Cargojet Inc

TSX:CJT

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to Cargojet Conference Call Third quarter 2022. My name is Precilla, and I will be your coordinator for today's event. [Operator Instructions]

I will now hand over you to your host, Ms. Pauline Dhillon to begin today's conference. Thank you.

[Pauline Dhillon, executive]

Good morning, everyone, and thank you for joining us on this call today. Our apologies for the slight delay. The service provider was having a few technical issues. With me on the call today are Ajay Virmani, our President and Chief Executive Officer; Jamie Porteous, our Chief Strategy Officer; Scott Calver, our Chief Financial Officer; and Sanjeev Maini, our Vice President of Finance.

After opening remarks about the quarter, we will open the call for questions. I would like to point out that certain statements made on this call, such as those relating to our forecasted revenues, costs and strategic plans are forward-looking within the meaning of the applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted earnings per share and return on invested capital. Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of GAAP and measures to GAAP income.

I will turn the call over to Ajay Virmani.

[Ajay Virmani, executive]

Thank you, Pauline, and good morning, everyone, and thank you for joining us this morning for the third quarter earnings call. I'd like to thank all those who attended our inaugural Investor Day on September 27. One of the objectives of this event was to showcase the passion for the entire Cargojet team. I hope we were successful in demonstrating our culture, our leadership team and how our various functions come together each business way, each business night to deliver excellent server customers. Despite the risks and volatility expressed in the business news, Cargojet continues to demonstrate growth of revenue, our ability to manage costs and the continued high level of customer service as measured by our industry-leading on-time performance.

Cargojet has lived to 2 down cycles. We live preparing for a downside scenario back in January 2021 when we strengthened our balance sheet with a [ $365 million ] equity issue. And it was not just the balance sheet, we also focused on strengthening our business model. We diversified our business with a significant expansion of our ACMI and CMI business that is underwritten by strong customer contracts that provide certainty revenue with incentives for additional growth. We have a strong balance with several risk mitigation opportunities to manage revenue, operating costs and capital expenditures. An example of how we manage our CapEx would be the most recent decision to exercise an option to defer the last of our Boeing 777 that was planned for 2026 and until most likely 2027.

If things change over the last, next 12 to 18 months, we believe that Cargojet will still be in a position to acquire that [ 8 777 ] as originally planned in late 2026. Cargojet is not immune to softness in consumer spending through the recessionary scenario become real. However, it's worth noting that Cargojet has evolved its business model that is increasingly based on strategic partnerships with its customers. By aligning our long-term commercial interest, we expect a greater stickiness of volumes with our strategic customers, even if over volumes softened during the recessionary period. Therefore, we remain cautiously optimistic that the strength of our business model would allow us to manage the volatility better.

One of the concerns that we often here is what happens to air cargo in the passenger aircraft belly capacity returns to pre-COVID levels. Concerns that [ shippers ] will revert to usually using belly space as opposed to dedicated airframe. Recent debt that in the U.S. shows that TSA checkpoint numbers are approximately 5% of prepandemic levels. European flights are within approximately 10% of the prepandemic levels. As I explained at our Investor Day, there are many more factors that will determine the utilization of belly space than simple return of flights. Many airlines are bringing narrow-wide aircraft into cargo friendly widebodies, the roots predictability and the speed-of-service all play a role in decision-making. Therefore, despite the capacity created by the return of the belly space in passenger aircraft, shippers continue to move their freight in the dedicated air cargo freighters because they can depend on the service.

We are pleased to report that in the third quarter, Cargojet's domestic revenue increased 21% compared to previous years and our ACMI revenue increased by 47% compared to last year. We remain confident in our business model and the ability of our leadership team continues to navigate expected volatile times, and we remain surely focused on our long-term strategy.

I will now pass on the call to our CFO, Scott Calver, for an update on the business.

[Scott Calver, executive]

Thank you, Ajay. Good morning, everyone. Before I get into the third quarter results, I would also like to thank everyone that either attended in person or dialed into our inaugural Investor Day on September 27. For those that were not able to attend, I would encourage you to visit the Cargojet website or you'll find all the material for this event. I would now like to share a few thoughts on the business. In past quarters, we've gone to great lengths, outlining the post-pandemic era and what that means to Cargojet. The third quarter revenues that Ajay just mentioned, once again confirm that our business model of a more diversified portfolio is proving resilient. For this update, I would like to add more color on the impact of a possible recession on our business.

