End of E-Commerce Hype Train Is Bad News for Planes

"There will be a price to pay for believing the pandemic e-commerce trend could last forever. Aviation might be one of the unexpected victims.

On Wednesday, Meta Chief Executive Mark Zuckerberg said he would lay off 11,000 workers, and admitted to being wrong in thinking that the surge in online purchases would be permanent. The mistake, which was echoed by companies such as Shopify and Wayfair, is widespread: According to data by Bank of America, the online penetration of European apparel and footwear sales is likely to be 22% this year, in line with the pre-Covid trend and far below the 26% registered in 2021.

It isn't just online retailers and advertisers that fell prey to hyped e-commerce forecasts: Eye-watering amounts of money were poured into cargo planes.

Amazon.com, FedEx, UPS and DHL all announced fleet expansions. Maritime-shipping giants such as A.P. Moller-Maersk, CMA CGM and Mediterranean Shipping raced to build up airfreight divisions.

Boeing has relied on increased freighter sales to keep its production rate up, and announced a cargo variant of its 777X. Airbus is trying to stake a claim in this market with a freighter version of its A350 wide-body. Both jet makers' optimistic sales forecasts are based in part on higher cargo demand. Secondhand freighter values benefited too, enticing lessors and investors.

Meanwhile, conversions of passenger aircraft to freighters reached a high, data by appraiser IBA shows, and keep coming: Slots are booked into late 2024. Two weeks ago, Hawaiian Airlines agreed to fly 10 converted Airbus A330 freighters on behalf of Amazon.com, which hadn't ventured into anything larger than midsize Boeing 767s.

The problem isn't just that traditional cargo-jet investments are being supersized, but that smaller aircraft -- better suited to carrying lower volumes more frequently for express deliveries -- are being converted for demand that may not materialize. Conversions within Boeing's 737 narrow-body family numbered 52 this year, IBA said last week, compared with an annual average of roughly 30 before Covid-19. In May, Boeing opened a 737 conversion line at London's Gatwick Airport.

These are big investments. A five-year-old 737 or A330 can sell for around $30 million, and conversions can cost about $5 million and $15 million, respectively. IBA data shows converted-freighter valuations haven't felt a hit. They almost certainly will.

Freight rates doubled during the pandemic, but only because passenger planes were grounded -- their belly holds usually make up half of the airfreight supply. This couldn't last and neither could pandemic bottlenecks. In October, spot air-cargo rates fell for the second consecutive month, coming in 20% lower than a year earlier, according to Xeneta data. The global economy is slowing, weighing on airfreight demand this year even as supply expanded, figures by the International Air Transport Association show.

While this was predictable, transportation executives and aircraft investors pinned their hopes on e-commerce, mistaking a lockdown-driven spending pattern for a permanent change in consumer behavior. In the aviation industry, which otherwise had a terrible pandemic, this may be forgivable. But now they must take delivery of the consequences." [1]

1. End of E-Commerce Hype Train Is Bad News for Planes
Sindreu, Jon. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 11 Nov 2022: B.12.