TSX: CJT | CAD 125.83 | Outperform | Price Target CAD 189.00
Sentiment: Positive
Our view. We see the recent decision by Air Canada to scale back cargo operations as a key positive for Cargojet demonstrating in our view the importance of Cargojet's cargo focused strategy and the competitive advantage provided by the company's Canadian domestic network. We also note that WestJet has been recently reported in the media (FreightWaves, Yahoo Finance; unconfirmed) as scaling back its cargo operations as well. We discuss the takeaways from these recent decisions below.
1. Cargojetshareshavebeennegativelyimpactedbytheperceivedroll-outofcapacityatAirCanadaandWestJet.Webelieve recent decisions by Air Canada and (reportedly) WestJet to scale back their respective cargo operations removes what we see as an overhang on Cargojet shares due to the perceived roll-out in cargo capacity at Air Canada and WestJet in recent years. While our view was that these fears were unfounded and the barriers to entry in Cargojet's overnight network are very high, we expect this news to ease any remaining investor concerns surrounding the issue.
2. Cargojet's sole focus on cargo is an important advantage in our view. Cargojet's sole focus is the movement of airfreight, which we see as an important driver of its success in that market versus Air Canada and WestJet that focus primarily on the movement of passengers. We believe the singular focus on freight helps ensure Cargojet's customers enjoy the highest level of service, while management's focus on load optimization and appropriate pricing results in strong returns.
3.Cargojet'sdomesticovernightnightbusinessisakeydifferentiator.WebelieveCargojet'scoreovernightnextdaynetwork is the foundation on which it has built a viable international airfreight business. We believe ACMI and/or charter is a tough business on its own; however, Cargojet's overnight network provides it a foundation upon which to build out these ancillary businesses. We therefore see Cargojet as better positioned to execute on these growth avenues.
What happened?
• AC announced with its Q2 results earlier this month that it removed two 767 freighters from service in April due to yield pressure in the Atlantic market.
• According to unconfirmed media reports (FreightWaves, Yahoo Finance), WestJet has abandoned its scheduled freighter operation and put two of four Boeing 737-800 aircraft in storage one year after launching the business venture.