Cargojet is prepared for our peak season. Cargojet's largest customers have secured additional capacity for the fourth quarter. Our customers are calling this year a controlled peak as opposed to all the uncertainty in the 2 previous years. Cargojet is continuing to add capacity to meet customer requirements. In July, we added a 767 to support revenue growth with a lane into Brazil. The company just took delivery of 2 757s to free up 767 capacities for additional revenue growth. One of these 767s will be used for a new route between Halifax and Los Angeles, the second 767 will be deployed to manage peak season volumes.

The company will take its next delivery of the 767-300 in January 2023, and it will be put to work immediately. The core business is and remains strong. Despite the short-term volatility in e-commerce volumes, we remain bullish in our view on the long-term growth cycle of online shopping. We also believe that any reduction in retail consumer spending will be impacted more severely in the bricks-and-mortar retail outlets, sophisticated systems used by e-commerce retailers. In a recession, consumers tend to be more price sensitive. It is our belief that e-commerce retailers are better positioned to meet the expectations of end consumers. That is why we are excited and feel confident in our long-term growth strategy.

Now turning to third quarter results. We posted another strong quarter with revenue growth of 22.8% compared to prior year. While we are pleased with a 21.2% increase in domestic business and a 47% increase in the ACMI business compared to prior year, the softness in our all-in charter revenue is primarily due to the extraordinarily high volumes carried in 2021 due to COVID-related supplies being imported from Asia. The adjusted EBITDA for the quarter came in strong at $82.1 million or 35.3% of revenue compared to $70.9 million for the same period in 2021, an increase of 15.8%.

Adjusted free cash flow for the quarter stood at $47.9 million, a decrease of $3.2 million compared to prior year, primarily due to increase in capital expenditures to support our secured growth. Total capital expenditures in the quarter were $118.9 million compared to $58.9 million in the same period in the prior year. Return on invested capital for the quarter was 9.7%. At our Investor Day, I mentioned that this would be a bit bumpy at times as we wait for annualized revenue and profitability to catch up with the capital expenditures and a related increase in our invested capital.

As at September 30, Cargojet has invested $292 million in capital expenditures that have not been put into service. If you adjust for this equipment under development, the return on invested capital would have closed the quarter at 12.7%. On the operational side, block hours increased 21.6% compared to prior year. The revenue per block hour is consistent to this increase in revenue. The slight increase in direct cost per block hour is primarily due to fuel costs and the reduction in all-in charter revenue.

As planned, we grew our air cargo fleet size to 34 aircraft at the end of Q3 2022, an increase of 3 freighters in the quarter and an increase of 5 freighters compared to this time last year. Our on-time performance remained strong at approximately 99.7%. While we feel confident about the long-term growth opportunities, Cargojet will continue to watch all of our key metrics very closely. We will find the right balance between investing in growth, managing costs and maintaining a strong balance sheet.

This concludes our opening remarks, and we will now open the call to any questions.

[Operator]

[Operator Instructions] We will now take our first question from Cameron Doerksen from National Bank.

[Cameron Doerksen, analyst]

I guess I just want a question really on the outlook. It sounds like your Q4, your customers are still pretty optimistic about the volumes. But I'm wondering if there's any indications as we look into Q1, or is it really too early for some of your customers to kind of look that far ahead.

[Jamie Porteous, executive]

Cameron, it's Jamie. Just on the 3 segments of the business, I would say, certainly, on the ACMI side, we're not expecting any softness in Q4. And going into 2023, as Scott pointed out during his opening remarks, we have significant -- we'll see the full year effect next year of a few significant ACMI routes that we started in 2022, primarily the one to Brazil that we started in July and a new route that we start between Europe, Halifax and Los Angeles this week as well as the other aircraft that we're taking delivery of next year that will go into service. So that will remain strong.

