Good day, and welcome to the Cargojet conference call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Ms. Pauline Dhillon. Ma'am, please begin.
Thank you very much. Good morning, everyone, and thank you for joining us on this call today. With me on the call are Ajay Virmani, our President and Chief Executive Officer, Jamie Porteous, our Chief Strategy Officer, and Sanjeev Maini, our Interim Chief Financial Officer. After opening remarks about the quarter, we will open the call for questions. I would like to point out that certain statements made on the call, such as those related 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 EBITDAR. Please refer to our most recent press release in MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP income. I will now turn the call over to Ajay.
Thank you, Pauline, and thank you everyone for joining this morning. Q3 was the summer of reopening. After a long, hard road, vaccinated Canadians were able to step out of their homes once again. We saw a gradual reopening of shopping malls, restaurants, gyms, sporting events. There's no question that there was a pent-up demand for all these services. The impact of this new freedom was clearly visible in July and August retail sales data published by Statistics Canada. One of the most interesting data points for us is new baseline of Canadians' e-commerce sales. Despite the reopening, the e-commerce sales are maintaining the new high baseline. We believe the massive digital adaptation that took place over the past year and a half has fundamentally shifted behaviors for consumers. As I noted in my last quarter remarks, hybrid is the new normal.
Be it schools, offices, and universities or shopping. People are adopting a hybrid approach to their lives. We continue to believe that shopping will move to two types of experiences. First, we'll call it joy shopping. This would include items that qualify as retail therapy, luxury goods, impulse shopping, and fun experiences. These are most likely to be enjoyed in person. Second, routine day-to-day needs. This includes household items that are needed on a regular basis, office supplies, groceries, appliances, electronics, books, back-to-school, holiday gifts, and many more. We believe consumers have discovered that they can efficiently order these items and free up time in their lives to do other things. Cargojet is very closely watching these trends and repositioning its business to continue to capture these emerging growth opportunities. Now turning to Q3 results. I'm pleased to see that our business diversification strategy is yielding strong results.
Our Q3 revenue growth of 16.8% was led by the ACMI line of business. Other lines of business, such as domestic, network, ACMI, and all-in charters, have taken turns to lead a given quarter. The adjusted EBITDA for the first nine months of 2021 stands at CAD 202.5 million, compared to CAD 194.6 million for the same period in 2020, an increase of 4%. Our balance sheet is strong, with the leverage ratio now standing at 1.0x adjusted EBITDA, compared to over 3.0x a couple of years ago. We have used our strong results to reduce debt, pay down aircraft leases, and build balance sheet capacity to fund future growth. All signs point towards monetary policy moving towards higher interest rates. Cargojet is now well positioned to navigate the next economic cycle.
This was an important priority for us, and I am pleased with our decisions and progress we have made. Business environment and macroeconomics remain strong for growth opportunities. Let me share a few observations. A much higher number of entrepreneurs are now starting online-only businesses compared to pre-COVID levels. This is visible on platforms such as Shopify and others. Traditional large retailers and big box stores have fundamentally increased the share of their online sales and are now putting new CapEx only towards online channel. Number three, new business models, such as recently announced partnership between Spotify and Shopify, will enable music artists to sell their branded merchandise on Shopify stores, will significantly expand the total addressable market for e-commerce. There are many more examples of such partnerships.
Number four, B2B is starting to behave more like B2C and is expected to contribute new growth to the overnight shipping market. Number five, the big retail giant Amazon continues to expand its offering, and according to recent media reports, it has now 46 warehouses, logistics, and delivery facilities in Canada, compared to 30 in mid-2020. This is more than 50% growth in one year. Number six, while there are early signs of hope in the domestic air travel, most experts do not expect the international air travel to return to pre-COVID levels until 2023 or maybe even 2024. This will keep the belly cargo capacity constrained for the next few years. This means the international air cargo cargo markets will remain tight and will continue to present opportunity for Cargojet.
This will also result in shipping patterns and shipping expectations to be different than what they are current as people get used to the better level of service with cargo aircraft rather than belly cargo capacities. The picture here is while there may be some short-term volatility due to pent-up demand for in-person shopping, the longer-term trends of moving on online shopping is firmly intact. On the operational side, volume growth remains strong. Average daily volume is up 22% for the first nine months of 2021 compared to the same period last year. We grew our fleet size by another aircraft, and it now stands at 31 aircraft. Our on-time performance remains at 98% plus. This is a crucial deliverable given the importance placed on this target by our customers.
