Cargojet gears up for delivery surge

Adding 10 planes to fleet ahead of Canada Post deal

American shipping companies were caught flat-footed last holiday season by last-minute online shoppers, but Canada’s Cargojet Inc. says it has learned from its competitors’ mistakes and will double its capacity this Christmas.

“We’re bringing in some extra aircraft on a short-term basis and have people ready to work extra,” CEO Ajay Virmani said in an interview, adding that Cargojet is prepared for holiday demand that’s up to 40% higher than its customers’ forecasts.

Both United Parcel Service Inc. and FedEx Corp. apologized to customers last December after failing to deliver some gifts in time for Christmas. The companies blamed bad weather and a surge in online shopping for the delays.

Delivering packages on time will become an even more important proposition for Cargojet as it prepares for a massive new seven-year contract with Canada Post that will nearly double the size of the company.

In the first six months of this year, Cargojet spent more than $80-million to get ready for the contract, which is projected to bring in about $1-billion in revenue. The company is hiring 200 people and adding 10 planes to its fleet to meet demand, which will depend in large part on online shopping.

“We certainly feel that the e-commerce and small parcel business is on the rise in Canada,” Mr. Virmani said. “We are behind the United States in e-commerce, but we expect that in three to five years we will be at the same level.”

As part of its preparations for the new Canada Post contract, Cargojet is acquiring wide-body extended range aircraft that will allow it to serve new markets when those planes aren’t being used for Purolator shipments.

“Our [regular] business is five days a week, so that leaves our aircraft free for Saturday, Sunday and most of Monday,” Mr. Virmani said.

“We would certainly look at putting those aircraft into service on the weekend” to fly to new markets like China, South America and Mexico, he said.

Since Cargojet’s regular business focuses on overnight deliveries, its planes are also free during the day. The company recently signed an agreement with First Air to fly cargo from Ottawa and Winnipeg to Iqaluit during daylight hours.

The company’s growing fleet will provide even more opportunities like this, said RBC Capital Markets analyst Walter Spracklin.

“With a fleet enhancement currently underway, bringing in wide-body extended range cargo aircraft, we believe [Cargojet] is just at the very beginning in exploring further ad hoc and charter revenue opportunities,” Mr. Spracklin wrote in a research note.

Finding new sources of revenue is becoming more critical for air cargo companies as shippers take advantage of massive new passenger planes like Boeing’s 777 that are able to carry freight in their belly at a lower cost. Other aerospace companies are developing planes that are designed to carry both passengers and cargo, such as Bombardier’s Q400 cargo-passenger combination aircraft.

“The trend away from all cargo operations has been evident for about 30 years and the advent of these very capable large twin-engine aircraft has just caused it to accelerate further,” said Robert Mann, president of aviation consulting company R.W. Mann & Co.

And rising fuel costs have also pushed shippers to use cheaper forms of transportation such as railways and trucks.

But Mr. Virmani said Cargojet’s customers rely on overnight delivery that can’t be guaranteed by passenger jets or other modes of transport.

Cargojet said on Monday its second-quarter EBITDA (earnings before interest, taxes, depreciation and amortization) was $2.0-million, down from $4.2-million a year earlier. The decrease in profit was largely due to one-time startup costs related to the contract with Canada Post. Revenue rose 3.7% to $44.3-million.

Cargoje t ’s shares have surged 55% so far this year.