Good morning everyone, and thank you for joining us today on this call. With me on the call we have Ajay Virmani, President and CEO; Jamie Porteous, Chief Commercial Officer; and John Kim, Chief Financial Officer.

After some comments about the quarter, we will open up the call for any questions. I would like to point out that certain statements made on this call such as those relating to our forecasted revenues cost, strategic plans are forward-looking within the meaning of applicable securities laws.

This also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDAR. Please refer to our first quarter press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP income.

I’ll now turn the call over to Ajay.

Thank you, Pauline, and thank you everyone for joining Cargojet’s second quarter conference call. Let me start by thanking my team for delivering another strong quarter with 12% revenue growth ex-fuel, margin expansion and strong EBITDA growth over 30% in quarter two.

We released our financial statements yesterday, so I'm not going to spend a whole lot of time on my remarks. However, we will certainly have question and answers after.

What I really want to talk about today is how Cargojet is successfully executing our planned strategy, and more importantly, why I feel we are still in the early stages of our full potential. Over the past decade, we have been singularly focused on five key priorities.

Yield the best and most effective overnight cost network in this country. Number two, maximize fleet and utilization of fixed assets and expand our business lines and diversify.

Number three, be relentless about our on-time performance. Number four, Cargojet culture leading to be one of the best employers in aviation.

Number five, financial discipline to build long-term shareholder value. Over the past several years, we have been focused on capturing market share so that we could participate in what we saw as the hyper growth segments of air cargo business, that is e-commerce.

As you have seen in our results, particularly over the past five years, we have successfully been executing on our Number 1 core strategy. But this required a significant investment in building a network that now serves over 90% of the Canadian population with a new – with a next date service.

Given the time zones and geography we serve, it is no small fleet. This is an extremely important competitive advantage for Cargojet and we continue to improve this by constantly looking at optimization opportunities.

As a result, we have now become the de-facto enabler of next day e-commerce in Canadian. Canadian e-commerce, as a percentage of total retail sales, is still behind the United States and Europe.

We believe we are still in the early stages of harnessing this secular trend and have a lot of catching up to do. Canada is about 7% of the total sales when it comes to e-commerce where USA is almost at 12%.

So, as you can see, there is a lot of catching up that Canada has to do and – which means a lot more potential. We shared with you last week the impact of Prime Day sale had on our volume and fleet utilization through a press release.

Summer has traditionally been [slowing] for our industry, but with Prime Day July, back-to-school shopping day in August and September, Halloween in October, Black Friday in November, and of course, Christmas in December, billing over to January with Boxing Day, we now see multiple shopping peaks. Our second priority has been to maximize our fleet utilization, and traditionally, customers used our network from Monday through Thursday with Friday’s load sent via generation transportation.

This used to leave our fleet idle on the weekends, but we have been very successfully bringing in ad hoc charter and ACMI that will have – that have helped increase utilization and expand margins. We have opportunistically added dedicated routes to USA and Mexico, but we see more opportunities for this on the horizon, which also helps us diversify our lines of business.

We have recently looked at our margins and suspended our South America flight, which was one flight a week in favor of operating the same aircraft domestically for the seven-day service that has recently been announced by our customers. We have also fine-tuned our domestic network and schedules and we have freed up 767-300 aircraft from our existing fleet making our network more efficient and use that freed up aircraft for a newly acquired route to Mexico City starting in the next 60 days.

The shopping patterns have now shifted to mobile services, mobile devices and orders flow through the e-tailers at all times of the day. Online shopping on the weekends is now competing with bricks-and-mortar.

So, we're not surprised to see the recent industry announcements to move their business to model seven days a week. E-commerce retailers want to provide instant satisfaction to customers just like when they shop in a store.

This means additional opportunities for our fleet utilization. While this new trend will take some time to materialize, we believe we are well-positioned to take advantage of the opportunity without the need of any extra or new capital expenditure in the near term.

Our third priority has been to be relentless in execution. This means driving an extremely high level of customer satisfaction by focusing on our key metric, which is on-time performance.

This required us to build a world-class maintenance organization and a disciplined and heavy maintenance routines that have consistently delivered two critical metrics, safety and on-time performance. Once again, I'm pleased to report that quarter two, our on-time performance remained about 99.5% or higher every night.

As Peter Drucker famously said, culture eats strategy for breakfast. Therefore, I have been passionate about building a culture – service culture from day one.

Our fourth focus has been on talent management and [employee relations]. Our ground handling employees often work in harsh conditions loading and unloading with tight turnaround times.

For the cargo airline, safety is at the core of everything we do, and let me tell you that it is the result of strong work environment, team culture, training and work ethic. For us, it is not the flavor of the month; it is rather the way of our life.

I’m so proud of each one of our employees who have delivered this exceptional performance to our customers. We have also taken proactive steps to manage the challenges that our industry will face with the new pilot fatigue rules coming into effect.

Working with our pilots union, we have implemented an innovated program to attract and retain qualified pilots. I'm also pleased to announce that with just one year after concluding over negotiation with the pilots union; both parties have extended the current collective agreement by additional three years for providing seven and a half years of predictability for our customers.

