Episode Transcript
[00:00:00] Speaker A: So some people are calling it a game changer, which is the creation of a fully integrated execution engine.
[00:00:05] Speaker B: Assets are one thing, execution is another.
[00:00:08] Speaker C: Jet fuel prices are still very, very elevated.
[00:00:10] Speaker D: One of the most important factors for airlines globally now is the price and the availability of fuel.
[00:00:15] Speaker B: I don't think these airplanes should be fl.
[00:00:26] Speaker A: Hello and welcome to Air Cargo Unpacked, a Freight Buyers Club production brought to you by on Tegos Cloud, the freight forwarder profitability specialist. I'm Mike King and with me as always is Neil Jones Shaw.
[00:00:39] Speaker B: Thanks, Mike. Coming up, Amazon launches a full logistics business and the market has a strong opinion about that. The Middle east capacity recovery, what the data says and what it means for your procurement. And, and we'll have a look at jet fuel's dramatic two months and what
[00:00:55] Speaker A: happens next, won't we just. We've also got the dashing Neil Wilson from TAC Index explaining the latest on rates from the Baltic air freight indices. Shantanu Gangaked, our Frost and Sullivan aviation lead gives us his insights into the Asia Pacific market. And Neil, I seem to recall you saying the MD11s were never coming back. I think we might need to talk about that.
[00:01:18] Speaker B: Let's, let's do, let's do that at the end, Mike.
[00:01:20] Speaker A: Okay, yeah, we'll save that humble pie for later. But First, Amazon. On the 4th of May the company launched Amazon supply chain services ASCs, everything they have built over the past decade packaged as one product available to any business. So not just Amazon sellers, we're talking ocean freight, air cargo, warehousing, last mile intermodal, all in one portal. Their own VP quite ambitiously reached for the AWS comparison. So same playbook, different product. Neil, what does this mean for 3pls and for air cargo more generally?
[00:01:59] Speaker B: I'm going to dig into that in a second here and first and foremost, let's not overreact as an industry to the news. Ok? I think that what you did see initially when this news came out, you know, FedEx was down 10%.
I think UPS was down a similar amount. I mean these are massive moves for $800 billion companies to, to, to react. Now obviously it was an overreaction. You know, if you look at FedEx over the past couple weeks, they've recovered half of the impact of, of this announcement. But, but look, I think, you know, when, when we look at what Amazon's doing, you know, the assets are daunting. I mean the planes, the trucks, the warehouses, you know, the final mile delivery network, it's an unbelievable asset base that they have accumulated. Right. Which has allowed them to dominate, you know, two porch retail around the world now over the, over the course of the last, you know, 20 years. And you know, they have their own business, right, that, that they can use to subsidize. Now they, this pivot towards third parties. But let's be clear, this isn't new. They have been doing components of this for several years. And so they've now packaged it up as, you know, one product. Right. Okay, but if you're a 3PL, you know, I keep a close eye on this.
There's no reason to panic here. From my perspective, I think you have to keep a close eye. But remember, operating these assets for your own internal business and operating these assets as a vendor to third parties, two very different things. And I think we're going to unpack that a little bit more over the coming few minutes.
[00:03:43] Speaker A: Yeah, well, we'll come back to what's new and what's not new in this announcement in a second. But let's, let's unpack the infrastructure first. So we're talking 100 plus freighter aircraft, 80,000 trailers, 24,000 intermodal containers.
They've got some big customers on board already. We're talking Procter Gamble, 3M, Lands End, American Eagle.
Eric Johnson broke down how you talk about the whether it's new or not. And in Journal of Commerce really well.
So is this a marketing ploy or an existential threat to 3pls?
So some people are calling it a game changer, which means really this is the creation of a fully integrated, I guess, execution engine. So it links forecasting inbound transportation, inventory placement and fulfillment in one overarching operating model. But I think coming back to where you sort of stand on this, I suspect Neil, others, including your old colleague at Flexport, actually Ryan Peter, said a lot of these services have been around for years. So you're implying that there's nothing new here, nothing to see.
