Morningstar DBRS Assigns an Issuer Rating of BBB (low) With a Stable Trend to Cargojet Inc.

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BBB (low) to Cargojet Inc. (Cargojet or the Company) with a Stable Trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating is supported by Cargojet's investment grade financial risk assessment (FRA) as a cargo services company with a high proportion of contracted recurring revenues, efficient operations with cost pass-through contractual provisions and commitment to a supportive leverage range through the cycle. The credit rating further reflects the Company's strong market positioning with about 90% market share of the Canadian domestic overnight air cargo lift, strong reputation in time-sensitive cargo, regulatory barriers to entry and long-standing contractual relationships with blue chip corporate customers. The Stable trend reflects Morningstar DBRS' expectations that the Company's operations will continue to grow earnings, supported by a combination of stable capacity demand from both scheduled and ad-hoc charter services and excellent execution. International cargo markets are faced with headwinds linked to U.S. trade tariffs, uncertainty in international trade, and a generally weaker economic outlook that could potentially reduce volumes and pressure yields. Cargojet should be able to navigate these challenging times supported by its contracted volumes, efficient management of its fleet, and timely adaptation to changing customer needs.

Cargojet is a holding company with material assets held through its wholly owned subsidiary, Cargojet Airways Limited. As such, As such, the credit rating was considered on a consolidated basis. Morningstar DBRS expects the Company to operate within a funding strategy supported by upstream guarantees from its subsidiaries to mitigate current and future structural subordination.

CREDIT RATING DRIVERS
Morningstar DBRS may take a negative credit rating action if (i) the Company's operational performance deteriorates for a prolonged period due to a weakening business risk assessment and/or (ii) if the Company adopts aggressive leverage policies; such that debt-to-EBITDA remains considerably above 3 times (x) for an extended period.

Conversely, while not anticipated in the near to medium term given a Stable trend, a positive rating action could be considered if there were a structural shift in the Company's business risk assessment driven by, for example, improvements in customer or geographic diversification profile, resulting in a larger scale of operations, without major deterioration in the current financial risk assessment.

EARNINGS OUTLOOK
The uncertainty surrounding changing trade policies and import tariffs in the U.S. continues to weigh on business confidence, consumer spending, and the flow of goods across international markets, including Canada. That said, Morningstar DBRS expects the Company to deliver mid-single-digit revenue growth in 2025, supported by steady operations in the domestic network, the first full year of the scheduled charter services with Hong Kong Express Airways, and additional contracted capacity in the second half of the year. Morningstar DBRS' revenue growth predictions also reflect moderately weaker Aircraft, Crew, Maintenance, and Insurance (ACMI) revenue growth year over year because of the increasing share of short-leg dedicated routes to South America, in comparison to 2024. Risk of underutilized capacity is considered low because of emerging opportunities to reroute cargo that used to flow through major airports in the U.S. EBITDA margins should remain above 30%, supported by strict management of direct and general costs and optimization of the fleet, network and crew.

In the medium term, Morningstar DBRS expects revenue and earnings to benefit from the gradual increase in the penetration of e-commerce, following notable investments in related infrastructure in Canada over the past three-to-five years. Furthermore, increased inter-provincial trade within Canada is a tailwind for business-to-business volume growth and related air cargo capacity demand.

FINANCIAL OUTLOOK
Morningstar DBRS expects Cargojet's financial profile to be stable in 2025, reflecting resilience in operating profits, and moderately strengthen in the medium term as large upfront investments become cash accretive. Cash flow from operations before changes in working capital (as determined by Morningstar DBRS) for 2025 could trend moderately ahead of earnings, supported by some non-cash costs, moderately offset by higher interest expenses. Total capital expenditures (capex) are expected to be about $300 million as the Company continues to add capacity through new aircraft, replacement of the leased aircraft that was returned in May 2025 and maintenance capex (typically around 10% to 15% of gross revenue). Dividend payments should grow in line with the Company's guidance. The Company is expected to have a moderate Morningstar-DBRS-calculated free cash flow (FCF) deficit, mainly because of higher capex, as a result, the Company could increase total indebtedness by between $50 and $100 million to fund the FCF gap. In the medium term, Cargojet is expected to continue to invest in its fleet and facilities to expand its charter and ACMI offerings to align with growing customer needs while remaining committed to debt repayment and leverage targets. Morningstar DBRS' base case does not anticipate any major acquisitions.

CREDIT RATING RATIONALE

-- Comprehensive Business Risk Assessment (CBRA): BB (high)
Cargojet's CBRA reflects the Company's solid market position as a leading provider of domestic overnight air cargo lift in Canada, with considerable barriers to entry; customer contracts with minimum revenue guarantees and cost pass-through provisions for increases in uncontrollable variable costs; its long-term relationships with large blue-chip corporate customers in the retail and transportation sectors, and the Company's ability to efficiently manage its largely fixed cost base. The CBRA acknowledges the Company's exposure to some markets that are known for cyclical volatility and high concentration of revenue by customer.

-- Comprehensive Financial Risk Assessment (CFRA): BBB (high)/BBB
Cargojet's strong CFRA provides an uplift for the credit rating, underpinned by a combination of growth in operating profits and a high conversion rate of earnings to operational cash flows. The CFRA considers that Cargojet is a capital-intensive company with substantial investments in maintenance and growth spending in aircraft and related facilities. The lease-adjusted debt-to-EBITDA ratio has remained at or about 2.5x since 2020, apart from in 2023. In the medium term, debt-to-EBITDA is expected to be within its historical range, with the opportunity to trend down in line with stronger earnings.

-- Intrinsic Assessment (IA): BBB (low)
Morningstar DBRS determines the IA based on forward-looking assessment of the CBRA and CFRA while also taking into consideration industry peers, among other factors.

-- Other Considerations: None
The credit ratings include no further adjustments from additional considerations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Further details on the Issuer's Intrinsic Assessment can be found at https://www.dbrsmorningstar.com/research/456590.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025)
https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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