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, ATSG and Atlas Air websites 13 Amazon facility growth across the US has shifted and is accelerating international inbound cargo
AMAZON FULFILLMENT CAPACITY: 16-18 ASIA E-COMMERCE INBOUND GROWTH: 16-18 Top Ten Largest State Gains in Square Feet CAGR in Weight by State 16.6 18.3%
15.8% 15.7% 13.8% 13.7% 14.2%
8.7 8.7 7.7 7.0 6.6% 6.7% 4.9 4.4 4.2 6.2% 4.1 3.6 3.2% Avg 2.1%
CA TX NJ OH IL FL GA MI NC WA CA TX NJ OH IL FL GA MI NC WA
Notes: Excluded sort center capacity using fulfillment network to represent first entry point for vendor into the Amazon ecosystem Sources: http://www.mwpvl.com/html/amazon_com.html 14 If Amazon continues to grow at 32 percent it will soon be roughly the same size as UPS and FedEx in the US domestic
AMAZON ADV UPS AND FedEx ADV IMPLICATIONS 1st Party and FBA in millions Million, 2021 • Amazon volume in 2021 equals UPS and FedEx combined volume +32% • Amazon continues to invest in 36.5 35.1 it’s fulfillment network with 20 facilities added from 2018 and 14.1 2020
+39% 22.4 • Amazon has announced that it will create more than 100K new 15.3 full-time, full-benefit jobs in the U.S. over the next 18 months
• Amazon will require incremental air and ground 1.5 capacity to fulfill the growing e- commerce business 2011 2018 2021 UPS FedEx Combined
Notes: Fedex numbers include Home Delivery and SmartPost, UPS includes SurePost
Sources: LogCapStrat Domestic Market Model growth estimates for FDX and UPS, Amazon growth based on press release estimates and 2018 10K ADV Structural change in the retail supply chain is creating an air cargo growth renaissance due to cross border e-commerce
EMERGING E-COMMERCE SUMMARY
▪ Manufacturers with long supply chains are shifting to online product sales fulfilled by Amazon or other online retailers
▪ Suppliers use air mode because they must meet the short cycle times required for online fulfillment
▪ Amazon continues to push into transportation leveraging their strong financial performance and need to provide a superior customer experience
▪ Manufacturers send weekly palletized shipments to online fulfilment centers by air. Previously, origin-consolidated full container loads would travel for weeks on multi-modal supply chains before reaching a distribution center –Amazon’s fulfillment, sort center and air network growth are reshaping international inbound air cargo to support faster deliveries
▪ As e-commerce continues to gain a material share in retail sales, additional online retail demand will develop –Amazon growth in retail has the potential to make it one of the largest shippers in the US by 2021
Source: LogCapStrat analysis 16 US nominal GDP growth will continue with deceleration through 2023 and Asia will lead GDP growth is the rest of the world
US GDP FORECAST: 19-23 USD (billions) CAGR% 19-23 2.2% 2.0% 1.9% 1.8% 1.7%
2.0%
2019 2020 2021 2022 2023
REST OF WORLD GDP FORECAST: 19-23 USD (billions) CAGR% 19-23
3.5% 3.6% 3.6% 3.6% 3.6%
3.0% AS 3.6% 2.9% 2.7% 2.7% 2.7% 2.7% 2.5% 2.5% 2.4% 2.3% EU 1.8% 1.9% 1.8% 1.7% 1.6% 1.5% LA 2.5%
ROW 2.3%
2019 2020 2021 2022 2023
= AS = EU = LA = ROW
Notes: IMF GDP forecast is reported using nominal dollars
Sources: LogCapStrat analysis, IMF 17 E-Commerce growth will continue to outpace GDP
US E-COMMERCE GROWTH: 12-22 USD (billions) 622.1 CAGR% 12-22 555.7 496.4 443.1 394.9 351.4 312.1 276.6 212.0 240.4 13.1% 181.7
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
REST OF WORLD E-COMMERCE GROWTH: 12-22 USD (billions) 1,028 CAGR% 12-22 941 862 775 AS 19.0% 699 620 EU 8.9% 537 430 393 423 364 327 335 LA 3.8% 273 302 234 246 236 255 181 180 215 ROW 19.6% 59 69 81 1814 2118 2523 24 26 2530 2536 2643 2850 29 28 26
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
= AS = EU = LA = ROW
Sources: LogCapStrat analysis, Euromonitor 18 US air trade is forecast to grow an average of 2.8% in volume and 4.0% p in revenue over the next five years AIR TRADE GROWTH FORECAST BY REGION: 19-23 Year-over-year percent growth CAGR% 19-23 3.6% 3.4% 3.3% 3.1% 3.3% 3.1% 3.2% 3.2% 2.9% 2.9%
Imports 3.4% AS
Exports 3.0% 2019 2020 2021 2022 2023
3.7% 3.4% 3.4% 3.3% 3.2%
1.9% 2.0% 1.9% 1.9% 1.9% Imports 3.5% EU
