Good morning, ladies and gentlemen. Welcome to the Cargojet's fourth quarter year-end results conference call. I would like to turn the meeting over to Pauline Dhillon. Please go ahead, Ms. Dhillon.
Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. On the call are Ajay Virmani, President and Chief Executive Officer, Jamie Porteous, Chief Commercial Officer, and John Kim, Chief Financial Officer. After opening remarks by Ajay and Jamie, we will open the lines for questions. At this point, I'd like to point out that certain statements 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 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 turn the call over to Ajay for his comments.
Thank you, Pauline, and thank you everyone for joining us this morning on the Cargojet conference call. I'm very pleased to report another successful peak season delivered by a Cargojet team with record volumes and an on-time solid performance. We delivered a strong quarter with 9.2% revenue growth excluding fuel surcharges, improved our margins, and grew adjusted EBITDA by 17.4% over last year. As I mentioned before, we are focused on growing each segment of our business, be it overnight work, overnight network, ACMI, or charters. We believe there are growth opportunities in each of our segments, and fourth quarter is a clear example of our diversification strategy in action that I mentioned in our previous conference call. Despite softness in the interline business from various international countries, e-commerce remained very strong and quarter four results show that. Jamie will make more comments on this right after myself.
We continue to see a strong shift in shopping patterns. One-day Prime by Amazon has been a great game changer for the e-commerce industry as other retailers play catch up. Online shopping has now moved to a seven-day-a-week shopping pattern and is now allowing us to maximize asset utilization and improve margins. Canada still lags behind U.S. and the international world out there on e-commerce shopping as a percentage of total sales. There is plenty of opportunity for Canada to grow within the e-commerce space in the coming years. Peak season growth means tremendous focus on delivery and on-time performance, with focus on quality and safety, especially when the weather is very bad. Our maintenance team works extremely hard to make sure that our fleet remains in top form.
Once again, I'm pleased to report that quarter four, our on-time performance exceeded our contractual commitments and was over 98%. This is a key metric for our customers because they have built their first and last mile networks that rely on our ability to meet our commitments. We are developing a culture of continuous improvement. This means managing our costs and cash flow prudently with an eye towards strengthening the balance sheet. As I look back at 2019, it has been a transformational year for Cargojet. We delivered a solid 10% growth in overall revenues, excluding fuel surcharges. This growth was achieved through a strong overnight business while strengthening our ACMI, that posted a growth of 44% over full year. We entered into strategic relationships to build long-term growth.
We redeemed our debentures early to further strengthen our balance sheet, and we invested in the business to lay a solid foundation for coming years. I am as excited about Cargojet's future as I was when we first started the business 20 years ago. Once again, thanks for joining us this morning. We will continue to build our business in all segments. Diversification of new business lines and other opportunities will be key for us. Now I will ask Jamie to share his thoughts on our fourth quarter revenue advantage.
Thanks, Ajay. Good morning, everyone. Q4 continued to see tremendous growth in e-commerce demand on our overnight network, both directly from retailers such as Amazon and indirectly from the integrators and legacy couriers that participate in the e-commerce space in Canada. We also saw the continued growth and expansion of our higher margin dedicated ACMI business with the addition of our sixth route, which began at the beginning of the quarter. This revenue growth was partially offset by declines in domestic overnight network volumes outside the e-commerce space and to lower overall air cargo demand globally as a result of continuing international trade challenges and lower economic activity. More recently, the impact of the coronavirus, especially on volumes out of Asia. We saw this reflected in the reduced demand for our scheduled international and ad hoc charter services and to lower interline revenues during the quarter.
As Ajay mentioned, we were proactive in reducing and suspending some of our scheduled international routes to Cologne and South America in the third quarter as a result of this lower demand. The reduction in operating expenses were reflected in the overall margin improvements shown in Q4. As Ajay also noted, we operated a very successful peak period in 2019 with record volumes and record on-time performance achieved on our overnight network. Average domestic network revenue per operating day increased 4.2% from the previous year. E-commerce continues to be the driving force in our overnight network growth. We continue to operate our Sunday night flights during Q4 and operated additional dedicated charters during the period to meet this growing demand.
E-commerce will continue to provide tremendous growth opportunities in 2020 as online retail sales continue to grow in Canada, and we plan on continuing to capitalize on this growth by offering value-added services on our domestic network and by continuing to grow our ACMI revenues and charter business. Thank you, and I'll now turn the call back over to the operator for any questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you need to speak phone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. To cancel the question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. The first question is from David Ocampo from Cormark Securities. Please go ahead.
