Does Cargojet have competition?

Air cargo is the only thing still flying - a Porter's 5 forces industry analysis shows how Cargojet can still thrive

Several weeks ago, a Canadian airline announced orders for 5 Boeing 767s and 2 777s. This news followed a 3rd quarter that saw the carrier’s profits nearly double year-over-year, an impressive feat considering how global passenger demand for air travel languished at half of regular levels. As most airlines were sending their jets to long-term storage facilities in deserts, this mystery company’s CEO was named The Globe and Mail’s Strategist of the Year - largely for increasing air capacity during COVID.

Cargojet has attracted widespread praise, but perhaps none as flattering as Air Canada’s breakneck buildup of their own all-cargo fleet. Freight has become the flag carrier’s crutch amidst the pandemic, with cargo revenues easily eclipsing passenger revenues in 2020. Air Canada has cemented this pivot to cargo by ordering the conversion of 7 passenger B767s to fully-fledged freighters, with operations slated to begin later this year. 

Both companies have publicly affirmed their belief in the future of air cargo - largely buoyed by the projected growth of e-commerce - but should Cargojet be concerned about their newfound competition?

This article examines the carrier’s competitive environment through the lens of Porter’s five forces, a popular framework for determining the underlying sources of competitive pressure in an industry - in this case, air cargo in Canada. 

This would typically feed into more comprehensive analysis for informing strategic decisions, but will serve our purposes by providing an introductory understanding of the threats facing Cargojet. These five forces combine to depict a favourable environment for the carrier; we’ll analyse each in more depth.

Force 1: Competition in the industry

Cargojet focuses on flying cargo within Canada, leaving them with little direct competition. The carrier’s international network, while growing, hasn’t historically been their core focus; revenues from international operations aren’t even isolated in their financial statements. This leaves global carriers like Cargolux outside of Cargojet’s domain, while integrated express carriers like FedEx and DHL utilise Cargojet’s domestic air network instead of competing with it. 

FedEx is more friend than foe - Photo by Yijia Wang

The only direct competitor is Air Canada’s nascent freight-only operation - Air Canada Cargo (ACC) - which is rapidly building up their own domestic freighter network. BC-based Kelowna Flightcraft (covered briefly in our previous article) delivers general freight, unlike Cargojet’s express focus. 

Cargojet reigns supreme within Canada, boasting over 4 times the domestic freight revenue of ACC. However, despite seeing a 20% year-over-year decline in domestic cargo revenues, Air Canada is doubling down. The carrier recently increased their 767 freighter conversion orders from 2 to 7 aircraft while renewing their promise to facilitate a door-to-door e-commerce programme.

"This programme … takes advantage of our domestic passenger network, facilitating the end-to-end distribution of e-commerce goods across Canada…" - Lucie Guillemette, Chief Commercial Officer - Air Canada

Cargojet has a formidable lead over ACC and is unlikely to be usurped domestically in the short run. The former has spent over a decade building supply chains and streamlining operations, in addition to holding exclusive, long-term contracts with key players like Canada Post and DHL. 

Deviating slightly from the focus on Canada, it’s important to note how Cargojet’s recent expansion is geared towards overseas.

"Fast changing global supply chains and e-commerce trends present a unique opportunity for Cargojet to substantially grow its international business from an opportunistic add-on to a long-term, sustainable growth driver” - Ajay Virmani, President and CEO - Cargojet

Competition within Canada might be low, but the dynamics of the global air cargo market are much more brutal. Cargojet needs to understand this, and their potential opponents, before branching out.

Overall: low industry competition (within Canada).

Force 2: Threat of new entrants

The airline industry is notoriously difficult to enter, and air cargo in Canada is no different. The immense internal and external barriers to entry strengthen Cargojet’s dominant position in 2 ways: 1) limiting the number of possible competitors and 2) empowering the carrier to negotiate better terms. 

Internal barriers (of potential entrants)

High investment and operation costs are the primary roadblocks that new players must overcome. Aircraft are expensive and margins are thin, making the path to profitability a precarious one. Cargojet acquired their first aircraft - 4 Boeing 727s valued at $8 million each - at the incredible post-9/11 discount price of just $800,000 per plane, yet that still amounts to $3.2 million. Factor in the massive operating costs of labour, permits, and fuel, and entering the industry becomes a considerable challenge.

External barriers

Air cargo hopefuls must establish their own supplier relationships, operational infrastructure, and distribution channels; this places them at a significant disadvantage compared to incumbents. It takes time to optimise certain processes and build familiarity with external handlers and warehouse operators, to name several examples. 

Government regulations can also be stifling, perhaps none more so than the limits placed on foreign ownership of Canadian air carriers. Although recently increased from 25% to 49%, this threshold restricts the type of foreign investment that can greatly aid entry into such a capital-intensive industry.

