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Cargojet Inc
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Good morning, ladies and gentlemen. Welcome to the Cargojet's Fourth Quarter Year-end Results Conference Call. I would like to turn the meeting over to Pauline Dhillon. Please go ahead, Ms. Dhillon.
Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. On the call are Ajay Virmani, President and Chief Executive Officer; Jamie Porteous, Chief Commercial Officer; and John Kim, Chief Financial Officer. After opening remarks by Ajay and Jamie, we will open the lines for questions. At this point, I'd like to point out that certain statements on this call, such as those relating to our forecasted revenues, cost and strategic plans, are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDAR. 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 non-GAAP measures to GAAP income. I'll turn the call over to Ajay for his comments.
Thank you, Pauline, and thank you, everyone, for joining us this morning on the Cargojet conference call. I'm very pleased to report another successful peak season delivered by the Cargojet team with record volumes and on time, solid performance. We delivered a strong quarter with 9.2% revenue growth, excluding fuel surcharges; improved our margins; and grew adjusted EBITDA by 17.4% over last year. As I mentioned before, we are focused on growing each segment of our business, be it overnight work, overnight network, ACMI or charters. We believe there are growth opportunities in each of our segments, and fourth quarter is a clear example of our diversification strategy and action that I mentioned in our previous conference call. Despite softness in the interline business from various international countries, e-commerce remains very strong, and quarter 4 results show that. Jamie will make more comments on this right after myself. We continue to see a strong shift in shopping patterns. One-Day Prime by Amazon has been a great game changer for the e-commerce industry as other retailers play catch up. But online shopping has now moved to a 7-day week shopping pattern and is now allowing us to maximize asset utilization and improve margins. Canada still lags behind U.S. and the international world out there on e-commerce shopping as a percentage of total sales. There is plenty of opportunity for Canada to grow within the e-commerce space in the coming years. Peak season growth means tremendous focus on delivery and on-time performance, focus on quality and safety, especially when the weather is very bad. Our maintenance team works extremely hard to make sure that our fleet remains in top form. And once again, I'm pleased to report that quarter 3, quarter 4, our on-time performance was -- exceeded our contractual commitments and was over 98%. And this is a key metric for our customers because they have built the first and last mile networks that rely on our ability to meet our commitments. We are developing a culture of continuous improvement. This means managing our cost and cash flow prudently with an eye towards strengthening the balance sheet. As I look back at 2019, it has been a transformational year for Cargojet. We delivered a solid 10% growth and overall revenues, excluding fuel surcharges. This growth was achieved through a strong overnight business while strengthening our ACMI that posted a growth of 40% -- 44% over full year. We entered into strategic relationships to build long-term growth. We redeemed our debentures early to further strengthen our balance sheet, and we invested in the business to lay a solid foundation for the coming years. I am as excited about Cargojet's future as I was when we first started the business 20 years ago. Once again, thanks for joining us this morning. We will continue to build our business in all segments. Diversification of new business lines and other opportunities will be a key for us. Now I will ask Jamie to share his thoughts on our fourth quarter revenue and revenue trends.
Thanks, Ajay, and good morning, everyone. Q4 continues to see tremendous growth in e-commerce demand on our overnight network, both directly from retailers such as Amazon and indirectly from the integrators and legacy couriers that participate in the e-commerce space in Canada. We also saw the continued growth of expansion of our higher-margin dedicated ACMI business with the addition of our sixth route, which began at the beginning of the quarter. This revenue growth was partially offset by declines in domestic overnight network volumes outside the e-commerce space and to lower overall air cargo demand globally as a result of continuing international trade challenges and lower economic activity, and more recently, the impact of the coronavirus, especially on volumes out of Asia. We saw this reflected in the reduced demand for our scheduled international and ad hoc charter services and for lower interline revenues during the quarter. As Ajay mentioned, we were proactive in reducing and suspending some of our scheduled international routes to Cologne in South America in the third quarter as a result of this lower demand. The reduction in operating expenses were reflected in overall margin improvement shown in Q4. As Ajay also noted, we operate a very successful peak period in 2019 with record volumes and record on-time performance achieved on our overnight network. Average domestic debt network revenue per operating day increased 4.2% from the previous year. E-commerce continues to be the driving force in our overnight network growth. We continue to operate our Sunday night flights during Q4 and operated additional dedicated charters during the period to meet this growing demand. E-commerce will continue to provide tremendous growth opportunities in 2020 as online retail sales continue to grow in Canada, and we plan on continuing to capitalize on this growth by offering value-added services on our domestic network and by continuing to grow our ACMI revenues and charter business. Thank you, and I'll now turn the call back over to the operator for any questions.
