Inflation Tempers Cargojet's Outlook Despite Q1 Volume Growth

Cargojet CGJTF reported Tuesday that revenue of US$169 million was nearly flat year over year, while adjusted earnings excluding accounting measures and taxes ticked up 3.6% to $57 million, in line with analysts' expectations.

The company said less hesitancy among consumers to make online purchases helped drive up flying revenue — divided among its core domestic network, dedicated contract flying for other airlines and all-in charter services — by 6.5% to $132.4 million. The gains were offset by lower fuel surcharges as the price of jet fuel came down in the past year. 

Cargo airlines typically see better results in the second half of the year as importers and exporters ramp up goods movement for the holiday shopping season and year-end financial targets, but management offered a conservative outlook as high prices for goods and services weigh on Canadians' purchasing power. 

"On the domestic side, the volumes from our major customers have stabilized and improved sequentially each quarter since the middle of last year" said co-CEO Jamie Porteous during an earnings presentation for analysts. "Given the macroeconomic environment of persistent inflation, and high interest rates, a much greater portion of household income is still being spent on borrowing costs, leaving a smaller portion for discretionary spending. As a result, we do not expect significant growth to return until financial conditions ease significantly for consumers." 

January and February volumes exceeded expectations but softened in March.  The positive direction in Cargojet's business mirrors the continuing signs of stabilization in the broader airfreight market, with global demand up about 12% in the first quarter versus the same period last year. It also compares favorably with UPS, which noted in its earnings last week that average daily parcel volumes declined in Canada.

Cargojet operates a domestic overnight express network between 16 major Canadian cities primarily for express shippers such as Amazon AMZN, Canada Post, FedEx FDX and UPS UPS, as well as dedicated routes for DHL Express and ad hoc charters utilizing a fleet of 41 Boeing 757 and 767 freighters. Large domestic customers typically pay upfront for fixed allocations, with extra space taken by international airlines that need a hub connection and freight forwarders. 

Under dedicated fly-only contracts, the aircraft lease and crew services are bundled, leaving customers in charge of setting the schedule, filling the aircraft with cargo, fueling and airport services. Porteous said Cargojet operated 17 aircraft for DHL Express in the two previous quarters, two more than specified in the contract, and they have been extended at least through the second quarter of this year. 

Moves last year to streamline the domestic network, such as substituting a larger 767 for two 757s on certain routes, are paying off in higher load factors and profit margins being sustained in the mid-30% range. Cargojet's flight hours during the quarter were down 16% year over year, but revenue per flight hour was up 18%, said Porteous.

Other efficiency measures also helped prevent cost increases. Better maintenance planning, for example, allows for lower inventories of spare parts and shorter turnaround times for aircraft. Flight simulators acquired last year have reduced pilot downtime and cut travel and hotel costs because pilots no longer have to be flown to Dallas or Miami for training. And Cargojet has reduced reliance on subcontractors for outsourced charter flights.

With the cost base per flight hour now locked in, any new volumes will likely mean revenues will drop to the bottom line, analysts say.

777 change of heart

Cargojet said it pocketed a net gain of $13.4 million from the sale of four Boeing 777-200s along with a 777 simulator and a Beechcraft aircraft it planned to use for crew transport for $95.5 million. The proceeds are being used to pay down debt and buy back shares. The company originally planned to expand into long-haul intercontinental service with the addition of eight 777 passenger aircraft acquired on the secondary market and converted into maindeck freighters but abandoned the strategy when the air cargo market soured in 2022 and 2023. It sold three 777-300s last year and in January sold the production slots for the 777-200 conversions. 

But after initially planning to offload four surplus 757s, Cargojet in February said it would continue using two of them because of increased customer needs. On Monday, the company said one of the freighters is being held for sale after undergoing an engine refresh, while the other is in reserve and being used for flex capacity as needed.

Porteous said the all-cargo carrier has plenty of capacity in its domestic and international contract flying segments to grow revenue by 15% to 20% per year without adding more aircraft. 

Management said added time and operational costs from ocean carriers diverting from use of the Suez Canal because of attacks by pro-Iranian rebels in Yemen has increased demand for aircraft. Revenue for charters provided on a short-term or trip basis grew 24% and remains strong in April, according to executives. 

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