Cargojet: Postal deal delivers

IT IS gratifying in this era of increased belly capacity to report that a freighter airline is not just thriving but planning a major boost to its fleet.
In November, Canadian carrier Cargojet will be adding two B767-200Fs and four B767-300Fs to bring its fleet up to 22 aircraft. By January it will be operating four B767-300ERs, four B767-200s, nine B727s and five B757s.
Admittedly, there are special circumstances. The expansion is a result of Cargojet winning the contract to provide all the freighter lift for Canada Post, as well as for Purolator, Canada Post’s courier company. Currently this lift is provided by Kelowna Flightcraft, which has two DC-10Fs and 13 B727Fs flying for Purolator. What will happen to these aircraft once they are no longer needed is not known.
The logic of having Cargojet operate the network is not hard to see. Jamie Porteous, executive vice-president of the carrier, reckons it already operates 50 per cent of overnight domestic freighter capacity in Canada, and he says that with the postal contract that could rise to 90 per cent. 
Canada Post wanted high reliability, lower costs and, crucially, more flexibility. “Letter volumes are declining, while the package business is growing, so they didn’t want to be committed to fixed amounts of capacity for either,” says Porteous. By combining mail volumes with its existing overnight courier traffic, Cargojet was able to offer Canada Post the deal it wanted.
Cargojet was born out of the cargo ambitions of two passenger airlines. One was Royal Airlines of Montreal, which stepped into the void left by Air Canada when it exited the domestic freighter business in the mid-1990s. Royal then became part of Canada 3000 in 2000, and Porteous and Ajay Virmani, president and chief executive of Cargojet, and a third person (now retired) set up a 50/50 joint venture with the new owners to do overnight express and also fill the bellies of Cargo 3000’s more than 50 passenger aircraft.
Then came the terrorist attack on the World Trade Center in New York on September 11, 2001 and in its aftermath Canada 3000 abruptly went bankrupt. “Fortunately, they were not operating the freighters: we had subcontracted that to other parties,” adds Porteous. The three founders were able to recreate their business as Cargojet in February 2002. “It helped that aircraft values had dropped a lot post-9/11, especially for B727s.” 
The goal of the new company was simple – to offer the many smaller express operators in Canada a neutral network serving the largest 13 cities of Canada, and so enable them to compete with the big integrators.
“We are like a less-than-truckload operator in the sky – a co-loading airline,” says Porteous. “With our more than 500 customers on con-tract to take a certain number of containers or pounds, they pay for that space whether they use it or not. We have done this very successfully and our customers have been able to grow their market share significantly.”
Ironically, one of the carrier’s biggest customers is UPS. It used to have its own dedicated aircraft in Canada, operated by a Canadian subcontractor, and would buy any excess capacity from Cargojet. 
“But they were thinking of adding another aircraft and we said: ‘Why not move onto a variable-cost basis?’ So they turned over all their business to us and we have now been doing it for 10 years and we have a contract for another six,” Porteous reveals. 
The deal seems to have been successful because Porteous reckons that UPS now signs up for more than three times the capacity they did when they started. “The market has not grown that much, but they have, because they have lower costs and a more flexible basis than their rivals,” he says.
The Canada Post contract – which is for seven years with three possible renewal periods of three years – will nevertheless be a big step up from all this. 
Porteous says it will effectively double Cargojet’s business. It is such a big change, in fact, that although the contract was awarded in February 2014, it will not start until April 2015. “We needed the time to ramp up, add aircraft and adjust our network,” Porteous says.
The contract will produce a number of benefits for the business. One is that Cargojet will be able to do more point-to-point flying – that is to say flying direct from Montreal to Edmonton rather than including stops to Winnipeg or Calgary en route. This will mean faster transit times for all of its customers.
The contract is also helping to cement a move away from B727s to B757s and B767s. This had already started as long ago as 2008 when Cargojet added two B767-200s and two B757s to its all-B727 fleet, but while the B727s were all owned outright, the B757s and B767s have until now been leased.
That will now change, with the Canada Post contract enabling Cargojet to raise the finance to own three of the new aircraft. Two of these are B767-300s bought from Guggenheim and Cargojet has also signed a deal with Israel Aircraft Industries (IAI) to convert a B767-300, for delivery in Nov- ember. IAI will go on to source two more -300s for conversion over the next two years, which will replace two of the B767-200s.
Ultimately, Porteous expects the fleet to consist exclusively of B767-300s and B757s. “The B767s have higher capacity and longer range which gives us more charter opportunities and are also good for heavy domestic legs, while the B757s are ideal replacements for the B727s,” he says. “The B767 is a little big for some of the markets we currently fly B727s to.”
The increased charter opportunities of the B767s are not a minor factor. Flying at night and on weekdays for its core business, Cargojet has plenty of availability for charter operations – particularly from Saturday morning to Monday evening. But the B727’s range means it is limited to the US and Canada, one exception being a flight from Newark to Hamilton, Bermuda, that Cargojet has been operating for nine years, selling space to the major integrators and a Bermuda-based courier.
Since the B767s have been introduced, however, the carrier has been able to look further afield, flying a weekend flight for Polish airline LOT on a Toronto-Warsaw-Chicago routing until the first quarter of 2014, when that carrier took delivery of B787 Dreamliners. It also has a weekend flight from Tor- onto to Havana for Cubana, and flies to Queretaro north of Mexico City every two weeks for the Bank of Canada to pick up polymers, an ingredient used in bank notes.
Another regular charter is from Halifax to Cologne with seafood, and there have also been a couple of flights to South America. Porteous is looking forward to a lot more business of this kind.
“We have definite ambitions to operate the fleet more at weekends,” he says. “The advantage we have over other charter operators is that the cost of our fleet is paid for by our domestic overnight business.”
There is, of course, the issue of making sure the aircraft are back in Canada for the all-important overnight operations, when the highest levels of reliability are a key customer requirement.
But that is a challenge Porteous says Cargojet is accustomed to meeting.
“We have been flying 10 hours to Mexico for two and a half years. Have we ever been stuck there? Yes, a number of times. But we covered it, and still managed to operate the overnight network.”
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