[Operator Instructions] The first question is from David Ocampo from Cormark Securities.
Ajay, you touched upon this in your opening remarks. But on the flying you're doing outside your traditional core market, how are the discussions with your customers progressing? I imagine Amazon is extremely receptive, but how large can those be? Are we thinking kind of a daily flight on all days of the week?
So I think one of the things, David, is that what is the core market for us? The core market at this stage does not mean just overnight. Core for us, we used to use that because that was the only line of business we had. And now we have diversified. And as you look at our charter business, our ACMI business and every one of them, when you're doing 1/3 of your business in other markets, they all become core to us. So I want to clear that misconception that we are focused on every line of business and every line of business is core for us. As far as Amazon is concerned, they've been a customer for -- since 2015. We do some special charter flights for them on certain -- like, for example, peak period or whether it's Prime Day sale or any events, back-to-school sale. But also they are a big customer on the overnight as well. So they kind of commented, too, if you want to call every business core business, they come into core charter business and they come into the core overnight business as well so. And they're still growing. So e-commerce is growing tremendously fast in this country, trying to catch up with the rest of the world. And we continue to service them in all areas.
And your other customers apart from Amazon, are they interested in the daytime flights as well?
You know what, right now, daytime flights are -- we do operate a daytime flight to Western Canada for our other customers. And what we operate for Amazon is not the 2 separate flights. But at the end of the day, if there is space lapped over, we would definitely market it to other customers, which means that's a revenue for us and we could lower Amazon's cost if we can have this space. So it's kind of a win-win. We haven't had that situation yet because when we do the charters, they're pretty full.
Okay. That makes sense. And on the new hours of service rules for pilots, the costs are going to increase this year. Do you guys have a sense on how much pricing will increase from this initiative in 2020?
Well, we have gone to our customers and implemented a pilot fatigue surcharge. Most of them have been implemented. There are a couple of them, in terms of when people give you increases, they want to make sure that they come and they have some other flights. In terms of looking at, if you're asking our pilot when the cost up by $5 million and you want to spread it among the customer base, one of the 2 customers have kind of done their due diligence. They're looking at our numbers, and we expect those to be sorted out in the next 30 days. Cost increases by customers are never easy. But I think the good part of this cost increase is that everybody is aware of the safety issues regarding pilots, why this surcharge is going in. And at the end of the day, everybody also knows that there's a big pilot shortage in the country. And basically, we will recover our cost. It's a matter of like a month or so, that once the due diligence by over a couple of our customers is over, we should be in good shape.
So is the right way to think about this is you're going to get your traditional cost inflation on your contract, possibly, and another [indiscernible]
Yes. They are independent of this surcharge.
The next question is from Kevin Chiang from CIBC.
Maybe if I were to follow-on that last question from David. If I look at your margin expansion on the EBITDA line and accounting for some IFRS 16 noise, you're up about 180 basis points, if my math is correct, year-over-year in 2019 despite some of those pilot fatigue costs you would have incurred. When I think of 2020, should I think of margins being -- or margin expansion being greater than that? As you mentioned, you implement some of these surcharges, or is the run rate we've seen this year kind of a good run rate over the next, I don't know, year or 2?
Kevin, as you know, the margins are very, very important. We had some routes that we were flying like Bogota Lima, which is kind of -- was a strategy that we wanted to go forward and expand in that area. But unfortunately, because of the international trade down from China, that's an activity -- Bogota Lima was lower, our margins fell lower. We took that flight out and took that plane and put into a higher margin ACMI business. So the focus is certainly on improving margins for us, which we have shown, and that was one of the reasons we did what we did. And any opportunities that we get, we'll try to increase our margins. And now with recovery of the pilot fatigue surcharge because some of it's staged over certain months, once it fully comes into -- back to the customers, you can certainly expect to see fairly decent margin increase in the -- overall.
Okay. That's helpful. And then I did notice your fleet schedule is up 1 for 2020 to 2022 versus your Q3 MD&A. It looks like all the CapEx though was spent in last year. So if I look at your CapEx into 2020, can you remind me what we should be thinking in terms of what that number looks like, even with the fleet -- the adjustment to the fleet schedule?