Exports 1.9% 2019 2020 2021 2022 2023
3.2% 2.9% 2.9% 2.8% 2.7% 2.2% 2.4% 2.2% 2.3% 2.0% Imports 2.8% LA
Exports 2.2% 2019 2020 2021 2022 2023
3.2% 3.0% 3.0% 2.9% 2.9% 2.2% 2.2% 2.2% 2.0% 2.1% Imports 3.0% ROW
Exports 2.1% 2019 2020 2021 2022 2023
= Imports = Exports Note: Air trade consists of air express package and standard air freight 19 Sources: LogCapStrat Air Cargo Workbench 2018 versus 2017
Structural versus cyclical growth
Air cargo supply curve
Implications and initiatives
20 Amazon, DHL, FedEx and UPS control the air cargo supply curve in the intra North America market
INTRA-NORTH AMERICA SUPPLY CURVE BY CARRIER AND CAPACITY TYPE: 2018(E) Load Factor %; Total Cargo Capacity %
53%
45%
25% Load Factor Load
5% 4%
Integrated Carriers* Passenger Carriers Low Cost Carriers All-Cargo Carriers Mixed Fleet Carriers*
0% 100% Share of Total Cargo Capacity
= LDB = LDP = MDP
Note: Intra North America is to/from countries in NA region, including Mexico; Mixed Fleet Carriers operate passenger and freighter aircraft; Integrated Carriers include Amazon, FedEx, UPS, and their ACMI contract carriers Source: LogCapStrat Analysis of T-100 Data (Department of Transportation), LogCapStrat Air Cargo Workbench 21 Mixed fleet carriers that operated belly and freighter capacity provide most transpacific capacity
TRANSPACIFIC SUPPLY CURVE BY CARRIER AND CAPACITY TYPE: 2018(E) Load Factor %; Total Cargo Capacity %
81%
70%
59%
40% Load Factor Load
All-Cargo Carriers Integrated Carriers* Mixed Fleet Carriers* Passenger Carriers
0% 100% Share of Total Cargo Capacity
= LDB = LDP = MDP
Note: Transpacific is to/from countries in AS; Mixed Fleet Carriers operate passenger and freighter aircraft; Integrated Carriers include FedEx, UPS, and their ACMI contract carriers Source: LogCapStrat Analysis of T-100 Data (Department of Transportation), LogCapStrat Air Cargo Workbench 22 Belly capacity is the largest source of supply in the transatlantic market
TRANSATLANTIC SUPPLY CURVE BY CARRIER AND CAPACITY TYPE: 2018(E) Load Factor %; Total Cargo Capacity %
69%
56% 51%
42% Load Factor Load
18%
Integrated Carriers* All-Cargo Carriers Mixed Fleet Carriers* Passenger Carriers Low Cost Carriers
0% 100% Share of Total Cargo Capacity
= LDB = LDP = MDP
Note: Transatlantic is to/from countries in EU, AF and ME; Mixed Fleet Carriers operate passenger and freighter aircraft; Integrated Carriers include FedEx, UPS, and their ACMI contract carriers Source: LogCapStrat Analysis of T-100 Data (Department of Transportation), LogCapStrat Air Cargo Workbench 23 Directional traffic imbalances in Latin America requires significant freighter capacity to cover demand
LATIN AMERICA SUPPLY CURVE BY CARRIER AND CAPACITY TYPE: 2018(E) Load Factor %; Total Cargo Capacity %
70% 65% 64%
Load Factor Load 24% 18%
All Cargo Carriers Mixed Fleet Carriers* Integrated Carriers* Passenger Carriers Low Cost Carriers
0% 100% Share of Total Cargo Capacity
= LDB = LDP = MDP
Note: Latin America is to/from countries in LA region; Mixed Fleet Carriers operate passenger and freighter aircraft; Integrated Carriers include FedEx, UPS, and their ACMI contract carriers Source: LogCapStrat Analysis of T-100 Data (Department of Transportation), LogCapStrat Air Cargo Workbench 24 Belly capacity, non-integrated freighter requirements, integrator fleet composition, and seasonality will impact air cargo supply
KEY FACTORS IMPACTING AIR CARGO SUPPLY IN 2023 • Belly capacity will outpace freighter capacity growth as passenger air-travel demand grows and freighter orders remain Belly Capacity Growth at an all-time low • The ratio of belly capacity per seat will continue to increase due to aircraft design
• The need for non-integrated freighters will continue to exist due lot/shipment size, directionality, and seasonality Need for Non-Integrated • Belly capacity has yet to exceed freighter total capacity and has Freighters its limitations (e.g. B777 belly pallet space makes it difficult for forwarders to achieve economies of scale)
• UPS, FDX and DHL control significant portion of freighter fleet with Chinese integrators and Amazon as new market entrants Integrator Fleet • Integrators will likely augment fleets with B777s over B747-8s; Composition the future supply curve will look different as the B747-400 retires and capacity shrinks