Good morning, everyone.
Morning, David.
Hi, Ajay, you touched on this in your opening remarks, on the flying you're doing outside your traditional core market, how are the discussions with your customers progressing? I imagine Amazon is extremely receptive, how large can this be? Are we thinking kind of a daily flight on all days of the week?
I think one of the things, David, is that what is the core market for us? The core market, at this stage, does not mean just overnight. Core for us, we used to use that because that was the only line of business we had. Now we have diversified and, as you look at our charter business, our ACMI business, and every one of them, when you're doing one-third of your business in other markets, they all become core to us. I want to clear that misconception that we are focused on every line of business, and every line of business is core for us. As far as Amazon is concerned, they've been a customer for since 2015. We do some special charter flights for them on certain, for example, peak period or whether it's Prime Day sale or any events, back to school sale.
Also, they are a big customer on the overnight as well. They kind of come into two, if you want to call every business core business, they come into core charter business, and they come into the core overnight business as well. They're still growing. E-commerce is growing tremendously fast in this country, trying to catch up with the rest of the world, and we continue to service them in all areas.
Are your other customers, apart from Amazon, are they interested in the daytime flights as well?
You know what? Right now, daytime flights. We do operate a daytime flight to Western Canada for our other customers. What we operate for Amazon is they're two separate flights. At the end of the day, if there is space left over, we would definitely market it to other customers, which means extra revenue for us, and we could lower Amazon's cost if we can push through space. It's kind of a win-win. We haven't had that situation yet because when we do the charters, they're pretty full.
Okay, that makes sense. On the new hours of service rules for pilots, the costs are going to increase this year. Do you guys have a sense on how much pricing will increase from this initiative in 2020?
Well, we are gone to all of our customers and implemented a pilot fatigue surcharge. Most of them have been implemented. There is a couple of them in terms of when people give you increases, they want to make sure that they come and they have some audit rights in terms of looking at if you're asking a pilot when a cost up by CAD 5 million and we want to spread it among the customer base. One of the few customers are kind of done their due diligence. They're looking at our numbers, and we expect those to be sorted out in the next 30 days. Cost increases by customers are never easy, but I think the good part of this cost increase is that everybody's aware of the safety issues regarding pilots, why this surcharge is going in.
At the end of the day, everybody also knows that there's a big pilot shortage in the country. Basically, we will recover all of our costs. It's a matter of a month or so that once the due diligence by a couple of our customers is over, we should be in good shape.
Is the right way to think about this is you're going to get your traditional cost inflation on your contracts plus say another 2%, 3%?
Yes. They are independent of this surcharge.
Okay. That's all for me. I'll hand the call over.
Thank you. The next question is from Kevin Chiang from CIBC. Please go ahead.
Hi. Thanks for taking my question here. If I were to follow on that last question from David. If I look at your margin expansion on the EBITDA line and accounting for, I know, some IFRS 16 noise, you're up about 180 basis points if my math is correct year-over-year in 2019. Despite some of those pilot fatigue costs you would've incurred. When I think of 2020, should I think of margin expansion being greater than that, as you mentioned, you implement some of these surcharges or is the run rate we've seen this year kind of a good run rate over the next, I don't know, year or two?
Well, Kevin, as you know, the margins are very important. We had some routes that we were flying, like Bogota, Lima, which kind of was a strategy that we wanted to go forward and expand in that area. Unfortunately, because of the international trade down from China, the connectivity to Bogota, Lima was lower. Our margins fell lower. We took that flight out and took that plane and put it into a higher margin ACMI business. The focus is certainly on improving margins for us, which we have shown, and that was one of the reasons we did what we did. Any opportunities that we get, we try to increase our margins.
Now, with recovery of the pilot fatigue surcharge, because some of it's staged over certain months, once it fully comes into effect with the customers, you can certainly expect to see a fairly decent margin increase in the overall.
Okay. That's helpful. Then I did notice your fleet schedule is up one for 2020 to 2022 versus your Q3 MD&A. It looks like all the CapEx, though, was spent in last year. If I look at your CapEx into 2020, can you remind me what we should be thinking in terms of what that number looks like even with the adjustment to the fleet schedule?