Yes. We're looking at -- we're trying to cap at between $100 million to $110 million. Probably $100 million would make me happier. Just keep in mind that we bought an aircraft, 767-300, which we got at a very good deal from Air Canada. We would part this aircraft for parts. That's just our strategy. But when we looked at every -- all of our aircraft have been deployed. So that means that left us with no aircraft for charter opportunities and expansion of new routes, and I think when you can -- so we decided to convert that aircraft into cargo rather than part it for parts because there is -- the aircraft are in short supply today as south of the border companies for Amazon keeps grabbing up anything that comes for sale. We found an opportunity. We said, okay, we're not going to cut this up for parts, but let's convert it to cargo and have an aircraft ready for growth charters. And I can easily say that right now, when the China market reopens, there is going to be a tremendous demand for cargo that has been backlogged over there for months. We shipped, and we are already getting so many inquiries about, would you be able to do 2 flights a week to China or 3 flights a week to China. And we sincerely hope that aircraft is ready for us and ready to go and take advantage of the strategic opportunities in the marketplace. Our experience has been, Kevin, every time we call an aircraft a spare aircraft, we end up finding a route. I mean that is a nice problem to have, that you always find work for that spare aircraft and that spare is not spare anymore. So we're getting this aircraft converted. It wasn't in our plans, but we felt that if we don't go out and convert this, our growth and our plans and our opportunities can be very limited, especially when we return our charters. What happens is that next time, people call other people. So we are being proactive in this expansion of one more aircraft at this time.
That's helpful. And maybe just last one for me. Jamie, you mentioned you're seeing some impact from the coronavirus, I suspect, in your first quarter interline and maybe some of your charter business there. But if I think of your domestic network revenue now, it sounds like e-commerce, given the tailwinds there, you're probably offsetting any interline weakness with e-commerce volume. So you're kind of net neutral. Your all-in charter revenue, you've kind of shrunk back given what you've been seeing in the market over the past year. So like is the coronavirus something that we should be anticipating being at least -- is it a headwind to earnings that we'll see in the next quarter or 2? Is that something you can offset? And then, as Ajay mentioned, if you have all this backed up volume from Asia coming in the back half of the year, is that over and above kind of a normal run rate revenue you can get on an annual basis?
Jamie, go ahead.
Yes, Kevin, I think as you're aware, the interline volume as a percentage of overall revenue on our domestic is not great. It was already low because of low international global air cargo demand that we're seeing in 2019. It's just being compounded a little more by the coronavirus in -- as we go into 2020 just when we thought it was coming back a little bit. But that's far being overshadowed by significant continued e-commerce growth.
And the charter business for the rest of the world and ACMI as well.
Your next question is from Walter Spracklin from RBC Capital Markets.
So on the volume side, when we thought e-commerce, we kind of lumped it into your overnight cargo. But Ajay, you were kind of indicating that some of that will now go into your all-in charter revenue, and that certainly came in higher than we expected.
No, Walter. Just to clarify, any charters that we do on the domestic network, for customers, let's say, in peak, that comes through domestic revenues.
Okay. So that goes into the overnight, even though...
Yes, and which we call it the domestic.
The domestic. Got it, got it. Okay. Okay. That makes sense. So when we look at your breakdown, the all-in charter has been down year-over-year. A lot of the -- due to what you'd been -- some of the movement, as you mentioned. But you indicated in your prepared remarks that you expect every category to grow this year. Am I reading that the all-in charter revenue component is likely or expected to be up in 2020? Is that right?