While we remain disciplined in most cost and expense management, and year-to-date SG&A cost is down 5.4%. One area that remains challenging is the cost of our crews. Crew costs have been impacted by a combination of factors, including the recently implemented new pilot fatigue rules by Transport Canada that discriminate Canadian all-cargo carriers against U.S. and other international all-cargo carriers. We are also investing in pilot training to prepare for growth in our fleet, which added short-term costs to the quarter. We are focused on finding cost-effective solutions and work with all stakeholders to address this headwind over the next coming quarters. Let us also make a few observations on supply chain bottlenecks. Much has been written and talked about supply chains recently, shortage of truck drivers and congestion at shipping ports.
In addition, the return of full passenger capacity on international route is still a couple of years away. Therefore, we continue to believe that cargo international markets is a growth opportunity, and we are seeing some of these trends play out in our ACMI business as well. Cargojet is focusing to ensure that our diversification strategy remains our focus, and we intend to use future 767 and 777 deliveries for our international ACMI growth business. We are carefully investing in talent, infrastructure, facilities, and aircraft necessary to build a strong, diversified business and are beginning to see some early encouraging results. Once again, thanks for joining us this morning. We'll now open the call for questions.
All right. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is live and open. Please be sure to state your name before posing your question. Again, that is star one to ask a question. Here comes our first question.
Hi, this is Kevin Chiang from CIBC. Good morning, everybody. Hope everyone had a good weekend.
Good morning. How are you?
Good. I'm doing good, Ajay. Thank you. Maybe if I could ask, just as we think about the peak season into Q4, and if I could just focus my question on the all-in charter, I guess the sequential pattern we should be thinking. I think in the past, and if I recall last year, you had suggested that, you know, you typically devote more capacity to your domestic network to service your long-standing customers, and we typically see a or should expect a sequential decline in that all-in charter number in the fourth quarter.
Just given the Amazon CMI contract, some of the capacity you've added, if you could just maybe speak to your ability to maybe continue to take advantage of what seems to be very hot, you know, charter market today for air cargo carriers, even into the fourth quarter.
Kevin, our strategy has always been to focus on long-term views in this matter. Q4 is expected to be extremely heavy as forecasted by our customers, domestic and some ACMI customers as well. All-in charters, while it is an attractive proposition for a shorter or a short-term situation, we need to service our existing customers, and that's where our focus is. As our existing customers have a lot of extra peak demand and capacity requirement, you can certainly expect decline in all-in charters for the month of November and December, definitely.
Okay. That's helpful. I think just looking at your MD&A, it looks like you picked up another ACMI contract in August there. Congrats on that. It looks like it's a U.S. route. I just wanted to get a little bit more color or if you could provide more color on that new ACMI contract. Did your JV in the U.S. play a role here in winning that business? If you could provide some color in terms of kind of where the cargo is being flown to and from?
Yeah. We did pick up a small ACMI route, but that was on a temporary basis. That route has now been discontinued. We are in negotiations to place that aircraft on another route. I can't give you any more information that I don't have, but the bottom line is that was a short-term route and hopefully that aircraft is flying today on various routes, and we'll have some permanent answers from a customer shortly on that.
Okay. That's helpful. Then just last one from me, just if you can give us an update on the Amazon CMI integration here going into the peak season and maybe how that ebbs and flows through your domestic network.
Yeah. CMI, as you know, we fly two aircraft. They are going to be in strong demand obviously, in the coming months. We'll also complement the requirements with, you know, some ACMI flying and also on the daily network as well. All three modes, daily network, flights, ACMI and CMI, and some charters done in domestic will probably fulfill the need of all of the customers in the coming months.
Thank you. That's it for me.
All right, thank you. Again, that is star one to ask a question. If you find that your question has already been answered, you may press star two to remove yourself from the queue. Here comes our next question. Konark Gupta, your line is open to ask your question.
Okay, thank you. Good morning, everyone.
Good morning.
Maybe first question on the fleet plan. Just reading through it, looks like you've signed an LOI for 757, but the timing for delivery was not stated. Can you give us an idea what the idea here, what are these for?
