason for the change in depreciation is a change in estimate for the useful life of our engines. You will notice that Cargojet's maintenance capex has been reduced for the last 18 months. Part of the reason was a reduction in spare engine inventory and part of the reason is the fact that our engine's estimated life is longer than what was previously estimated. Selling general and administrative expenses closed the quarter at $24.3 million compared to $15.2 million last year, an increase of $9 million. Approximately $1 million of this increase is due to a foreign exchange gain in the previous year. Other SG&A costs have increased by $3 million, mostly due to an increase in operating costs related to IT for software and for outside professional service providers. The remaining $5 million increase compared to prior year relates to an increase in salaries and incentives. Salaries have increased due to the 2023 inflation. Vacant positions have been filled from this time last year. Given the uncertainty of the freight recession that we were managing through last year, employees did not qualify for incentive last year. We are now back to a normal run rate on salaries and incentives in 2024. As Jamie noted, it should also be taken into consideration the number of operating days in a given quarter. The third quarter in 2024 had one less operating day. The number of operating days impacts the majority of our revenue. With the current run rate of revenue per operating day, one less operating day compared to the prior year can impact EBITDA over $1 million. With the increase in revenue and with our current cost structure, CargoJet closed the third quarter with $47.8 million in free cash flow compared to $29.8 million in the same period for prior year for an increase of approximately $20 million. In closing, it was one year ago that we announced our long-term strategy as it relates to our capital allocation. CargoJet's long-term capital allocation strategy continues to deliver consistent dividend growth, We're investing in growth opportunities that meet our margin requirements. We've maintained a conservative balance sheet as measured by debt to EBITDA, and we're opportunistically buying back shares. We are pleased with the progress we have made on each of these pillars. I will now pass it back to Jamie and Pauline and AJ for any questions.

Operator, would you like to...

Yes, thank you. So we will now take questions from the telephone line. If you have a question, please press star one. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Matthew Lee from Canna Cork. Please go ahead.

Hey, morning guys. Thanks for taking my questions. On the domestic side, you know, revenue growth this quarter is maybe a bit slower than Q2. Can you just maybe talk about what trends are seeing that give you some confidence and further acceleration for Q4 and any colors you're getting from customers around the holiday season?

Yeah, good morning, Matthew. It's Jamie. Thanks for joining us this morning. Yeah, it was a little, it was kind of in line with what we had predicted back at the beginning of the year in terms of revenue growth. I think a couple of factors that impacted it. One, As Scott mentioned, one less operating day in the quarter certainly had an impact. Two, there is some domestic revenue that includes a fuel surcharge component, and with lower fuel costs, we had lower fuel surcharge revenue included in that base domestic revenue. I think that was one factor. But the indications from domestic customers for peak season going into Q4 and what we've already seen in the month of October remain strong, as I noted before. We have additional peak scheduled charters from several customers this season that were stronger than last season. So we should have a good peak season in terms of domestic revenue.

That's fair. And then maybe on fleet, 15% block hour growth this quarter on no New York house. That's very impressive. And I think the fleet plan only has one net additional aircraft next year. But if Q4 kind of shakes out the way you're expecting and it seems like the demand is pretty buoyant. Should we be expecting you guys to look at adding to your fleet, or is there kind of some more eye-opening stuff under your current aircraft?

We have flexibility in the fleet, and you're right, 15% is impressive, and I think that coincides with what we said at the beginning of the year, that we were confident that we could grow our business 15% to 20% with the existing fleet of aircraft, and in the first three quarters, we've demonstrated that we have that capability, plus a little bit more. We do have two aircraft companies coming into the fleet in 2025, 2767, 300s. You're correct that it's net one if we return the leased aircraft, or only leased aircraft, its term ends at the end of February. But we still have some flexibility on whether we keep that aircraft to meet our growing needs or not.

Well, one of the things that, JJ, you know, the more we fly, the less maintenance time we have on the existing fleet. And cargo jets keep success factor has been on-time performance. When you have maintenance that cannot be performed because aircraft are always flying, you will always be behind on your maintenance, which we don't like. That affects our on-time performance. Although it's good to get a max utilization of any aircraft, but we want to make sure that we have enough aircraft in our fleet that can go into maintenance while the other ones are flying. So it's a balancing act. And as Jamie said, we do have an option to bring on an extra aircraft in the new year, early new year. And any time we have taken these aircraft for maintenance, they end up being both aircraft. So we're not too worried if we add an aircraft. I'm sure it'll be gone. But I think our biggest concern right now is to make sure that aircraft get the required maintenance routine and heavy checks at appropriate times to ensure there's a safe working environment and also that our on-time performance stays where it should be.