Well, there's 2 reasons why some of this charter business was down in 2019 because of the global trade disputes and secondly, now as we were seeing the recovery as the trade disputes were settled or were being settled or close to settle, we saw that coronavirus sort of hit that market. So we have already, as I said, had many calls to say, can you give us 3, 4 flights a week into China in a couple of weeks when this thing opens up or in a month? So we know that the demand is going to be very heavy for that kind of flight. Now you asked a question, can you expect the growth on all segments of our business? Yes, we expect certainly that the charter business, especially after the cleanup with the coronavirus and the global trade deals being penned because they will, at some stage, have to sign a global trade deal, whether China-U.S. or India-U.S., those are all pending deals. And eventually, they will get signed. So we expect that the business will come back to normal when those are done, and that will be our -- mostly interline business first and then the charter business, second. In case of our growth for overnight business, our domestic business, let's call it, yes, e-commerce is growing. We certainly expect the growth of that particular business for sure because countries still behind U.S. and other countries by at least double digits growth is expected over the next 5 years in the e-commerce. So we expect that segment to grow as well. The third segment is the ACMI segment. And as I said, every time we get a spare aircraft, it's gone to an ACMI route. And we continue to keep talking to our customers. And because of the service we provide and the flexibility, we continue to find routes that are better -- ACMI routes that are profitable, and we can do those. And I expect that we will continue to monitor that situation. I don't have a route that I can announce today, but there's -- as any company would do, we continue to look for those opportunities. And when we look for certain opportunities, majority of the time we find them. I guess, in other words, we expect all our lines of business to grow.
Okay. Walter, it's John. Just keep in mind, we still had Bogota and Lima, those all-in charters in the first couple of quarters and part of the third quarter last year. So those -- that revenue stream won't be there for the first -- at least for first 2 quarters of this year. So you'll still see that variance.
So probably, we'll see a negative trend in the first half. And then assuming all these other issues are gone by the first half ended, we should see growth in the back half on the all-in [ trackside ].
Yes, that's what I would say.
And we expect -- actually, when global trade improves, we expect Bogota Lima to come back up as well because traffic flows all over the world, improves when these trade deals are gone. So if that route -- the demand comes back like it used to be 2 years ago, we could be back in that business as well.
Okay. And then on the domestic side, you had very good -- very strong growth last year, up 11%. And it kind of moderated this year and even here in peak, up for just over 4% for a total of 2.5% roughly for the year. So obviously, e-commerce is a big driver but largely being offset by some of the declines we're seeing in the domestic business related to those other issues. As we look out to next year, is it more likely we'll see a growth rate similar to 2019? Or again, assuming some of the recovery and the other issues and the indirect impact that will have on domestic, could we see closer to your 2018 run rate?
Well, we certainly expect that the growth of 2020 would be closer to 2019. But the biggest -- one of the biggest drivers in our domestic overnight business was also the interline business that we got from many international carriers moving domestically. So if we maintain what we've got on e-commerce and add on the interline stuff, as we said, the world situation stabilizes, you could go back to 2018 type of growth, definitely. But it also depends on how quickly -- right now, the freight is so restrictive even before the coronavirus, and now it's gone down to a halt. So the interline business is kind of our daily freight that moves on unutilized sectors and becoming higher margin and higher revenue. So that part, when it comes back along with the e-commerce growth, I think you can certainly expect that the revenues would go up and the growth could go up to the 2017 -- '18 level.
So probably more prudent at this point to split the difference and call it kind of mid-single-digit rather than...
Yes, because we -- it could take a few months for it to come back. But we totally expect that the trade, once it gets normal, will make a big difference. And Walter, just to highlight that. And this is part of the reason about 1.5 half ago, we got on the strategy of diversifying for just overnight into ACMI and charters and others so that we reduce the dependence of 1 particular sector in a major way and move to other lines of businesses. And that's paying off dividends for us, as you can see from growth on other areas.
And Walter, it's Jamie. Just to add to Ajay's comments, the other thing that was fairly significant that we saw certainly at the last half of 2019 was -- I know we don't report individual customers' revenues, obviously, but there's certainly a difference between e-commerce revenue that we get directly from retailers or indirectly from sort of those legacy couriers that participated in the e-commerce space and some of those that don't. The ones that don't participate in the e-commerce space, we're certainly seeing a softening of their volumes overall on the domestic side.
The next question from Konark Gupta from Scotiabank.
So I just wanted to get some more context on the 4% volume growth in Q4, especially because some of your top customers were calling out very significant double-digit volume growth in the peak season. So like I understand, obviously, there's softness in international and some non e-commerce domestic. Can you throw around some numbers so I can at least help us understand how the e-commerce from these core customers shake out compared to other guys?
Jamie, go ahead.
Yes. Konark, I can give you in terms of our overall, as you know, we don't report individual customers' volumes. But on the interline side and on the general cargo business, I would estimate 25% to 30% reductions in volumes year-over-year as a result of all of the impact of various factors that Ajay and I mentioned earlier. Certainly, the e-commerce growth, we saw significant double-digit growth, both directly from retailers, indirectly from again, from those legacy carriers that participate in the e-commerce space where we saw sort of single-digit declines in overall demand from sort of just the general courier business.