We are expecting Q1 2022, two for the first plane, and then every quarter for those three planes. The idea of these triple sevens is that they would be put mostly in the domestic network to free up the 767s for ACMI and other charters and international flying.
Okay. You're cascading some of the 767 into ACMI international. Do you have kind of visibility into pipeline or where these things are where the 767 are going to be operating for? Is there more ACMI plan than a-
Well, ACMI
pipeline that you can talk about?
ACMI/international. At this stage, we can't, we are in discussions with at least two customers. We don't have exact details that we could share with you. Once they're finalized, we'll be press releasing those. There is a lot of demand for, 767 aircraft. 757 is a good aircraft for domestic. It kind of provides more nonstop domestically, improves the service on a lot of lanes. It's a strategic fit to take the 767 and put them at alternate uses where the demand is much higher and where the yields are much higher. It's a growing business for us. Fits in with our diversification strategy and puts the asset to use a little more yield wise.
Okay. Second question on the Amazon rollout of the, he CMI aircraft. I'm guessing at this point, you kind of have a good visibility into how these two aircraft are rolling into, you know, and impacting your domestic network. Would you think kind of Q4, we would see normal seasonality versus the third quarter at this point? Like, what can you tell us about,
Uh-
Yeah.
The CMI aircraft are performing well. The customers operating with us are still testing out various issues with their own logistics requirements, daily movements and all that. By no means do we expect the Q4 to reflect anything normal because the volumes are forecast and demand is gonna be so high that some of them might be doing double turns, some of them doing ACMI flight. We have the right to use those aircraft too on certain ACMI requirements that we might have. To be honest with you, I don't think Q4 will be anything like anything normal that you've seen.
If all the forecasts mature of various customers they've given us, it would be a chaotic sort of Q4 to make sure that all the demands are met for all the customers. I don't think that by any means you can expect a normal Q4 viewing of any kind of numbers or visibility.
Okay. Maybe one last just follow-up quickly. You talked about kind of the steps or initiatives you're trying to make to control costs, improve cost a little bit. You know, expenses have been growing faster than revenues.
For the last, couple of quarters at least. Is there a pricing opportunity at some point where you can start to, pass through some of these crew cost increases and others, or that's going to be a cost side improvement and not really pricing? Well, for example, as you can see, that last year and a half has been very taxing on the people of this organization in terms of workload, in terms of all the enhancements, improvements to network, a number of flights, number of aircraft. We have not increased any management for the past five to six years, actually. We need to really expand our team, number one.
We need to expand our facilities because the facilities are absolutely operating at 150% of the capacity right now. There's a lot of investment that Cargojet needs to make to continue with this growth pattern, because we don't want the system to collapse while we're growing. The cost will increase somewhat from where they are. We are watching them. We are making sure that they don't go out of proportion. Everybody understands the labor shortages that exist. W e are no different. We are competing with some of our own customers who are hiring labor and offering signing bonuses in various places.
The hardest part to find right now is labor, for example, of loading and unloading, and we have 400-500 people that strictly do that. In order to maintain them, street is offering signing bonuses, double digit increases to these people, and increase in benefits. It is a bit chaotic. It is a bit hectic. To be honest with you, we're no different than any other people in terms of cost of labor, for example.
As far as the crew costs are concerned, they're a direct result of the government legislation, as I mentioned in my call, because American cargo crews are operating at different levels, so their cost remains lower compared to ours, which puts us in an uncompetitive situation somewhat. Then we gotta find the savings somewhere else. Some of the costs, you know, our customers realize that, they're facing similar cost increases, so they sympathize with us, but we have annual contracts with them as well. The phenomenon is so new that we have not sort of floated at this time of getting these increases passed through our customers. At some point, we will definitely, after the Q4 , sit down and take a look at what's passable and what's not passable.
We, as I said, this is the new norm and we are in the same boat as our customers and the whole marketplace. This will all have to be studied to make sure that we're not absorbing all the costs. If whatever is passable, we'll definitely look at it. Okay, great. Thank you.
Thank you. Here comes our next question.
Hi, good morning. It's Walter Spracklin here. How are you doing? How are you doing, everyone?
Hi, Walter. How are you?