The domestic business, a little stronger results in Q3 than we were expecting the trend year-to-date. For the first 6 months, we were running about 15% ahead of year-over-year on the domestic revenue, a little surprised that the increase in Q3, our forecast from our domestic customers as Scott said, is for a more controlled peak period. But certainly, we expect a significant increase continued year-over-year increase. Going into 2023, as you said, I think it may be a little premature to expect. I don't think we'll continue to grow at the same 15% to 20% level year-over-year in 2023. I expect we'll see some softness. But again, as I think we've said before, softness is not negative growth instead of 15% to 20% growth, maybe we see high single-digit or low double-digit growth.

The one area that we're seeing some -- although we've seen a nice bounce back in Q4 -- the early part of Q4 has been on our charter business. We're running in Q3 sort of in the range of $15 million to $20 million per quarter that we had indicated would be sort of a normal run rate. We're above that in the first 2 quarters kind of in that range in the third quarter, primarily because of some softness we saw globally, especially out of Asia, but we're seeing some strong demand right now. Although the international, which is also part of that segment is impacted by lower yields, particularly out of Europe because of the value of the euro against U.S. dollar and inflation in Europe. So that's one area where we're seeing some softness.

[Cameron Doerksen, analyst]

Okay. That's very helpful. The second question I have was on the [ adox ], you answered that.

[Operator]

We will now move on to our next question from David Ocampo from Cormark Securities.

[David Ocampo, analyst]

Ajay, you talked a little bit about your flexibility in terms of deferring CapEx, which is a few years out, but maybe you guys can speak a little bit about your flexibility in the near term in the [ event ] that you guys do see a slowdown. And then maybe layering on to that, maybe for Scott. Can margins still hold up these levels of volumes to fall by, call it, 5% or 10% into next year.

[Ajay Virmani, executive]

Yes. So, our fleet plan, as you probably have seen on Investor Day and some of the other communications are basically adding 767s 300 steerable fleet. And those are primarily committed to ACMI work. So we do have an option of 2 aircraft deferrals for 2023 as well. So if things were to slow down, there's 2 aircraft that we can either shift to 2024 or cancel them all together. So we do have -- and that's almost $100 million or slightly even more. So there is some flexibility in the 2 767s that we -- we can exercise in the next year to postpone it, defer it or cancel it. So that's -- and also on the 777, we also mentioned that we have already deferred one, and we have the option to defer another one. So we could be -- if things got really bad out there. We certainly have at least -- we mentioned at the Investor Day, $150 million to $200 million that we can defer. But I think after coming back and looking at it, we also made other contingency plan, and we think certainly deferred maybe twice as much as we said we could. So we're still looking at it, working at it. But yes, we have some flexibility in that area.

[Scott Calver, executive]

Yes. David, just on the margins. And yes, we do believe we can maintain these margins. And really, there's 3 main reasons. On the direct cost side, we do have ability to manage those block hours, and we do it daily already, but obviously, in a recession, we'd have to potentially execute more frequently, and that's combining flights, rationalizing flights, getting a little bit more creative with triangulating freights. But just to manage our block hours accordingly if there is any change.

In the SG&A, we've already made decisions. We've got a hiring freeze right now. We're not much different than any company right now that's really looking at their -- what they can manage and we're not traveling. We're doing all those things just to manage our costs in anticipation. But really, the third thing that's most critical in terms of us maintaining margins is this growth revenue that we're bringing on is spreading our fixed costs over a greater revenue base. So we have that fixed cost absorption benefit that as long as we keep adding this growth revenue that we've secured, it's going to dilute those fixed costs over greater revenue. And that's really going to help us maintain our margins.

[David Ocampo, analyst]

Got it. That makes sense. And then on the charter revenue, Jamie, you talked a little bit about this, but there's a $15 million quarterly run rate here now the new normal, I think before you guys were talking about something in the kind of closer to the $20 million range?

[Jamie Porteous, executive]

Yes. I think going forward in 2023, $15 million to $20 million is still a sort of normal run rate for the charter business. Q4 is always a little bit different. Not that the demand is not there. The demand is usually very strong in the fourth quarter for ad hoc charter revenues and the only thing that restricts us from making or achieving those revenue levels is the availability of aircraft and crews because we normally have those dedicated to the domestic and the ACMI peak volume needs. So that would be the only question in the fourth quarter.