Yeah, we're trying to cap at between CAD 100 million to CAD 110 million. Probably CAD 100 million will make me happier. Just keep in mind that we bought an aircraft 767-300, which we got at a very good deal from Air Canada. We were going to part this aircraft for parts. That was our strategy. When we looked at all of our aircraft have been deployed, so that means that left us with no aircraft for charter opportunities and expansion of new routes. We decided to convert that aircraft into cargo rather than part it for parts because the aircraft are in short supply today as south of the border companies for Amazon keeps grabbing up anything that comes for sale.
We said, "Okay, we're not going to cut this up for parts, but let's convert it to cargo, and have an aircraft ready for growth charters." I can easily say that right now, when the China market reopens, there is going to be a tremendous demand for cargo that has been backlogged over there for months to be shipped. We are already getting so many inquiries about, would you be able to do two flights a week to China or three flights a week to China? We sincerely hope that aircraft is ready for us, is ready to go and take advantage of the strategic opportunities in the marketplace. Our experience has been, Kevin, every time we call an aircraft a spare aircraft, we end up finding a route.
I mean, that is the nice problem to have, that you always find work for that spare aircraft, and that spare is not spare anymore. We're getting this aircraft converted. It wasn't in our plans, but we felt that if we don't go out and convert this, our growth and our plans and our opportunities can be very limited, especially when we turn down charters. What happens is that next time people call other people. We are being proactive in this expansion of one more aircraft at this time.
That's helpful. Maybe just last one for me. Jamie, you mentioned you're seeing some impact from the coronavirus, I suspect, in your first quarter interline and maybe some of your charter business there. If I think of your domestic network revenue now, it sounds like e-commerce, given the tailwinds there, you're probably offsetting any interline weakness with e-commerce volume. You're kind of net neutral. You're all in charter revenue. You've kind of shrunk that given what you've been seeing in the market over the past year. Is the coronavirus something that we should be anticipating being a headwind to earnings that we'll see in the next quarter or two, or is that something you can offset?
As Ajay mentioned, if you have all this backed up volume from Asia coming in the back half of the year, is that over and above kind of a normal run rate revenue you can get on an annual basis?
Jamie, go ahead.
Yeah, Kevin, I think as you're aware, the interline volume as a percentage of overall revenue on our domestic is not great. It was already low because of low international global air cargo demand that we were seeing in 2019. It's just being compounded a little more by the coronavirus as we go into 2020, just when we thought it was coming back a little bit. That's far being overshadowed by significant continued e-commerce growth.
The charter business for the rest of the world and ACMI as well.
Correct.
Okay. That's it for me. Thank you for taking my questions.
Thanks, Kevin.
Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Thanks very much. Good morning, everyone.
Good morning, Walter.
On the volume side, when we thought e-commerce, we kind of lumped it into your overnight cargo, but Ajay, you were kind of indicating that some of that will now go into your all-in charter revenue, and that certainly came in higher than we expected.
N o, Walter, just to clarify.
Yeah.
Any charters that we do on the domestic network for customers, let's say in peak, that comes through domestic revenues.
Okay, that goes into the overnight, even though it.
Yeah. Which we call the domestic.
The domestic.
Yeah.
Got it. Okay. That makes sense. When we look at your breakdown, the all-in charter has been down year-over-year, due to some of the movement as you'd mentioned. You indicated in your prepared remarks that you expect every category to grow this year. Am I reading that the all-in charter revenue component is likely or expected to be up in 2020? Is that right?
There's two reasons why some of this charter business was down in 2019 because of the global trade disputes, and secondly, now, as we were seeing the recovery, as the trade disputes were settled or were being settled or close to settled, we saw the coronavirus sort of hit that market. We have already, as I said, had many calls to say, "Can you give us three, four flights a week into China in a couple of weeks when this thing opens up or in a month?" We know that the demand is going to be very heavy for that kind of flights. You asked a question, can you expect a growth on all segments of our business?
Yeah, we expect certainly that the charter business, especially after the cleanup of the coronavirus and the global trade deals being penned, because they will, at some stage, have to sign a global trade deal, whether it's China-US or India-US or those are all pending deals, and eventually they will get signed. We expect that the business will come back to normal when those are done, and that will be our mostly interline business first, and then the charter business second. In case of our growth for overnight business or domestic business, let's call it, yes, e-commerce is growing. We certainly expect a growth of that particular business for sure because countries still behind U.S. and other countries by at least double-digits growth is expected over the next five years in the e-commerce. We expect that segment to grow as well.