Let me talk about the financial discipline, our fifth and final strategic focus. Over the past five years, we have won many new customers.

We have – as we have shared with you before, there are top tier brands and we have long-term contracts in place with them. Therefore, we funded our growth through debt financings.

We continued to carefully manage growth and investments and putting strategies in place to start repaying our debt in the medium term. But as I mentioned earlier, we’re still in a very hyper growth environment in the e-commerce space and we are presented with strong growth opportunities with attractive economics that can drive long-term shareholder value.

We will not be shy to invest in our business, but our default focus will be to bring debt levels down over the medium-term. Let me conclude by looking ahead.

Much of the macro trends today – trends point to strong e-commerce future. It seems the past five years for us were largely a preparation to harness what is about to come.

For example, mobile commerce is rising rapidly. People are shopping all the time.

Number two, Canada’s e-commerce sale still lags behind U.S. and Europe.

Number three, recent industry announcements, including the seven-day delivery will enhance our business to a full seven-day week. Number four, Amazon's announcement to move Prime Service from two days to one will have a major impact on the service levels that we are providing.

Number five, focus of virtually all major brands on direct-to-consumer business models. Number six, number of retail store closures across North America forcing consumers to use even more online channel.

Number seven, increased use of automation and [our] warehouse fulfillment centers. These are a few trends, but I'm sure there are several more you are seeing in the market.

Looking at this, we feel we're just getting started. We believe we have made wise investments in our network.

We have brought in right talent and we focused on delivering superior service levels to our customers. We firmly believe that we have the right ingredients to enter the next phase of our growth journey.

I’m also pleased to advise you that our focus in the next little while will remain on expanding our lines of business, like, charters and ACMI and – while we continue to grow our domestic overnight business. Thank you very much, and I have John Kim, our CFO; Jamie Porteous, Marketing Office; and Pauline Dhillon here to take any questions that you might have.

Operator, you could open the lines for questions please.

Thank you very much. Good morning everyone.

Good morning.

So, let’s start with – Ajay, you talked about the shift toward buying more and buying obviously more – using that capacity more days of the week. Can you remind us when – what your current weekly, how many nights a week you’re currently operating, what you plan to operate in terms of nights per week at the upcoming peak?

And how soon do you believe that we could be on a seven-day a week permanent part of your overnight schedule?

Yes. So, Walter, I’ll give you a little background on this, and then, I’ll Jamie expand on that.

So right now, we are currently operating – we used to operate four nights a week, probably number of years ago, we expanded it to the fifth night, and now we are into the sixth night on a regular basis. We are looking at a seventh day operation.

Presently, we are doing [adhoc] flights for the seventh day, but soon to become after the summer, and starting in September, we expect the seventh day flight to continue on permanently. Besides operating on seven days a week, there is a lot of shift also, Walter, from which we call – used to call or we still call it core overnight network.

I think it will be more appropriate to call it domestic overnight network rather than the core overnight network, but we’re also seeing a lot of shift from domestic overnight network into more charters for the specialized type of sales whether it’s a Prime Day sale, back-to-school. So, we’re seeing a lot more charters shifting from domestic overnight into that space as well.

So, maybe Jamie you can quickly expand on that.

Yes. Just to add, Walter, just to remind to, we’ve been operating the Sunday night scheduled service, certainly not the full network that we operate on the core Monday to Friday, but we’ve operated a Sunday night, 767-300 to Western Canada and back since May of 2018.

We have operated Saturday flights, the seventh day of our networks certainly this past month during Prime Week, and have that schedule to continue again starting in Q4 for peak 2019 and we fully expect that trend to continue and to grow into a scheduled weekly Saturday flight as we go into 2020 to meet that seven-day a week demand, particularly once – a big driver that we believe once Amazon launches their next day delivery in Canada, which is expected by the fourth quarter of this year.

Okay. And this obviously comes at no – you know this revenue and capacity growth is coming without the need for additional aircraft by adding nights of service.

So, if you look at your current, and maybe John can chime in, in terms of how many aircraft or in your current program for delivery for this year? And if you could update us on the CapEx number for this year and perhaps indicate to us, you know, is your need for new aircraft as you shift to more days a week as opposed to more on the same day, does your need for a new aircraft come down going forward?

Yes. I think you really pointed out a good point there, Walter.

We of course – if we are expanding our networking into the weekend, we wouldn’t need a new aircraft, and you’re right pointing out that we did reduce our fleet forecast by one 767-300, which in Canadian dollars is about CAD49 million CapEx spend. So that was, you know, early in the year something that we thought we would need to acquire another aircraft, but, you know, with the efficiencies that we’ve achieved with the existing aircraft, and even in light of the, you know, new flying, we still feel that we don't need that extra 767-300.

So, our CapEx should be lowered by about $40 million this year.

And Walter, we have also – as by realigning our network and making some changes to what we're doing and how we’re doing it, we’ve been able to free up an aircraft fly, which we just got a confirmation literally and in the last 24 hours to fly a new route to – for one of our customers to Mexico City within 60 days.