Okay. That's very helpful, Jamie. And then secondly, DHL, that's your sort of biggest, I guess, maybe the ACMI customer there. They are investing heavily at Hamilton Airport. And I think they are expecting like double-digit volume growth in cross-border. So I know you got 6 ACMI routes so far. And what are the [ connotations ] like? Any opportunities in the year ahead in the ACMI routes? And would you need more aircraft to support that growth?
Well, we are certainly getting one 767-300 ready, which will help us do charters or if there's a new route that comes available. We are certainly very -- we are top-performing for DHL. They certainly want to -- they like us, and they want to expand the relationship with us. But keep in mind, we are somewhat limited with our licensing that we can fly transborder flights or we can fly from U.S. to other countries. We cannot do intra-U.S. at this stage because we're not licensed to fly in the U.S. as a U.S. carrier. So whatever opportunities from U.S. to international come up, we get the first call. As they expand their business, we certainly are -- have been expanding with them. And we certainly expect that we are on the top of the list to get expansion opportunities with DHL because of their service record and our relationships. And as I said, we don't have any specific routes or discussions with them, but we are talking to them on a weekly or monthly basis about opportunities and improving how we can help them save some money on certain routes and fly certain ways. And we will definitely continue to follow them, and we've also been talking to other customers about expanding our ACMI business as well. That's a key thing for us.
Okay, that's great. On the 767-300, that I think Kevin had a question on that. You added -- are you firm that the LOI that you signed last year, that's coming from Air Canada? Is that for domestic, like weekday flights? Or is that for some other aspect?
First of all, it will act as a spare aircraft because we have spare aircraft 767-200, which is kind of short. So first, it would act as a spare aircraft or network. Second part of it will be used for charters. And third part of it is, the day we sign up an ACMI business, that will be gone and then we'll look for another spare. So that's been our routine for the past 3 to 4 years that we go -- you need a spare aircraft and the next thing you know is we've sold that spare aircraft or route. And that's exactly what I anticipate. If the history is any indication, it will certainly be the same route that -- we have enough aircraft for our nightly business because, remember, we can also rotate those aircraft for day flights. So this particular aircraft is not marked for domestic because we have enough capacity, and we can rotate the existing aircraft. This is spare aircraft first; charter aircraft on ad hoc, second; and number three, if you get an opportunity to plug it into an ACMI route, this aircraft is gone as well.
That's perfect. And then I think, John, you talked about CapEx numbers for this year. Just -- and Ajay as well, and I just wanted to understand, how do you think about the split between maintenance and growth Capex? I mean, how much of that $100 million to $110 million CapEx is coming from aircraft additions this year?
Konark, I think this year, we're looking at roughly $55 million of maintenance CapEx. The rest is growth. So in terms of that additional aircraft, probably -- and we're getting 3 aircraft deliveries today for this year. The first 767-200 came in about 2 weeks ago. We're getting another 767-200 out of conversion, probably by the end of March or middle of April. And then the 767-300 is scheduled to come out of conversion, say, September, October. So altogether, we're looking at, say, $50 million of growth Capex, $50 million of maintenance Capex. Those are pretty broad figures in terms of our current plan.
Okay. That's perfect. And then lastly for me, on the number for operating days, obviously, like we have 1 extra day this year, right? If you can help us understand what do you think about the number of operating days? And have you -- are you -- do you plan to update the definition that kind of e-commerce is kind of expanding. So I think it's still Monday to Thursday, largely speaking.
Yes. You're right, there is 1 extra operating day this year, I think, because of the leap year. But in terms of changing the definition of operating day, I'm a little hesitant to do that only because it serves as sort of a good reference point to do comparisons to previous years. If we did, I think it's probably more useful. And look, I'll ask you and the other analysts whether it's more useful for us to change that definition. But I think right now, it serves a really good purpose in terms of showing relative performance in revenue growth year-over-year.
The next question is from Mona Nazir from Laurentian Bank.
So my first one is just a clarification. So If I'm looking at the quarter and I see the 27% increase in G&A costs. Is that primarily from the initiative that you had taken around the new fatigue regulation? Would that be correct?
No, Mona. The G&A -- I think we have quite a large variance coming out of the warrant deal with Amazon. There's a -- right. So the way you do the accounting...