Photo by The Hamilton Spectator

These monumentally high barriers to entry create an environment with few disruptors. For many external players - the likes of FedEx and Amazon, for example - the creation and maintenance of their own Canadian fleet makes little financial sense. 

Few individuals or companies are capable of even entering the market, let alone rival Cargojet immediately. Potential threats can be detected and guarded against ahead of time, such as acquiring new aircraft in response to ACC’s own buildup.  

Overall: low threat of new entrants.

Force 3: Power of suppliers

The bargaining power between Cargojet and their suppliers appears to be fairly balanced. Cargojet operates in a specialised space - air transport - and therefore depends heavily on their suppliers, yet many of these suppliers - primarily aircraft manufacturers, infrastructure operators, and service providers - in turn rely heavily on Cargojet to sell their services to. 

This codependency is even more prevalent in a small market like Canada. It may be odd to consider airports as “suppliers”, but take Hamilton International Airport as an example of an infrastructure supplier. Cargojet is the anchor tenant of a $12 million Cargo Centre that likely wouldn’t exist without the carrier’s demand. The Centre has transformed Hamilton into a relevant cargo hub and bettered its fortunes, while Cargojet has benefited immensely from operating out of an Ontario hub cheaper than Pearson.

Photo by aircargonews

Cargojet relies heavily on a few suppliers with unique offerings, making it difficult to switch away. Yet many of these suppliers rely on Cargojet as a primary customer, especially in the aviation-related buyer’s market created by COVID. 

Overall: high bargaining power balanced between suppliers and Cargojet.

Force 4: Power of customers

Cargojet’s customers arguably hold the most power of these 5 forces. Despite the recent boom in e-commerce, the carrier’s customer base remains dominated by a handful of third-party logistics players. Cargojet’s domestic services form a critical link in the distribution networks of Canada Post/Purolator, FedEx, and Amazon, creating a codependency currently locked in by lucrative contracts, yet the balance of power tilts towards customers. 

If it's in the truck and travelled by air, it probably flew Cargojet - Photo by Bloomberg

Unlike suppliers, which may increase capacity to serve Cargojet, customers who leave can’t create additional demand to serve Cargojet and a competitor. It’s true that leaving is difficult - evidenced by Canada Post’s 10-year contract with Cargojet - and may not even be desirable for the customer; however, contracts do end, and remember that Kelowna bowed out of express services after losing the Canada Post contract to Cargojet. 

A handful of freight forwarders, shipping companies, and integrated express players make up for a significant portion of Cargojet's business. These third parties depend on the carrier for now; however, Cargojet will face strong headwinds should their customers eventually leave for a competitor.

Overall: moderate bargaining power held by customers.

Force 5: Threat of substitutes

The lack of true substitutes may be the strongest reason that air transport still exists, and Cargojet is no exception. To clarify, substitutes do not compete directly with a given offering but are products or services that can act as replacements; ACC’s domestic flights are therefore not substitutes. 

Is this really a substitute? Photo by The Canadian Press

Rail and trucking are the only services capable of transporting large cargo across Canada, yet they fail as true substitutes. Air cargo is typically flown for 3 reasons - speed, security, or accessibility - and aircraft are often the only medium for executing such demands. Road and rail transport can’t come anywhere near the overnight delivery speed of Cargojet, and many Northern communities are only accessible by air. 

Barring the development of a revolutionary technology or the significant investment in rail infrastructure, Cargojet is unlikely to face a true substitute that can outperform the carrier on speed or accessibility. In an increasingly impatient world, demand for such cargo will most certainly grow. 

Overall: low threat of substitutes.

Conclusions for Cargojet

We set out to determine whether Cargojet should be concerned about the competitive dynamics of air cargo in Canada; short answer - no. The carrier is in the enviable position where they face low threats from most major forces, with mutually dependent relationships established in many cases. 

Where Cargojet ought to pay additional attention to, however, is overseas. As mentioned in Force 1, the carrier is looking to aggressively expand their international network; moving beyond the Canadian market presents an entirely new environment with radically different competitive forces. Competitors are plentiful, barriers to entry vary vastly between countries, and supply chains become arcane webs of interdependence. 

Cargojet has accomplished an incredible amount for our country, refining a reliable overnight shipping network that many of us now take for granted. Beyond the strategy and finances, the carrier has also built an admirable culture. Consider their response to the pandemic: Cargojet increased capacity, stuck ardently to new health guidelines, and maintained less lucrative routes to Northern communities at real risk of isolation. In another noteworthy example, company leadership provides staff with warm clothing to tackle the Hamiltonian winter. This humanity is commendable, and I hope that Cargojet continues to see success.


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