And we won't be – at this point, adding another aircraft.

Yes. And that will be done with existing aircrafts.

So, basically, we have reduced it by one and put one more aircraft to utilization, so you can technically think that its two aircraft that you’ve been able to synergize.

Yes. One thing that wasn't in sort of our earlier or previous quarter, you’ll notice in our fleet notes, we bought some engines.

We've done a deal for eight spare engines essentially that will help us greatly reduce our engine overhaul cost in the next 24 months. So, you’ll see that we’ve – these were at least came off a couple of 747s that we’re parking and we’ll take the engines off and just keep the part for future use or sale.

So, that will be CapEx of about $30 million that we didn't have previously.

But it’s a timing issues because these aircrafts, we picked it up for at least 30% to 40% better than the market price, which will help us not sending our engines to overhaul shop to use these engines. So…

Long term. Over the next couple of years, it will pay-off in a big way.

Okay. That’s fantastic.

So, we heard you at [225] total for this year, I'm hearing you minus 40 now for the lack of an aircraft or one less aircraft, but plus 30 for the engines, is that the right…?

Yes. I think around 200 at this point [is about correct].

And we heard you at 75 for next year, is that still hold?

Yes. I mean we’ve – as you might appreciate, the fleet plan is a bit fluid depending on the business that we have, but no changes really through next year.

Yes. We don't anticipate to add anything until we are definitely committed with the number of routes.

Yes. We have the one 767-200 delivery slated for the end of Q1 next year, and that’s the only aircraft and that’s already encompassed in the fleet plan.

Got it. Okay, my last question here is in the volume, it was a little bit more muted this quarter, kind of similar to last quarter.

You know you’ve obviously talked a lot about the significant growth in e-commerce, so presumably this is, you know, less growth or declines in non-e-commerce. I was wondering if you could break-out, you know, kind of what was the growth rate of e-commerce, and how much of that – your business is roughly represented by e-commerce, and reaffirm if you can, if it is the decline in the non-e-commerce growth and some of the reasons what would have caused that decline?

Yes. I can answer that, Walter.

It’s – you’re right. I mean to be sure and just to reinforce Ajay’s comments, we are definitely not seeing any of decline in e-commerce.

We’re continuing to see significant double-digit growth in the e-commerce space domestically across the country and no signs of that slowing down. Some of the softness in the tonnage that we saw in Q2, you know, a combination of a couple of things, Q2 is not traditionally – those months are not heavy shopping months.

There’s no significant, you know, Prime Day or Black Friday shopping that really spikes up the e-commerce. In spite of that, e-commerce was stronger during that month.

As a percentage of our overall revenues, as I think we’ve indicated before, it’s a little difficult for us to accurately predict because we see directly from companies like Amazon, but indirectly, you know, there’s still a big user of our other customers and there’s other e-retailers that are shipping with our customers, but I’d say its somewhere 20%, 25% of our overall core revenues. We definitely saw some softness on the tonnage, on the overnight network.

As a result, the softening – and really in…

Non-e-commerce.

In non-e-commerce business and overall global air cargo demand softening. We saw that – you know, certainly our interline volumes or traffic that we get from international carriers through major gateways in Canada was down 25% or 30%.

We saw softening. In fact, we took actions as Ajay alluded to in his comments of suspending service to [indiscernible] because of softening demand and I think during the quarter, we cancelled seven frequencies between Canada and Germany, again primarily because of the softening demanded and that also effects the tonnage on the domestic because not all that traffic is just operating or we’re not carrying it just from Europe into Hamilton, it's connecting to and from our domestic networks.

That’s really where we saw the softening.

And that’s why, you know Walter, it’s important for us to – you know we have started to view this business more as – you know it’s very difficult to engage in a quarter-to-quarter on overnight and that kind of stuff because the shipping and buying patterns have changed. For example, in quarter two, there was no real, you know, event day that was planned, and you know, one of our observations was that a lot of people were not buying and often even through e-commerce in quarter two because of the well-advertised and publicized Prime Day coming up in July, so a lot of people were holding back and saying, well, I’ll order it three weeks from now when I get a great discount.

So, I think we now have to start rationalize our business more like on a full-year sort of basis because of the buying patterns and the shipping patterns of people as well.

Really appreciate the color. Thanks everyone.

Hi, thank you and good morning. There’s obviously a lot of excitement around the shift to seven-day a week scheduling and volumes.

Can you talk through how – when you go to your partners, you know, Canada Post or any of your other significant partners and talk about negotiating adding those routes, do you do it through increasing the contractual minimums and how we should think about that as you add that to your permanent schedule?

So, basically, whenever a new flight or a six-day or a seventh-day flight comes on, it’s taken – we don’t operate a flight on speculation, we look for minimum guarantees from certain customers to make sure that the flight [indiscernible] and leaves us with a margin. So, yes, they make a certain commitment for that seventh day flight and we look for certain minimum guarantees on it, and yes, that’s one part of the contract at the end of the day.