So you only have the net with 6. Is that correct? If I'm reading that in the MD&A?
Yes.
Of 2019.
Right. So we break down the components of SG&A. But the costs associated with the pilots, that's all indirect costs.
Okay. And so if I'm just going back to Ajay's comments on the majority of the uptick from new fatigue regulation has been passed through at this point. Would that -- is that correct?
Well, majority of it has been passed through, and a couple of them are in the process of being audited to make sure the costs are right. And so that due diligence is happening, and it should be -- our policy is that this is a cost through -- that pass through regulation, and it has to be shared with every customer with no exceptions. So once we go through the due diligence, we don't see it -- we don't anticipate any issues with that.
Okay. So I think just going through the last call transcript, there was 1 or 2 major customers remaining. So that would likely be the same at this point?
Yes.
Okay. Perfect. And my second question is, looking at the overall demand, and you touched on it in your prepared remarks. And you just provided some numbers in regard to quantifying the reduction of interline cargo and courier, which I found very helpful. I'm just wondering, looking at the overall freight data continue to be very weak for the month of January and the ongoing coronavirus. What are you seeing for 2020 at this point? If you look at Q2 and -- Q1 and Q2, is it looking like these declines might stick? Or do you feel that the situation is improving.
Jamie?
No. I think you would expect that we would continue to see similar results in terms of volumes that we saw in Q -- the latter end of Q4 going into the first quarter of 2020 and going forward.
Okay. Perfect. And lastly for me, this is just more of a housekeeping item, but I'm just wondering what adjusted EPS would be? So I just saw onetime items in the MD&A. So some of that's included in the SG&A and some's in the other line, including the fair value of adjustment for warrant and FX. So if we could take it offline as well.
Yes. But I think one of the -- probably the adjustments that I expect everyone's making is the -- any gain or loss on the warrant liability. And so I think in the -- that can swing in a quarter by $10 million pretax. I think that's probably the only significant adjustment I would make.
The next question is from Doug Taylor from Canaccord Genuity.
I just want to pick up the line of questioning related to the 7-day week shipping. You ran that through peak season. Can you talk about how many days a week you're running presently? And then the conversations you're having about returning to 7-day a week shipping this year at some point or permanently.
Jamie?
Yes. We've been -- in 2020, we've continued to operate, and so we added a second Sunday flight in the late third quarter, early fourth quarter of 2020. And those 2 flights on weekends from Hamilton to Western Canada continue, and we plan on continuing those throughout 2020. We'll add -- whether we add a Saturday flight or whether we add additional morning flights will be dependent on volume, but I fully anticipate that we'll be operating. We say 7 days a week. I'm not sure Saturday we'll be there until some of the online retailers have sufficient final-mile delivery capabilities on a Sunday at points in Western Canada. But we will definitely continue with the 2 flight at -- minimum of 2 flights on Sundays throughout 2020. I'm sure that will grow by the time we get to the end of it with additional daytime flights as well.
That's great color. Switching gears. You talked about your Capex, I think, taking a bit of a CapEx holiday this year related -- relative to last year anyways. Can you talk -- looking at it a little further, can you talk about whether there's any aircraft in the fleet that are -- you feel are approaching end of life or any chunky items that you expect to -- we should take into consideration that are on the horizon?
No. We don't anticipate any aircraft that are going to retire anytime soon. When we invested in this aircraft, we at least expect them to go 10-plus years and maybe up to 15. So our fleet is fairly young from a cargo perspective, and it's in good shape. We take great care of it, and we expect them to go on for a while. So no sort of -- yes, there could be addition of aircraft because we are getting more business but not because of replacement of aircraft.
Okay. That's helpful. Last question is just housekeeping. I guess the added surcharges related to pilot fatigue regulations, do those flow through the core revenue? Or are those broken out along with the fuel surcharges kind of below that core revenue line?
John?
Yes. I think it depends on our contract with the customer. I would expect that most of the fatigue surcharge will come through -- we'll categorize it as surcharge. But of course, you have a customer where you negotiate the increase through their base rate, then we don't split that out. It's been a bit of an internal debate, I guess, whether or not we actually should even separate the surcharges from the gross revenue. But it's something that we've always done, but there are anomalies where you won't see the surcharge coming through the surcharge line.
And then when you lap a contract or something like that, it would kind of move it up into what you'd consider core?
Basically, yes.