[00:04:53] Speaker B: Well, I don't think there's nothing to see here because I do think that they continue to take steps forward to package something in an overall product offering. So I'm not implying there's nothing to see here. I think I am implying that it's nothing to panic about if you're in the industry. And again, just issuing a press release doesn't make this sort of viable in the marketplace. So let's be clear because assets are one thing and again, like I mentioned, they, they've got an unbelievable sort of accumulation of assets. And I have been very public about the fact that, you know, even years ago that Amazon was building the fourth integrator, right? And you know, here in North America, you know, they may even, you know, they're the third large, they'd be the third largest integrator, right, given the asset base that they built. So again, very, very interesting stuff. But assets are one thing, execution is another.
Okay? And like I mentioned, there's just a big pivot from running a network for your own business than it is being a vendor to third parties. And I've had experience with components of this over the years. And even if you look at their air cargo business, right, you know, Amazon Air Cargo executing has not been a forte of theirs, has not been as easy as it sounds. And so, you know, they're going to have to overcome these challenges and before this network is going to be seen as, I think, appealing and easy to use for the general public. And you know, three PLs, four PLs, freight forwarders, you name it, everybody has worked really hard, right, to build a network of products and services that work for their customer base that are priced appropriately. Now one thing that Amazon absolutely has in their favor is that they have this massive internal business that they can use to subsidize how they go to market. And so when it comes to cost effectiveness, that is one thing you gotta keep an eye on because Amazon has the ability to really be a cost effective solution if and when, you know, their execution comes to par.
[00:07:04] Speaker A: I did reach out to Amazon Air Cargo and asked them if they wanted to come on and talk us through what this means for their cargo market specifically. I didn't hear back, but that invitation remains open. We'd love to have you guys anytime. You are welcome. But Neil, you mentioned cost there, so I just want to unpack that slightly. There was a really good article in Journal of Commerce again, actually, Paul Tonsage from IMS Advisory broke this down and his view is rate, if you're negotiating with Amazon isn't the only cost or not the real cost. You should be thinking about this as the rate plus data exposure.
So how this argument goes is if you hand Amazon your demand patterns, your inventory data, your supply network, and once their forecasting models are sort of calibrated to your operation, then leaving means rebuilding that capability elsewhere. So it's closer to changing a cloud provider than changing a freight forward, especially on year two. Do you see that view?
[00:08:07] Speaker B: Yeah, I mean, I think there's something to that, right? I mean, there's a history here where entities have shared, you know, data with Amazon or They've gleaned data from a potential customer's business and then they've recreated that. Right, to enhance their own business. And so I think that there is something absolutely to be wary about. And the data is critical, right? I mean it is, it's the holy grail for people's business.
It's what, you know, gives them the upper hand, particularly when they're talking to suppliers, is keeping their data close to the vest and using that to their advantage, you know, as they're going through these discussions and negotiations with vendors. And if you sort of give it away, you're right, it may sort of pen you in as you go through subsequent years. So it is something to be concerned about.
I haven't thought through this entirely, you know, yet, but I do think that a lot of potential customers are going to be quite cautious here just on
[00:09:10] Speaker A: the Amazon air operation itself. So we're talking 100 plus aircraft including 10-8330 freighters added last year. Earlier this month, Sun country confirmed two more 737, 800 converted freight is coming by the end of June.
We're not talking about a sort of, you know, know, the small fleet here. What does that fleet inside this full end to end logistics offer sort of mean for the overall competitive air cargo landscape?
[00:09:39] Speaker B: Yeah, I mean look, their fleet is impressive. I, I love their fleet of regional freighters. Right. I mean it's fantastic. And the coverage is out of this world. Their ability to connect air cargo or to connect cargo domestically at pricing that's not, you know, significantly deviated from team trucking in the US is something really special. And so I want to give them a lot of credit, right, for building a network that is, is very attractive from a network standpoint for a lot of customers. Again, I come back to the ability to execute on a consistent basis. And you know, is there operations set up to not only handle their own internal business that comes with its own set of compliance rules, et cetera. Right. That they abide by. But can the industry sort of work under those rules and constraints?
And that's one thing that I would say, you know, right now it's difficult.
It's difficult. And so they're going to have to figure out how to handle that conflict. But as far as a network goes, honestly, I love it. I love the coverage.
