E-Commerce Impact and US Air Trade Market Outlook: 2019-2023
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E-Commerce Impact and US Air Trade Market Outlook: 2019-2023 Confidential May 5, 2019 2018 versus 2017 Structural versus cyclical growth Air cargo supply curve Implications and initiatives 2 US air trade weight grew at 5.1%, which was roughly 1x nominal US GDP US GROWTH RATES: 17-18 US AIR IMPORT WEIGHT BY REGION: 17-18 Percent growth, US GDP growth multiple Percent growth, US GDP growth multiple 17.0% 13.7% 6.1% 3.1% 3.5% 5.2% 5.1% 2.0% US Air trade weight E-Commerce AS EU LA Intra NA ROW GDP Decreasing US air import market weight NOMINAL GDP BY REGION: 17-18 US AIR EXPORT WEIGHT BY REGION: 17-18 Percent growth Percent growth, Destination region GDP growth multiple 7.9% 7.9% 7.1% 6.6% 5.3% 3.0% 1.3% -5.2% AS EU ROW LA AS EU ROW LA Decreasing region GDP size Decreasing US air export market weight Note: Air trade consists of air express package and standard air freight. Intra NA import includes US domestic. ROW export is Africa, Middle East, and North America Source: LogCapStrat analysis, IMF, Euromonitor, LogCapStrat Air Cargo Workbench 3 Transatlantic market from/to Europe was the star performer in 2018 US AIR IMPORT GROWTH BY REGION: 17-18 Absolute growth (kilos, millions), YoY air weight growth % 118.0 73.0 44.0 +7.9% +6.1% +3.1% Percent growth Percent 4.4+3.5% EU AS LA ROW New air import market weight US AIR EXPORT GROWTH BY REGION: 17-18 Absolute growth (kilos, millions), YoY air weight growth % 73.0 76.0 +6.7% +5.3% 5.0 12.5 Percent growth Percent +1.3% +3.0% EU AS LA ROW New air export market weight Note: Air trade consists of air express package and standard air freight. ROW is Africa, Middle East, and North America Sources: LogCapStrat Air Cargo Workbench 4 2018 versus 2017 Structural versus cyclical growth Air cargo supply curve Implications and initiatives 5 Air cargo use cases include shippers with perishable, high-valued, process impairing, or international e-commerce derived products AIR CARGO USE CASE SEGMENTS Products that physically deteriorate or spoil overtime, Physically Perishable making them ineligible for long shipment and storage times Products with a high ratio of value to weight/density, and High Value and High Unit-Value travel by air to mitigate the risk of transportation Products which may be low values but are tied to a larger Economic Process Impairment production process that is time-critical or has costly service disruptions Products where demand is driven by increasing International E-commerce globalization and usually have small lot size, low unit value, and an intercontinental origin and destination Sources: LogCapStrat analysis 6 Long term trends impact air cargo shipper segments differently AIR CARGO USE CASES BY SHIPPER VERTICAL High Value Density Physically Economic Process Characteristic E-commerce Product Perishable Product Impairment Medium or low value Shipments requiring air High value products use component or part that is Low value products that freight due to risk of delay Definition of usage air cargo to minimize tied to a larger production have limited physical shelf in transportation process driver inventory carrying costs, process and cost of life (e.g. border crossing risk of damage and theft impairing the process is delay, etc.) substantial Diversified Vehicles & Parts Government Healthcare High Tech Industrial Manufacturing & Distribution Professional Services Retail and Consumer Goods Minimal Impact Significant Impact Sources: LogCapStrat analysis 7 E-Commerce demand is pushing the supply chain towards faster, lighter shipments - Walmart CONVENTIONAL RETAIL SUPPLY CHAIN - Target - Best Buy EOQ = 10,000 – 50,000 kg Volume LTL High value SKU Households DCC Store (FTL) Drayage Homo SKU FCL Retailer China (FCL) FCL Intermodal FCL (FEU) Distribution Factory US Port Trainload Rail Ramp Store Center 10,000 kg 15,000 kg HKG LAX ONT DFW DFW Hetero SKU LTL Store “Build to Vendor Origin Order” Consolidation 45 days 15 days 30 days 3 days 1 day 30 days 1 day ≈ 125 days E-COMMERCE RETAIL SUPPLY CHAIN EOQ = 1,000 - 2,000 kg China Fulfillment Air by Amazon 5kg Factory 1,000 – 2,000 kg Forwarding Center HKG (pallet) “Build to Stock level = Stock” Amazon threshold Weekly cycle Source: LogCapStrat analysis 8 Amazon continues to dominate the US E-Commerce market with nearly twice the cumulative share as the next 9 retailers US E-COMMERCE – HOLIDAY SEASON MARKET SHARE 2017, percent "No retailer will catch up to Amazon 37.5% Amazon unless they spend billions of dollars on fulfillment and “Our goal with Amazon Prime, technology.” – Al Meyers, director Best Buy 4.7 make no mistake, is to make Retail and Consumer Practice for sure that if you are not a Prime PricewaterhouseCoopers member, you are being Target 3.0 irresponsible.” — CEO Jeff Bezos at 2016 “I don’t think [Amazon.com] wants to shareholder meeting own a piece of retail, they want to Walmart 2.6 own all of it.” — Scott Galloway, a professor of Macy’s 2.4 marketing at New York University’s Stern School of Business. 