Okay. And how should we think about, you know, the volume growth potential, versus, you know, redistributing between, you know, what would have been I guess Monday or Sunday night traffic moving earlier and on to the weekend?

You’ve obviously had some experience adding a route before or should we expect when you do make that permanent for there to some sort of step function change in your revenue profile and the growth profile?

I think our experience was it will be – our concern initially when we started the Sunday night flight was exactly what you – I think you’re suggesting is that there would be some dilution to the next day. We may have seen that for the very, very short term, but we found that all of the revenue that was associated with our Sunday night flight was all incremental new revenue that was added and was just a result of continued sort of 24-hour a day, seven-day a week online shopping and it drove that volume and we would expect to see the same.

But we saw the same during Prime Week for a Saturday flight and I think we would expect that same incremental growth of new business on the side of the seventh day.

Okay. And is it fair to say as we contemplate, you know, the increased volumes and that seventh day or sixth and seventh day permanently that, you know, the contribution margins in terms of a profitability of the excess volumes given, you know, a large fixed cost infrastructure is going to be, you know, significantly superior to the overall margin profile for the company right now, I’ve, it will very margin accretive if you’re not adding aircraft?

I think that’s a good assumption, Doug. That makes sense.

Could I get you the [indiscernible] so far as perhaps pegging what you’d see the variable cost as, as part of the, you know, the cost picture for that incremental traffic …?

Yes. I think if you look at our detailed cost breakout in our MD&A for fuel expense, you know, that fuel and probably the commercial costs, you know, like landing navigations, those will step up in proportion to the number there of flights, so those will be variable.

But when you look at overall say, crude costs or other, you know, maintenance staff say…

Or heavy maintenance.

…or heavy maintenance, so really if you look at the margins that we – in terms of the percentage of cost to revenue for our fuel and commercial, that’s sort of the gross margin.

We expect significant margin will improve.

Yes, it will definitely be. But if you are looking to try to pin down a number, you’ll kind of have to back into that by looking at those parts of our cost, Doug.

Yes. that’s very helpful.

You’ve identified this Mexico City route that you’ll be starting up in the next 30 days, 60 days, can you talk about, you know, the dynamics. Do the potential profitability of that route relative to the one that you just canceled to South America and the puts and takes here?

Yes. So, South America route was not an ACMI route, but we took the commercial risk on it and it was very marginal business, but it's sort of helped our – get some business flowing into our network and also connect our Cologne flight with it.

So, there were some advantages of it, but it was not a very high margin growth. You know when we had an opportunity to expand one more Mexico route, as you know, we already operate one Mexico route into Guadalajara, this was to Mexico City.

We had an opportunity to do six days a week service into that. This is going to be certainly at no less margin for the ACNI that we do today.

It’s about 2,400 hours a year, roughly. It’s a very sort of, you know, high density route and we feel pretty good that the margins of this is going to be actually quite attractive and probably close to a better than the ACMI we are doing.

Just so you know that, you know, today with this aircraft going into an ACMI service, which is guaranteed revenue as compared to the South American, which was not guaranteed revenues, you know, six out of our 24 aircraft, which is 25% of our aircraft, are now committed to ACMI service, which is again our way of diversifying and not just totally relying on the overnight network. We as an airline, you know, have expanded into charters into ACMI into a full-service cargo airline rather than just the domestic overnight.

So, our focus in the next year would certainly be to reduce the dependence while we continue to grow the e-commerce and overnight network, but expand our lines of business to have more of ACMI and more of certainly charter business into our portfolio.

Yes. Doug, we’ve announced in the past when we've added sort of ACMI cross-border routes, roughly what those revenue numbers would be.

I think in the next quarter we’d be able – we’d be reporting what the incremental revenue would be from the new routes, but until we kind of finalize those – that contract, that will be available from next quarter.

Alright, I’ll look forward to that disclosure, thank you. I’ll pass the line.

Yes. Thanks very much.

Good morning. I guess maybe just a question on the pilot extension, you’ve mentioned this retention bonus, which obviously is probably something you need to do to keep the pilots so that’s good news.

But I’m just wondering how that sort of $20 million is going to be accounted for? Is that going to be sort of spread out over the life of the new contract?

And is it I guess a cash payment that we’ll see in Q3?

So, yes, it will be spread out over the seven-year contract, but more importantly, that we have started a program, which our customers are fully aware of because they – some of them own their own airlines and [hunt] airlines, and the press has been quite a bit active on the shorter the pilots and the need for retaining and attracting new talent for flying. You know, we have started a program and meeting of our customers and presentations with recovering, you know, because this is a regulatory change which is going to cost an increase in cost.

Our goal is to fully recover this cost of any pilot over [indiscernible] cost from our customers because of the – I mean most of our contracts have the vision to recover that kind of cost, which is mandated by the government.

Right. And how have those conversations gone so far?

Has there been any pushback from customers on that?

No. I think the customers are very sensitive to the fact, but we don’t want to ground planes and we hit on because obviously the country is going to be due to 3,000 pilots short next year.