All right, that makes sense. Thanks, guys. I'll pass it on. Thank you. The next question is from Cameron Dorksen from NBF. Please go ahead.

Thanks. Good morning. I just want to ask a question about the China flights. Obviously, very strong growth in the island charter line item. You mentioned that you'd seen some increases in frequency, I guess, more recently. Can you just talk about how that contract is evolving, how you see that evolving further in the next couple of quarters?

Yeah, good morning, Cameron. As you know, when we started that program back in May, initially the revenue forecast related to that business was about $55 to $60 million per year based on three frequencies per week. We have seen an increase in those frequencies up to five or six frequencies per week in the fourth quarter, but that will return back. Our expectation is that's peak demand and will return back to the contractual minimum of three flights per week going into 2025.

Okay, no, that's helpful. And then maybe my second question is just around, I guess, the optimization of some of the controllable costs. It's something you mentioned in the prepared remarks as well. Can you just maybe detail a little bit about what measures that are yet to be done here that will, I guess, optimize your cost structure in the next few quarters?

Maybe I'll take that one, the costs. structure, it's a strange situation. While we try to manage the internal costs and get efficiencies, you know, we're not immune to the cost settlements and the wage settlements are going on in the industry. You know, WestJet did a maintenance contract. They did a pilot contract. Air Canada did a pilot contract. Across the border, there are pilot contracts. A lot of our spare parts come from the U.S. where the wage settlements have been 30-40% plus. So all these are reflecting, are going to start reflecting in a lot of the requirements we have. So while we do certainly manage it very efficiently and we don't spend a dollar when we don't need to, but the industry, as you can see that how many strikes have happened and how many When you look at Canada Post almost ready to strike and the federal workers and everybody else, the pressure is continuing on cargo debt as well. And we are also part of the whole logistics chain and supply chain, and it attracts us as well.

Okay, but are there specific measures you can point to on the cost side that are elevated right now, but you have some ability to reduce those to offset some of the other escalating costs?

Not very much from the industry standpoint, but gaining efficiency through extra flying and doing consolidation of some of the routes, rerouting the aircraft, those are the kind of things that we always look at. how we can get the work of 15 hours of flying at 12 hours. Those are the kind of things we're internally always looking at, daily basis.

And if I could just add to AJ's comments, Cameron, a couple of things. In terms of overtime with the pilots, that'll level out as we add more crew to our line. But as AJ said, we're facing some headwinds. in the future, not just with the pilot group, but with a number of different employee groups in terms of wage increases. We've had some significant and long overdue permanent headcount additions, particularly to the senior and executive management team that we're lacking in certain areas. And also factor in the Canadian dollar is trading at the lowest level against the U.S. dollar in over four years. And as you're aware, a lot of our costs are in U.S. dollars. So all of those things sort of impact in the longer term. Right.

Okay.

That's very helpful. Thanks very much. Thank you. The next question is from Chris Murray from ATB Capital Markets. Please go ahead. Yeah, thanks, folks. Good morning.

Maybe just turning back to the costs in the quarter, you did mention that there were sort of some one-time costs, right? around the increase in the block hours. Can you maybe try to help us quantify exactly how much that was in the quarter? I know that there's some puts and takes, and I know you called out some items, but any additional color would be helpful.

Well, you know, the additional costs mostly come from, as you know, we have 70 pilots. We are, you know, looking at the market condition. Just take the pilots, for example. we should have about 450 pilots, which is our ideal cost. But, you know, the market is such that there's a pilot shortage. The bottom 100 is the one that rotates. And every time a pilot rotates, there's a $50,000 to $70,000 in training costs because these guys take three to four months. By the time they're hired, they come online, they get trained, they get relieved. It's five, six, seven months. And since they're a backlog of training, that even adds further to the cost. So these are kind of the one-time costs where a pilot is not productive because they have the trainings to go through. And secondly, you know, these guys are hard to find right now because there is a shortage. So we continue to work and manage because we can't turn down any business. So a lot of business that you see today, you know, we carry it on over time. And that costs us a lot of money. So this is a kind of example that one-time costs, we always call it one-time costs, but if every year you've got 50, 60, 70 pilots leave, they become permanent costs until the market stabilizes that there is plenty of pilots in the marketplace. So some of these challenges, Chris, are definitely the industry challenges, just not ours. But we try to manage it as much as we can. Okay.