The third segment is the ACMI segment. As I said, every time we get a spare aircraft, it's gone to an ACMI route. We continually keep talking to our customers and because of the service we provide and the flexibility, we continue to find routes that are ACMI routes that are profitable and we can do those. I expect that we will continue to monitor that situation. I don't have a route that I can announce today, but as any company would do, we continue to look for those opportunities and when we look for certain opportunities, majority of the time we find them. I guess, in other words, we expect all lines of business to grow.
Okay.
Walter, it's John. Just keep in mind, we still had Bogota and Lima, those all-in charters in the first couple of quarters and part of the third quarter last year. That revenue stream won't be there at least for the first two quarters of this year. You'll still see that variance.
Probably, we'll see a negative trend in the first half, and then assuming all these other issues are gone by the first half ended, we should see growth in the back half on the all-in charter side.
Yeah, that's what I would say.
We expect actually, when global trade improves, we expect Bogota, Lima to come back up as well because traffic flows all over the world improves when these trade deals are done. If the demand comes back like it used to be two years ago, we could be back in that business as well.
Okay. On the domestic side, you had very strong growth last year, up 11%, and it kind of moderated this year, and even here in peak, up four, just over 4% for a total of 2.5% roughly for the year. Obviously e-commerce is a big driver, but largely being offset by some of the declines we're seeing in the domestic business related to those other issues. As we look out to next year, is it more likely we'll see a growth rate similar to 2019 or again, assuming some of the recovery and some of the other issues and the indirect impact that'll have on domestic, could we see closer to your 2018 run rate?
We certainly expect that the growth of 2020 would be closer to 2019, but one of the biggest drivers in our domestic overnight business was also the interline business that we got from many international carriers moving domestically. If we maintain what we got on e-commerce and add on the interline stuff, as we said, the world situation stabilizes, you could go back to 2018 type of growth definitely. It also depends on how quickly Right now the trade is so restrictive even before the coronavirus, and now it's gone down to almost a halt. The interline business is kind of our gravy freight that moves on unutilized sectors and becoming higher margin. Higher revenue.
That part, when it comes back, along with the e-commerce growth, I think you can certainly expect that the revenues would go up and the growth could go up to the 2017, 2018 level.
Probably more prudent at this point to split the difference and call it mid-single digit rather than.
Yes. It could take a few months for it to come back.
Yeah.
We totally expect that the trade, once it gets normal, will make a big difference.
Fair enough. That's all my questions. Thanks very much for your time.
Walter, just to highlight that, this is part of the reason about a year and a half ago, we got on the strategy of diversifying, but just overnight into ACMI, and charters, and others, so that we reduce the dependence of one particular sectors in a big major way and move to other lines of businesses. That's paying off dividends for us, as you can see from growth on the other areas.
Makes sense. Okay.
Walter, it's Jamie. Just to add to Ajay's comments, the other thing that was fairly significant that we saw, certainly in the last half of 2019 was, and I know we don't report individual customers' revenues, obviously, but there's certainly a difference between e-commerce revenue that we get directly from retailers or indirectly from sort of those legacy couriers that participate in the e-commerce space and some of those that don't. The ones that don't participate in the e-commerce space, we're certainly seeing a softening of their volumes overall on the domestic side.
Yeah. Okay. Thank you very much.
Thank you. The next question is from Konark Gupta from Scotiabank. Go ahead.
Thanks, and good morning, everyone.
Morning, Konark.
Yeah, just wanted to get some more context on the 4% volume growth in Q4, especially because some of your top customers were calling out very significant double-digit volume growth in the peak season. I understand, obviously, there's softness in international and some non-e-commerce domestic. Can you throw around some numbers or can at least help us understand how the e-commerce from these core customers shaped out compared to other guys?
Yeah. Jamie, go ahead.
Yeah, Konark, I can give you in terms of our overall, as you know, we don't report individual customers' volumes, but on the interline side and on the general cargo business, I would estimate we have 25%-30% reductions in volumes year-over-year as a result of all of the impact of various factors that Ajay and I mentioned earlier. Certainly, the e-commerce growth, we saw significant double-digit growth both directly from retailers, indirectly from, again, from those legacy carriers that participate in the e-commerce space, where we saw sort of single-digit declines in overall demand from sort of just the general courier business.
