E-tailers shop for airfreight as their share of retail rises

E-commerce’s share of retail in the United States has skyrocketed to 27% in recent months, up significantly from 16% last year. This dramatic shift in retail equilibrium during the pandemic favors increased reliance on air cargo, but what happens as the crisis abates? The Cargo Facts team is proud to be able to deliver actionable information and insights through our premier aircraft symposiums presented regularly throughout the year. In the coming months, we will roll out the full Premium Plus product, which encompasses registration to all our live events, exclusive monthly webinars like this one, access to an archive of Cargo Facts event recordings, and a Premium subscription to Cargo Facts . In this special preview episode of the new Premium Plus product, Frederic Horst, managing director of Cargo Facts Consulting , revisits the link between e-commerce and dedicated air cargo capacity. Below this video, a copy of the presentation and a full transcript of the conversation are available. The accompanying presentation is available for download here . The following transcript has been generated by software and is being presented as is. Some transcription errors may remain. Charles Kauffman 00:04 Hello everyone and welcome to this special preview episode of the new cargo packs Premium Plus product. I'm Charles Kauffman, your host and I'm joined today by Frederick Horst The Cargo Facts team is proud to be able to deliver actionable information and insights through our premier aircraft symposiums presented regularly throughout the year. But we don't want the conversation to end at the close of an event. In the coming months, we will roll out the Cargo Facts Premium Plus product, which encompasses registration to all of our live events, exclusive monthly webinars like this one that you're about to see access to an archive of Cargo Facts, event recordings and a Premium Plus subscription to Cargo Facts. Each monthly webinar is designed to give you key insights into crucial industry trends and developments and will serve as a reference for you to move your business forward. So stay tuned for more information on the launch of the Cargo Facts Premium Plus service. It is now my pleasure to welcome our guest speaker for today. Frederic Horst who is our Managing Director of Cargo Facts Consulting. As many of you know, Frederick is a longtime Air Cargo industry participant and is among its most creative thinkers on new business trends and opportunities and on the underlying economic drivers facing the air cargo and freight or aircraft industry. He has previously worked at cuantas cargo box DHL average cargo among among others, in Frederic and I will today be discussing a trend that is on the minds of many and that is the link between e commerce and dedicated payer capacity. 01:47 So, Frederic, I will now hand it over to you. Frederic 01:50 All right. Thank you. So we have we have indeed throughout the pandemic been seen increased e commerce Just one reason because the normal retail options just when when there anymore. I mean, for example, if we look at the US last year, ecommerce share retail was about 16%. In Europe's bit lower. In recent months, it's shot up to about 27%. In the US. In Europe, it's also higher. And when we see consumer surveys, people are, even though they're spending less overall, they're spending much, much more online. And the general trend over time has been that that customers have been spending more money, spending more often and buying a much wider range of products online than before. So when we when we look at ecommerce, it's important to realize I mean, even though there are a multitude of platforms, and most of the activity is concentrated around around the big three platforms, which account for most most of the world's gross merchandise value, which is the sum of all sales so that's it Alibaba, and their respective subsidiaries, Amazon and JD carpet. But Amazon is actually the only one who's effectively running its own airline, whereas Alibaba and JD comm make use of air capacity, but they do it through third parties also increasingly through through use of chatter, chatter capacity. So with that, it's worth actually taking a closer look of what what Amazon is doing. Amazon has dedicated networks in in in two regions around the world in the United States. And in Europe, in the United States. Amazon operates about 56 planes at the moment menu, seven, six sevens of the 56 there's about 10 7378 hundreds that are in operation as well. The planes are leased from from Gecas from from at ATSG and from Atlas and there's a multitude of operators that operate for them. So there's few a ATSG airlines, there's Atlas and southern that operate and most recently, also Sun Country, which is pushing about five aircraft. So if we look at Amazon's Amazon's volumes, they've been really growing at high double digit rates year after year. So if we look at the first quarter of 2020, Amazon operated 40% more flights than they did in the same period in 2019. And if we compare them, it's not really a sensible comparison, because it's a different business model. But if we compare them to FedEx and UPS, they're about one third the size of ups is network and about a fifth the size of access network in in the United