Consultant’s Insight: UPS expects to benefit from Red Sea, Panama Canal issues

The macroenvironment continued to impact UPS ’ international services , resulting in volume shifts from air to ground in the fourth quarter. However, UPS anticipates that high-value goods will shift from ocean to air transport because of the Red Sea and Panama Canal issues, thus benefiting UPS’ revenue and volumes. Houthi rebels continue to fire missiles at ships in the Red Sea , traveling to the Suez Canal, making travel in the region risky. Also, lowered water levels in the Panama Canal have limited the number of ships allowed daily transit to 24, according to the Panama Canal Authority. Before drought conditions hit, 36 to 38 ships passed through the canal daily. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo Next columnist[/caption] “What we’re seeing today is, for shippers who have high-value packages, they’re worried about the ocean conditions, so they’re moving to the air,” UPS Chief Executive Carol Tome told analysts during the company’s Q4 earnings call on Jan. 30. International total average daily volume (ADV) was down 8.3% year over year in Q4. UPS Chief Financial Officer Brian Newman said the decline was primarily due to lower domestic ADV, which was down 10.8% YoY. Export ADVs were down 5.9% YoY. However, export volume from the China-to-U.S. lane increased by 2.7% YoY, driven by small and medium-sized businesses, almost offsetting the decline in Asia. Asia’s export ADVs were down 8.9% YoY. In response, in Q4 UPS focused on revenue quality and adjusted its global network to match changes in geographic demand, which included reducing international block hours by 9.4%. Slow to make impact When asked if the issues with the Suez and Panama canals will provide more opportunities for airfreight in Europe or out of Asia, Tome said UPS is already seeing benefits in its Asia-to-Europe lane. “This is going to be [a] repositioning of vessels around the globe,” Tome said “It’s going to be a global event, so we see it as an opportunity throughout.” Recent shippers’ earnings commentary suggests that there has been no impact yet from the Red Sea or Panama Canal situations. “It’s not creating any actions today, but we’re watching that closely,” Holden Lewis , chief financial officer at industrial product supply chain company Fastenal Co. , told analysts Jan. 18. And branded food company ConAgra Brands Chief Executive Sean Connolly said in a Jan. 4 earnings call, “The answer is no, no impact there.” However, Levi Strauss Chief Financial Officer Harmit Singh told analysts on Jan. 25 that the company had shifted some ocean freight from the U.S. East Coast to the West Coast, which is “easing some of this impact.” Analysts see tide turning Ocean and airfreight rate analytics platform Xeneta reported that air cargo volumes from Vietnam to Europe spiked 62% in the week ending Jan. 14. “This is the first signal in Xeneta data that the Red Sea crisis is impacting airfreight,” Xeneta Chief Airfreight Officer Niall van de Wouw said. “This is typically a quieter time of year for airfreight, so to see increases of this magnitude, with higher volumes than at any point in 2023, is significant.” “We should also recognize that the upcoming Lunar New Year [on Feb. 10] may also be contributing to the volume increase,” he said. In its latest air cargo report for December, IATA said manufacturers and shippers are increasingly opting for air over sea because of regional conflicts, particularly in the Red Sea. IATA CargoIS data for the week ending Dec. 9 recorded a 1% increase in global air cargo demand and a 5% increase in yields attributed to the disruption in the Red Sea when compared to the week ending Nov. 4. Demand increased by 2% in the Asia-Pacific region and yields by 6%. There was a 1% increase in demand between China and the rest of the world and an 11% increase in yields, while Europe’s demand remained steady, but yields increased by 3%. In the Middle East, demand was constant, with a 4% rise in yields. Regardless of whether the increases in airfreight demand noted by Xeneta and IATA are attributed to the Red Sea attacks or the Lunar New Year, UPS should see some volume increases. But UPS’ Newman said he expects international ADV to be within a range of approximately flat to up around 3% for the whole year.

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