Cargojet carries cheaper e-commerce products and excess inventory

Continued e-commerce momentum as well as businesses favoring dedicated cargo air travel due to unreliable passenger air service make Cargojet relatively immune to a potential economic downturn, Canadian carrier executives said. freight.

Cargojet (TSX: TCJ) operates an air freight network between major Canadian cities carrying shipments for Amazon, Canada Post, DHL, Purolator and UPS. It also offers fully crewed leased aircraft on international routes for dedicated customers and short-term charters.

Consumers are changing what they buy online in response to inflation, but that hasn’t slowed Cargojet’s parcel volumes. People are reducing their purchases of expensive luxury items and buying basic necessities instead, CEO Ajay Virmani said.

“It is certain that the composition of traffic has changed. For us, it doesn’t matter if you have a nice pair of Nikes or you have a bottle of oil in them, it’s cargo for us,” Virmani told analysts in a call Wednesday about the second of the season. ‘company. – quarterly results.

“Whether they want a toothbrush or toothpaste, we see a lot of these shipments that we’ve never seen in e-commerce. People don’t go out and buy this product in stores, they just know the prices and they order it and they have it delivered to their doorstep, so that convenience factor is the change that we haven’t seen in the past.

E-commerce is Cargojet’s main growth driver, particularly for the domestic network, where online sales as a percentage of overall retail sales are rapidly catching up with the United States and Europe since the pandemic.

Canada is the 10th largest market for e-commerce, with revenue of $35.5 billion in 2021, according to data firm Statista. The e-commerce market in Canada grew by 14% last year and is expected to grow by 6% annually through the middle of the decade.

Cargojet, however, is not immune to macroeconomic headwinds.

Seasonally adjusted Retail e-commerce sales in Canada fell 2.9% in May, according to the government. On an unadjusted basis, online retail sales fell 23.5% year over year to $2.7 billion, accounting for 4.9% of trade total detail. The share of e-commerce sales in total retail sales decreased by 2.5 points.

Flights within Canada represent Cargojet’s largest line of business, but efforts to diversify the business have reduced reliance on the domestic network to 35% of total revenue. E-commerce and express businesses need daily overnight flights to power their networks and have guaranteed space and weight allowances that they pay for, no matter how many packages they need to move.

Last year, Cargojet began operating two Amazon-owned 767 freighters in Canada (NASDAQ: AMZN) for the online retailer.

Toronto-based Cargojet even expects to take deep discounts on certain categories of goods and offer them online or through secondary channels to offload excess inventory. Walmart (NYSE: WMT) and target (NYSE: TGT), for example, posted weak first-quarter profits in part due to inventory overstocking as demand fell short of expectations.

“As these retailers eliminate excess inventory, we expect many of these items to float through the e-commerce channel. Additionally, despite the short-term volatility in e-commerce volumes, we remain optimistic about our view of the long-term growth cycle for online shopping. Many malls are being redeveloped for residential and commercial purposes. Those stores are gone forever,” said new chief financial officer Scott Calver.

Cargojet posted adjusted earnings before interest, taxes, depreciation and amortization of C$81.1 million ($63 million), a 20.3% gain from a year ago and slightly above market expectations. Total revenue climbed 43.3% to $192 million. During the first half, revenue and adjusted EBITDA increased by almost 25% and 45% respectively.

Domestic network revenue rose 2.7% from the first quarter despite a drop in flight hours as Cargojet was able to better fill its planes. Sequentially, earnings were weaker than the typical improvement of 5% or more, a sign that demand is beginning to subside, BMO Capital Markets said in a client note.

But Virmani said the growth in revenue and earnings is sustainable because e-commerce is so entrenched in the economy. Consumers and businesses have grown accustomed to fast delivery and will want airfreight even if supply chain disruptions are eventually eliminated, he said.

“People have learned to live with next day delivery of most things and cost is no object. … If you order something, you don’t want it sitting in transit for six days,” said explained Virmani.

“The big difference is that e-commerce is driven by small businesses as well as big brands, like Amazon, Walmart and Best Buy. This is much bigger than the last mail order cycle. The transportation winners of this cycle will be air freight for the mid-mile and trucking. That’s why we’re excited about the new economy and confident about our long-term growth strategy. »

A recent survey by PYMTS seems to reinforce Virmani’s conclusion about the changes in e-commerce. It found that more Americans were shopping online in May than in November, and a significant number of them had low incomes.

Cargojet operates 34 aircraft, including 20 Boeing 767 medium jumbo jets and 10,757 freighters. The fleet is expected to grow to 40 aircraft by the end of the year and 50 by 2025. Four pre-owned 757s are expected to be delivered in the second half after being converted to freighter configuration by Precision Aircraft Solutions. Cargojet is also investing in eight converted 777 large freighters over the next three years.

The 757s, ideal for regional routes, free up larger 767s for long-term international charter deals. On Wednesday, DHL Express announced a new dedicated cargo route from Miami to Sao Paulo operated six times a week by Cargojet.

Freight leaks from passenger airlines

Executives said shipper concerns about the reliability and consistent capacity of passenger airlines are permanently shifting more business to all-cargo carriers. Airlines and airports have been unable to bring staff back quickly enough to cope with a surge in pent-up travel demand this year, leading to widespread flight delays, cancellations and curtailments. ‘schedule.

“Major passenger airlines have been focused on fixing their passenger side of the business. Many resources that typically focus on cargo, including people, are being deployed on the passenger side to help stabilize their core business,” Virmani said. “Therefore, the freight industry is just an orphan right now with these kinds of carriers.”

He singled out Westjet, without referring to it by name, as an example of a passenger airline that is reducing its focus on cargo. Last month, Calgary-based Westjet announced it would suspend further investment in additional long-range 787 Dreamliners and concentrate the existing wide-body fleet on Western Canada.

Chief Strategy Officer James Porteous said the planned long-term leasing business – consisting of dedicated aircraft, crew, maintenance and insurance (ACMI) – benefits from a strategic shift of DHL from partial dependence on passenger aircraft to exclusive use of its own aircraft. controlled cargo ships, as well as cross-border e-commerce. DHL, for example, previously relied on commercial air transport to connect to Brazil from the United States.

Shortage of passenger airline cargo capacity – down 32% from 2019, according to consultancy Seabury – flight disruptions and increased demand for sea transport are also driving charter rentals ad hoc,” Porteous said.

Cargojet is selectively moving aircraft to take advantage of non-scheduled charter flight opportunities. The home network has plenty of daytime spare capacity as planes are only engaged for four and a half to five hours each night, depending on management.

Virmani said the company gave preference to existing customers who needed additional service due to turmoil in the general air cargo market.

“I think it solidified more relationships,” he said. “We haven’t taken advantage of the scam yet and charged them an arm and a leg because they’re stuck. I think in helping these clients, they clearly see the benefit of entrusting things to us for the longer term. »

All three business segments – Home Network, ACMI and Charter – reported double-digit revenue growth during the second quarter. High utilization rates led to dedicated and planned activity sequential growth of 14.6% to $47 million.

Regarding its own workforce, Virmani said Cargojet was short of about 20-40 people to load and unload planes, but was able to maintain 98% on-time performance by juggling shifts and increasing extra time.

Cargojet generated net income of $160.9 million in the quarter ended June 30, compared to a net loss of $11 million a year ago.

(Correction: An earlier version of this story contained a typo stating an incorrect figure for EBITDA in Canadian dollars.)

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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