So, we started our program way ahead of everybody else and we want make sure that number one, our priority is to retain our great pilot that we have today. And number two, to attract new pilots into this company and our conversations with our customers have been very positive.

They totally understand the impact because they have faced the same impact over their own mainline airlines and we don't anticipate obviously everybody's going to do their homework in due diligence and we are fully transparent on what our cost increase is going to be because of this regulation. We are sharing all the information from them.

So, far we have not had any pushback except, you know, basically they want to make sure that, you know, we are recovering, but it's costing and not sort of being opportunistic about it and which is not our – in our D&A to do that anyway. So, it’s gone pretty good so for, and we expect that by the end of the year, we will have, I would say, a no later than – majority of it will be – probably be the – in the recovery and the pricing by the end of the year and some of it might lag over the first quarter of 2020 because our customers do have budgets, and you know, they make annual budgets, so we are a little bit careful to make sure that we work with them and not sort of accept their plans as well.

Okay. No, it makes sense.

That’s good to hear and just – you know, just technically [indiscernible] you know the $20 million that sort of cash retention bonus that’s something that will be paid out in…?

Yes. So, the accounting for it [Doug] and it’s the number – the total number will depend on how many pilots we have on staff, you know, certain time next year.

But if it’s around 20 million, roughly half of that will amortize over the first four years and the other half will amortize over the sort of the seven-and-a-half-year period.

Okay. And just a final one for me, just on the leverage you mentioned that one of the priorities you have is to pay down some of the debt.

I’m just wondering if you’ve had any I guess changes to your sort of target leverage. I think in the past, you’ve kind of talked about, you know being below three times the leverage.

Is that still kind of the target?

Yes. Well, I think the target is zero.

Well, a of couple things we should probably think about this year are $125 million debenture issue at 4.65%. Those are in the money, our first opportunities to convert those is December 31 this year.

So, we’re thinking about that. You know there’s a lot a compelling reasons to call those debentures at the end of the year and that would take out about $120 million, $125 million of debt.

In terms of the rest of the debt, as Ajay pointed out in his opening remarks, we are focused in the near term to use all of our available free cash that we have invested to reduce the debt.

Okay, great. That’s all the questions I had.

Thanks very much.

Quick question on the overnight business, kind of want to back out the volume growth. It looks like pricing was a very strong 7% to 8%.

It seems quite a bit higher than kind of the CPI for the year, just wondering if the delta is there.

Because it’s the mix of customer really, and as some of our customers are growing at a faster pace than others, you know, its – pricing at Cargojet is really a – largely volume-based. So, as customers grow, you know, probably the better pricing, but that's what's really driving it.

It’s – you know, our CPI contractual increase has evolved on through, you know, as under contract may fix in terms of the type of percentage increase, but that’s what you're seeing is a better mix – a change in the mix of customer revenue, and also, if you look at our backhaul rates, they’re probably firmed up a bit.

Yes. And I could just actually – the other thing that would impact the yield improvement is, you know, the accelerated growth of e-commerce.

Those customers – you know all of our rates are volume-based, so the smaller customers that are going at an accelerated pace are – you know the rate – the average yield that we’re getting, the average rate per pound is proportionally higher, and the, some of the general cargo customers that are not in the e-commerce space that haven’t been growing where we’ve seen some softness, some of them have minimum volume commitments where they haven't made the minimum volume commitment, but they have to pay the minimum guarantee. So, proportionally the [yields growth].

Alright, that makes sense. And I guess on the weekend flying, if you do have to add any incremental aircraft, how is the current market for the 767…?

Yes. You know just to be clear; we’re not having any aircraft.

The weekend flying?

We will have that any aircraft to go to a seven-day a week.

In terms of availability of aircraft, there are 767-300s available now in the next 12 months for delivery. So, I would say as the market is improved, but we’re not – I mean, we’re always looking for aircraft, but at this point, we’re not planning to add any.

Okay. And last one for me, I know the Morningstar contract is probably – I'm not sure if there’s any update there, but there was supposed to [up for renewal] this year, if you guys can provide any color on that there, it would be good?

Yes. So, you know, that’s – I mean our information is that there are – they have – they’re facing similar issues, the pilot issues they have.

You know they are trying to work with the FedEx and Morningstar. Obviously they don’t reveal what they’re doing, which we don't expect them to, but we have no indication of whether they have extended or how long they’ve extended and I guess they are fighting through some of the aviation issues that we have with them and I personally don't think it's going to come out for a bit anytime soon because we have challenges that are going on in the industry.

And so, we are not sure as to what their thinking is, but we’ll certainly be – we’re certainly on top of it and they know that we’re waiting and once we get the idea, we will be able to sort it [indiscernible].

Okay. That’s great and I’ll hand the call over.

Good morning, and thanks for taking my questions. I just have a couple, the first one is, how has the growth on the backhaul has been?

I know – and I guess what were the seasonality of those [indiscernible]?

On our domestic overnight network? We’re first…

Yes, on the backhaul [indiscernible].