I use it today because that coverage is great and allows us to offer products to our customers that you wouldn't be able to without Amazon. But they gotta keep working on the day to day execution.
[00:11:09] Speaker A: All about execution.
Okay, let's pivot, Middle east capacity really rotates. Latest data, as of 12th of May, overall Gulf capacity at 74% of the pre conflict baseline freighters 72%. Widebody passenger back to 71%. Some numbers, I'll throw some more numbers out there. Bahrain went from below 10% two weeks ago, is now 66%. Or on the 12th of May, Jeddah not just back on track, actually booming at 134%.
And if you're watching, you can see all these numbers on screen on Spotify or YouTube. Abu Dhabi and Riyadh up around 90%. Doha 58. Dubai 70%. Dubai World Central still at 55%.
It's not a clean upward slope, Neil, but all good news for shippers.
[00:11:57] Speaker B: Yeah, I mean, of course it's good news. I mean getting the Middle east carriers, getting the Middle east hubs back into the flow of things is obviously great news. Right. We talked about in our episode, you know, right as this conflict was starting out that that close to 19, 20% of global capacity runs through the Middle East. Right. So getting that part of the world restarted is obviously good news for shippers and contributed heavily to, you know, global capacity being up 3%. Right. Which you can, you can see on, on the chart there. And, and I also want to thank our friends at ROTATE for getting this as real time data feed. It's greatly appreciated. And, and they're, you know, they're, they're amazing to work with. So yes, good news, good to see the carriers and coming back. And you know, for me from just a personal note, you know, I'm in and around Chicago o' Hare very frequently. Right. So it's great to see the Emirates, Qatar, Etihad aircraft. Not only the passenger, but the cargo, you know, flights coming in and out on an incredibly regular basis. Because I tell you, I saw the, for, for the first month of the conflict I saw some. Qatar saw the same old, same tail number sitting on the ramp there for two, three weeks on end just waiting to, to get that operation restarted. So it's great to have them moving. And you mentioned some gateways in that region are above where they were pre war. Right. And that's just because you see a shift of people moving capacity as far away from the conflict as possible.
So Jeddah's up. Well, okay. It's further away. Dubai always tends to be in the crosshairs. I think Iran and the UAE are probably not the closest of friends right now. And so, you know, Dubai being in the crosshairs, you see capacity moving to Jeddah Bahrain restarted because you know, that's DHL's hub. So you would, you would expect that as the conflict has sort of stalemated, Bahrain has, has fired up a little bit. But overall, you know, good to see it. You know, one thing I'll just say is I feel maybe we've plateaued a little bit here. You see that the week over week gains are sort of incremental. Went from 69 to 74% or 69 to 71 on the freighters and a little bit maybe more on the packs. But I'm wondering if we're plateauing here. I hope we continue to move towards 90, 95% in terms of the overall capacity number, but we'll see how the next few weeks play out. And again, this conflict doesn't seem to be going anywhere. We seem to be in this deadlock stalemate of a situation and I think we're just a trigger away from maybe things flaring up again.
[00:14:32] Speaker A: Yeah, we seem to have peace in our time every Friday as the markets close. And then things tend to deteriorate during the week again. Or is that just me being a cynic?
Okay, thank you, Neil. Let's see what's going on with rates. I caught up with Neil Wilson, editor of Tacindex, the leading global price reporting agency on air freight rates and the calculating agent for the Baltic air freight indices.
We've seen air freight rates make some big upward moves in the last few months, mostly down to the war we've just been discussing in the Middle East. So I started by asking Neil if that has been continuing in late April and the first two weeks of May.
[00:15:11] Speaker C: Hello again, Mike. Good to talk to you again. And to start with the big picture, the BAOA index, which is our global composite, if you like, average of the rates globally that seems to have levelled off, as I think we were indicating when we spoke to you this time last month.
It was beginning to level off, then flatlining, we said, but at very elevated levels, crisis levels at or above previous peak seasons. So as you can see on the BAO chart, it seems to have topped out for the moment.