Okay. No, that's very helpful, Jamie. Secondly, DHL, that's your sort of biggest, I guess, maybe, the ACMI customer there. They are investing heavily at Hamilton Airport. I think they are expecting double-digit volume growth in cross-border. I know you got six ACMI routes so far, what are the conversations like and the opportunities in the year ahead in terms of ACMI routes, and would you need more aircraft to support that growth?
Well, we're certainly getting one 767-300 ready, which will help us do charters, or if there's a new route that comes available. We are certainly very top-performing for DHL. They certainly like us, they want to expand the relationship with us. Keep in mind, we are somewhat limited with our licensing that we can fly transborder flights, or we can fly from U.S. to other countries. We cannot do intra-U.S. at this stage because we are not licensed to fly in the U.S. as a U.S. carrier. Whatever opportunities from U.S. to international come up, we get the first call. As they expand their business, we certainly have been expanding with them. We certainly expect that we are on the top of the list to get expansion opportunities with DHL because of their service record and with our relationships.
As I said, we don't have any specific routes or discussions with them, but we are talking to them on weekly or monthly basis about opportunities and improving how we can help them save some money on certain routes and fly certain ways. We will definitely continue to follow them, and we've also been talking to other customers about expanding our ACMI business as well. That's a key thing for us.
Okay. That's great. Thanks, Ajay. On the 767-300, that I think Kevin had a question on that. You added or you firmed up the LOI that you signed last year that's coming from Air Canada. Is that for domestic weekday flights, or is that for some other aspect?
Well, first of all, it will act as a spare aircraft because we have spare aircraft, 767-200, which is kind of short. First, it would act as a spare aircraft for our network. Second part of it will be used for charters. Third part of it is, the day we sign up an ACMI business, it'll be gone, and then we'll look for another spare. That's been our routine for the past three to four years, that we go, we need a spare aircraft, and the next thing you know is we have sold that spare aircraft for a route. That's exactly what I anticipate. If the history is any indication, it will certainly be the same route. We have enough aircraft for our nightly business because remember, we can also rotate those aircraft for day flights.
This particular aircraft is not marked for domestic because we have enough capacity, and we can rotate the existing aircraft. This is spare aircraft first, charter aircraft on ad hoc second, and number three, if you get an opportunity to plug it into an ACMI route, this aircraft is gone as well.
Okay. That's perfect. Then I think, John, you talked about CapEx numbers for this year and Ajay as well, I just wanted to understand how do you think about the split between maintenance and growth CapEx? How much of that CAD 100 million, CAD 210 million CapEx is coming from aircraft additions this year?
Konark, I think this year we're looking at roughly CAD 50 million-CAD 55 million of maintenance CapEx, and the rest is growth. In terms of that additional aircraft, and we're getting three aircraft deliveries today or this year. The first 767-200 came in about two weeks ago. We're getting another 767-200 out of conversion probably by the end of March or middle of April. The 767-300 is scheduled to come out of conversion, say, September or October. Altogether, we're looking at, say, CAD 50 million of growth CapEx, CAD 50 million of maintenance CapEx. Those are pretty broad figures in terms of our current plan.
Okay, that's perfect. Then lastly for me, on the number of operating days, obviously, we have one extra day this year, right? If you can help us understand what you think about the number of operating days, and do you plan to update the definition now that e-commerce is expanding? I think it's still Monday to Thursday, largely speaking.
Yeah, you're right. There is one extra operating day this year, I think because of the leap year. In terms of changing the definition of operating day, I'm a little hesitant to do that only because it serves as sort of a good reference point to do comparisons to previous years. If we did, I think it's probably more useful, and look, I'll ask you and the other analysts whether it's more useful for us to change that definition. I think right now it serves a really good purpose in terms of showing relative performance and revenue growth year-over-year.
Okay. That makes sense. Perfect. Thanks a lot. That's all my questions. Thank you.
Thank you. Your next question is from Mona Nazir from Laurentian Bank. Please go ahead.
Good morning, and thank you for taking my questions.
Morning, Mona.
Morning. This was just a clarification. If I'm looking at the quarter and I see the 27% increase in G&A costs, is that primarily from the initiative that you had taken around the new fatigue regulation? Would that be correct?
No, Mona. The G&A, I think we have quite a large variance coming out of the warrant deal with Amazon.
Okay.
Right. The way you do the accounting.
Yeah, the net was six. Is that correct if I'm reading that in the MD&A?
Yeah.