Good. So, when you first announced your aircraft purchases, there was a little bit of trepidation about whether there was too much capacity coming on at a time when passenger airlines were gonna bring back the belly space. But I think there's been some interesting developments since then that addresses that risk, and I was wondering if you could speak to them. First of all, you've been contracting fairly quickly the new aircraft that you're having come in and even pre-contracting them somewhat, where you got agreements either in place or about to be in place well ahead of the delivery. If you can give some thought on that.
Then the second point, where I thought was pretty interesting was DHL's facility adjacent to yours in Hamilton, four times the size of the one they had there before, suggests to me that they're aligning with dedicated freighter aircraft providers like yourself and away from belly space in the future. Would you have the same read on that?
Yeah. Just to take your last question. Yes, my read is that integrators like DHL have certainly shifted away from a lot of commercial lift into their own network of aircraft, which are providing them with much better service and competitive pricing in the marketplace. If they were using three flights from London to Toronto or London to JFK before now they're consolidating everything into one flight and using their own flights. Yes, it is a bit costly exercise for them, but also keep in mind that what they are experiencing is that the service now is much better in the marketplace and has made them a lot more competitive. Those habits are being formed.
To go back to the commercial lift and having your freight split over three or four different flights is not that attractive an option anymore. You know, once you've tried Uber, I guess you don't wanna get in a normal cab. That's the kind of trend we are seeing that not only DHL, but other customers who were using commercial belly lift and now they're chartering or they're doing ACMI. We find that the market will have a slight shift or a major shift. It might settle somewhere in the middle, but the key routes would probably, in our opinion, would stay with this ACMI rather than going back to the commercial lift.
On the contracting of your aircraft.
Yes. Cargojet, we have seven 767s lined up for the next, starting this coming January and then one aircraft every quarter roughly. We have a commitment of four 777 in 2023, and then a couple in 2024. We already have expressions of interest from at least a couple of customers on 777. As I mentioned in my call before, as far as the 777 are concerned, it's good to have options on ACMI, which is kind of a little lower margin, but no risk. That's one option. The second option is to fly commercially and take the commercial risk.
At this stage, if we were to apply those in today's market, there is no commercial risk because the pricing and yield is much better than ACMI, and we could get longer term BSA type contracts on those planes. It's nice to have those choices on those two type of aircraft. We'll obviously have to study these closer to the market. Nobody's gonna sign these aircraft 2 years in advance, but certainly there's a lot of interest. When I say a lot of, I literally mean it. As far as 767s are concerned, as you know, Cargojet has aggressive plans to start the international markets as soon as these aircraft become available. We would have a dedicated service to some strategic international points as we start getting these aircraft. There is a lot of demand.
It wouldn't be contracts like we have blocks-based agreements like, you know, longer term contracts on the international market. Certainly, with our connections in Canada, for example, we can cover all of Canada and feed into a gateway flight out of Vancouver internationally or Hamilton. It certainly gives us a great advantage in any of the international markets in this country. We are going to leverage our domestic network to feed our international flights. We already, as you know, fly a couple of flights a week into Germany. That's a perfect example of extending one of those flights into South America and having also connections to Far East through Vancouver and feeding that into the network as well.
We do have plans to expand that as we get our aircraft. Contract-wise, that we do have options to place some of these aircraft on ACMI. We might do a bit of a hybrid, which kind of protects the risk, but also, the idea is to grow the international brand of Cargojet at the same time, and the opportunity is right at this time for it.
That's great. Your block hour agreements with UPS, Purolator, and they're coming up in 2025. That's still a ways away, but you do tend to negotiate these early. Any sense of when negotiations will start and when you might have an extension on those, in-
I think, Walter, as you know, 4 years, still left on that. That's a bit early to start talking. I would say that you can expect that any discussions with these. You obviously we casually and we certainly talk about those, but any serious negotiations would not start 24 months but prior to that, please.
Okay. Just back on the crew cost highlight you mentioned, you do have within the scope of your current agreement the ability to pass on crew costs. Is that right?
Yes, we do to a certain point, you know, which we are trying, but not on all contracts.
Right. Okay. That's all my questions. Thanks very much. Great quarter.
Yeah. Thanks.
Thank you. Here comes our next question.
Hi. Thanks, operator. It's Konark Gupta from Scotiabank. Good morning, everyone.
Morning.
Morning, Ajay. Maybe I want to kind of, you know, start with domestic first. You called out, Q4 is going to be pretty strong based on what you are hearing from your customers. I wanted to confirm with you. I think Purolator came out recently saying they expect this peak season to be up 10% in terms of their packages. Is that the latest, or have you heard anything different now? Does that fully reflect what Amazon also plans to do in Canada?