Underlying that, I think is two things to note. It's quite a complex picture because jet fuel prices are still very, very elevated. They're up about 80% year on year, which is much more than the crude oil price, for instance, given that the crack spread is wider. But they have started to fall back a little. So if you look at the first week of May, the average indicated by Platts, which is on the jet fuel Price monitor that I have put out is about 10% down. So there's been a bit of a pullback there that might be to do with various things, supply being a little bit easier perhaps. There was this reports that China had stopped exporting jet fuel because they did refine a lot and apparently that's now been eased and they have started to export mainly into the Asia region. And the second thing is that there's been perhaps a fall in demand because of the number of flight cancellations. The last data that I saw, it's probably being updated all the time, was that there were at least 12,000, 12,000 plus flight cancellations announced for May, May alone led by Turkish, Lufthansa, China east and various other airlines. So that obviously means fewer flights, it means less jet fuel needed but also less belly hull capacity. So rates are still elevated but they seem to have topped out for now. While we see what happens, Neil, looking
[00:17:05] Speaker A: at the spot rate picture from Asia, are we seeing this same leveling off in those Asian markets as we're seeing in the overall index there that you were just talking about? And are these markets mo together or is there a divergence between routes?
[00:17:21] Speaker C: That's a really good question. So obviously what we were looking at before the b00 is the global average. That's all kinds of transactions including things done on contract that were agreed months ago as well as things that are current. The spot rates focus on the marginal price, what people are paying today or tomorrow to move something. I think that what you're seeing there is that the Hong Kong, which is the biggest airport in the world for cargo, 5 million tons last year, seems to have topped out. It's a little bit off from its peaks. Europe about $560 a kilo. US East coast about $7. At the time we're talking, this is like coming into mid May so that reflecting the overall index, whereas India, which really spiked in March, it more than doubled from 1.85 a kilo to Europe to over $4.10 at the beginning period of the Iran war. That was 4.10 at the end of March.
It drifted down to 393 at the end of April. So that's come off a little bit. That was the most impacted so obviously went up the most and it's come off a bit. Whereas in other places like South Korea, the outbound there, it's still edging up a little bit to Europe and to the US where I think this is delayed reaction. The further away you are from the Middle east, as I think we noted last month that that's still the case. One more thing to note, sorry, is that we're about to add more spot rates and Shanghai should be up soon, so we have various people wanting to be panelists. So that should be happening fairly soon.
[00:18:50] Speaker A: Okay, we'll watch this space. Neil, any lanes really been jumping out of you that are acting out of the ordinary at all?
[00:18:57] Speaker C: Yeah, yeah, very good question. So we had a look at the data and there are various lanes that are up much more than that average, you know, higher than peak season. And obviously the one that stands out, as I think you can see from the chart, Europe to Dubai, it's a pretty specific market.
Unlike say Transpac where a lot of the volume is done in dedicated freighters. This is mainly a belly hold market and it's also dominated quite heavily by one player, which is Emirates, which is the home airline for Dubai. And so they've obviously had a lot of cancellations since the war started in Iran, as have other carriers going into between Europe and Dubai.
So the year on year figure for that is now currently up 140% which I guess is not. It's pretty astonishing.
It's not a gradual movement and until we see something more like a normal program being restored by Emirates and the other airlines running those routes, then I think it's going to stay very expensive. That's certainly what it looks like.
[00:19:57] Speaker A: Thanks, Neil. The Freight Buyers Club is going to be attending Air Cargo China and Shanghai at the end of June. Will we see you there?
[00:20:05] Speaker C: I won't be there personally, as you know. I was in Hong Kong last month for our dinner there, which was very interesting as always. But various of my colleagues will be in Shanghai. You know, we have quite a lot of team in Asia and you'll be seeing some of them there.
[00:20:17] Speaker A: Neil Wilson, thanks for joining on this May episode of Air Cargo Unpacked.
[00:20:21] Speaker C: Thank you, Mike. Thank you.
[00:20:23] Speaker A: So Neil, rate still buoyant and that's with capacity up 3% year on year right now according to rotate.
[00:20:30] Speaker B: Yeah, I mean look, the market is surprisingly resilient because the consumer is resilient. You know, demand is okay right now.
E Comm continues to boom.