[David Ocampo, analyst]

And then just as a modeling question for the 15% growth that you guys saw in your domestic business. What was the breakdown between volumes and pricing there?

[Jamie Porteous, executive]

The -- it was 21% in the quarter as I think it's 17.5% year-to-date for the first 3 quarters, most of all that is volume related. As you know, most of the domestic revenues are contractual. So the -- other than there's some CPI increases throughout the year on the anniversary date of those major agreements, but the majority of it would be volume.

[Operator]

We'll now move on to our next participant, Chris Murray from ATB Capital Markets.

[Chris Murray, analyst]

A couple of things just on the ACMI contract. So just maybe trying to understand the -- that new contract. Historically, sector 767 contract, you're somewhere in the neighborhood of USD 11 million or USD 12 million. Is that about the right way to think about that contract?

[Ajay Virmani, executive]

Yes. I think this one -- you're talking about the one we're starting this week, Chris?

[Chris Murray, analyst]

Yes, exactly.

[Ajay Virmani, executive]

Yes. It's probably a little higher than that because it's a much longer range. It's actually rerouting an existing aircraft that we're flying from Europe to, to Cincinnati and adding the new aircraft and crisscrossing the 2 and they fly from Leipzig in Germany, Cincinnati our DHL's hub into Halifax and then on to Los Angeles and then from Los Angeles back to East Midlands in the U.K. and then on to Leipzig. So it's a significant -- I think it's 7 -- just over 7,000 block hours per year for 2 aircraft, which would be a little higher than the average. So it would be probably more in the [ mid-$15 million ] range in terms of revenue.

[Chris Murray, analyst]

Okay. U.S., that…

[Ajay Virmani, executive]

Canadian.

[Chris Murray, analyst]

Okay, cool. And then you also mentioned that you've got an additional [ 6, 7 ] you think that will free up early next year. Should we also assume that, that will take a route similar to that? And again, for DHL?

[Ajay Virmani, executive]

I think the best way to do it, if you averaged out $12 million because some routes are longer, some are shorter. We average them out. And I think that's a good average to grow with around $12 million.

[Chris Murray, analyst]

All right. That's helpful. And then maybe to ask the question in a slightly different way. Thinking about demand forecast into 2023, how much visibility do you have right now from your partners about their 2023 plans even on a scheduling basis, that give us some confidence that 23% is at least shaping up to be okay at this point.

[Ajay Virmani, executive]

Well, all I can tell you is nobody has requested any downgrades to space or set. We're going to be down or we're going to be lower. So we publish our schedules. We just published them for the peak, and we just got publishing all indications. So far, we have met people on the peak, peak side of things, but nobody has indicated any sort of -- that they want the contract reduced or for that matter, any kind of reduction has not been requested. So we'll get into some planning sessions as everybody is kind of now concerned about the peak right now to get that out of the way. I think early January, we grew with some of our customers and look at it. But normally, they give us an indication, but we haven't seen anything from anybody here. Our schedule is at this…

[Operator]

We'll now move on to Matthew Lee from Canaccord.

[Matthew Lee, analyst]

Maybe we can just start with something on the cost side. I noticed that ground handling was up substantially in Q3 year-over-year. And is that more to do with increased wages or maybe labor shortages? And how do you see that impacting Q4 at all?

[Ajay Virmani, executive]

Yes, it's up a bit, and -- but revenue is also up as well because we have one revenue stream that is providing the service. Amazon would be the best example. So there -- even though it's up, there's revenue that's up as well, that gets coded in our domestic revenue.

[Matthew Lee, analyst]

Right. But maybe from the perspective of hiring people for the Christmas holiday [indiscernible].

[Ajay Virmani, executive]

Yes. So there is some part-time supplementation of labor, which is a bit higher than our normal cost. We also have some region freezes that are more in line with what the industry has done. So yes, there is -- there always be a part.

[Operator]

We will now move on to our next participant, Kevin Chiang from CIBC.