• International seasonality for consumer products will likely continue to change as consumers order more efficiently Seasonality & Directional • Directional imbalance, which has historically been driven by Trade Imbalance China, could be affected by changes in China’s export as a percentage of imports
25 2018 versus 2017
Structural versus cyclical growth
Air cargo supply curve
Implications and initiatives
26 The shifts in commerce are causing supply and demand patterns to change, resulting in larger and more frequent price dislocations
▪ Shipments go from pallets to parcels as share shifts from retail to e-tail ▪ Density declines as more shipments are B2C Demand ▪ Shipments move along more O&D routings as e-comm disperses demand ▪ Daily volumes often spiked by digital-enabled unscheduled promotions ▪ Special handling like Cold Chain needed for perishables, healthcare
▪ Any O&D can sell-out at any time, and all O&Ds can sell-out for the peak ▪ More freighters needed to handle low-density parcel volumes Supply ▪ Network changes needed to bring freight closer/faster to destination ▪ Different handling needed at hubs to connect parcels rather than containers ▪ Need to meet customer expectations for real-time tracking
▪ Prices increase due to rising load factors and limited supply growth ▪ Pricing will become more surgical: less use of seasons, zones, Pricing equalization ▪ Increasing truckload costs and work rules will reduce effectiveness/reach of gateways ▪ Assessorial charges will proliferate
Sources: LogCapStrat analysis 27 Shipper and forwarders must invest in data-driven decision-making and new capabilities to grow
Shipper Forwarder Initiatives initiatives
Strategic Capacity Procurement Sell-Side Price Optimization Benefits: ▪ Enable surgical pricing to fit demand using ▪ Reduced risk through longer term contracts range of transit time/price options to manage with risk sharing between carrier, 3PL and e-commerce product life cycles shipper/consignee ▪ Typical profit improvement of 2 to 5 margin ▪ Typical transportation cost savings of 5-10% points (2-5% of revenue)
Strategic Buy-Side Capacity Procurement ▪ Optimized capacity purchasing to manage Logistics Network Optimization volatile air and rising truck costs while linking Benefits: to sell-side pricing ▪ Improved understanding of total landed costs ▪ Typical transportation cost savings of 5-10% and modal mix options
▪ Reduced risk through service and mode Acquisition-led growth combinations that align with shipment economics ▪ M&A builds lane-level purchasing scale to lower buy-side prices ▪ increase freight density mix to improve consolidation effectiveness ▪ Use M&A to gain entry into perishables or healthcare verticals
Sources: LogCapStrat analysis 28 Changing network structure and infrastructure requirements will drive airline and airport priorities
Airport / Cargo Airline Handling Initiatives Iniatives
Price Optimization Master Plan Re-Assessment Benefits: Benefits: ▪ Pricing optimization with dynamic pricing to ▪ New and different facility capacity designs cash-in on demand spikes that are aligned with shipper and carrier ▪ Often wide ranges in profit improvement with needs large, transient market dislocations ▪ Ability to address increased demand for on- airport, ramp-side access ▪ Integration planning of air and road-side Network Strategy Redesign airport infrastructure for air cargo terminal Benefits: robotics and driverless vehicles ▪ Network restructuring to move freight closer to ▪ Material handling process re-engineering for final destination ground handlers to offer economically viable e-commerce capability (shift from forklifts to ▪ Actively market differentiated routing options chutes & slides) to forwarders or shippers to better align with their shifting economics ▪ New services for e-commerce and cold chain flows, such as small shipment handling at airport hubs, real-time tracking, etc.
Strategic Capacity Planning Benefits: ▪ Secure freighter supply to meet secular increase in demand
Sources: LogCapStrat analysis 29