And then the other question I had is just in terms of, you know, with the existing fleet, you know, Jamie made the comment about kind of 15 to 20% kind of growth on utility, on utilization, you know, which kind of almost puts you at the far end. But we've also talked a lot in the past about being able to find different ways to optimize a fleet, whether that's daytime flying or weekend flying. As you sort of took the fleet out to, I guess, maybe what you would be thinking about would have been your max, are there any other opportunities, either in fleet mix or the way that you operate the network, to maybe find some additional capacity without having to add additional aircraft?

Good morning, Chris. It's Jamie. We're pretty happy with the fleet mix that we have. One of the things that's almost transparent to people, but it's from a cost standpoint very efficient, is the fleet mix that we have with the 757, the 767, the common flight deck, pilots being able to interchange between new aircraft seamlessly, both from an operational standpoint. And obviously, they're checked out on both aircraft types equally, so we don't have specific crews for specific aircraft that makes us, or aircraft types that makes us very efficient. And we manage that literally on a daily basis, particularly with the domestic network. We have more control over the domestic flying and the volumes are more... We control the volumes, but we control the capacity and can match the capacity to the volumes more closely than we would look at on the ECMI or the Charter as an example.

Okay. I'll leave it there. Thanks, folks.

Thanks, Chris. Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead.

Thanks, operator. Good morning. I just want to follow up on the cost discussion here. In Q3, you guys had a pretty decent 33.5% margin, which is kind of very consistent with the last two and a half years or so. I'm thinking like if you normalize for these, you know, the upfront costs you talked about, that normalizes probably in the first half of 2025. What's the margin on a normalized rate looking like? Are we close to 35% or are we close to 34%?

No. Sorry.

One comment before I turn it over to Jamie. Those costs that we talked about, the two costs, are only going to stabilize if the market stabilizes and there's you know, the demand for the pilots come down, or there's plenty of them. As I've said, that these costs, when you have the turnover kind of redo in any sort of airline where people leave for, you know, other opportunities or they don't want to fly cargo or they don't fly at night, they go into other operations. it's very difficult that we can say, we always call it one-time cost for now, but if market in 2025, the passenger of the way that's grown continues to grow, those one-time costs will continue for a period of time till the market stabilizes. So I just wanted to make that clear that by 2025, these are not magically going to disappear. That's an industry issue that we, not us, but every airline is facing. So I just wanted to make that clear.

And just to add to AJ's comments, Konark, I think we would agree, and I think most people on this call would, the expectation would be with the level of revenue growth that we have, even with some one-time costs, that at some point that levels out and you'll see an increase in the historical margins that we've been able to generate for this business. And I think in a normal world, that logic would apply. And those costs will normalize over the next year, year and a half. But I think the point is that we believe that those are being more than offset by other permanent increases, whether it's facing the wage increases that we talked about with various parts of our organization, various employee groups, certainly adding headcount that were, as I mentioned before, were We're long overdue. Those are permanent costs. The impact of the U.S. dollar, I think all of those things would lead us to an expectation that that 33.5 EBITDA margin is not going to increase substantially in the next few years. In fact, it might actually decrease. But having said that, we're still very confident that that's going to meet our capital allocation requirements. We're still going to generate enough free cash flow to meet our short and long-term CapEx requirements. and certainly to continue our priorities of dividend payments to shareholders and share buybacks and continuing to keep our debt level at 2 to 2.2 times EBITDA.

And Konark, I must add that anything that keeps us up right now is the past pressures that not only us, but the whole industry and whole supply chain sector, whole logistics sectors face, whether it's Canada Post or whether it's UPS who had its elements, or whether it was the hotel who recently had a settlement. So this is not an issue that is just for CargoJet. This is an industry issue, and we are part of the industry. And that is our biggest challenge today is the creeping costs.

Okay. That makes sense. Thanks, guys. In terms of capacity, I think, Jamie, you know, you pointed out earlier on that, you know, initially you guys were looking at 15, 20% sort of, you know, increase in block hours without adding the fleet. Now, Q3, you had 15% growth in block hours on the same fleet, essentially. How much more capacity for that, you know, on the existing fleet? So the next two aircraft that you get in 2025, you know, that will increase the capacity maybe, but on the current fleet. Can you squeeze out more block hours?

