Considering the implications and suitable alternatives
For a long time, industry experts and observers suggested that e-Commerce was the next big thing and that it’s here to stay. Yet, that hype has not completely materialized, even though many continue to use the internet for shopping. Nevertheless, the end of the e-Commerce hype is bound to negatively affect planes. After all, they would be one of the key modalities for quickly transporting goods from different parts of the globe.
Counting the cost of a trend that never really took off
During the Covid-19 pandemic, there was a definite shift toward online shopping. Many worried about the risk of catching the coronavirus, which is transmitted through respiratory means and close contact. Others were simply following the dictates of the lockdown measures designed to halt the spread of the deadly virus. Meanwhile, many traditional stores looked at the possibility of shutting down due to a lack of customers.
Yet, consumers began to live with and adapt to the post-Covid-19 era. Indeed, the pandemic shift towards online purchases is now being reversed. Those that invested in air freight are stuck with eggs on their faces. It seems that they were shortsighted in assuming that the boost in online shopping would become the norm rather than an anomaly designed to sidestep a highly contagious pathogen.
Adjusting to new storage requirements and modalities
Aviation was the potential beneficiary of any trend towards online shopping. Of course, that expectation could only hold if the upward trend in e-Commerce continued. Indeed, some invested in air freight-related sectors on the back of this speculation. Now that the e-Market has somewhat cooled, many are beginning to ask questions about the wisdom of going all-in when it comes to investing in air freight. The current signs are not encouraging for freight industry investors.
Mark Zuckerberg, the Chief Executive of Meta, has already started the trend of cutting back. He laid off 11,000 staff on Wednesday, much to the dismay of those hoping for a quick recovery from the Covid economic slump. During his communication about the layoffs, Zuckerberg admitted that he had overestimated the surge in online sales. Others similarly assumed that the Covid-19 boost in e-Commerce was here to stay.
A second look at the more traditional forms of shopping
Other affected companies include Wayfair and Shopify. Data released by the Bank of America suggests this pattern is reflected elsewhere in industries. For example, the online penetration of online footwear and apparel is expected to be 22%. This is consistent with the trends seen before the Covid-19 pandemic. However, that statistic is significantly lower than the 26% penetration for the same products registered in 2021. The upshot is that the enthusiasm for e-Shopping is waning, if not disappearing.
The immediate and obvious victims of the mistaken hype include advertisers and retailers specializing in e-Commerce. Indeed, some businesses made the fatal mistake of shifting resources away from traditional channels and towards e-Commerce in anticipation of a boom. Then some investors poured millions into purchasing, upgrading, and redirecting cargo planes to take advantage of the expected rise in demand. For example, we know that the likes of DHL, UPS, FedEx, and Amazon.com announced a significant expansion in their air freight fleets.
The competition to take advantage of the anticipated trend swept up the likes of Mediterranean Shipping, CMA CGM, and A.P. Moller-Maersk. These companies had to be at the forefront of the e-Commerce boom by investing in their airfreight divisions. Indeed, many start-ups have emerged because of the anticipated boom in e-Commerce. That means investment is being poured into this niche, hoping for great returns. The reversal of the trend is bound to be devastating to these investors.
Even the more traditional actors in the logistics industry were taken in. For example, Boeing relied on increased freighter sales when keeping its product rates up. To that end, the famous brand announced a cargo variant of its upcoming 777X. Meanwhile, Airbus is also getting its house in order with a freighter version of its A350 wide body. These investments were supported by optimist sales forecasts which depended on high cargo demand.
Industry activity in preparation for a trend that was only fleeting
The buzz around e-Commerce was so great that even secondhand freighter values rose. Investors and lessors were soon enticed to this segment too. Passenger aircraft freighters are being converted for cargo at record-high rates. The appraiser IBA shows data supports this trend. Slots are being booked right into the end of 2024. Just a fortnight ago, Hawaiian Airlines consented to fly 10 converted Airbus A330 freighters at the behest of Amazon.com. This is a departure from its previous caution, which did not allow the airline to go beyond anything larger than midsize Boeing 767s.
It is a problem that traditional cargo-jet investments are becoming supersized in this climate. Moreover, the smaller aircraft (that would have been better suited to carrying lower volumes for frequent express deliveries) are being converted to meet a demand that is simply not there. This represents a distortion of the business model. This year alone, conversions of the Boeing 737 narrow-build group have reached 52. This is much higher than the annual average of 30 before the Covid-19 pandemic.
Everyone is trying to capture the demand that has not materialized
The market is heating up so much that Boeing opened a 737-conversion line within Gatwick airport in London. Moreover, plans with fewer than 150 seats are being targeted for conversion. Embraer, the Brazilian plan manufacturer, signed a contract with Nordic Aviation Capital. This contract involved converting up to 10 of E-Jets into freighters. Such significant investments are less likely if the metrics and outcomes they are based on hold true. To give context to the size of the investment requirement, the current price of a five-year-old Airbus A330 or Boeing 737 is $30 million. A conversion can range anywhere from $5 million to $15 million.
The freight rates doubled during the pandemic because planes had been temporarily grounded. This meant that about half of the airfreight supply was out of action. However, that was just a temporary trend to deal with the extraordinary stresses of the pandemic. Similarly, the pandemic bottlenecks that had pushed up prices were bound to ease at some point. This normalization means that the over-enthusiastic predictions of a boom seem misplaced. For instance, by October 2022, the sport air-cargo rates fell for the second consecutive month. Xeneta reported that they were 20% lower than they were at the beginning of the year. Moreover, the global economy is slowing down despite the expansion of airfreight supply, according to the International Air Transport Association.
Wrapping up
Overall, the predictions of a sustained and steady rise in e-Commerce have not been fully realized. The lockdown-driven spikes are beginning to dissipate. Those who invested or changed their operational plans based on these predictions are now worried about over-supply and falling prices. Once again, the pandemic created cruel mirages that are now being revealed for what they were.