You know, many parts of the world continuing to see double digit growth. You know, in E Commerce volume, Mother's Day flower demand was off the charts. Right. And you see that in the rotate numbers. 8, 9% capacity growth, you know, in, in South America, coming northbound into North America and Europe, really strong numbers. AI AI. Boom continues. Right. I mean you saw the Earnings reports from the, from the high tech companies just last week, tens, hundreds of billions of dollars, you know, being spent on this data center, you know, build out. So lots of things to move demand forward, lots of things to be quite, you know, buoyant about when it comes to air freight. But, and people are still spending money. But, you know, I think there are some dark clouds on the horizon and maybe a dark cloud and it's called inflation. We saw the latest CPI and PPI prints from the U.S.
not good news, particularly on the producer price index front. Right. You know, and fuel is the driving force of that. But fuel goes into everything we do. Every product we buy, right. Is impacted by this. And so it is catching up. It is catching up to the consumer. When you start paying twice as much to fill your car with gas, the first couple of weeks, you shrug it off. But when it's happened for 6, 10, 12 weeks in a row, it starts to be impactful.
You have to then give other things up. And so when does the, I would say the elastic part of the demand, when does that snap and when did those consumers say enough is enough? I've got to really cut back on my discretionary spending. We'll see when that happens. There's always a lag, but that's my concern. And you know, we gotta, we gotta keep a close eye on it.
[00:22:26] Speaker A: We're going to do a bit of a deep dive in the June episode on China. I'll be attending air Cargo China Transport logistic in Shanghai at the end of June.
Please give me a shout if you, if you want to have a chat while I'm over there.
But, but Neil, early thoughts, right? So President Trump and Xi have just met.
Is this a possible boost for demand or. It seemed like a relatively good summit.
Anything, any early thoughts on that? We don't really know what's going to, what, what concrete's come out from that, but it seemed like it was quite a good meeting.
[00:23:00] Speaker B: Yeah, I mean, I think it was overall a very friendly meeting. I think that, you know, both, both leaders, I mean, especially Trump. Right. I mean, you know, there are lots of, lots of fires burning. I don't think we needed another one. So I think detente on a trade, from a trade perspective with China is very important.
There's not another thing for the market to worry about, for consumers to worry about, for shippers to worry about. So I think there's a lot of stability now with the US And China, just in terms of the overall tone and the comments coming out of both sides. So let's see. Let's hope that this continues. I do think that stability, you know, between China and the US Is a very good news for most, most shippers right now. They don't. They don't need any more drama. They've got enough to deal with.
So I'm hopeful. But like you said, we'll. We'll dig into this in more detail in June. I think we'll have some more opinions. Right. Post this summit and post some of these deals actually being, you know, inked.
[00:24:09] Speaker D: Right.
[00:24:09] Speaker B: That we talked about. But again, overall, it was a good two days.
Lots of smiles and handshakes, One warning from Xi on Taiwan, but we don't talk about that too much. But apart from that, I think that it was a good couple of days.
[00:24:27] Speaker C: Yeah.
[00:24:27] Speaker A: We don't need any more fires, do we?
[00:24:29] Speaker B: No, we don't.
[00:24:30] Speaker A: Okay, let's take a break. And after, we'll be looking at some interesting carrier profits, the return of a freighter we thought had been lost to our industry. And we'll be hearing the latest on Asia air cargo markets from Frost and Sullivan, no less.
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[00:25:19] Speaker A: welcome back. Lufthansa Cargo Q1 revenues up 5% to 876 million euros. Cargo traffic up 7%. EBIT up 40%. 83 million euros. Interesting numbers. Middle east capacity disappeared. And Lufty's Asia Europe network seemed to absorb this displaced demand. They also added 7% more capacity through ITA Airways belly space.
Few other things to point out. Despite the March pickup, not surprisingly, fuel costs bit into some of those gains. And they had some strikes. But strong headline numbers, Neil. With caveats, would you say?