States. So this is what their network looks like, in the US at the moment, about 30 different gateways with with flights between these these gateways. At the moment, as I mentioned, flavors about 56 aircraft, they say it's a bit more but it's actually Up 56 it'll be about 68 by the end of this year based on the delivery schedule, and by the end of 2021, it will be about 81 aircraft that's that's assuming all the the aircraft that are scheduled for delivery actually end up operating in the US and not in Europe or in other parts of the world. This doesn't include the the operations that that cargo jet operates for, for Amazon within within Canada and Amazon, as you as you know, also has a stake in our potential potentially as warrants to acquire a stake in in Canada as well. In Europe, the operations much smaller I mean job geographically your is much more compact. So there's there's more happening on there on the road. At the moment, Amazon does by our count, probably about probably about 17 flights a night and somewhere between eight and 10 aircraft that are operating for them under an ACMI agreement the bad weave with ASL how pretty much exclusively 737-400s that are operating in this particular market. And yeah, as I mentioned, they're really the only ones to be doing that we have seen with, with with China and you and your colleague, Jeff reported on that in cargo effects, as well, that charter activity has been increasing quite a fair bit and is expected to increase quite a bit. And JD comm for examples is rumored to be looking at at their own at their own airline as well. The big problem really arising out of out of all this I mean, it's maybe great from a from a customer value proposition but the big problem arising out of this, I guess it's illustrated quite well in the next slide where we've seen particularly for Amazon, but also for other e commerce platforms, shipping costs, rising money Faster than revenue. So as we move from from two days shipping to one day shipping across networks of one day shipping to instant delivery, shipping costs of about pace growth and revenue. So if we look at 2019, for example, Amazon shipping costs increased by about 37%. While it's North American revenues increased only by 21%. And its North American revenues only by about 13%. Previously, years before that, as Amazon was, was aggressively growing its fulfillment network, we had a slightly different situation where fulfillment costs were outpacing the growth of revenues and shipping costs were more and more or less in line with with the growth in revenues, but now as the as the proposition has moved towards more rapid shipping, this is this is definitely seen shipping costs accelerate. And the question is, is that is that sustained? How long How long can you can you run a business where your shipping costs or, or any individual costs items are growing faster than your then your revenue base. So from it from, from our perspective, for this to be sustainable going forward, something has to give either costs have to come down, which is going to be great for the operators. Customers have to become more willing to pay for shipping, or prices of the goods they buy have to have to increase. Charles over to any questions? Charles Kauffman 08:37 Yes, you've touched on a number of interesting points, Frederick. As you mentioned, you know, we've seen quite an uptick in in charter activity, both in in recent months. And it looks like this is going to continue for the remainder of the year for some of the detailers like Alibaba and JD, you mentioned that Amazon is really the only retailer to kind of go all in, if you will, with with a dedicated operation. You know, what are what are the prospects for based on your research for some of these other retailers when it comes to launching a dedicated operation beyond charters? Frederic 09:24 Yeah, I mean, as you as you said, I mean, particularly China has increased its charter activity. I mean, you report it that in the coming nine months flights, we're going to go up to about 1260 flights compared to 260 flights in in in 2019. Now, a lot of these operators are already indirectly using air capacity through Express operations that are out there and Amazon as well. I mean, you know, Amazon account with 2019 for 11.6% of ups is revenue and actually roughly a quarter of Amazon's shipping spend was with ups as well. And so there's always the potential to shift some of these operations to put it in their, in their own networks. And my feeling is so far particularly Alibaba and JD comm have been much more prudent when it comes to their managing their, their bottom line and their profitability and their shipping spend, and as a consequence, have have stayed away from, from offer offering from from running their own their own airlines. And the big question in my mind is always is it? Is it actually a commercially sustainable way to run a large e commerce operation by flying stuff around from one side of the country to the other, or is that actually just a sign of a failure of inventory management rather than anything else? Charles Kauffman 10:53 That's a good point. And then certainly, you know this Coronavirus pandemic that we're currently in that has altered inventory management practices. You know, I've come across anecdotal reports that