Konark, just when Purolator and some of these they say they're gonna have 10% more parcels, you know, that's the information they're getting from their customers. Obviously, that's what we read and that's what we're told. But that also includes a lot of ground, as well, not just all air. There's an air component, which probably is a lot lesser than the ground component of these shipments. That's number one. Number two, yes, we are expecting the peak volumes from our customers. W e are planning for whatever capacity they have requested. W e'll see how much of it materializes. We are prepared to handle it. We cannot give you an exact as to how much of this would come.
This is kind of a very abnormal year for predicting anything. W e have no idea in terms of things are opening up a little bit. Would that mean more shopping at brick-and-mortar and less online? Or is it going to be that some of the habits that have formed over the past 18 months will continue on? As I said, in spite of heavy demand for shipping, we expect that, as I said in my remarks, a bit of a hybrid situation in terms of online shipping versus personal shopping by people. This is a very unique situation. Lockdowns are being lifted. Canada is in good shape with vaccinations, so there will be some spillover that people would like to do personal shopping.
We'll have to wait and see how, but as far as Cargojet is concerned, we are prepared if those demands mature, that we can absorb it and handle it and not let our customers down.
That's good, Konark, thanks. Perhaps talking about your one of the fastest growing customers, Amazon. Like these guys were recently saying they wanna grow their Canadian employee base by 60%. That's pretty huge, I guess. They were also kind of, I think, reportedly looking into a Boeing triple seven freighter market to get their own products from Asia directly. I think from your perspective, Amazon is obviously our domestic customer primarily. What kind of opportunities can you suggest you can explore with these guys? Can they go international with you as soon as you have triple sevens, or is it all confined to domestic or not?
No, our agreement with Amazon is shipping. It doesn't entail domestic. We have opportunities with them to grow North America and international as well, and we continue to have those discussions with them and other customers as well. Our growth strategy and our growth discussions with them are not just limited to domestic only.
Thanks. Then on the ad hoc charter, I think, like, this was a pretty strong quarter, with CAD 24 million revenue, and I think this has breached above your CAD 15 million-CAD 20 million kind of range that you were anticipating. I'm just wondering, I know you mentioned that Q4 typically is seasonally weaker than Q3 on that. But I'm just wondering how much of the recent supply chain constraints in ground and in ocean shipping has played into that strength in Q3, and how much is still continuing in Q4?
Our Q3 is definitely a great quarter from a standpoint of all in charters. If we wanted to, under normal circumstances, we would have taken probably a similar type of business in quarter four. Because of the demand for our existing customers, and also the service to the existing customers is important. As you do more charters, you get less maintenance times on the planes. We wanna make sure that quarter four reflects not only a capacity that we wanna make available to our existing customers, but also have, you know, proper time to maintain the planes to make sure that they are, especially in the cold weather, that they operate on our on-time performance that over 98%.
We have the opportunities for those charters at quarter four, which we have elected not to take in order to make sure that we take a long-term vision with our customers of servicing their needs in quarter four, which is the most important for them, and not sort of letting them down in terms of delays or in terms of service and in terms of availability of space and aircraft. That's a conscious decision made by management to make sure that the charter activity is very limited in quarter four to make sure that the demand of our customers is kept in mind.
Okay.
Basically, we don't wanna get greedy with that and sacrifice the service of our existing customers.
That makes sense. Okay, thanks. Lastly from me before I hand it over. With the recent, you know, fleet changes that you announced, and it seems like there's been a few, you know, minor push out of the 767s in terms of timing by a quarter or so, maybe perhaps that's due to parts and supply chain issues, that's happening all over. What kind of CapEx can we expect for this year and next year? Thanks.
It's Sanjeev here. We are expecting that our CapEx forecast for current year will be in the tune of CAD 240 million-CAD 250 million. Next year it will be in the range of CAD 280 million. That primarily because of the Boeing 757 which are coming up. At present, that is the level which we are expecting. It may happen that these items may delay it a bit, so the actual amount may be quite different from what we are forecasting at present.
That's great. Thanks so much. Thanks, guys.
No problem. Thank you.
Thank you. Here comes our next question.