Yes. So it's probably, over the years, it has become less useful because of the way that our contracts have evolved.
Your next question is from Chris Murray from AltaCorp Capital.
Just turning back and looking maybe at some of your comments around volumes but also thinking about your economic dependents. I'm just wondering if you've had any opportunities to maybe extend your direct relationships in e-commerce with any other clients. I know that you're seeing the growth come through other channels and into your network. But I was just wondering if you had any thoughts about how that might progress in 2020.
Well, one of the things is that we have a policy that we do not like to go out and expand our commercial and business relationship with our customers' customers. So as we go out to some retailers that are already shipping to our existing customers, it wouldn't be very ethical and accepted in the marketplace. Amazon becomes a different story because of their size and their needs and their demands because no one courier company can service their demands. And they have always had a policy and strategy of having direct relationships with a carrier as they have done in U.S. So if we were to go after, for example, a Walmart, that could already be a customer for one of our customers. And we do not encourage that, and we do not -- it will be kind of rating your own customers and cannibalizing from your own airplane and your own customers. We do not believe in doing that and not at this stage, but we don't believe in doing that, and we will never do that. So yes, go ahead.
Yes. No, I'm just going to say, like Walmart yesterday was talking about having to change their network down in the U.S. in order to get some cost out. And there's this sort of somewhat similar commentary around what Amazon was talking about. So I'm just wondering, I know you're probably not looking to go and move some customers around. But I was wondering if the customers are starting to come to you and saying, are there different ways that we can run our model?
No. I don't think anybody is large enough to -- keep in mind, the country is very large in size. We have 4 time zones. In Newfoundland to Victoria is a 7.5-hour flight. The density of our country, except for a few cities, is very low. For anybody to go out and service 16 major cities at 5 in the morning or middle of the night, it's very, very difficult. So it's not economical that single -- to work our few planes for 1 customer will cover this kind of geographical area. And it wouldn't be economical for anybody to even look at that direction.
Okay. Just one other housekeeping question, John. On the adjustment to the warrant, is there any tax impact on that one? Or is this just straight up cost?
Yes. There's no tax effect on the warrants.
The next question is from Gianluca Tucci from Echelon Wealth Partners.
I guess, can you speak to what you're seeing so far in Q1 on a cross-border perspective? And how advanced the company is in additional ACMI possibilities this year?
Jamie?
I mean we obviously continue to have dialogue with both existing ACMI customers, primarily DHL and other potential customers that we could potentially provide service for. And as Ajay noted before, it's kind of one of the reasons why we made the decision to convert that aircraft that we had bought, mainly for the engines earlier this year in anticipation of being able to take on some more business. So nothing to report at this point, but we're actively pursuing additional routes.
Okay. Awesome. And then in terms of the upcoming election in the U.S. this year, are any of your customers showing any possible cost for like hesitation to committing to additional routes or additional like volumes until they have certainty into the trade policies of the successful candidate?
You know what, nobody has ever brought up this issue and nobody has had any concerns on this. As a matter of fact, our customers are looking forward to solely define the gray -- the trade deals that have been pending. And everybody is kind of trying to gear up for when the deals get signed. We start getting the normal cargo from international destinations, which we call it interline in our world, to get going. So no sort of hesitation on the election side at all.
Okay. Great. And then just a housekeeping item for me. John, in terms of expected tax rate for 2020, do you have a range for us?
Yes. No. It's the same. I think that tax rate, roughly 27%, that's -- we are definitely on the -- we use the same tax rate in our financial statements, and we disclose it. So no change in the tax rate.
Your next question is from Cameron Doerksen from National Bank Financial.
Just maybe a question on the -- again, on the fleet, I mean, you guys have done a pretty good job of being able to source 767s to keep growing when necessary. It does seem like going to the market is continuing to get more and more challenging on finding feedstock for cargo aircraft. I'm just wondering if you guys see at any point this is going to be a limitation on potential growth. Or are you still pretty confident you'll be able to source planes in future years?