[Kevin Chiang, analyst]

Maybe, Scott, you mentioned hiring [ fees ], which makes sense to be prudent here, given all the uncertainty. When I look at your headcount, just over [ 100 ], should I think of that being kind of a good run rate, I guess, for the next few quarters? Or is there some seasonal lift as you prepare for peak season? And if I could just -- if you could also share maybe how much of that labor is what I call unproductive, if you know pilots that are training that aren't yet able to fly with you, which I suspect without the margin if [ that they get into the points ]?

[Scott Calver, executive]

Yes. So Kevin, right now, we have about 60 to 70 pilots that are not productive. They're in training. And most of them are dedicated to the ACMI contracts that we have pending. And secondly, we also, by hiring more pilots, we also get more flexibility. Right now, we can bring a lot of overtime for charters and some of the other stuff. So that comes back in line as well. We have our own simulators now. So that's going to save us a lot of travel days between -- for the pilots they were going to Miami or Vancouver to get on simulator from other companies training. So we will gain some efficiencies in that area.

But certainly, as far as the other employees are concerned, the only people we will add in some part time is in the peak time to -- which we always do every peak because the volumes are substantially higher than the normal period. So yes, we will be adding some part-time labor, but we don't anticipate to add any full time on the labor side. But there are a couple of open positions we have on the executive side that needs to be filled. But generally, the higher decrease is the growth right now, but we're just being prudent for not hiring any permanent people at this time.

[Kevin Chiang, analyst]

That's very helpful color. And then just my last question. A question I asked in that is -- do you say that the modal shift in a downturn. We've seen significant declines in ground transportation cost and a lot we look forward to the weakening truckload market? I know that's more of the U.S. phenomenon. But do you see a risk there that some of your customers could [ shift forms from ] airfreight to ground as rates fall in the latter node?

[Ajay Virmani, executive]

Kevin, I mean, there's always a risk when ground trade is cheaper and certain B2B staffing. But keep in mind, majority of our customer base is like time-sensitive stuff. So if you look at spare part market, if you look at the computer parts or computers or any chips or medical supplies or -- which is a lot of fresh produce and lobsters. And no matter what price you can down does, that business, fundamental business that flies does not shift. There might be an odd 5,000, 10,000 pound shipment that normally went air and now it's gone down. But we don't see that as a major shift from our base business because we -- people use us when they need to use us. And that's -- nobody is going to risk going to a truck, number one.

And nobody is going to go risk to a belly passenger on domestic because he could be 24 hours to 48 hours, and the product will be audited by the time it got there or somebody could be needing that product in an [ ER room ] in Vancouver or some of spare parts that are needed for cars and stuff like that. So we are in a very time-sensitive market, and we don't compete with those occasionally, when we have space left over and we might take on a standby shipment that would have gone by profit and that kind of stuff. But that is not our primary business.

[Operator]

We will now move on to Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

I just wanted to ask first on the fleet schedule. So I noticed on the fleet plan, there has been some pull forward of 757s and 767s, and like it's probably 1 or 2 quarters of ship I'm talking here not much, but any sense why you have to get in these aircraft earlier? Is it because the customer full, or is it because of the suppliers push where we have prepared these aircraft earlier than expected?

[Ajay Virmani, executive]

No, the 757s were -- our plan was to get those as soon as possible, so they can free up the 767s. These 2 advantages of coming to 757. Keep in mind that our goal is to improve on our domestic service, which has already runs at phenomenal 98.5% on-time performance. But now with the introduction of 757, we have more direct flights to more stations to invest and ease returns than we ever had. So for example, from Hamilton, now we can offer direct service to every major city without stopping in Winnipeg. Same thing going to the East Coast as well.

So there is a lot of advantages to service enhancements where we can give our customers a little later cut-off time so they can continue to pick up even till 8:00 at night and still bring it to us at midnight and then we can ship it direct now. Direct shipments also improved service because they're not transiting, there's no deicing delays in Winnipeg or Calgary. So those are some of the advantages of direct ship lying. It's no different than when you're flying to Vancouver going Winnipeg or Calgary, you're stopping over, same thing the shipments have. So that's why we are replacing those aircraft.