On page 19. Yeah.
Right. We break down the components of SG&A, but the costs associated with the pilots, that's all in direct costs.
Okay. If I'm just going back to Ajay's comments on the majority of the uptick from new fatigue regulation has been passed through at this point. Is that correct?
Well, majority of it has been passed through, and a couple of them are in the process of being audited to make sure the costs are right, and so that due diligence is happening, and it should be. Our policy is that this is a cost through the pass-through regulation, and it has to be shared with every customer with no exceptions.
Okay.
Once we go through the due diligence, we don't anticipate any issues with it.
Okay. I think just going through the last call transcript, there was one or two major customers remaining. That would likely be the same at this point.
Yes.
Okay, perfect. My second question is, looking at the overall demand, you touched on it in your prepared remarks. You just provided some numbers in regard to quantifying the reduction of interline cargo and courier, which I found very helpful. I'm just wondering, looking at the overall freight data continued to be very weak for the month of January and the ongoing coronavirus, what are you seeing for 2020 at this point? If you look at Q1 and Q2, is it looking like these declines might stick, or do you feel that the situation's improving?
Jamie?
I think you would expect that we would continue to see similar results in terms of volumes that we saw in the latter end of Q4 going into the first quarter of 2020 and going forward.
Lastly for me, this is just more of a housekeeping item, but I am just wondering what adjusted EPS would be. I just saw a number of one-time items in the MD&A. Some of that is included in the SG&A and some is in the other line, including the fair value of adjustment for the warrant and FX. If you could, we could take it off warrant as well.
Yeah, no, I think one of the probably the adjustments I expect everyone's making is any gain or loss on the warrant liability.
I think that can swing in a quarter by CAD 10 million pre-tax. I think that's probably the only significant adjustment I would make.
Okay. Thank you.
Thank you. The next question is from Doug Taylor from Canaccord Genuity. Please go ahead.
Yeah. Thank you. Good morning, everyone.
I just want to pick up the line of questioning related to the seven-day-a-week shipping. You ran that through peak season. Can you talk about how many days a week you're running presently, and then the conversations you're having about returning to seven-day-a-week shipping this year at some point, or permanently?
Jamie?
Good morning, Doug. In 2020, we've continued to operate our We added a second Sunday flight in the late third quarter, early fourth quarter of 2020, and those two flights on weekends from Hamilton to Western Canada continue, and we plan on continuing those throughout 2020. Whether we add a Saturday flight or whether we add additional morning flights will be dependent on volume, I fully anticipate that we'll be operating, we say seven days a week. I'm not sure Saturday will be there until some of the online retailers have sufficient final mile delivery capabilities on a Sunday at points in Western Canada. We'll definitely continue with, at minimum, the two flights on Sundays throughout 2020. I'm sure that'll grow by the time we get to the end of it, with an addition of additional daytime flights as well.
That's great color. Switching gears. You talked about your CapEx, I think, taking a bit of a CapEx holiday this year relative to last year anyways. Looking out a little further, can you talk about whether there's any aircraft in the fleet that you feel are approaching end of life or any chunky items that you expect we should take into consideration that are on the horizon?
We don't anticipate any aircraft that are going to retire anytime soon. When we invested in these aircraft, we at least expect them to go 10+ years and maybe up to 15. Our fleet is fairly young from a cargo perspective, and it's in good shape. We take great care of it, we expect them to go on for a while. There could be addition of aircraft because we are getting more business, not because of replacement of aircraft.
Okay, that's helpful. Last question is just housekeeping, I guess. The added surcharges related to pilot fatigue regulations, do those flow through the core revenue, or are those broken out along with the fuel surcharges below that core revenue line?
John?
Yeah, I think it depends on our contract with the customer. I would expect that most of the fatigue surcharge we'll categorize as surcharge. Of course, you have a customer where you negotiate the increase through their base rate, then we don't split that out. It's been a bit of an internal debate, I guess, whether or not we actually should even separate the surcharges from the gross revenue, but it's something that we've always done. There are anomalies where you won't see the surcharge coming through the surcharge line.
When you lap the contract or something like that, it would move it up into what you'd consider core.
Basically, yes.
Yeah.
Yeah. Probably over the years, it has become less useful because of the way that our contracts have evolved.
Understood. Thank you. I'll pass the line.
Thank you.
Thank you. Your next question is from Chris Murray from AltaCorp Capital. Please go ahead.
