Is Flexport dropping its ‘private air’ freighter a sign of further trade war victims?


Flexport has made rapid progress in its six-year life span. Revenue in 2018 totalled $441m and represented a Really Quite Impressive 95% expansion on 2017’s $224.8m. Headcount has reached 1,600 and six warehouses make up a network that spans North America and Asia. Flexport though, remains unprofitable, and on January 25th its ‘private air’ freighter which operates three times a week between Hong Kong and Los Angeles will return to its owner, its logo will be wiped and the service consigned to history.

“Private air put us on the map – but now we’ve established relationships and feel very confident about the future.” Neel Jones Shah, head of air freight for Flexport

Flexport’s rationale for the move is an almost unrelentingly pragmatic response to an evolution of its business and a cyclical forwarding market. The service began in April 2018, when Flexport remained a relatively unknown name and the global airfreight market was still basking in the warm glow of a restocking cycle. Ti data put global air forwarding market growth at 10.2% in 2018, with Flexport’s key Chinese air export market-beating the global figure as annual expansion hit 15.2%. In such conditions Flexport says its status as an unknown name was viewed as an unnecessary risk by airlines and left it struggling to secure space in a competitive, high price market.

With a pile of pre-Softbank VC cash burning a hole in its pocket, Flexport decided a ‘private air’ freighter service was the way forward. Or as Jones Shah puts it, Flexport felt it necessary to “…manage our own destiny…the private air service made sense for a rapidly growing business. It gave us a tremendous foot forward, and we’d have had a really hard time growing otherwise.” As such a deal with Western Global Airlines was signed for a Flexport-branded Boeing 747-400F to operate three times per week between Hong Kong and L.A. That deal didn’t go exactly to plan and Flexport switched in July 2019 to a service operated by a Nippon Cargo Airlines subsidiary.

So why end the service now, 15 months before the original Western Global deal was set to expire? Well, Flexport says the primary driver is that its status as a risky unknown is gone and it’s now able to operate like its competitors. The 3x weekly ‘private air’ freighter will be replaced by block space agreements with Nippon Cargo Airlines, United Airlines and Cathay Pacific, amongst others. Jones Shah, again; “It was never our intention to be an airline. The intention always was to transition to a heavy BSA and spot market model, like our competitors. But we’ve accelerated that timeline.”

The decision’s not all about Flexport, though. It’s also because of some fundamental changes in trade over the last year or so. Flexport is highly exposed to the China-to-US lane, probably the most uncertain trade lane in the world at the moment. The trade war between the world’s two largest economies is around 18 months old and its effects are starting to show through in trade data. Analysis in Ti’s Global Freight Forwarding Update 2019/2020 report found that over the first nine months of 2019, China has exported 426.5million kg less iron/steel exports to the US by sea as a result of tariffs introduced by the Trump administration. These lost exports have occurred in line with increased exports to the US from South Korea (+64.6million kg), Thailand (+61.8million kg) and Vietnam (+60.5million kg). There are similar findings for a range of other commodity groups too. It also played no small part in Ti analysts estimating global air freight market growth at -3.9% in 2019. 

It’s shifts like these that are helping drive Flexport’s rationale – a final quote from Jones Shah; “Our business has changed, with the trade tension, and also with Hong Kong’s unique situation. We have only seen single-digit growth out of China, but we have seen high double-digit growth out of south-east Asia. There has been exponential growth there which we hadn’t anticipated.”

What does this tell us? In the case of Flexport, it’s significant the move is framed as a strategic evolution to block space agreement and spot market model, putting it in line with DHL, K+N and other big players and focussing the points of differentiation even more acutely on customer service and technology. Just as significant is the shifts towards other trade lanes – in some ways, Hong Kong-China has proven the Flexport concept, now the time has come to follow the volumes to South East Asia and beyond.

For those watching the air freight market, the implications are potentially wider. With the trade war as a catalyst, the forwarding market is changing to meet demand where it originates. The outcomes are now filtering through into trade data and are impacting strategic decisions forwarders will face over the next 12 months. While a deal on January 15th may signal an end, however temporary or permanent, to the trade war’s escalation, its effects are likely to cause bigger forwarding market changes in 2020 than at any point we’ve seen so far.

Source: Transport Intelligence, January 14, 2020

Author: Nick Bailey

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