And second thing is we take the 767s that are going to be freed up and deployed in the ACMI and the charters and some of the international markets we're thinking of. So it helps both ways. But what I mentioned on the fleet plan was that we do have the auction to defer the 2 767s that was scheduled to come in midyear next year into either the following year or cancel them all together.

[Konark Gupta, analyst]

Makes sense. I think that's a good segue to my next question, actually. So you mentioned, Ajay, like at the Investor Day, you were saying, as you said, $150 million to $200 million of CapEx that can be deferred or maybe cancel to some degree and then you say that could be potentially double in the --?

[Ajay Virmani, executive]

Yes, we could easily do go up to $300 million if things got -- if you hear bad news in next year. We are in a position to trend that.

[Konark Gupta, analyst]

Right. But like is there any [ tunnel ] to be associated with that deferral or cancellation? And like will it be surpassed --?

[Ajay Virmani, executive]

In the whole scheme of things, it's not going to be material. I'm talking, if I deferred another $150 million or canceled it could be in the neighborhood of $5 million. So it's not going to be material. I mean I'd rather take the $5 million, second if I think we don't need to spend $150 million. That's a no-brainer. So that's -- as I said, it's not a material those penalties.

[Konark Gupta, analyst]

Makes sense. And last one for me. So I mean, actually, you guys were talking about how you see sort of kind of the EBITDA and revenues, et cetera, and ramp up to EBITDA 500-plus in 2026 as you get more aircraft coming in. With respect to sort of the bridge to that 2026 guidance you provided, is there a way to kind of think about how you get there? Like is it a leaner curve to 2026, so you will see maybe some sort of lower growth in the early years and then stronger growth in the later years?

[Ajay Virmani, executive]

Well, one of the things is that we're very -- we read the papers. We talk to people. We see the industry. And we know that next year or the year after, it could be a bit rocky and with headwinds and turbulence coming in the shipping and [ company ]. So we know that our fleet plan, our workforce, we are solid and delivering when the need arises. So next year or 2 years, that's why we have the option to defer some of those expenses. If we defer some of the aircraft, obviously, the revenue and revenue side also gets a little bit deferment. We feel that we have a strong enough balance sheet and our liquidity position is almost like $1 billion. So we don't feel that we're going to go down totally if everybody went down. We are in the best position that anybody in the marketplace to weather those storms. So I think that your question is how the curve is going to follow, I think it's kind of a difficult one to answer. But whichever way it follows, we are prepared. I think that's the key thing that you should take from this.

[Operator]

We will now move on to Walter Spracklin from RBC Capital Markets.

[Walter Spracklin, analyst]

So I wanted to ask a little bit on ACMI and the potential evolution of your customer base there. And I know you've been pretty focused on DHL. They've been buying a lot of your capacity. They've indicated that they like more, and you've been happy to service them there. For anyone that would like to see a little bit more customer diversification, I know there's a lot out there that suggests others would be interested as well. Do you think you're going to see more -- a more diverse customer base in your ACMI line over time? Or you -- is DHL just due to either contractual commitments you made with them in that agreement or other reasons? Are you devoting most of your available capacity as it comes online to DHL.

[Ajay Virmani, executive]

So Walter, I'm all about diversification, and that's why we went from domestic to charters to HMI to be international. And same thing, I believe, in the customer base as well. We totally are open for diversification. Yes, we do a lot of DHL. And to be honest with you, we have commitments with DHL that because of our performance, we are always in the top couple of carriers for them and the strategic partnership we have. So right now, the aircraft we have coming in this year and early next year are committed to DHL. Now we are also -- there's no reason why we are quoting for other customers as well. But to be honest with you, we can't, at this stage, go on and take a seriously 1-year deal available in Europe or Far East is not a week goes by where we don't get an e-mail. We've got $200 a month in flying from Hong Kong to Manila. And we're just not in a position to entertain some of that ACMI work.

And that work, I must tell you is not only profitable, it's good for us, get our international presence growing as well. But we're absolutely not in a position to take that on because of the pilot situation because we've got so many of them in training. And second part is that we have commitments to DHL right now that we need to meet. But we have taken on work for a month or [ 60 ] days here and there just from other suppliers, other customers, and we'll continue to do that. But yes, our strategy would be that when the 777 comes in, we are only committed with 4 aircraft with DHL. And we would certainly -- we have a lot of inquiries on those, and then that would be the diversification time to expand our ACMI business.

