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Cargojet quietly buys 6 more 777 freighters

Cargojet is investing in eight Boeing 777 passenger planes that will be converted to a pure cargo configuration, quadrupling its original order, according to a recent management document presented to shareholders and industry sources.

Canada’s largest all-cargo airline took a step into larger aircraft in November when it announced an agreement to buy the first two 777-200s converted by Mammoth Freighters, an Orlando, Florida-based startup. But the company has not widely broadcast that it now has eight of the large jets in its fleet plan.

In a March 7 letter to shareholders, executives said their fleet expansion includes eight 777 freighters scheduled for delivery between 2023 and 2025. The long-range aircraft will open the door for Cargojet (TSX: CJT) to handle more intercontinental traffic.

A March 29 press release about a long-term strategic partnership with DHL Express included news that the global parcel carrier will be the initial customer for Cargojet’s 777s, which will be deployed in late 2023 or early 2024. In a client note later that day, BMO Capital Markets analyst Fadi Chamoun said Cargojet disclosed in a call with analysts that it will provide DHL with four 777s. The other four 777s already have customer requests but will potentially operate with block space agreements — allocation commitments — for multiple forwarders.  

A source close to the situation told FreightWaves that Cargojet has exercised its option for two additional twin-engine 777-200s from Mammoth, for a total of four converted freighters. The contract also includes an option for two Boeing 777-300s.

The information strongly indicates that Cargojet has also ordered four 777-300s from Israel Aircraft Industries, which began engineering a 777 conversion kit at least one and a half years before Mammoth was founded in 2021. IAI aims to deliver its first 777 freighter, dubbed the “Big Twin,” to Kalitta Air in the first half of 2023.

Mammoth has said it will complete its first conversion for Cargojet in the third quarter of 2023 once the Federal Aviation Administration signs off on its conversion design.

Cargojet officials declined to comment about the 777 investments or how they will be deployed. 

“At this time we have nothing more to add than what we had included in our press release,” said Pauline Dhillon in an email that failed to mention the shareholder document. 

Israel Aircraft Industries did not respond to questions in time for publication.

The 777s are heavy-lift aircraft that are able to carry about 103 tons of goods and fit large quantities of light e-commerce parcels. The remodeled freighters will have 80% more space than the 767s and are about 20% more efficient than older, four-engine 747 jumbo jets.

Cargojet raised $365 million last year from a stock offering and is using the proceeds to rapidly grow the fleet. The company currently operates 31 dedicated freighters, two-thirds of which are medium widebody 767s. The remainder are Boeing 757s, a large narrowbody aircraft. 

The shareholder letter says Cargojet has purchased six additional 757 aircraft, with five to be delivered this year and one in 2023 following retrofitting by an undisclosed aircraft maintenance company. It also bought six 767-300 aircraft, half of which will be converted in 2022 and the other half next year. By the end of 2022, Cargojet expects to have 39 aircraft in its fleet and grow to 47 by the end of 2024.

Cargojet operates a domestic overnight network among 16 Canadian cities as well as points in the U.S., Mexico and Europe, providing dedicated aircraft, crew, maintenance and insurance for express customers such as DHL. It also runs scheduled international routes for multiple cargo customers between the U.S. and Bermuda, and between Canada, the U.K. and Germany, as well as ad hoc charters, mostly during the day and on weekends. It flies more than 80 flight legs per night.

Last year, revenues increased 13.3% to CA$758 million (US$597 million), helping boost adjusted operating income to an all-time high of US$231 million. It also joined Amazon Air (NASDAQ: AMZN) as a contract carrier with two 767-300s dedicated to the online retailer. 

The airline says it has a much larger customer base than prior to the COVID crisis and is aggressively working to diversify the business to take advantage of projected medium-term growth for air cargo associated with e-commerce demand and the ongoing shortage in passenger belly space. Customers include UPS (NYSE: UPS), FedEx (NYSE: FedEx), Purolator, Canada Post and Loomis Express.

Cargojet doesn’t have a dry lease business — straight aircraft rentals, with no additional services — but mentioned in the DHL news release it would offer equipment rentals. Company officials recently said that dry leases are an option in a downside scenario if market conditions don’t allow them to sell a turnkey freighter service, Chamoun told FreightWaves.

DHL, Cargojet deepen partnership

DHL Express’ decision late last month to significantly extend its transportation contract with Cargojet and take an ownership stake in its Canadian supplier demonstrates how deeply their partnership has evolved over 15 years.

The parcel logistics giant renewed its transportation contract with Cargojet for five years, with a two-year right to extend. Cargojet, which operates 12 Boeing 767s dedicated to DHL, will add five 767s to the fleet through 2023, as well as the four larger freighters, to meet DHL’s anticipated network requirements.

The new master agreement consolidates all existing DHL contracts and represents up to CA$2.3 billion ($1.8 billion) in revenue.

Cargojet has become so integral to DHL’s regional and international operations that the express carrier is taking a position in the company. The Canadian carrier, which derives 30% of its revenue from DHL, said it will issue warrants to acquire up to 9.5% of its outstanding voting shares at a price of CA$158.92 per share over seven years, with vesting contingent on DHL reaching the revenue target over that period. That should be achievable because most of the revenue increase is incremental.

Executives said on a call with analysts they expect 80% to 90% of DHL revenues to be from long-term aircraft operating charters, with the balance for supplying crews to fly DHL aircraft, as-needed flying and potential aircraft lease services.

Two percent of the warrants vest immediately. 

The length of the contract for aircraft, crew, maintenance and insurance, compared to a typical three-to-five-year ACMI contract, demonstrates the strong partnership between the companies but also the realities of a tight market in which transport buyers are doing longer deals to guarantee capacity.

“Cargojet is an important aviation partner of DHL in North America, and we see this expansion of our relationship further strengthening intraregional and intercontinental links to and from this region,” said Mike Parra, CEO of DHL Express Americas. “Its versatile cargo fleet and high on-time reliability positions us well to further capitalize on the dynamically growing e-commerce market, in particular.”

Becoming a minority shareholder in an air transport supplier is the same approach Amazon has taken with partners Air Transport Services Group (NASDAQ: ATSG) and Atlas Air (NASDAQ: AAWW). 

DHL’s airline, most of which consists of outsourced airlift, has significantly increased its global capacity during the past two years, including by 18% in the Americas for the 2021 peak season in response to strong demand, especially for e-commerce shipments. DHL also recently added a new weekly connection from Vietnam to the U.S., offering 102 tons of extra capacity for exporters.

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

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