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EQUITY RESEARCH
September 23, 2022 Flash Research
CARGOJET INC.
Eastern Conference Takeaways
We had the pleasure of hosting CJT at our 21st Eastern Institutional
Conference in Montreal. With us from the company was Jamie B. Porteous, Chief Strategy Officer. Below are our key takeaways from our fireside chat with CJT.
Addressing The Elephant In The Room - FDX Situation Not Indicative Of
What CJT Is Seeing: CJT continues to see good volume trends and noted that it has not seen similar issues noted by FDX last week. CJT noted that conversations with its customers, including FDX, point to a healthy peak season. Looking across its business segments, domestic volumes were strong in H1/22 and Q3/22 is tracking at similar levels. Q4/22, which is CJT’s peak season, looks to be another record quarter. Demand for ACMI is also positive and CJT noted again that it does not have enough aircraft to meet customers’ needs. Ad hoc charter, however, is seeing some softening as this segment is lapping tougher COVID comps. That said, CJT looks to utilize this capacity tactically and rates remain comfortably above pre-pandemic levels.
Net-net, volume trends continue to be positive for the company.
Diversification Strategy: CJT is diversifying its revenue mix through
expanding non-domestic revenue, primarily by expanding its ACMI revenue.
We would highlight two benefits of this strategy: 1) CJT noted that ACMI is its highest EBITDA margin segment at ~70%-75%. The company owns the planes and charges a fixed rate per block hour for a minimum number of block hours per month, while customers are responsible for other variable costs. ACMI contracts provide good downside protection and earnings visibly; and 2) CJT’s ACMI and charter operations are complimentary to CJT’s domestic network. All the planes brought on are available for CJT to use across the network. This allows the company to increase utilization of its assets and spread fixed costs across its segments. For example, an ACMI aircraft dedicated for DHL during the week is available for CJT to fly charter or ad hoc services on the weekend. Additionally, CJT noted that ACMI contracts can feed into its domestic network (i.e., ACMI contract from U.K. to Hamilton). These volumes can enter into CJT’s domestic network, providing
a seamless transition from major international cargo gateways into smaller Canadian destinations and vice versa. As well, when CJT takes possession of the 777s, it can originate volumes further out. For example, for a shipper that wants to move cargo from Shanghai to New Brunswick, CJT can use its 777 for the international leg and utilize its 767 to fly goods from Hamilton into New Brunswick. In other words, we do not view the growth in ACMI or charter as “lower quality” but complimentary to CJT’s domestic network, leveraging its existing network