19.9% Kohl’s 1.6 share Nordstrom 2.3 Apple 2.4 Home Depot 1.1 “We see our customers as invited guests to a J. Crew 0.9 party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better.” – Jeff Bezos Source: : https://www.digitalcommerce360.com/2018/01/11/amazons-e-commerce-market-share-dips-november-surges-december/; Quotes on Amazon 9 Delivery failures put “customer promise” at risk leaving Amazon with no choice but to build out logistics capabilities KEY POINTS • Amazon Prime started in February 2005 UPS and others warn that allowing members to pay per year for free two-day shipping in the US on eligible holiday deliveries are already purchases falling behind • Customer centricity or obsession tops Amazon’s leadership principals resulting in Prime delivery commitment paramount to customer experience • Recently during the holiday shipping seasons, Amazon has experienced a number of delays, missed deliveries and service disruptions due to the inability of their carrier partners to handle the rapid 2011 Christmas delayed: increase of E-Commerce orders Amazon offers $20 gift cards, • Amazon has quickly pivoted and is building out a delivery network that would refunds shipping charges after reduce it’s reliance on third party providers UPS and FedEx problems Sources: Amazon leadership principals, Reuters 2011 “Christmas delays impact Amazon”; https://www.washingtonpost.com/news/business/wp/2017/12/12/ups-and-others-warn- 10 that-holiday-deliveries-are-already-falling-behind/?noredirect=on&utm_term=.39181369e8f0 Amazon’s financial position has rapidly improved, enabling “big bets” in logistics MARKET CAP 788 LOGISTICS “BIG BETS” IMPLICATIONS $B • 141 fulfillment centers in the US • In the past and for the now situated an average of 57 foreseeable future 185 miles from the Top 40 MSAs Amazon has representing 164M consumers experienced a need for (or 52% of the US population) expanded capacity to 2013 2018 address their US volume • Air Cargo fleet – scheduled to growth take delivery of 50 planes NET INCOME 10,073 incrementally11 through 2020 • From the build out to $B support their capacity • Now a large ocean freight and growth, Amazon shipping market as an NVOCC, could offer competing 185 enabling them to ship goods services with UPS and 2013 2018 from China to the US FDX CASH 30.7 • CVG Airport investment is $1.5B, • Current press $B includes: 920 acres, 2-3M sq. ft. communications from facility, ramp space for 100 the CEO and C level aircraft and 200 daily flights reinforces they are 5.5 focused on long term growth needs 2013 2018 Notes: Market Cap based on 12/31 closing; Cash = Net Cash Flow from Operating Activities Sources: Amazon 10K analysis; company fact sheet, press releases; http://www.mwpvl.com/html/amazon_com.html In order to control delivery commitment and improve service, Amazon has rapidly morphed it’s first, middle and last mile network AMAZON DELIVERY NETWORK IN 2005 Amazon Controlled Sort / Air / Ocean Ground Fulfillment Air / Ground Factory Retailer Delivery Center UPS / FDX AMAZON DELIVERY NETWORK IN 2019 FIRST MILE MIDDLE MILE LAST MILE Sort / Air Ground Delivery Air Gateway Air Gateway AMZL UPS / FDX Ground Ground Sort Center Air / Ocean Ground Fulfillment Ground Factory Cross-Dock Center Ground Air / Ocean Retailer Ground Ground Fulfillment Prime Now DDU / Center USPS Amazon Controlled Sources: LogCapStrat Analysis 12 Amazon will have a network with 137MM SF of distribution space, 16MM SF of sort capacity and 50 aircraft by 2020 FULFILLMENT CAPACITY SORT CENTER CAPACITY AMAZON PRIME AIR FLEET 05-20E Square Feet in MMs 10-20E Square Feet in MMs 16-20E Aircraft Units 137 132 16 54 112 +28.2% +47.0% +27.6% 91 12 12 44 11 39 30 ATSG 73 767 32 25 55 8 20 6 45 20 38 5 20 29 Atlas 22 19 767 14 2 20 19 19 8 8 12 Southern 4 4 5 0 0 0 5 737 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 16 17 18 19 20 Amazon Amazon buys Amazon starts Amazon invests Amazon signs Amazon adds launches Amazon warehouse Amazon adds Sunday $2.5B in sort contract with 737-800 Prime robotics, KIVA Delivery with center expansion ATSG options with launches secondary market Amazon signs USPS plans Southern Air Fulfillment expansion (Mobile, contract with by Amazon AL, etc) Atlas for 20 more aircraft Notes: excludes Pantry, Fresh, Whole Foods and Cross Dock operation capacity; the first sort center started operation in 2010, the first aircraft operated in 2016 Source: http://www.mwpvl.com/html/amazon_com.html, Amazon press releases on aircraft,