COVID-19 logistics market situation report: express

express crisis boom

The express sector finds itself in a strange position, with some parts experiencing a crisis and other parts in a boom.

In Summary:

  • Cargo freighter demand is strong
  • Larger consignment demand is strong
  • Medical and Pharma logistics is experiencing very high demand
  • Last-mile deliveries within grocery and some other areas of e-retail are strong.

On the demand side the picture is remarkable. Undoubtedly consumer demand has fallen and this must be hitting e-retail sales. Overall, however, the impact on different categories of goods has varied enormously. The leading beneficiaries have been been e-retail grocery operations which have generally seen a doubling of volume even in economies that have a less developed e-retail supply side. However, the major express companies have little exposure to grocery, rather it is grocery specialists such as Ocado, grocery retailers such as Walmart, Amazon or small home-delivery operations.

In contrast, initial reports strongly suggest that clothing and hardware expenditures have fallen considerably. It is here that UPS and FedEx have both developed capabilities, therefore it is likely that they have been net losers in e-retail in recent weeks.

Airfreight & Express

The airfreight market has undergone a crisis focussed on both the supply and the demand side. However, both demand and supply have been deformed as much as they have been depressed. Although none of the ‘Big Three’ express providers – DHL, UPS, FedEx – are wholly reliant on airfreight, it is generally central to their express operations.

The impact of the near-collapse of passenger airline services has affected the Big Three. They use belly freight for the movement of consignments but on the peripheral parts of their network. For the core parts they have their own freighter aircraft complimenting these with their own hubs.

With a change in the nature of airfreight resources available they have had to reconfigure their networks. They are in a good position to do this as they control in-house substantial resources. By shifting aircraft and pilots to the areas of highest demand they can optimise yield on assets. In this sort of market, with a number of market segments seeing very high increases in rates, this is likely to be lucrative.  

They also have the option of supporting air operations with road freight. All of the ‘Big Three’ have road fleets of different types and re-deploying them for national or continental movements has been a useful option. It is believed that FedEx and UPS have been doing this in North America whilst DHL Express may have been doing this in Europe and China.  

Overall, the ability of the Big Three to access large cargo fleets must have been highly profitable for them. The question is, to what degree has the fall in small package consumer segment demand been compensated by the opportunities in the larger-sized consignments from industrial shippers. The initial indications suggest the Big Three have benefitted overall; for example, they have not made any workers redundant.

It should also be noted that all three are well-positioned to benefit from the most distressed air freight trade lanes, especially those in and out of China. DHL Express in particular has a strong position in the Chinese international market.

Life Science Logistics

The pharmaceutical and medical equipment sector is at the centre of the present crisis. Activity in parts of this sector appears to have increased very substantially in terms of the movement of medical equipment, some of which is quite low value and would normally be moved by marine container shipping. Also, the area of ‘drug trials’ seems to have become more active, although the situation is equivocal with the possibility that there has just been a shift in resources to relevant areas, and this may have been at the expense of ‘non-relevant’ types of drug trials.

Nonetheless, reports from both FedEx and UPS suggest that they have benefitted from higher activity in this area. UPS in particular has invested considerably in the are of pharmaceutical trial logistics, for example through the purchase of the specialist logistics company Marken. All of the Big Three also have the ability to handle products such as vaccines in high volume.

However, looking at anecdotal evidence, the real upsurge in volumes measured in tonnage seems to be in the area of protective equipment, such a specialist clothing and masks, generic drugs and also specialist electronic and mechanical equipment. Again, it seems likely that this is being moved in ‘high-speed’ channels, suggesting that the yields may be quite high.

Situation in China

It is important not to become too myopic in viewing the Big Three express carriers as the only significant express carriers. China has a number of very large express providers, although their market positioning is distinctly different being much less international than the Western ‘Big Three’.

The large express companies in China – ZTO, SF, STO, – but also China Post and parts of organisations such as SinoTrans, are heavily exposed to courier and road freight deliveries. Their exposure to international cargo airfreight is much less than for the Big Three, however they do have very significant domestic air freight operations. In addition, there are a large number of medium-sized and smaller carriers who are overwhelmingly regional or local and focussed on road freight. Many of the smaller carriers might be described as couriers.

The experience of the whole crisis has been positive for the sector as a whole. The sector has experienced frenetic increases in volumes in some areas and huge drops in other areas. Volatility has been far beyond anything that has happened in the West, with for example a 90% fall in domestic passenger volumes.

The smaller express and courier sector in particular benefitted from the near-collapse of traditional retailing activity, with huge parts of grocery retailing shifting to reliance on home delivery. It is probably reasonable to say that this has boosted the prospects of an already strong e-retail sector, especially in areas such a groceries. In turn this is likely to lead to the further development of this sector, especially in terms of continued integration with customer facing web applications.

The position of the larger express carriers is more equivocal. Their business model had been very much moving towards greater international exposure and away from the smaller-scale, harder to manage retail operations. It is quite possible that the crisis will accelerate their move into large-scale grocery and related sector retailing. One problem might be the international expansion of their operations. The previous marketing thrust was to seek to integrate supply chains outside China into the Chinese retailing system. This looks questionable now.

However, one area that the larger express carriers are likely to benefit from is the realisation of the need for fast and agile logistics response even in an economy such as China. The clear indication is that the authorities in China have recognised this.

Mail services and smaller carriers outside China

It is also important to realise that certain areas of the express market are fragmented, with smaller carriers sharing the market with the ‘Big Three’, or even overshadowing them. In addition, state mail monopolies and private sector mail providers can be important in the last mile market segment. So far the impact in most national markets on state mail Monopolies seems to have been moderate. There appears to have been some suppressing effect on traditional areas of mail, notably promotional mail. As mentioned above, there has also been a downturn in the purchase of clothing and hardware, including through e-retail channels. This may well have a depressing affect. However, there also appears to be a greater reliance on express and mail type channels for the movement of a variety of different consignments using mail and express channels whereas previous they used conventional road solutions. It might be suggested that on balance the state monopolies may suffer more than they benefit from the crisis.

The problem that the Mail providers have is that they are not in the area of grocery e-retail and it is this that has been the largest beneficiary of the crisis. Ironically, it is the smaller providers who have benefitted from this most. This varies from market to market, with the UK, US, Japan, South Korea and some more advance economies in South East Asia already having developed home delivery solutions for grocery. These have seen exploding demand, and in many cases, have struggled to cope. Rather it is in economies with less developed e-retail capabilities that smaller couriers are benefitting from. Ironically, it is partly their very smallness that enables them to adapt, with even medium-sized companies struggling to re-orientate their systems to new operational profiles.

Immediate Prospects

It seems clear that China is progressing with its recovery plan. Judging by the reaction of both the express companies themselves and the Chinese national and regional authorities they are pushing the express sector to recover normal operations as rapidly as possible. This may have an effect within China, however they will surely be constrained by the situation outside China.

The immediate prospects of the Big Three are more unclear. The situation in Germany – the national domicile of DHL Express – seems to be stabilising, however the situation in the US is more uncertain. It is also very uncertain when – or indeed if – passenger air transport will recover. There is a possibility that various forms of ‘phytosanitary’ measures will be taken around air travel in the same manner that ‘counter-terrorism’ measures were taken after September 11th. This could mean the belly-freight market will not recover quite as quickly as could be assumed.

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Source: Transport Intelligence, March 26, 2020

Author: Thomas Cullen