suggest ecommerce is consumption is is way up in recent months. I'm curious if you could speak to ecommerce adoption throughout the pandemic and maybe your long term prospects for e commerce. Frederic 11:27 I mean, the the long term trend has been increased e commerce adoption across a whole range of across a whole range of product groups. The most popular product groups for economists generally tend to be click clothes, sports goods, and so on. And household items and those are products that have in the long term seen, seen quite an increase in the level of adoption. So if we look back in 2008, for example, at the time in Europe, 13% of countries As I said they bought clothes online, fast forward that to 2019, 41% said they bought clothes online within the last three months, household items went from 11 to 29% books 12 to 23% yeah books is traditionally where the whole ecommerce or Amazon at least as an e commerce business started, Electronics has been increasing groceries have actually seen the largest increase in in in online penetration but obviously that doesn't have a huge impact on air because groceries need a local distribution centers rather than moving stuff across the of the country. So these numbers during the pandemic a while our feeling is that and that's something that we'll look closely at out when when we put out our ecommerce reporting in a few months as well, whether and to what extent this high level of ecommerce penetration where we're seeing 2030 35% of retail actually happening online To what extent that comes back down to to normal levels. I think the long term trend will be there will be more adoption but it's not going to stay at the levels we're seeing at the moment. Charles Kauffman 13:13 All right, and so far, you know, our our analysis is touched on primarily developments in in Asia and in in in North America. Amazon does have a network growing in in Europe as well but are there other regions that you're you're monitoring are closely watching and see is maybe you know, an opportunity for for to grow the link between air freight and growing e commerce moving forward? Frederic 13:46 Yeah, I mean, we lay even though you know, the bulk of our research obviously focus on the large platforms, we keep an eye on what's happening with with regional platforms like Jimea in Africa or Mercado Libre in Latin America or Europe. And there's a there's a strong level of growth here. It's growing off a small base, it does support a degree of charter activity that goes goes into these regions but but nothing like the kind of dedicated intra regional networks that you're seeing in. In North America or Europe. I mean, by our estimate, roughly 16% of global air freight is actually in some form or another. business to consumer ecommerce, either moving as postal traffic or moving within Express networks, or, or just moving as general cargo consolidations that are then distributed through through regional networks as well. So there's there's different angles that we're that we're looking at that as well but there's some very interesting developments happening in some of these, these smaller secondary, smallest, perhaps the wrong word but in turn Have these secondary markets in the platform right. Charles Kauffman 15:04 I will look forward to learning more about those in the next ecommerce report. So, in looking at your research on you know, on the link between e commerce and and dedicated operations, what would you say are three key takeaways Frederic 15:25 1) We are definitely seeing more use of air freight capacity directly and indirectly that's that's linked it to e commerce. 2) We are seeing a greater level of ecommerce adoption or a trend towards greater level of e commerce adoption overall. 3) The area where we I guess we we say we need to take a bit with a bit of caution is is you know how commercially sustainable is increasing use of a capacity to support e-commerce. As I mentioned before, you know, three things, one of three things needs to happen. Either prices need to go down and airfreight has never been a particularly profitable business anyway. Customers need to be more willing to pay for premium shipping options, and that's what some of the ecommerce providers and express providers are banking on that during the peak season, people are actually going to be willing to pay to get faster shipping. All prices of goods received online are going to have to go up. Charles Kauffman 16:40 All right. Well, thank you for joining us today. Frederic. I think that's about all the time we have. 16:47 Thank you. Charles Kauffman 16:49 Thanks to all of us who are joining us today for this special preview episode of Premium Plus. With this video, you will see the full transcript of the conversation And as I mentioned earlier, Frederic will be back regularly to share insights and analysis from the cargo consult perfects consulting team. You can learn more about Cargo Facts Consulting at Cargofactsconsulting.com. We hope you have enjoyed this Premium Plus event. please do let us know how we did by emailing us at info at info@cargofacts.com. Once again, keep an eye out for more information on the Cargo Facts Premium Plus Product. Until next time, we will see you online at Cargo Facts and at CargoFactsConsulting.

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