Airline’s uncertain future means price volatility in logistics

Freight forward fall air sea

The Western world is emerging from the COVID-19 crisis. The likelihood is that economic demand will pick-up, however it is unclear if the freight transport capacity will be there to support such a recovery. It appears that in important areas of the market there may be longer-term reductions that will have implications for prices and capabilities. Airfreight seems an extreme case.

An example is Emirates, the largest international airline. Rumours are circulating that Emirates will imminently reduce its workforce by one-third. The news agency Bloomberg wrote an article on Monday asserting that the UAE carrier was “considering slashing about 30,000 jobs.” It was said to be part of a plan to realign “its operation to cope with a travel downturn expected to last for years, according to people familiar with the matter”. Emirates is also reducing its fleet of A380s. The airline said no decisions had been made about staff reductions.  

Lufthansa is also reported to have just agreed to a bailout from the German government, with the state agreeing to take 20% of the company’s equity in exchange for an injection of €9bn in cash. The airline has already announced substantial job cuts and reductions in its fleet, with the bailout essentially designed to avoid a takeover or collapse of the airline rather than sustain jobs, although this is likely to become a difficult political issue in Berlin.

In the US the situation is different with the statement that “no US airline will go out of business” so far appearing to be correct, although the CEO of Boeing appears to think this may change. However, there is tension between the politicians who have provided key liquidity to the airlines and the management of the airlines who are keen to ‘right-size’ their operations. Essentially the government money means that the airlines must delay widespread redundancies until the third or fourth quarter. This may give American airlines time to judge the market or they could simply immediately move to shrink their workforce in October.

The problem is that it remains far from certain at what level demand will return and when. Looking at indicators in other sectors, such as Chinese ports, it is far from certain that volumes will quickly return to the sorts of levels seen at the beginning of the year. The balance of demand and supply is likely to be hard to judge with markets such as airfreight still very volatile. Prices are still high and the potential for downward correction must be regarded as significant. However, the ability of emaciated airlines with weak finances and hugely reduced staff levels being able to immediately react to higher demand is also questionable. They may have fleets of furloughed aircraft in a desert somewhere but getting them back into the air could take time. Therefore, the prospects for a sharp price increase for airfreight, or certainly the present high prices being sustained, is also quite possible.

These supply and demand balance questions are likely to dominate many logistics markets in the medium-term, with the most successful logistics service providers being those who can exploit the market most effectively.

Source: Transport Intelligence, 21 May 2020

Author: Thomas Cullen

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