[Walter Spracklin, analyst]

That makes sense. Stay on the topic of customers, I assume you're continuing your negotiations with your larger ones, the UPS, Purolator and so on. Is there anything that is contentious, anything that's a matter of debate? Is there -- does your customer want to kind of just see how the economy plays out before locking in a -- locking in something? What are the main sticking points, if any, that you're having with either UPS, Purolator or so?

[Ajay Virmani, executive]

There's no sticking points. We've always successfully renewed with every customer. I mean with Canada Post and Purolator Group, we had a 3-year extension as you see the number even to the 7-year deal that we signed. So that was a 10-year agreement. And I think that, I think everybody is kind of a little bit focused on peak. We have had initial round of conversations. We always do. That's our normal procedure. But I just want to remind everybody, you still like more than 2.5 years away on all those contracts. So although preliminary discussions have had both parties have expressed interest in working with each other.

So there is no issues. There's no material issues that we know of or we even told. We just need to get focused on peak and after peak, we -- if something happens before peak, it'll be great, but everybody is kind of now starting for -- as of November and December, the only thing we focus on is the extra flights and how we going to cover the peak. And to be honest with you, as I said, that still 2.5 years. And to answer your question, again, there is no issue that we are aware of that are any contentious in renewals.

[Walter Spracklin, analyst]

Fantastic. Okay. And then, Jamie, you mentioned growth still being solid, not double digit, but obviously lapping, you're still able to get high single digit for next year. Just wanted -- I don't want to be too specific to fourth quarter, but I know you did -- you had a huge ramp in the fourth quarter last year. And I'm just curious as to whether that's a difficult compare. I mean I had built in some negative growth on that because you're up 20% -- over 20% in block hour volume in the fourth quarter of 2021. Are you -- does that high single digit still apply to fourth quarter 2022 even on that difficult compare? Or should we look at it with a little bit more of a challenge given that the growth was so high in the fourth quarter '21?

[Jamie Porteous, executive]

Yes, I think it's going to be a little more challenging in fourth quarter 2022 than it was last year. You're right. We had a phenomenal fourth quarter last year. I think based on the trends that we're seeing in the first 3 quarters on the domestic revenue, I think it's going to be a good fourth quarter, but I think some of those macroeconomic factors are going to impact Q4 this year.

[Walter Spracklin, analyst]

So instead of -- you're up 20% to 30%, can you still do double-digit in the fourth quarter here this year?

[Jamie Porteous, executive]

Yes, I think so, but I think it will be below -- it will sort of be in the range of what we've experienced year-to-date in [ Q1s to Q3 ].

[Operator]

[Operator Instructions] Dear host, it appears there is no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks. Thank you.

[Ajay Virmani, executive]

Thank you, everybody, for joining us. I appreciate it.

[Operator]

I am very sorry. I am very sorry. We have one participant who is waiting right now that it will be Tim James from TD Securities.

[Tim James, analyst]

I'm just wondering if you could talk a little bit about the domestic environment. Can you just -- I know you've addressed it regularly in the past in what some of the competitors are doing in the domestic market. But any update on kind of what you're seeing in terms of their aggressiveness in pricing and going after volumes? Any changes on that front?

[Jamie Porteous, executive]

No, it's Jamie. Nothing at all actually. And if you look at certainly on -- from WestJet standpoint, they don't even have their 2 freighters certified or on their operating certificate in Canada and don't expect they think to have it until sometime next year. So no impact from them at all. And equally, from Air Canada with the 3 freighters that they're operating as we expected and suggested those are being flown mostly on international routes to supplement belly cargo capacity that they didn't have. So really no competitive threat to the domestic business. And I think a good indicator of that would have been the renewal that we did earlier at the beginning of 2022 on a long multiyear basis on both the TFI International contracts and the [ Andalou ] health care contract, where both of them were just simple extensions of existing agreements that we're ending in 2022 with really no consideration for what any other domestic player was doing in Canada.