Yes. It’s – you know with the exception of – as I noted before, you know most of our Interline revenue, we focus on traditionally – historically have focused on filling those backhaul routes with you know lower yield Interline business.

It’s coming to major gateways like Vancouver in the [indiscernible] or our natural [perforators] coming internationally from Asia. That softened a bit.

However, on the e-commerce side, we’ve seen tremendous growth not just on our historical head haul routes, but with – as an example, with the opening of fulfillment centers like others like Amazon in Calgary and additional ones in Vancouver, we’re seeing significant growth in two way e-commerce traffic, which is helping to fill the backhauls. So, it’s kind of a combination of both.

We’re seeing – I would say overall, we’re seeing a much higher percentage of growth on the backhauls that we’ve historically seen and at much better yields than the traditional Interline business.

Great. And then, if I heard correctly, you’ve cancelled backhaul flight.

No. We’ve suspended service to Lima and Bogota to South America.

We still operate two weekly scheduled flights between Canada and Cologne. We had – we cancelled the couple through Q2 because softness, but our – we have no intention of suspending services to Cologne, we’ll continue with that as we go forward.

And then how should we speak – what should we think about your routes to place [indiscernible] going forward. Are you going to resume those flights if there is adequate demand?

Or you’re just going to focus [indiscernible]?

Yes. We will certainly operate it on certain times of the year when the demand is high for certain produce, flowers and stuff like that, but at this stage, you know, we are focusing more on – as I said, we just want to make sure that, you know, the pilots issue for example, we want to make sure that our resources, whether its pilots or whether its aircraft, go towards the highest yielding routes.

We would do both of that even if there is nothing else to do, but to be honest with you with the seven-day service coming on and getting ready for the peak, in another six weeks to eight weeks, the semi peak starts, then back-to-school starts, the Black Friday is thus coming on. So, we would rather divert our resources whether they are pilots, maintenance or aircraft into those than into the marginal routes.

But we will certainly – we have scheduled authorities to Bogota and Lima, and we have good sort of general sales agents and handling a set up. So, we would be tackling those markets at high demand times and do more charters rather than scheduled service.

That’s great color, thank you.

Good morning, guys.

Good morning.

Good morning, Ben.

Just on the pilot issues, I recognize as an industry-wide issue for you in Canada, but my understanding is U.S. cargo shippers have been exempt from those kinds of changes to file pilot fatigue rules, and does that in any way make you less competitive on ACMI business transporter against some carriers who might not have the same kind of cost increases in their labor?

One thing, Ben, keep in mind that, you know, we do have our labor cost and some of the cost in Canadian dollars, so which is still a big advantage. Yes, the U.S.

has exempted the Canadian – the U.S. government has exempted the cargo carriers from fatigue rules, but to be honest with you, those are helpful to UPS and FedEx, which operate 300 or 400 aircraft each.

Certainly, the kind of market we have with our customers, I don't think there’s a major impact. As far as the charters are concerned, we are still very competitive because again, our costs are in Canadian dollars for salaries and some of the other stuff we do.

So, I don't think we are losing the competitive advantage, but it certainly will put some pressure on us to be more competitive on those charters, but so far it hasn't impacted us in any big way. As you probably know, and we made it clear in the press as well that the three years we’d lobbied with the government to ensure that we stay competitive, but unfortunately, you know, our voices have not being heard and, you know, they think a pilot is a pilot whether its cargo or whether its passenger.

Whereas U.S. did make that distinction, and you know, we are working with – we never know when the government’s things can change.

Right now, they were trying to implement this in 2020, but we hear that might be extended for another year. So, the competitive side of things haven’t really impacted us, yes, but we are fully aware of it, and you know, we will make sure that we keep our cost down to offset that situation.

What’s the trade-off between lower cost on Canadian labor and higher cost of aircraft in U.S. dollars?

Well, because keep in mind that the U.S. pilot salaries taking U.S.

into account are much, much higher than ours. A lot of the U.S.

carriers have very mature level of pilots, which mean, you know, our average age of the pilot might be 10 years or 12 years whereas some of the other companies that operate in U.S. have pilots that have been working in the same company for 15 years or 20 years.

So, their scales are much higher to begin with. So, I don't think we have lost much competitive advantage in terms of charters or what you see on [my ability].

As a matter of fact, we just own the Mexican route. I mean that could have gone to an American carrier.

It was being operated by a Mexican carrier at that time. So, we don't feel that this is going to play out as a major factor in our charter business.

Okay. John, in the MD&A, no discussion I can see on EPS, but the reported number was $0.32 this quarter.

It appears there were some gains $4 million or $5 million, was it FX or gains on disposal?

No, if you look at … Sure. Those gains [indiscernible] go ahead.

Sorry, what would the adjusted EPS be after-tax on – excluding that gain?

Well, the gains – we hedged our incentive program and we also have some hedges on – in play options. Those gains would typically be reported as part of the sort of bonus employee expense, but because the program hasn’t fully started, you know, we reported that separately.

