Canadian carrier Cargojet [TSX: CGJTF] says it will add a customer surcharge in the fourth quarter to minimize higher labor costs as it works to comply with new government rules aimed at addressing pilot fatigue.

The hours-of-service rules from Transport Canada, which go into effect in December 2020 and apply to all commercial carriers in Canada, lower the number of hours pilots can spend flying and on duty, bringing Canada’s standards in line with most other countries, including the U.S.

The new work rules cap annual flying time at 1,000 hours compared to 1,200 today and also extend rest periods from eight hours to up to  12 hours.

In its third quarter financial statement this week, Cargojet said a new collective bargaining agreement and other incentives for pilots puts it in a strong competitive position, but that the new fatigue rules will increase costs and exacerbate an ongoing pilot shortage. 

“Cargojet has become a very attractive place. We are leading in terms of compensation and working conditions,” CEO Ajay Virmani said during a November 4 earnings call with analysts. “Because of the steps we took we’re in a place to attract more pilots that want to come back to Canada, that are expats flying for various foreign carriers. Getting direct entry [as a] captain or first officer jobs on widebody aircraft is something that neither Air Canada or Westjet can offer.”

Virmani said the airfreight provider has all the pilots it needs at the moment.

Cargojet operates a domestic overnight network for Amazon.com and express delivery companies, with its airplanes also carrying interline traffic from international airlines. It also offers aircraft leasing and international charter service. It has 26 widebody aircraft in its fleet.

The company said it intends to pass on to customers the additional cost of recruiting, training and retaining new pilots, noting that its contracts include provisions allowing cost recovery incurred as a result of government action. It takes several months, it noted, to recruit and train new pilots 

With the anti-fatigue rules in mind, the all-cargo carrier in July extended its contract with pilots, represented by UNIFOR, until mid-2026 and introduced a retention bonus. The three-year extension followed the completion of a five-year contract in 2018 that includes language barring either side from a strike or lockout. 

While providing Cargojet stability, the new contract increased pilot costs by about 20%, the carrier said. The cost of the incentive program alone will add C$20 million ($15.2 million) in expenses over seven years.

“The current pilot shortage in the industry is expected to dramatically increase pilot attrition rates. As other larger Canadian airlines accelerate their pilot hiring campaigns, the shortage of pilots will become more acute,” Cargojet said in its third quarter report.

The Canadian Council for Aviation and Aerospace has estimated that Canada will need to hire 7,300 pilots by 2025 to keep pace with growth and retirements, with half the shortage due to the new  flight duty rules. In a report last year, it said many Canadian pilots are drawn to outside airlines who pay more than regional operators and flight schools, which decreases the pipeline of candidates moving up to big carriers.

Transport Canada is giving airlines flexibility to use fatigue management systems to go above the prescribed limits if they can demonstrate that pilot alertness and safety are not affected.

Passenger airline WestJet “already has a comprehensive fatigue management system that is evolving to meet the new regulated requirements” and a work plan for implementing the new rules, which includes hiring additional crews, spokeswoman Morgan Bell said in an email.

Air Canada did not respond to a request for comment.

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