The Cargo Boom: Containerlines refloat Airlines May 2022

The containerline industry is concentrated, dominated by the ten companies shown below. Their combined 2021 revenue was $265bn, about a third of that reported by the airline industry in its peak year of 2019. Consolidation in the maritime sector has been intensive over the past 15 or so years, unconstrained by the archaic national ownership rules of the aviation business.

To take some examples, CMA-CGM emerged from an amalgam of nationally owned French companies and expanded through the take-over of Neptune Orient (the former national line of Singapore) and American President Line (one of the six former major US lines). Maersk Line, part of the Danish AP Møller-McKinney group, has grown through the purchase of Safmarine (the South African national line) and SeaLand (another US major). Hamburg-based Hapag-Lloyd has absorbed CP Ships (once the leading Canadian carrier) and UACSC (a multinational line formerly owned by Arabian Gulf states). MSC (Mediterranean Shipping Company) by contrast has mostly grown organically into the world’s largest containerline; it is headquartered at Geneva but owned and controlled by the Italian Aponte family. The industry is also characterised by a number of alliances; for example, Maersk and MSC have a vessel-sharing alliance on the transpacific, transatlantic and Asia-Europe routes.

However, despite the consolidation the containerline industry in “normal” times has been no more profitable than the airline industry; indeed, the shipping sector has tended to follow a more extreme boom and bust pattern. The reasons for the 2020/21 boom are explored later in this article, but first a summary of the proposed maritime/aviation transactions.

CMA CMG and AF KLM

At the end of last year CMA-CMG firmed up an order for four A350Fs, adding to the five A330Fs currently operated or being converted. Then in May CMA-CGM announced that it was participating in the refinancing of Air France-KLM, in the process signing a 10-year strategic cargo partnership. The stated aim is to combine the maritime and airline cargo networks, giving CMA-CGM a rapid boost into airfreight, at the same time as securing Air France-KLM’s €2.3bn rights issue which is needed to redeem high-interest bonds taken on a part of the Group’s state aid package.

For an investment estimated at €400m CMA-CGM will acquire about 9% of the Air France-KLM Group, taking shares from the two joint-venture shareholders, Delta and China Eastern, rather from the French and Dutch states.

Air France-KLM and CMA-CGM will jointly operate the full-freighter capacity of the two companies (including Martinair), consisting initially of a fleet of 10 747 and 777 aircraft, with a combined 12 aircraft, 777Fs and A350Fs, on order. Importantly, the partnership also covers all of Air France-KLM’s belly cargo, which accounts for most of the group’s cargo capacity. Based at both Paris CDG and Amsterdam, the partnership plans to establish a single global and marketing operation.

For CMA-CGM the new joint venture promises to alleviate the problem of extensive sea-voyage delays to customers, allowing more freight to be expedited by air. For Air France-KLM there is the attraction of accessing CMS CGM’s global logistics operation, CEVA, and realising the long sought-after but rarely achieved synergies of multi-modalism.

However, as a reality check, it is worth remembering that CMA-CGM did not foresee the container boom that enabled it to invest in Air France. On the contrary, at the beginning of the pandemic CMA-CGM applied for and received a €1.1bn French state-guaranteed COVID loan, which was repaid when the market unexpectedly soared.

MSC and ITA

The world’s largest containerline, MSC, has emerged as the leading contender, in a joint bid with Lufthansa, for a majority stake in and management control of ITA Airways. Why would MSC/Lufthansa be interested in the latest incarnation of Alitalia when all previous attempts to rehabilitate the Italian flag-carrier have failed miserably?

Alitalia was renationalised in October 2021, replaced by ITA, an airline with a fleet of 52 passenger aircraft — a much smaller company than its predecessor, and with an 80% reduction in staff. Mario Draghi, the latest Italian prime minister — but significantly the well-respected ex-president of the European Central Bank (ECB) — appears to have made it his personal mission to finally deliver a successful privatisation of the flag-carrier.