[Ajay Virmani, executive]

And I just want to add, keep in mind that the domestic service, like I just mentioned to my earlier question that was asked, that we are taking the 757s and deploying them domestically, which means direct service. So the kind of service that we offer the late departures and early arrivals like you're talking any business that's given to us by midnight even 1:00, 4:00 at the destination. That's kind of hard to beat. We have 18 aircraft probably now, I would say, deployed in the domestic service. So anybody who needs to parallel that will have to come up with a network that gives lead departures, early arrivals and covers 18 cities every night and supplemental lift of daytime if they need it.

So the barriers that we have built around of a business and strengthening of the network and on-time performance, people come to depend on that. It's like your utility. You get up in the morning and switch your lap on. It's there. The power is there. Similarly, you open your door and your packages are there. So you're not choosing anybody. And that is where the key to of our businesses. And I think you saw some of that yourself and you were there on the Investor Day.

[Tim James, analyst]

Okay. That's really helpful. My next question, just sticking with the domestic network, and you've talked -- provided lots of good color on sort of the big customers and their intentions as far as the peak season goes. Anything notable you're seeing from that additional space that typically goes out to several hundred smaller customers? Anything you're seeing in terms of that demand or that capacity that's being called upon from those customers.

[Ajay Virmani, executive]

Probably, it's a bit early, but I can tell you that if that demand, it's hard to say, I think, because the smaller customers also depend on their customers and their order books. But I can tell you that we do plan -- our plan is to have that capacity available. And if for any reason that capacity exceeds what we have, we have the ability to scale it up. And we also have the ability to scale it down to not spend that money if that capacity doesn't show up. So we have the 767s 2 spares available for peak. We also have 757, so we can downscale it. We can upscale it, and we can cancel it. So I think that's anybody's guess whether all those smaller customers where they're going to be and what they're going to show up with. All indications to us by our bigger customers are they expect like not the greatest, greatest peak or peak season, but they think they're going to be steady. And I think the similar trend can be assumed for the smaller customers.

[Tim James, analyst]

Okay. And then if I could just squeeze in one more question turning to [indiscernible] and the DHL agreement, the 7-year agreement when you announced that, I think it was $2.3 billion, I'm not taking in terms of total revenue potential, from that. Could you talk through what the economic environment of next year means to that dollar figure? Does it sort of put it at risk or just by nature of the way that contract is established. Could volumes within that agreement to move around without it having an impact on the dollars per Cargojet at the end of the day?

[Ajay Virmani, executive]

Look, I mean we always know that nothing is forever, right? And we -- if the business -- everybody's dropped 50%, we will probably drop maybe 10% or 20% because we are -- we have a strategic partner. We have a long-term agreement. So from what our understanding with DHL has always been because of the high level of performance and the competitive price we provide. And we have the strategic agreement with them that they would always try to give us, the routes that we can handle, number one, effectively, efficiently, given our Canadian license and pilot situation. And number 2, if there was a downturn, we would be the last one out. So it's -- we don't see that worst-case scenario at this stage. Yes, every -- when you look at FedEx and UPS and DHL, everybody is going to be down proportionately at some point. But the nature of our strategic agreement helps us, and that's why we did what we did with them is because they will -- if they cancel, let's say, Cincinnati, you pay out with us, and they would probably replace us with an [ LA2 trust stock ] or something else.

So -- and we have been doing that all year along with them. They use us where they need the capacity. So I don't see anything different with them. But again, I can't guarantee that they're not going to cancel everybody out and do what they need to do if things got really bad. But I think the way our contract is structured, gives us the comfort level that we would probably be one of the large carriers to be a lot more what happened before we are asked to [ pack our bags ]. So that's the nature of the contract. And that's -- and we are the only -- and we're the only operator who has that kind of contract, by the way, with DHL. So just so you know that…

[Operator]

It appears there is no further questions at this time. I'd like to hand over to you. Thank you.

[Ajay Virmani, executive]

Thank you, everybody, for joining us. Sincerely, appreciate it. While we prepare for peak, wishing everybody a great holiday season, and look forward to connecting you soon. Thank you.

[Operator]

Thank you, everyone. You may now disconnect.