Good morning, folks. It's Chris Murray from ATB Capital Markets. My first question is really around labor, and specifically pilot labor. Just wondering how you guys are finding the availability of pilots and crews. The second part of this is thinking about, you know, some of the comments from some of the U.S. carriers about shortages down in the U.S. Does that create an additional opportunity for you on ACMI to be able to take Canadian crews and operate through your joint venture?
No. Actually, the pilot situation and the labor situation is such that specifically that although you read a lot of pilots are out of work, but to be honest with you, as you notice, a lot of flights by Canadian carriers are being canceled because of lack of crews. When you hire a pilot, you're looking at three to four months before they're inducted to flying after training and line checks, so it takes a while. While there is a lot of pilots unemployed, yet there is a shortage of pilots on the other hand. We're facing that. We hired a number of pilots from passenger airlines, and some of them are deciding to go back to passenger airlines. Yes, there is a shortage in real numbers when it comes to pilot.
As far as the opportunities being granted by our affiliates in 21 Air, they have four aircraft now operating. To be honest with you, their hands are full with their own customers. While there would be opportunities in the future that they plan to grow their business, we can certainly pass on some of the business that we can't handle to them, provided they can handle under their licensing requirements, we can handle our licensing arrangements. Strictly at this stage, they don't have the capacity to do it. Those opportunities are pilot-driven somewhat, but they're also aircraft-driven. Right now, both are in short supply. There's no aircraft, and there's not enough pilots.
That's why you're seeing the demand and the pricing so high on that market because of those two factors.
Okay, fair enough. That kind of brings me around to my next question, is that you do have, I believe, your first 767 or seven six seven coming in in December. What's the intent for that one aircraft? We're pretty close to it now. Is that, gonna get used in the domestic market, maybe for maintenance spares relief? Or do you have an ACMI contract that you think that you'll be able to place it with immediately?
Jamie?
Hey, Chris, it's Jamie. No, that aircraft that'll be delivered at the end of December really is going to become a maintenance spare. It replaces aircraft that we took out of the fleet to take on previous new ACMI commitments earlier this year.
Okay. Along those lines, should we be thinking that there'll be a step up of maintenance costs? I know you did call it out a little bit, it isn't that big so far, but should we be thinking about higher maintenance costs as we go into 2022?
Maintenance cost at present is in the range of CAD 80 million-CAD 90 million. As a new aircraft comes in in our fleet, definitely, as we said in our earlier, we expect CAD 3 million expense for each aircraft which is added to the fleet. Next year, probably if three to four aircraft comes, it will be in the tune of CAD 90 million.
Okay, that's helpful. Thanks, folks. I'll turn it over the line.
Thanks, Chris.
Thank you. Here comes our next question.
Hi, it's Matt Lee from Canaccord Genuity. I just wanted to kinda ask, in terms of B2B and B2C revenues, can you kinda talk about the trends you're seeing in each segment? P robably fair to assume that your B2C revenue growth has kinda slowed down a bit and maybe B2B is accelerating.
Yeah. Good morning, Matt. No, yeah, I would agree. I mean, definitely during the quarter, as Ajay articulated in his opening remarks, w e saw softening of the B2C volumes, probably related to the reopening of the economies and people being able to get out to bricks and mortar stores. I know I've said to you before, it's a little bit difficult for us to have direct visibility to what's B2B and what's B2C with our customers because, you know, the vast majority, with the exception of, perhaps Amazon, obviously being strictly in the B2C space, the others all participate in both, and we don't have direct visibility to, which portion of Purolator's volume that they're giving us is B2B or B2C.
Certainly, the B2C portion of it's growing at a much more accelerated pace with each of them.
Great. Then maybe, on the fuel side, margins on fuel remain, in the mid-teens%. I know that historically has been kind of closer to 20%. Is that because of the, you know, volume-based fee model? Is there any chance that margin shrinks going to Q4 given the price of WTI right now?
Yeah. I mean, the fuel, our fuel surcharge recovery is based on weight. Typically, you would see during a quarter when we have heavier volume, if fuel prices are going up, our fuel surcharge goes up accordingly, and the revenue that we collect as a fuel surcharge goes up again proportionately if it's during a season like Q4, where the weights are higher. You should expect to see higher fuel surcharge revenue in Q4.
Oh, in terms of margin, in terms of fuel revenue versus fuel cost.