Thanks. Good morning. Just turning back and looking maybe at some of your comments around volumes, but also thinking about your economic dependence, I'm just wondering if you've had any opportunities to maybe extend your direct relationships in e-commerce with any other clients. I know that you're seeing the growth come through other channels and into your network, but I was just wondering if you had any thoughts about how that might progress in 2020.
Well, one of the things is that we have a policy that we do not like to go out and expand our commercial and business relationship with our customers' customers. If we go out to some retailers that are already shipping through our existing customers, it won't be very ethical and accepted in the marketplace. Amazon becomes a different story because of their size and their needs and their demands because no one courier company can service their demands, and they have always had a policy and strategy of having direct relationships with a carrier as they have done in U.S.
If we were to go after, for example, a Walmart that could already be a customer for one of our customers, we do not encourage that. It'll be kind of raiding your own customers and cannibalizing from your own airplane and your own customers. We do not believe in doing that. Not at the stake. We don't believe in doing that. We will never do that.
Okay.
Yeah, go ahead.
Yeah, no, I was just going to say, Walmart yesterday was talking about having to change their network down in the U.S. in order to get some costs out, and this was some of the similar commentary around what Amazon was talking about. Wondering, I know you're probably not looking to go and move some customers around, but I was wondering if the customers are starting to come to you and saying, "Are there different ways that we can run our model?
I don't think anybody's large enough to. Keep in mind, the country is very large in size, and we have four time zones, and Newfoundland to Victoria is a seven-and-a-half-hour flight. The density of our country, except for a few cities, is very low. For anybody to go out and service 16 major cities at 5:00 in the morning or in middle of the night, it's very difficult. It's not economical that a single network or a few planes for one customer will cover this kind of geographical area. It wouldn't be economical for anybody to even look in that direction.
Okay, thanks. Just one other housekeeping question, John, on the adjustment to the warrant. Is there any tax impact on that one, or is this just straight-up cost?
Yeah, there's no tax effect on the warrants.
Okay. Thanks, folks. I'll turn it over.
Thank you. The next question is from Gianluca Tucci from Echelon Wealth Partners. Please go ahead.
Hi, guys. Good morning. Thanks for taking my questions.
Good morning, Gianluca.
I guess, can you speak to what you're seeing so far in Q1 on a cross-border perspective and how advanced the company is in additional ACMI possibilities this year?
Jamie?
Good morning, Gianluca. We obviously continue to have dialogue with both existing ACMI customers, primarily DHL, and other potential customers that we could potentially provide service for. As Ajay noted before, it's one of the reasons why we made the decision to convert that aircraft that we had bought mainly for the engines earlier this year in anticipation of being able to take on some more business. Nothing to report at this point, but we're actively pursuing additional routes.
Okay. Awesome. Thanks for that. In terms of the upcoming election in the U.S. this year, are any of your customers showing any possible cause for hesitation to committing to additional routes or additional volumes until they have certainty into the trade policies of the successful candidate?
You know what? Nobody's ever brought up this issue, and nobody's had any concerns on this. As a matter of fact, the customers are looking forward to solidifying the trade deals that have been pending. Everybody's kind of trying to gear up for when the deals get signed. We start getting the normal cargo from international destinations, which we call it interline in our world, to get going. No sort of hesitation on the election side at all.
Okay, great. Just a housekeeping item from me. John, in terms of expected tax rate for 2020, do you have a range for us?
Yeah, no, it's the same. I think that tax rate, roughly 27%, we use the same tax rate in our financial statements, and we disclose it, so no change in the tax rate.
Okay. Thanks, guys. Good work. Thank you.
Thank you.
Thanks, Gian luca.
Thank you. The next question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. Just maybe a question, again, on the fleet. You guys have done a pretty good job of being able to source 767s to keep growing when necessary. It does seem like going to the market is continuing to get more and more challenging on finding feedstock for cargo aircraft. I'm just wondering if you guys see at any point this is going to be a limitation on potential growth, or are you still pretty confident you'll be able to source planes in future years?
We don't anticipate any problems because there's over 200-300 aircraft that are going to come into the market over the next couple of years. These are 767-300s. Also keep in mind that as the business grows, we will also start looking at 777-200s. That would be ready. They would be 15 years old or 20 years old in the passenger market, we will be looking to convert those. Those aircraft carry double the payload of 767-300s. There's already talk and discussions with various conversion companies that are looking for launch customers to look at 777-200s. Right now, we are certainly about a year or two years away from that because as the business grows, you can eliminate two aircraft of 767-300 with one 777-200.
