Putzger perspective: Engine trouble
05 / 06 / 2023
In May, the US Postal Service did something rather startling. It announced plans to lower rates on some packages.
For years parcel rates have only gone in one direction – up, at a steep angle. Year after year, e-commerce shippers have had to swallow eye-watering rate hikes (in double digits, when surcharge increases are factored in).
For them, cost savings are the top priority now, as the high costs are widely described as unsustainable.
In conjunction with a soft market and inflation choking consumer purchasing power, this trend is forcing parcel carriers to adopt a more competitive pricing strategy and cut their own costs.
The heaviest impact in their cost reduction efforts is on the air transport side, which shippers are targeting for significant savings.
Moreover, as surface networks have regained fluidity, there is a diminished interest in air transport to meet delivery windows.
The shifts at FedEx are a stark illustration of the changes caused by the slowdown of e-commerce. Management aims to drive deferred air shipments to the ground network and cut flying hours.
The integrator is restructuring its air network to save $700m a year. This involves retiring or parking aircraft, increasing point-to-point flying and relying on commercial airlines to move a growing portion of its traffic.
Essentially, its own aircraft will largely focus on profitable core routes, while less lucrative sectors will be covered through arrangements with other carriers.
In the most recent quarter FedEx cut aircraft utilisation by 8%. It grounded nine freighters and downsized equipment on some routes.
The company is accelerating the retirement of its MD-11F fleet, which should be gone by the end of the year.
Meanwhile, the US Postal Service reduced its spend on FedEx by 11% last year.
In addition to this, UPS has got rid of its MD-10-30Fs and has indicated that it is moving to phase out its MD-11s.
And in response to the softening market, Cargojet, whose core business is flying parcels for the large players, is currently negotiating the sale of a third B777-300, which was designated for conversion into a freighter.
Earlier this year the company announced it would reduce its freighter conversion plans to four B777s from a previous plan for eight.
The cargo airline’s management remains upbeat on the long-term prospects for e-commerce, but it remains to be seen how far the sector will rely on air transport.
The large shift to deferred services suggests that the balance between speed and cost is changing. At the same time, operators are achieving shorter delivery windows through placement of goods closer to markets.