[00:25:55] Speaker B: Yeah, I mean, overall, strong headline numbers. I mean, Lufthansa has always been really good at managing their network and managing to the current situation. Right. I mean, they shut down City Line. They took that proactive move because, you know, it didn't make sense to operate these small jets that were incredibly high cost, particularly where fuel is. So I don't think they're shy to make moves that they need to make. You know, Lufthansa cargo, again, you know, good numbers. It's, I'm, I'm not reading too much into them because honestly, you know, partly impacted by what was going on in the Middle east and partly not the ITA numbers, I don't know how much that impacted the numbers, you know, are the past comparisons, you know, are they apples to apples? Completely. Right. So. So let's not read too much into it. But I would say that on the surface, it's good to see that they're managing their business tightly. And clearly the fact that they can participate in the Europe, Asia to Europe market, particularly in the early days of this, we saw rates between Asia and Europe spike. And so if they were able to add a lot of capacity in these trade lanes bypassing the Middle east, clearly they were going to benefit from that. And so anybody involved in that trade lane was going to benefit during the early, early weeks of this conflict. And you clearly see that playing out in their numbers. So let's see if they can keep this up through the year as we continue to deal with the fallout from this, from this conflict.
[00:27:21] Speaker A: Neil, for the air cargo by us actively procuring maybe right now or maybe in the next few months, is there any real takeaways or practical reads from these company results and also maybe throw in what we're seeing in rates from TAC Index. Any advice?
[00:27:40] Speaker B: Yeah, I mean, I think, look, we've seen a big spike in yields, I mean, mainly driven by fuel surcharges.
I think at the end of the day, when you're a shipper, obviously you need to be bifurcating between the base rate and the fuel surcharge because the fuel surcharge is quite volatile. It's going to come and go based on, you know, what's going on in this macro environment. It's obviously a globally traded commodity, so you can't escape from it no matter where you are in the world. I mean, here in North America, we don't, there's no fuel shortage. We've got plenty of jet fuels coming out of our ears. Right. But you're still playing double for it because it's a global market, you know, of course. And so even in parts of the world where they're running out of it, you're still pricing is quite consistent. But I just think as a shipper, you just have to make sure that you know which component of these costs as you're negotiating contracts are truly variable, that you can make sure. That as the impact of things alleviate that you can shed those costs very quickly. I do think that base costs are a little bit under pressure in many segments. You know, again, because while demand is decent, there are segments where demand has taken a hit. And so, you know, you're seeing base rates come down in some areas even though the FSC has taken, you know, overall all in yields up, you know, 40%. So I think overall as you're a shipper, you just have to make sure that you're, you're looking at the components of the yield. You're not signing up for all in rates. Right. Where you have a little less visibility and ability to renegotiate those as the situation warrants.
[00:29:24] Speaker A: Thank you, Neil. Okay, let's hear from Shantanu Gangakeda, principal consultant and aviation lead at Frost and Sullivan Asia Pacific. He's got some interesting thoughts on the AP market and how jet fuel costs are impacting it and some thoughts on what frames what happens next.
[00:29:46] Speaker D: So before the outbreak of the Iran hostilities in the Middle east that's happening, air cargo was growing steadily. So year on year it was growing multi digit, not only in Asia Pacific, but globally as well. But since the outbreak of the war, from end of February, March, there has been a decline. So globally the air cargo demand has declined slightly. Not as much as people would have thought about, but it has declined. But what has also happened simultaneously though the speed of growth of air cargo in Asia Pacific might have slowed down, but it's still growing. So it has grown about eight single digits. Definitely it's grown since the outbreak as well. So what I'm trying to get across here is that there is strong demand in the region, especially because coming from demand for E commerce, from high value manufacturing, from semiconductors. So there's a strong demand there. It's just for stakeholders to navigate how can they manage costs with this increasing demand. So that's what is currently happening. But one important factor, and which is I believe one of the most important factors for airlines globally now is the price and the availability of fuel. And this directly impacts the price of the tickets in case of passenger aircraft. And in terms of cargo, it impacts directly the price that the shippers have to pay for a kilo of air cargo, be it belly cargo or be it in a freighter. So the next deciding point will be where does the fuel price move? Does it increase from here? Does it come back to what it was originally also bringing or cooling down the prices as well? Because there have been double digit increases in air cargo prices Globally, what comes next depends on multiple scenarios. So one is, of course, the most likely, which everybody wants, is tomorrow's trades of Hormuz open up and we try and go back to normal in a couple of weeks.
But airlines, air cargo operators globally are preparing for what if this state of almost doesn't open? What if the crisis continues? So they are trying to find out alternate routes where they can focus their availability on. So bring in that revenue from alternate routes. For example, let's say Southeast Asia and East Asia is a growing demand for air cargo. India, Asia Pacific is a growing demand as well.