We will in the fourth quarter for peak season. And I think it's consistent with what we said at the beginning of the year that we felt very confident that we could grow revenues by 15% to 20% with the existing fleet that we have. And I think growing it to 15% in the last quarter is a demonstration of our capability to do that. I think, as we said, it was 15% to 20%, so we're not at 20% yet. So there is a little bit of growth, and that's why we're very – We have the flexibility going in, as I mentioned earlier, going into 2025 with two additional aircraft coming sometime towards the end of the second or first quarter, second quarter of the year and providing the flexibility to whether we keep the leased aircraft or not keep the leased aircraft. We still have some time. We'll make that decision before the end of the year. But we're very confident that we'll have enough capacity to continue to grow at that level if demand is there.

Okay, that's great. Thanks. And last one for me before I turn over. Maybe, I don't know if, AJ, you'd like to comment on that, but Canada Post has been going through, obviously, these issues which are very public, obviously, and their employees are, I think, looking like they're against the weekend deliveries and all that. How do you see all these issues shaping up and how does it impact your existing contractual agreements with Canada Post? So any thoughts there?

Yeah, so, you know, we do have a long-term contract with Canada Post, and, you know, we don't see any of those labor issues, you know, impacting our kind of business that they do with us because a lot of it's parcel, not the letter mail and all that stuff they do with us. You know, the key thing is that if you're looking at they don't want to do a seven-day delivery and they don't want to do this, you know, You know, what we will find is that if Canada Post wants to be profitable or even break even or be competitive with the others, which they're mandated to do, by the way, in their charter they have to be self-sufficient, and I know they're losing $700 million, $800 million, $900 million a year. They will have to be competitive with UPS, DHL, and FedEx for their parcel delivery because or even their own subsidiary peer relator, you know, being their customers, I can't give them advice or be, I'm just giving you this as a general reader that in order for them to meet the wage demands that they're being asked of, they will have to increase productivity to become profitable. You cannot give wage increases to any group of people when productivity is being asked to be reduced. So if their mandate is truly that they have to be self-sufficient and they cannot get financing from the government purses, then something has to give. The other option is that if they don't want to do that, maybe they should go to two days of delivering a mail or three days or cut back in services. So some of these things need to happen. Otherwise, Canada Post, it's in all of our interest to see that Canada Post makes some kind of money that is not dependent on public purses.

I appreciate the time, as always. Thank you.

Thank you. The next question is from Walter Sprachling from RBC Capital Market. Please go ahead.

Yeah, thanks very much, operator. Good morning, everyone. I want to start on the charter run rate now, and I know there's always some fluctuations in charter as sometimes domestic or ACMI borrows some capacity from your charter opportunity during your peak. And I'm just curious whether what the run rate now is on the charter, it's lifted a lot this year and is now north of 40%. $40 million per quarter. Do we look at that as, you know, the run rate $40 now each quarter going forward? Does it dip down in the fourth quarter as perhaps there's some borrowing from capacity? And maybe just the quarterly run rate on your very successful in-charter revenue piece would be appreciated here.

Yeah, good morning, Walter. I think the expectation would be exactly as you described it. Even though we have increased frequencies with our scheduled – and And just to clarify, we group both the scheduled, what we call scheduled charter, which is mostly the China flying that we're doing, and our ad hoc charter revenue together in the same bucket. But you're correct, in the fourth quarter, we see an increase in scheduled frequencies per week that we're doing to and from China, as I mentioned earlier. We have seen very strong ad hoc charter in the month of October, but as we get towards the end of the fourth quarter, particularly in December, the availability of aircraft and crew for continued ad hoc charter flying will probably be muted a little bit. So I think that the fourth quarter will be similar to the third quarter, but going into 2025, again, we'll see a reduction. Our expectation right now is it will go back to the normal three frequencies per week on the scheduled charter flying. And ad hoc charter demand will be a little lower than we've seen in Q3 and Q4 going into the beginning of the year.

Okay. And in terms of your revenue per block hour, that was trending up and then took a dip. And I know, Scott, you mentioned there's some mix in there. I guess it comes back, first of all, is that dip the new mix we should kind of model for a decline in rates per block going forward to reflect that kind of new mix. And my second question is, and I know there's a lot of cost discussions, you know, you're in a pretty good competitive environment. To what extent can you just turn around now and say, look, cost pressure is pretty high. and we're going to have to pass it on to our own customers. How do those conversations go?