The terms of the agreement reached with the European Commission last October, which freed ITA from the liability of Alitalia’s state aid debts, gives the proposed privatisation some chance of success: essentially there has to be a genuine economic discontinuity between Alitalia and ITA, and, according to the EC, “ITA will have a more sustainable cost structure, in terms of fleet and labour contracts. It will hire a significantly reduced number of staff from the market, including from Alitalia, but under new labour contracts, based on market conditions. It will also modernise its fleet through digitalisation and new-generation fuel-efficient aircraft”.

All this is just another theoretical wishlist unless ITA gets a top-class, hands-on, politically-connected management team — which is where MSC might come in. Gianluigi Aponte, the founder of MSC is still, at 81 years old, the Executive Chairman of MSC, with two of his children holding the CEO and CFO positions. The company is 100% privately owned. The MSC story is remarkable: from a single ship operation in the early 70s the Aponte family has grown the company to the largest containerline in the world, overtaking all the famous names in the shipping industry. MSC has a reputation for rigorous cost control and price competition with established carriers, concentrating on expanding its own operations and mostly avoiding the merger and takeover activity that has characterised the rest of the industry (in some ways, a bit like a maritime Ryanair).

Gianluigi Aponte has stated clearly that he would not be interested in just a financial investment in ITA: MSC would need to control and manage ITA. MSC does, however, need Lufthansa technical aviation know-how. And Carsten Spohr, CEO of Lufthansa, has stated that his management are fully aware of the political complexities of ITA and has implied that Lufthansa would not have contemplated an investment in Italy without MSC. (incidentally, Lufthansa itself now has a 10% shareholding by Klaus-Michael Kuehne who is the controlling shareholder of the logistics giant, Kuehne+Nagel, and the 30% owner of Hapag-Lloyd.)

There might be an immediate opportunity in the airfreight sector for MSC. Northern Italy, specifically Lombardy, a highly industrialised and affluent region, lacks direct airfreight connections to the rest of the world, following the closure of Alitalia’s MD-11F operation. A new airfreight operation at Milan or Bergamo would be an alternative to congested road journeys to Frankfurt or Luxembourg from Lombardy. Another attraction is that the Italian market offers exports like luxury goods which would partly mitigate the trade imbalance from Asia. However, the main challenge would still be the passenger market, and competition from Ryanair and Wizz, which might just be beyond the capabilities of the MSC management.

A decision on the ITA investment is scheduled for the end of June, with the Italian government hinting, optimistically, that the airline would be valued at around €1.5bn.

Maersk Air Cargo

Maersk Line, for decades the world’s largest containerline and always one of the most dynamic carriers in the container sector, also has announced aviation plans, this time of a more conventional nature. It is expanding its air cargo operations by setting up a new cargo airline — Maersk Air Cargo — based at Billund airport in Denmark, which will take over its existing cargo airline, Star Air, which operates 14 767Fs from Denmark, Germany and the UK, largely on behalf of UPS.

Maersk Air Cargo itself currently has a fleet of five aircraft — two new 777Fs and three leased 767-300Fs, and a further three 767Fs are planned for a separate US-China operation. The new airline is expected to be operational from the second half of 2022.

Launching the new airline, Maersk stated “Air freight is a crucial enabler of flexibility and agility in global supply chains as it allows our customers to tackle time-critical supply chain challenges and provides transport mode options for high value cargo. We strongly believe in working closely with our customers. Therefore, it is key for Maersk to also increase our presence in the global air cargo industry by introducing Maersk Air Cargo to cater even better for the needs of our customers”.

That statement takes a bit of untangling, but essentially Maersk is recognising the great contradiction of the container shipping boom. Financially, it has been excellent for the industry; operationally, it has been a disaster, with unacceptable delays causing pain for importers and exporters. An expanded presence in airfreight is needed to help restore reliability to the sector, and regain customers’ confidence in containerlines.

Profiting from inefficiency

Moreover, a growing concern is that the shipping boom, that has led to this new interest in aviation, is not sustainable and will be reversed, as the containerline industry has in effect been profiting from inefficiencies that, sooner or later, will be cleared from the market.