I think those gains are in terms of the – the hedges of our equity swaps. Those really are operational in nature and they will be offset against employee costs or crew costs going forward.

So, I don't know if – that they are not one-time gain or loss on disposal or something that’s non-operating. They are in fact operating, so I don’t know if …

So, there’s a reason that there are not – they are not. No, they are not.

Well, they are because they are non-cash. They haven’t been exercised yet in terms of realizing the actual gain.

So, as a non-cash gain, we’ve taken them out. But it's really more operational in nature.

Alright. So, even with that maybe you can just explain how because I’m still, as you know, trying to get familiar with the economics and your business, but your utilization looks pretty good, you know, cargo revenue per day is up, block hours are up, volumes although marginally up, but still up and EPS and operating margins are down.

How does that work, like where is the offsetting variable in that?

You know, I think in terms of looking at where, you know, our EPS could be improved, it’s a finance expenses, I mean it’s a level of debt than that we've accumulated because of this incredible sort of growth period in the last few years. You know that will move the needle significantly once we’re able to pay down the debt and reduce those finance costs because I think they are running around a little over 40 million per year.

Also, our depreciation, when you buy – when you bring new freighters into the fleet. There is – in the first 10 years or 15 years, you will have depreciation that’s running a little higher than what your sort of normal replacement capital cost will be, but it's mostly finance costs than that we need to pay down our debt to improve our EPS.

Yes, but I see the – even above the finance line like EBIT was – the margin was lower and [indiscernible] short-term phenomenon and that’s the real cost of operating the aircraft presumably to generate revenue, right?

Ben, I mean you have to again look at the different aspects of our P&L and you'll see that the one line that's really grown substantially is our depreciation. You know and that…

But that depreciation drives the revenue because you’ve announced that in terms of business, right?

Yes, but, you know, we’re depreciating assets that are 25 years sort of in terms of lifespan. we’re depreciating quicker than that and we’re also depreciating parts of the aircraft because under IFRS we have to componentized, so we’re taking a hit on depreciation in the first, you know, again 5 years to 10 years in the life of the aircraft that, you know, will start coming down to a more normal number that looks more like our maintenance CapEx, which is [indiscernible].

[Indiscernible]

No, but I think, yes, that low right.

Okay, thanks.

Hi guys. Good afternoon and congrats on a good Q2.

Hi, Gianluca.

I have some questions here in terms of expectations for the balance of 2019, we’re about halfway or a third through Q2 to Q3 here. In terms of your top customers, like what are their expectations for peak volumes, compared to prior years?

I don’t know if you can quantify, but qualified if you may. And like so far in Q3, taking into account Amazon Prime Week are – like is that volume was consistent to the past year trends that have been observed?

Hi, Gianluca. It’s Jamie.

Just to answer your questions, and the last one first, we definitely saw, you know, significant double-digit growth in Prime Week volumes this year as compared to previous years, which was kind of what we were expecting. I think we actually operated seven dedicated charters in addition to additional flying that we did both directly and indirectly for Amazon during that week.

The forecast for e-commerce remains extremely optimistic for the back half of this year, and we’re extremely confident about our full-year outlook. You know, given the fact that’s there’s more significant shopping events in the back of the year including Prime Week than they are, as Ajay mentioned before, with Black Friday and Cyber Monday and the traditional Christmas peak period.

Back-to-school.

Back-to-school starting in August and September.

Okay. So, we should expect similar kind of peak growth demand for the holiday period this year plus all of these other ad hoc things that you’re doing.

We just started discussing peak requirements of customers right now like in the last couple of weeks, and we’ve not seen anything that makes us to believe that will be anything less than what we’ve seen before. So, as a matter of fact, we’re expecting some increases.

Excellent. Thank you, Ajay and Jamie.

And just a question on the pilot incentive program pass-throughs, I guess, John, if we think about this on a per volume or per pound basis, what's the kind of delta that can be expected in terms of the pass-throughs to your customers?

Well, at this stage, because depending on what the customer contracts are and stuff, so that is a stuff that we are in the middle of negotiations with customers at the time – at this time, and, you know, obviously customers who have a lot more business and a lot more, you know, contractual commitments and volumes would have slightly different than the other ones, normal ones. So, it will be tough for us to sort of reliable percentages on the phone, but the bottom line is we intent to recover our costs.

Yes. I think we’ll more clarity in our future disclosures, you know, once we’ve set down the customers, and also have more certainty about the timeline.

We know what our costs are. That 20 million is spread out over seven years, but, you know, in terms of the absolute total increase in costs on an annualized basis, Gianluca, that’s something we’re still working out, but, you know, I mean it’s going to be north of 10 million at least, but, you know, we don't have a firm number that we’re comfortable sharing right now.

Thank you, guys.

So, and – look just I know [indiscernible] off the question, but it is for everyone else and then Ben’s benefit, when you look at our business model, and you know, especially the comments we made in – outlined in terms of our efficiency, you know, we feel that – we’ve always felt that Cargojet has a lot of leverage in terms of being an airline having some high fixed costs and to the extent that we can grow our topline without increasing our air fleet just utilizing the assets more, I mean harnessing this – you know, e-commerce growth with the minimum amount of capital that's really what’s going to move the needle for our EPS. You know the interest expense will come down.