So, Walter, let me take that quickly. I don't know if you... We just talked about cost pressures. This morning, Boeing settled for 38% increases. So this is the kind of industry has been paying, and it's been going on. So these pressures are definitely spread to... you know, from Boeing to airlines to aerospace industries to automobiles. So you can keep talking about that. But just keep one thing in mind that if we were just competing for charters in Canada, I could agree with you that we would have the pricing power and we could probably get some better yields. But when the charters come in, 90% of our charters, we are competing with companies in the U.S., And if you're not competitive with their, you know, pricing, they tend to, how do I put it? Because there is so much pressure and capacity, like UPS is chartering planes because they got too many. FedEx is chartering planes because they had too many. You know, DHL is always chartering planes when they have the extra capacity. ETSG and Atlas and Kalida, they also charter planes. So we are not just competing on the Canadian landscape when it comes to any charter, whether it's Canada, U.S., or U.S. to other countries, or Canada to other countries. We always have three or four or five competitors on each of those charters. So we do not contain the pricing power. We have to be competitive with those companies.

Well, to the other thing, too, with that revenue per block hours, is it's been a steady decline in the price of fuel ever since Q3 last year. We saw that big pop a year ago, and then it's been a very slow and steady decline ever since then. So a lot of our revenue does have fuel baked into that revenue as well. The fuel surcharge is just for domestic. So all that other revenue, you're going to see some noise there with the change of price of fuel.

Okay. That's great. I really appreciate the time. That's all my questions.

Thank you, Walter. Thank you for your optimism always.

Thank you. The next question is from Kevin Chang from CIBC. Please go ahead.

Hey, thanks for taking my question. Maybe if I could just put a finer point on maybe how block hours look in Q4. If I look at 2022 and 2023, I think sequentially you saw block hours up, let's say, about 10%. I mean, that was obviously in the face of a freight recession. Is that the type of sequential increase you'd expect this peak season? Or do we go back to something like you saw in prior years where you could see, you know, 15, 20 plus percent sequential improvement in block hours?

No, I don't think, good morning, Kevin. I don't think it's of that magnitude. You're definitely going to see sequentially an increase in block hours. You know, the big part of it will be driven by the additional frequencies that we have flying to and from China that that we didn't have in those previous two years in 2023 and 2022. But we're also seeing strong demand in the fourth quarter with additional aircraft that we have flying primarily for DHL on an ACMI basis, as well as I noted before, some additional peak charters we're doing for our domestic customers.

And Kevin, you'll also see an increase in block hours, because if you remember, we had said that we have four 757s parked that are being utilized. So when we can't find a 767, we fire a 2757, which increases the block hours a bit. So that number might not be fully, you know, up to speed because when we don't turn down business and if it's profitable, we will put two aircraft instead of one. So that does increase the block hours a bit.

That's helpful, Culler. Maybe just my second question here on the pilot situation. It feels like it's been pretty fluid. Things were tight a while ago, and then we've had a few airlines here in Canada go under on the ultra-low-cost carrier side. That seemed to alleviate some of the pilot pressure, but it seems like maybe we've come full circle here where supply-demand for four pilots has gone tighter. One, is that what you're seeing? And then two, just wondering if some of the more recent headwinds in hiring, are you talking that up to some of the recent pilot contracts that have been signed effectively? WestJet Air Canada, total compensation has increased 30-40% over the term of the contract. Is that making it tougher? Has that made it significantly tighter in this short period of time in getting pilots just with these new contracts being ratified?

Yeah, so a number of things play a factor in the pilots issue. A lot of our pilots seem to be going flying for South. You know, they're flying in U.S. They pay in U.S. dollars. Some of the single guys don't care where they fly. So there's a lot of being pilots that are moving to the South. The second part of it is while the wage increases have gone 35%, 40%, or even more in some of the airlines, the work rules and the productivity hasn't kept up. So, you know, they're giving more money, but they're also hiring more pilots because some of the work rules are not increasing productivity. So you get... Two factors. One is that you've got more money getting in other airlines. And the second thing is you also have less productivity. That means if you needed 50 pilots to do a job, you might need 60 or 70 to do the job. So those are some of the things that are today's reality. And the other part of it, you should also keep in mind that when Lynx went into CCAA or bankruptcy, they had a few hundred pilots that came on and they were absorbed within like a week. So we don't have an excess pilot, especially when you have a number of Canadian carriers that have beefed up operations. Canada's got more flights today than WestJet has got a lot of flights. Sunwing, Porter Airline is a full-blown airline. Flare has expanded. So if you look at all the pilots that were And there, like prior to COVID, we will find that the number of pilots have gone up 30%, 40%, 50% from where they used to be. The country is only producing so many pilots. There's no emphasis on producing pilots, as a matter of fact. The same old private, not private, these flying clubs exist, and they've not had any increase in output to get the pilots trained and out of the lines. And whatever we are producing, we are losing a fair bit to U.S. We are losing a fair bit to companies like Emirates overseas, Qatar Airways, you know, Singapore Airlines, Cathay, Korean. So there's a lot of Canadian pilots who choose not to fly in this country.