So understanding different scenarios and trying to make the best out of those scenarios is what airlines and air cargo operators are trying to look at, while, of course, managing the costs.
[00:32:20] Speaker A: Neil Shantanu flagged fuel price and availability is the single most important variable right now for airlines. And the chart we're about to look at shows why.
Prices up almost 100%. And this is playing into yields per lane, according to Netta and Rotate, Lufthansa flagged it as a headwind even in its strong first quarter.
So what does this mean for carriers and for the shipper paying the surcharges?
[00:32:47] Speaker B: Yeah, I mean, you know, I think the chart that you're looking at is a very interesting one. I mean, because if you look at what we're seeing on a global basis, again, you know, there will be some regional differences that we all know about in terms of yield growth. But, you know, Overall yields up 40%. Right. But look at the jet fuel number. Right? It's up 100%. It's double. And that's the important number because you can look at Brent, but you can't put Brent crude in your airplane. Okay? It has to be refined and the crack spread has increased. Right? And so now you see the crack spread much, much higher than it was pre conflict. And that's why the jet fuel price is up double, even though Brent is only up, you know, 60, 61%.
And so it should be a concern because, you know, obviously this is the biggest cost input for freighters. It might be the second biggest for passenger planes because, you know, labor is still, I think, the biggest input cost there. But certainly for freighters, it's the biggest cost input. And the more this stays elevated, right, the more shippers have to rethink how much cargo they can ship by air, whether they have to start shifting supply chains. Now, nobody shifts a supply chain because of a conflict, because by the time you figure it all out, the conflict will be over. In, in most cases. But you know, you, you might see completely changing sort of, they might not decide to hold less inventory. So I think lots of decisions will get made kind of as this drags on that will, you know, that'll impact things. But give me a second to sort of digress just a little bit because I think as you discuss fuel, you know, right now there, there is a pretty big, I think, dichotomy here between different airlines, right. And how they're reacting and how they're able to weather the storm. And I think we'll see this on the passenger side of the business and we'll see that a little bit on the freighter side of the business as well. And you know, let's, let's use the example of Delta and Spirit here in North America really quickly because if you look at Delta, they're basically trading at an all time high right now. Okay. Their stock price in the low 70s, all time high. I think it's like 76, 77. So, you know, they're, and, and Spirit, in very dramatic fashion, you know, went completely belly up and liquidated. Right. You know, two weeks ago. And so he's like, well, what's going on? How can this one carrier be doing this the other? Well, it's because they've built their demand so differently.
Delta plays in the inelastic part of the demand curve. High premium traffic. Consumers who don't care whether they pay $100 to fill their tank with gas or $50, they're not cutting back on experiences. Right. So very high end of the yield and the premium curve. Spirit played in the completely in the opposite end in the very elastic part of the demand curve. And so those consumers are like, can't do this anymore. Or, you know, and as a result, they couldn't raise prices on these consumers. And then the fuel price overcame their cost structure and their ability to continue operating. So I think you're going to see this continue to play out over the coming weeks and months. I mean, Spirit isn't going to be the first airline to go out of business if this crisis continues. And I think that it's just, it's just an interesting state of affairs, you know, in the industry right now. And again, you know, we know that passenger Demand counts for 50% of cargo capacity. So what happens here will be impactful maybe, maybe not in the next few weeks, but over the long term as carriers maybe even cease. Cease to exist. So when's a wide body, low cost carrier going to go out of business? Right. What's the first one to bite the bullet that might really impact cargo capacity. And one last comment I'll make on this is that, you know, you just actually, just yesterday, Berkshire Hathaway made an announcement that they've bought a 5% stake in Delta. This is Warren Buffett's company, who, you know, famously said that if you want to start out a millionaire, you know, start out as a billionaire and invest in an airline, right, and you'll lose everything. And so it's under new leadership now, his company, but even at these high prices, high stock prices, they made the decision to. So, you know, they clearly see something there. So again, it's a weird market.
All carriers are not built alike and they're not all going to weather the storm alike and it's going to have a big impact on capacity.