Depreciation, it is, you know, as I said, 5 years to 10 years on the 25-year asset, it’s a bit heavier. But it’s a thing I think that will really move the needle on our EPS in the next three years or four years is our ability to increase our cash flow without increasing the size of our fleet.

That’s very helpful, John. Thank you.

And if I could just ask a question about this, I guess phenomenon I think around the world about e-commerce, how – like how much of your business – how has that been sourced out of Asia in terms of the Alibaba’s or the [indiscernible] of the world? Have you seen an uptick from e-commerce parcels sourced out of Asia over the past few years?

Not directly, Gianluca. I mean I assume there’s some of that business is – indirectly is on our network through some of our direct customers, but we haven't had any direct relationship or any direct insight into that.

I’d be just guessing to give you a number. I think – but I think that’s certainly tremendous opportunity as part of the future growth of e-commerce that we’ll benefit by.

I agree. No, that’s good.

Thank you, guys. And then just two last questions here for John, I think you gave your CapEx guidance for 2019 of $200 million.

How should we be thinking about depreciation for 2019 and 2020?

You know, I think with the last of the aircraft that we added on at the end of last year and the beginning this year, you know, we’re approaching our run rate that should be fairly consistent for the next, you know, five years to six years, you know, given the amount of flying that we do. Depreciation will go up as our block hours go up because now the engine – you know engine depreciations are probably one of the bigger components.

But I mean typically you’d expect your depreciation to be similar to your maintenance CapEx, but as I said, the maintenance CapEx should be a bit lower than that depreciation figure. But, you know, we’re getting to the point now where once we stop adding, you know, two or three aircraft a year, your depreciation figure should to be fairly static.

Understood. Thank you, guys and keep up the good work.

Thanks guys.

Thank you.

Thanks, Gianluca.

Hi, it’s Nauman for Mona here. Just a quick question with regards to your other revenue, I understand it’s still a small component of your business, but how much of that is from ground handling services?

And do you guys have any contract with other airlines on that?

Yes. So, it's a small component of our business, but it’s actually highly profitable one because of our investment of about $25 million to $30 million we made in ground support equipment to provide service to our customers.

It continues and we have been handling some airlines on a regular basis. A couple of our customers are regular, so we do in five or six different airports.

We also handle a lot of ad hoc ground handling for charters that command whether they are military charters. For example, we were very big in handling the F1 Race in Montreal.

So, and, you know, we certainly view that as an incremental business because we already have the staff, most of it on our team and we already have the equipment, so it’s a very high market and high yield sort of business for us. Yes, we have regular business as well and we do a lot of ad hoc handling of various aircraft that’s coming to the airport.

So, it is – you know, the decision we made a number of years ago to go to our self-handling was for the singular reason, number one, to get control of our service and the quality of product we put out. And number two, was to enhance some revenue from this which we have successfully done.

We don’t want to take on too much because it will jeopardize our service, but anytime we can squeeze in some third-party handling, we definitely do that, and we also do third-party maintenance of aircraft as well at certain stations. We just actually won from UPS, we handle one of their MD-11s in Toronto, port maintenance, and we just won an award from UPS as the best maintenance organization providing service to UPS aircraft as third-party maintenance as well.

So, those are the little pockets of business that we always try to squeeze in whenever we have extra capacity.

Fair enough. And as you add more customers on this line of business, my assumption is there is not too much cost addition there, as you add more [indiscernible] operating leverage is good.

Yes. a little e bit of incremental labor, but no cost in equipment for sure.

Fair enough. Thank you.

So, thank you everybody for joining the second quarter conference call. As I’ve said during my opening remarks and in between, we continue to focus on our core strategies that I outlined, and I think the biggest change or biggest achievement that we want to get into is more diversification and flying more charters and mores ACMI and also continue to growth and expand into the e-commerce world.

I think that – there’s a lot of potential in that. We feel we’re just getting ready for it.

We have seen some slowness in general cargo, but not in the e-commerce world, and all I want – that I've been thinking about this e-commerce thing while I look at the trends and the volumes is that this has now become more of a utility for people like you need your hydro, you need your water, you need your gas, and now you need your shipments in the morning before 9 o'clock or when you order, you want it instantly, the next day or the same day. So, this has is become more of a utility and we see a lot of daily products like, you know, from toilet papers to toothpaste to Listerine being shipped by e-commerce and I think people’s dependence on this is a lot more as people are not going to the brick-and-mortar stores that they are depending for a lot their daily needs.

Even if there is a slowness down in general trend of shipping or an economy, we feel that certainly that e-commerce and the daily requirements of people are not going to change and the shift in the whole e-commerce shipping from occasional buy to daily products buy is now something else, but we view it as a utility. And again, we see a lot of catching up to do with Europe and U.S.

in terms of sales and we continue to focus on that. So, thank you very much everybody and we look forward to talking to you after quarter three.