Revenue versus fuel cost is, like as we have said earlier, right? Our fuel surcharge is dependent on volume. Whereas actual fuel cost is what we are priced for. Since volumes goes up in different quarters, our fuel surcharge revenue will always surpass our fuel cost.
Okay, thanks. That's it for me.
Thank you.
Thanks, Matthew.
Here comes our next question.
Good morning. It's Cameron Doerksen from National Bank Financial.
All right. Good morning.
I just wanna come back to the CapEx question. Again, you mentioned 2022 expectations of around CAD 280 million. Are you including, I guess, any initial CapEx related to the triple sevens in that number, or is that more gonna be concentrated into 2023?
Triple Seven mostly will come in 2023. Maybe initial deposits will flow in 2022.
Okay. Just a second, quick question coming back to the questions around crew costs and pilots. I know that, some of the pilots maybe you've hired in the last couple of years here were, maybe on kinda leave from some of the major airlines. Are you seeing some of those pilots kinda go back as they get recalled, and is that impacting your ability to find enough pilots? Are there any issues around that?
Yes, some of them are going back. Some of them are staying. We are attracting a lot of pilots from overseas. You know, expats who left 10, 15 years ago and have kids now, they wanna come back to Canada. Places like Emirates, Etihad, Cathay Pacific, Korean Air. A lot of Canadian pilots work with those kind of airlines, Qatar Airways. We are attracting a lot of that crowd, people who want to return to Canada. In some way, yes, you know, we are facing some kind of pressure on that side, and we are continuing to hire people to make up for that. One of the reasons that crew costs go higher is obviously because of the overtime being offered to keep up with the demand at the same time.
Even if there's not a month go by where we are not hiring 15, 20 pilots. S ome of them do continue to go back, but that's the way the whole industry works, right? As far as the operations are concerned, we are managing to make sure that our operations certainly is keeping up with the demand.
Okay. All right. No, that's helpful. That was all I had. Thanks very much.
Okay, thank you. Here comes our next question.
Hi. Good morning. It's Nauman from Laurentian Bank.
Good morning.
Going back to the labor shortage question, I was just wondering if you could provide some color around how big a compensation difference is between what you guys pay or what a typical commercial airline would pay?
In terms, I mean, the two big labor groups of pilots, we would be comparable to, what a commercial airline like Air Canada Rouge particularly would pay. In terms of warehouse and ramp staff or entry-level jobs, we would be comparable to what anybody else in the industry, in that service industry would be paying, whether it's Purolator, whether it's Amazon, whether it's Canada Post or trucking companies for that matter, any general warehousing companies. You know, they've gone up significantly because of a labor shortage in the last couple years, particularly related to COVID-19. E ntry-level salaries are probably higher than CAD 20 an hour in most cases, including benefits.
Okay, that's fair. Any reason that some of the pilots want to go back to the commercial airlines even though you guys still are at par with the compensation front?
Well, it's a type of flying. A majority of the people go back for various reasons. That could be they wanna fly passengers, they don't wanna fly cargo. A lot of cargo flying is at night. So there's certain pilots who prefer night flying and they don't mind flying cargo. There are certain pilots who don't like flying cargo and they wanna stay only on the passenger side of things. It's a personal preference. Really no reason why to go back except that they prefer that kind of flying. Cargo pilots who've been with us for 25 years, and they'll never go back to passenger side of things.
Okay. No, that's good. Good, good. Thank you. Just one last one from my end. You've mentioned that pricing in the Canadian market, you guys are at a disadvantage with the U.S. or other players. You've mentioned that with Amazon, you can actually grow with them, not just domestically, but in North America as well. I'm just wondering if you guys have engaged the policymakers or if there is any conversation you're having with them around this competitive disadvantage that you guys are and maybe down the line that can get changed.
We are always hopeful that at somewhere along the line when, you know, when the pricing becomes too high if these prices get passed on to the consumers, you know, when things get a little bit, you know, the shipping costs are factored into, cost of living, you know, it would certainly impact the Canadian consumers. The second part is, yes, we have engaged with the regulators for the past three to four years, and unfortunately, they decided to follow their own approach and not look at what happened in the international markets and U.S. markets, and hoping that someday they will realize that Canadian cargo carriers will lose market share and lose their competitive edge.