That's a very helpful color. Thank you very much and best of luck this peak season.

Thank you, Kevin.

Thank you. The next question is from Scott Karskollen from McKinsey and Winston. Please go ahead.

Good morning and thanks for taking my call. In the event that we get a Trump presidency announcement tomorrow and he embarks on what he says he's going to embark on with tariffs, that is 10 to 20 percent tariffs on everything coming into the U.S. and 60 percent tariffs on all goods coming in from China. I'm just wondering, how do you see that kind of event happening? impacting your businesses? I'm thinking in particular ACMI and Charter. Thank you.

Thanks, Scott. It's Jamie. I'll give you some comments on that. I mean, we're well aware of that. I mean, the one thing that we're optimistic about and was very encouraging with our agreement with our Chinese customer is they're focused on only the Canadian market and not the U.S. market at all. So I think any impact of a Trump presidency with increased tariffs on on imports into the US will have less of an impact on our business that we're doing directly with some of the Chinese e-commerce companies that are focusing more on Canada. Equally, on the charter business, our ad hoc charter business is certainly global. Most of the business is around the world. It's not specific to the US. It's certainly not specific to Canada at all. We do very little domestic ad hoc charters. Most of them are global to Europe, to other parts of Asia. very little coming back into the U.S. It's usually between other third and fourth countries or between Canada and a third country. We're not concerned with a major impact of that. On an ACMI basis, certainly with the exposure that we have with DHL, at DHL we operate 17 or 18 aircraft on an ACMI basis for them. We're not currently operating any aircraft for them out of Asia into the U.S., so I don't think there'd be any impact there.

Okay, that's helpful. Thank you.

Thanks. Thank you. The next question is from Tim James from TD Collin. Please go ahead. Thanks.

Good morning. My first question, just wondering if you saw any signs of a pull forward of peak season or Q4 volumes into the third quarter from any of your customers or business lines?

I'd say a little bit at the tail end of the third quarter. In September, we had a very strong September year over year in terms of volume, really on all three segments of the business. We saw increased activity, increased flying on an ACMI basis, particularly for DHL during September, which continues into the fourth quarter. Equally, we started to see a little bit of the ramp up of the Chinese flying, not quite at the level that it's at today in October, November, but a little bit in And certainly our ad hoc charter business in September started to pick up and was very strong in October.

And then I guess the follow-up to that is you were providing some commentary earlier with regards to Q3 charter, Q4 charter looking sort of equally strong for a number of reasons, and I meant the typical seasonal kind of slower revenue run rate in the first and second quarters. What about third quarter next year, maybe the broader question is, is this Q3 now kind of the new baseline do you think for the third quarter? Putting aside any potential natural growth or economic influences, but is this kind of the starting point as you would see it for next year in Q3 or were there some particular headwinds or tailwinds that maybe are not necessarily normal for future years?

Yeah, I think it's maybe a little premature now at this point, Tim, to be able to accurately predict what Q3 next year is going to look like. We did have sort of significant almost record growth in ad hoc charter during the quarter. Does that continue? I mean, a lot of that is driven, as I mentioned in the prepared remarks, by global sort of geopolitical impact of things in the Ukraine, things in the Middle East, different disasters around the world. It's hard to predict whether those will continue and that portion of it continue to drive ad hoc charter opportunities or growth next year. Equally, you know, the growth of e-commerce that we're seeing both on the domestic and on our international business, I think will continue, but I think it's a little early for us to be able to predict that accurately for a year from now.

Fair enough. Thanks very much. Thank you. Thank you. Once again, please press star one if you have a question. There are no further questions registered at this time. This will conclude today's conference call. Please disconnect your line at this time, and we thank you for your participation.