We don't anticipate any problems because there's over 200 to 300 aircraft that are going to come into the market over the next couple of years, I mean the 767-300. But also keep in mind that as the business grows, we will also start looking at 777 -200s. That would be a -- it would be 15 years old or 20 years old in the passenger market, then we will be looking to convert those. Those aircraft carry double the payload of 767-300s. So the next -- there's already talk and discussions with various conversion companies that are looking forward to launch customers to look at 777-200s. Right now, we are certainly about a year or 2 years away from that because as the business grows, you can eliminate 2 aircraft of 767-300 with one 777-200. So I think we don't -- right now, there is a temporary kind of shortage because of Amazon has not reached the potential of all the flying they want to do themselves with their aircraft. So there is a bit of a shortage, but that means a few million dollars higher price at the present time. But I think within the next -- this year, we anticipate that will totally become normal. So we don't anticipate -- there's more supply coming in the next couple of years than there will be demand. So we don't anticipate aircraft shortage that would limit our growth.
Okay. No, that's great. And just secondly for me, just on -- Air Canada mentioned on their quarterly conference call earlier this week that they had captured a bit more domestic cargo business. I guess it's an offset to some of the weakness they've seen on the international side. I'm guessing they're going after volumes that are not really core to you or not competitive at all. But I'm just wondering if you can comment on any impact you've seen competitively within Canada, any changes there? Or any of the network airlines potentially pursuing any domestic cargo business that might affect you?
Well, they are in a very different market than us. We do sensitive overnight e-commerce. And we do stuff like spare parts. We do fresh produce. We do seafood. We do critical medical supplies because, one, they have to be there. Air Canada services operate during the day. They have security restrictions. It takes a bit of time for them. So their product line -- what they handle domestic cargo, they've always handled that. And I'm sure there's a few pounds that cross between each other. But mostly, they're in a very sort of different space. Their pricing levels are different. Their service levels are different. And we -- our service is very prime, and it's 99% there. It's not dependent on passenger loads that can be offloaded. Cargo can be offloaded. So they play in a very different market than we do. So we don't -- we have not seen any kind of major shift whatsoever that has impacted us at this stage.
We do have one final question from Sakash Singh from Amazon.
My question is kind of along the lines where you spoke about Amazon and e-commerce being the key drivers for the growth. But can you talk about like your other customers that were like -- that played a greater role in this improved Q4 profits?
Other customers -- I mean, Amazon uses a lot of our customers for e-commerce and shipping as well. And they've been growing at pretty well the same rate as the growth because any time we have met with Amazon, they've always told us that no one carrier can handle their growth and they have some very good aggressive growth plans for Canada. And with the help of the other member -- customers that handle Amazon on our network and rehandling Amazon directly, I think we've been able to fulfill the demand very nicely. We expect that Amazon will grow with our customers and with ourselves and as I said, no one company can handle. There's the different product lines that Amazon ships, whether it's fleet, different deliveries required or only middle mile required. So there are so many variables that I think there is room for everybody to grow.
Also, like someone mentioned the problem of geography in Canada and bad weather. Any plans on expanding on the routes that currently don't require like big planes, but like smaller planes, like tapping into those markets, like any expansion plans for those?
We certainly will look at selected markets. We'll look into a network of somewhat smaller planes like 737s or even CRJ freighters or ATR freighters. We do want to build on that. Obviously, we would like that kind of a network to be built in conjunction with all customers because, let's say if we put on a flight to Prince George, British Columbia just for 5,000 pounds, it's not going to pay. So our -- obviously, in the future, in the very near future, we are looking at speaking to our customers to see -- pick 10 or 12 major cities in Canada that are not serviced at the present time, like, for example, a city like Kelowna or Victoria or Quebec city, the secondary cities. And we will do -- or we are in the middle of talking to our customers about if there is enough demand and what kind of size of aircraft would fit. Now the key for us is that we want to make sure that we have 1 type of aircraft if we ever get into that business rather than 10 different prospects in training and spare parts. So yes, we certainly plan to expand in that area but also grow a little bit faster so we could make sure that we are not putting on a 20,000-pound aircraft and there's only 5,000 pounds sort of capacity available. We wouldn't grow into every market. For example, we don't go as -- you wouldn't see us going into Kingston, Ontario for 2,000 pounds a night. But certainly, in places like, as I said, Victoria, Quebec City and that kind of places are certainly on the map. And hopefully, 2020 will be the year that we start looking at expanding into those regional routes on a selective basis if we can drum up and carry the same principle of multi customers, full load network extending beyond our 16 major stations.
There are no further questions at this time. I'd like to turn the meeting back to Ms. Dhillon.
Thank you, everyone, for joining us on the call today. Any questions or any other information you need, you can reach out to us directly. Have a good day.
Thank you.
The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.