Again, it's one of those things that, yes, there is an increased cost. There is increased awareness. We have constantly pointed out to all stakeholders about the situation, and I think the idea for us is to work with all of them. We're open to working with all of them to prove a case that, look, I mean, we have to, number one, operate safely and number two, we have to be competitive. I think at some stage, all parties will come together and look at this as a common cause rather than just a Cargojet cause.
Okay. That's it for me. Thank you. All right. Thank you. Here comes our next question.
Thanks. Good morning, everyone. It's Tim James here from TD Securities. I'm just wondering if you could sort of give us an updated sort of long-term view of the margin potential for Cargojet, and specifically the kind of key factors that will be biasing it both lower and higher. I mean, the volume outlook, given e-commerce trends and the success you're having with customers, obviously very positive. I'm just interested more specifically on things like as belly capacity comes back, if that has much of a margin impact, other factors, you're changing product mix, moving international. If you can just kind of talk about the key considerations that we should think about on the margin profile of the business longer term.
Good morning, Tim. It's Jamie. I think if you looked at, the three segments of our business, obviously on the domestic, I think, margins are gonna be driven by continued strong growth of e-commerce, particularly as we get into 2022 and 2023. The ACMI business remaining very strong and margins will continue, pretty steady margins and high margins on that, as you're aware, on that business. Obviously as you know, as indicated by the fleet plans that we have over the next several years, we're very confident that we're gonna be able to take advantage of entering into numerous new ACMI agreements with customers that'll keep those margins at the levels that we've historically been able to experience over the, particularly over the last couple of years.
Then again, the ad hoc charter margin, we still, you know, other than, AJ's comments about Q4, we slowed down a little bit just to protect our domestic business and our strong domestic demand and strong ACMI demand in the peak season. It's not because of a lack of demand globally for ad hoc or international scheduled services. As we add more aircraft, we'll again take advantage of growing that sector of the business and improving those margins. I think overall, if you looked out the next two to three years, you should expect to see continued growth of, or at least sustained and growth of the existing margins on each segments of our business.
That's great. That's the only question I had. Thank you very much.
Thanks, Tim.
Thank you. Here comes our next question.
Hey, everyone. It's David Ocampo from Cormark Securities Inc. I just wanted to follow up on Tim's question about the margin profile going forward. I'm just curious, you know, when you take a look at your margins from when the Canada Post contract was first negotiated, you're kind of in that 20%-30% range, and now you're in kind of high 30% or low 40% margins. Do you expect to have to give some of that back in negotiations? Because I know you mentioned that you're not gonna get into discussions until 24 months out, but I imagine that's gonna be a main point of contention as you enter into those contracts.
Yeah, no, that's a good question, David. I mean, obviously, always in negotiations with any customer when it comes to pricing, the discussions are sensitive. C ertainly the margin increase that we've been able to gain on the domestic business that you're talking about, is primarily related to the growth of, all of our customers' business and the different service levels that we've been able to offer as we've grown from, primarily a business day, Monday to Thursday, with a limited schedule on Friday to more seven days a week, which we'll continue to do.
I think e-commerce, you know, is gonna continue to drive demands for that, not just from Amazon, but as other retailers increase their, and improve their online platforms here in Canada, it's gonna drive additional demand for volume seven days a week and not just overnight, daytime flights, particularly during peak season. I don't anticipate that you should see any dilution in those margins going forward. I think the, you know, the pricing when it comes to renewing any of our major agreements, obviously that's a sensitive discussion that we'll have, but we also provide, significant value to our customers in terms of on-time performance and reliability that shouldn't be forgotten.
That's perfect. Just a quick follow-up on the pilot cost differential between you and international peers. Do you have an order of magnitude on how much that's impacting you, whether it's 20% or 30% up? We don't have, like, we haven't given any guidance on what that total impact is. As you can see, our hourly cost of pilots is substantially up, and that's all due to , that's not only for domestic but all of our operations. When you look at the cost increase of that magnitude, from what it would have been, that will give you an idea of the differential between us and the international and U.S. carriers.
Okay. That's it for me. Thanks, guys. Thank you. Speakers at this time, we have no questions in the queue.
Thank you everybody for joining. We appreciate it, and we look forward to talking to you in the next quarter. Have a great holiday season, everybody.
Thank you, ladies and gentlemen. This concludes today's call, and thank you for your participation. You may now disconnect.