Cargojet (TSX: CJT) operating revenue fell 5.75% year over year to $188.7 million, due to a 21% drop in revenue from fuel surcharges but stayed steady for the core flying business thanks to a modest rebound in demand that benefited all carriers in the second half of 2023. Lower jet fuel prices reduced the opportunity to charge additional fees above contract rates. 

Co-CEO Jamie Porteous, in his first earnings call with analysts since taking the top role at the start of the year, said Cargojet is seeing strong demand from customers buying transportation service with dedicated aircraft and crews, as well as ad hoc charter flights. The charter business produced $20 million in revenue during the fourth quarter, which is about $3.5 million to $7 million more than normal. Cargojet has spare 757s that can pick up extra flights or free up larger 767s for other assignments.

Higher demand from DHL Express, for example, meant that Cargojet operated 18 freighters during the recent peak season instead of the 15 that are under contract with the parcel giant, and DHL is retaining the extra aircraft for at least the first half of the year. 

Cargojet’s results were mostly in line with investor expectations. The positive momentum in demand mirrors the continuing signs of stabilization in the broader airfreight market, with preliminary data showing a 10% volume increase in January versus the prior year. 

Cargojet’s full-year net earnings fell $113.5 million, to $27.6 million. Earnings adjusted for interest, taxes, depreciation and amortization fell 9.3% to $222.7 million for the full year. Pre-tax earnings were down 43% to $11.7 million, largely due to interest expense for aircraft. Despite the decline, adjusted EBITDA is double what it was in 2019, before COVID, in large measure due to diversified lines of business such as dedicated contract transportation.

Cargojet reduced fourth-quarter flight activity by 7.4% year over year, which significantly decreased operating costs and, in conjunction with flat operating revenue, helped support profit margins in excess of 30%. Consolidating routes is a major way the airline improves efficiency when planes are not full.

“Given the challenging economic environment we faced, we are very pleased with our Q4 and full year results. 2023 was a transitional year for us as we moved from managing a period of hyper growth during the COVID-19 era to focusing on cost management and preparing the business to face the current economic environment,” Porteous in a statement that coincided with the earnings release.

He expressed confidence Cargojet can easily add 10% to 15% more revenue on the domestic network without increasing flight time.

Management said its continued emphasis on productivity gives confidence it can maintain profit margins.

Investment rethink

Cargojet executives admit they got caught up in the euphoria over sky-high demand and rates fueled by the pandemic, which continued midway through 2022 and led them to invest in aircraft bigger than any previously operated by the company.

But in response to a severe downturn in freight activity that extended until late 2023, and forecasts for the international airfreight market to remain soft for the short-to-medium term, the company unwound $739 million in capital expenditures by reversing course on aircraft investments, including for eight large Boeing 777 converted freighters. 

Last month it sold production slots for four used Boeing 777-200 aircraft it had planned to buy and convert into freighters after abandoning investments in four 777-300s. The airline said Monday it is trying to sell the 777-200s, one 777 simulator and two Beechcraft aircraft purchased for crew transport. It expects to recover the $85.7 million book value of the aircraft and complete the sale in the first quarter.

Cargojet in 2023 sold three 777-300s already purchased and canceled conversion orders for them. It took a $1.7 million loss on the resale of one 777-300 and a net loss of $1.6 million on the other two after receiving an insurance payment for severe hail damage. It also wrote off nearly $1 million related to construction for a 777 hangar that will no longer be used and sold four GE90 engines for $43.8 million.

Late last year, Cargojet said it would try to sell or lease four newly purchased Boeing 757 aircraft that were modified for dedicated cargo use and slowed plans to convert two used 767-200 aircraft to freighters until demand recovers. In Monday’s briefing with analysts, Chief Financial Officer Scott Calver said Cargojet only intends to offload two 757 jets after finding new work for two others in its existing network. Depreciation on the two surplus 757s are having a material impact on the bottom line until the company designates them for disposal. The other two freighters could also be activated if demand recovers faster than anticipated. Keeping the planes is a strong possibility because the market for used 757s is oversupplied and values are low.

Cargojet recently exercised an option to purchase one Boeing 767-300 coming off a lease. The airline now has a fleet of 41 aircraft — up from 34 at the end of 2022. A fleet table shows Cargojet plans one less unit this year after its lease expires and to stick with 40 freighters through 2026 after indicating three months ago that the fleet could rise to 46 aircraft by the end of 2025. But the fleet strategy is subject to change if revenue opportunities increase.

With two 767-200s and one 767-300 scheduled to be converted over the next three years, the planes could end up replacing older aircraft unless Cargojet experiences a spurt of new business and wants to utilize all available aircraft. 

Cargojet hasn’t permanently abandoned its dreams for 777 freighters, said founder and Executive Chairman Ajay Virmani. The company still retains four 777-300 conversion slots with Israel Aircraft Industries and is negotiating to defer them between three to four years, when market conditions are more conducive to growth.

“We don’t want to put it into today’s market where the yields are down and competition from widebody passenger aircraft is very, very substantial. So it will not be prudent to put them in. But since we have done a lot of work [developing technical manuals and feasibility studies], we have developed a lot of infrastructure around it, that keeps us at least looking at when the timing is right,” he said.

Adjustment in capital expenditures and other belt tightening helped Cargojet generate $28 million in free cash flow during the fourth quarter. The company doesn’t expect any meaningful capital expenditures for growth in 2024 and 2025 as it focuses on dividend growth, share buybacks and maintaining low debt leverage. A reduction in inventory levels for spare engines also helped to reduce capital spending on maintenance last year.

Cargojet’s total revenue actually fell an additional $24 million when including a one-time, noncash amortization of a stock warrant issued to Amazon. The warrants, issued several years ago, give Amazon the option to own about 15% of its strategic partner once certain commercial milestones are reached. Calver said the adjustment was made because revenue from new ground operations conducted for Amazon-controlled aircraft in Canada, which now amounts to about $29.5 million per year, does not qualify as an approved business line toward the warrant target.

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

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