The chart breaks out price and volume trends in the containerline business. Global container movements actually fell slightly in 2020 before growing by about 6% in 2021, good by historic standards but nothing remarkable; by contrast the global freight rate index soared by 37% in 2020 and 192% in 2021.

Although total container volumes only increased modestly there were surges in key routes — from China and SE Asia to the North America and, to a lesser extent, Europe. COVID changed consumption patterns, shifting demand away from services (travel, restaurants, etc) to goods (electronics, DIY, etc). Seaports — Los Angeles in particular — could not cope, ships queued for berths, COVID-impacted workforces were unable to secure the land transfer of containers at anything like standard efficiency, supply chains were stretched to the limit. And then there was the Ever Given grounding in the Suez Canal, underlining how exposed maritime trade routes are to disruption in the Suez and Panama Canals, or though the Straits of Hormuz and Malacca.

This year the global maritime industry has experienced 12.5m TEU waiting-days; this is a measurement of inefficiency, developed by Kuehne + Nagel, using the TEU (20 foot equivalent unit) capacity in a containership multiplied by the number of days the ship is waiting for a berth. In normal times, the number of TEU waiting-days would be under 1m.

The airfreight price/volume graph shows a similar, is slightly less dramatic, pattern to the maritime sector. CTKs globally fell in 2020 by 9% before rebounding by 18% in 2021, but unit prices are estimated to have risen by 45% in 2020 and 60% in 2021. This was caused by the global shortage of bellyhold capacity as widebodies were grounded or flown at low utilisations. And airfreight in many cases became competitive with sea containers as a result of the unprecedented boom in maritime freight rates.

The network carriers with major airfreight operations — Qatar, Emirates, Korean, etc — have been to some extent protected by cargo during the pandemic, but again they have benefitted from the yield effect rather than from structural change in trade volumes or modes. To take two examples:

THY managed to improve its profitability throughout the pandemic, despite a collapse in international passenger traffic, by boosting its cargo revenue from $0.8bn in 2019 to $4.1bn in 2021. It now has the target of establishing itself as one of the top three cargo airlines in the world. In 2021 THY owned a fleet of 20 widebody freighters, and also used up to ten passenger widebodies in cargo roles, but its increase in CTKs between 2020 and 2021 was fairly modest, up about 18%, while the real boost to revenues came from a near doubling in unit prices.

Cathay Pacific has had to reinvent itself as a cargo airline following the clamp-down on travel to and from Hong Kong. In 2021 Cathay Pacific operated a fleet of six 747-400Fs and six 777 “preighters” while Air Hong Kong operated 12 A330Fs, generating US$466m in revenues out of a total of $630m, and allowing the Group to get close to break-even. The 2021 cargo revenue increase, 32%, was entirely due to increases in yield, up 33%, not volume, down 1%.

The two major integrators — FedEx and UPS — have seen their profitability improve over the past two years, though perhaps not to the full extent that might be expected. For 2021 UPS reported a net profit of $12.9bn, a 13.2% margin on revenue, while FedEx for the 12 months to the end of February 2022 produced a net profit of $6.1bn, 6.4% of revenue. In the US domestic market they are facing intense ground competition, and Amazon Air has now built up its fleet to nearly 100 freighter aircraft, mostly 767s operated by Atlas and other contractors.

Overall, the air cargo industry could be facing a difficult combination of events in the short term (2023 probably) — increased capacity with the return of widebody bellyholds to the market, rapid deflation in maritime and airfreight rates as COVID-related congestion dissipates, and maybe a softening in demand (AAPA recorded an 8.5% year-on-year fall in its members’ CTKs in April)

Still, in the longer term it seems likely that there has been a structural shift benefitting airfreight, prompted by the performance of the maritime sector during the pandemic. Certainly, this is Boeing’s view: in its 2021 World Air Freight Forecast, it predicts a 4% CAGR in air freight volumes up to 2039, equating to 2,260 new freighters, half for growth and half for replacement.