I think right now there is a temporary kind of shortage because Amazon has not reached the potential of all the flying they want to do themselves with their aircraft. There is a bit of a shortage, but that means a few million dollars higher price at the present time. I think within this year, we anticipate that will totally become normal. We don't anticipate There's more supply coming in the next couple of years than there will be demand, so we don't anticipate aircraft shortage that would limit our growth.
Okay. No, that's great. Just secondly from me, Air Canada mentioned on their quarterly conference call earlier this week that they had captured a bit more domestic cargo business. I guess as an offset to some of the weakness they've seen on the international side. I'm guessing they are going after volumes that are not really core to you or are not competitive at all. I'm just wondering if you can comment on any impact you've seen competitively within Canada, any changes there, or any of the network airlines potentially pursuing any domestic cargo business that might affect you?
Well, they're in a very different market than us. We do sensitive overnight e-commerce. We do stuff like spare parts. We do fresh produce, we do seafood, we do critical medical supplies, because once they have to be there, Air Canada services operate. They have security restrictions. It takes a bit of time for them. Their product line, where they handle domestic cargo, they've always handled that. I'm sure there's a few pounds that cross between each other, but mostly they're in a very different space. Their pricing levels are different, their service levels are different. Our service is very prime, and it's 99% there. It's not dependent on passenger loads that can be offloaded, cargo can be offloaded. They play in a very different market than we do.
We have not seen any kind of major shift whatsoever that has impacted us at this stage.
Okay. No, that's great. That's all for me. Thanks very much.
Thank you. We do have one final question from [Sakash Singh] from Amazon. Please go ahead.
Hey. Ajay and Jamie, good morning. My question is along the lines where you spoke about Amazon and e-commerce being the key drivers for the growth. Can you talk about the other customers that played a greater role in this improved Q4 profit?
Other customers, Amazon uses a lot of our customers for e-commerce and shipping as well, and they've been growing at pretty well the same rate as the growth because anytime we have met with Amazon, they've always told us that no one carrier can handle their growth, and they have some very aggressive growth plans for Canada. With the help of the other number of customers that handle Amazon on our network and we handling Amazon directly, I think we've been able to fulfill the demand very nicely. We expect that Amazon will grow with our customers and with ourselves, and as I said, no one company can handle. There's different product lines that Amazon ships, whether it's peak pickup and delivery is required or it is only middle mile required. There are so many variables that I think there is room for everybody to grow.
Cool. Thank you. Someone mentioned the problem of geography in Canada and bad weather. Any plans on expanding on the routes that currently don't require big planes, but with small planes and just tapping into those markets, any expansion plans for those?
We certainly will look at selected markets to look into a network of somewhat smaller planes like a 737s or even CRJ freighters or ATR freighters. Obviously, we would like that kind of a network to be built in conjunction with all customers because, let's say, if we put on a flight to Prince George, British Columbia, just with 5,000 lbs, it's not going to pay. Obviously, in the very near future, we are looking at speaking to our customers to see, pick 10 or 12 major cities in Canada that are not serviced at the present time. Like, for example, a city like Kelowna or Victoria or Quebec City, the secondary cities. We are in the middle of talking to our customers about if there is enough demand and what kind of size of aircraft would fit.
The key for us is that we want to make sure that we have one type of aircraft if we ever get into that business rather than 10 different cockpits and training and spare parts. Yes, we certainly plan to expand in that area, but also go a little bit cautiously to make sure that we are not putting on a 20,000-lbs aircraft when there's only 5,000 lbs sort of capacity available. We wouldn't go into every market. For example, you wouldn't see us going into Kingston, Ontario, for 2,000 lbs a night. Certainly places like, as I said, Victoria, Quebec City, and that kind of places are certainly on the map.
Hopefully, 2020 will be the year that we start looking at expanding into those regional routes on a selective basis if we can drum up and carry the same principle of multi-customers pool load network extending beyond our 16 major stations.
No. Thank you so much. That was it from my side.
Yes.
Thank you. There are no further questions at this time. I'd like to turn the meeting back to Ms. Dhillon.
Thank you everyone for joining us on the call today. Any questions or any other information anyone needs, you can reach out to us directly. Have a good day.
Thank you.
Thank you.
The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.