[00:37:14] Speaker A: So on the one hand, we've got, we've got carriers going to the wall or potentially going bankrupt as these costs mount up, but on the other, we've got capacity growth this year is up 3% globally. You've been in the room for these decisions. How does that elevated fuel price put a brake on your capacity growth decisions?
Or maybe, maybe frame that from a global perspective or for some carriers, and I'm guessing this varies by carrier, does the yield environment override that issue with the fuel question?
[00:37:47] Speaker B: Yeah, I think in the near term, carriers are loathe to make any big changes, right, because they just want to weather the storm, they don't want to send the wrong signal to their customer, etc. But, you know, as they see things drag on, then they obviously have to make moves to protect the P and L and protect the balance sheet. And that's what you're starting to see. So you're starting to see some of that now come into play. And you know, Mike, I think that carriers don't make big announcements when they cut capacity. Nobody likes to press release bad news because that just never works. You sort of do it under the radar screen. And. And so we are seeing thinner routes, you know, routes that have less stable demand on the freighter side being canceled or frequencies being pulled back. You know, instead of operating three days a week, they're operating two or one day a week. So this is happening again. It's happening selectively and in regions where they haven't been able to, let's say, recoup all of the fuel costs. And we know that the yields, yield growth has been very different by region. Right. You see yield growth in and out of the Middle east is very high, of course, because demand has been suppressed the most in that region. But if you look at, you know, Asia to North America, yield growth is about 30%. Europe to North America yield growth is 20%. Well, that's not keeping up with fuel. So, you know, you have to say, when is that going to catch up? It will eventually because carriers will just start burning cash.
And how long do you burn cash? It doesn't make sense to do that for too long.
[00:39:18] Speaker A: No, of course. Right. Neil, to finish, I seem to recall on a previous episode of this podcast you making the not unreasonable case that the MD11s were not coming back. Simply too dangerous.
Earlier this month though, two FedEx MD11 Fs flew again. There was a test flight out of Memphis, then Memphis to Miami and then a second aircraft, Memphis to LA.
The FedEx COO told the Wings Clubby aircraft, we're ready to go. So what's your thoughts? What's changed?
[00:39:50] Speaker B: Well, thank you Mike for bringing this up and reminding me of my earlier prognostication. And I stand by my earlier call in the sense that I don't think these airplanes should be flying. At least UPS heeded my advice.
From my perspective, I think that FedEx and UPS obviously flew the vast majority of these aircraft.
They both made internal decisions. UPS had the capacity, both from third parties and internally to cover their fleet of 28, 29 aircraft.
And so I think having been the victim or having experienced this tragedy firsthand, I think they took the decision that these aircraft, even though there was an FAA approved Boeing fix for this bearing issue, right, for the, for the pylon, they made the decision that, that maybe the risk was obviously too great for them to continue to take. And so, you know, the decision was made. I think FedEx had a different capacity situation. They clearly need these airplanes to continue to operate their network and at the cost structure that they want to operate it at. So let's, you know, I'm, you know, keep my fingers crossed that we don't have any other issues with this aircraft. But I suspect they will look to retire them as quickly as they possibly can as, you know, replacement capacity comes online. And as far as the other operator I think is Western Global, they have a bunch of these aircraft. I don't think they're all airworthy. I think they're four or five that they operate in the schedule. Even though I think they technically might have 15 or so airplanes. I haven't heard anything about what they might do with these aircraft. But you have to just wonder at these fuel prices, who's going to want to, you know, lease or charter an MD11 for long haul, you know, Pacific or, or South America flying. I just don't see how the math is going to add up there. It seems like a money losing proposition, but I've been. As you've nicely pointed out, I've been wrong before, so I'm sure I'll be wrong again.
[00:41:54] Speaker A: Well, let's just hope there's no more tragedies. That is all for this episode of Air Cargo Unpacked. Thank you to Neil Wilson at Tacindex for the rates analysis, Shantanu at Frost and Sullivan for his insights on the Asia Pacific. Huge thanks to On Tigo's Cloud for their support of this show, and to Karen Ball and Tom Matthews for their production skills. I'm Mike King.
[00:42:15] Speaker B: I'm Neil Jones. Shaw. We'll see you again.
