Year: 2019

Air cargo industry forecasts for 2020 are now out and company revenue budgets are locked in. Air cargo is cautiously looking for a mild 2% turnaround on volumes in 2020, according to the International Air Transport Association (IATA), after its worst year since 2009. A rebound would be welcome news for air cargo stakeholders – airlines, air cargo handlers, airports, freight forwarders, trucking and expedited delivery companies. Some recent developments would appear positive for air cargo – a long-awaited U.S.-China “Phase One” agreement is taking firmer shape, more clarity on the U.K. political situation and Brexit, and continued strength in the U.S. economy. At the same time, other developments, such as Boeing halting production on its 737 MAX aircraft, may actually have negative traffic impacts on supply chains.  

The broader trends hold some surprises

Where will the new growth come from? For a leading global economy like the U.S. that both consumes and produces products of all kinds that are shipped by air in large quantities, there are long-running structural trends that challenge growth. Air cargo industry data specialist WorldACD points to the large year-over-year global shrinkage in general cargo traffic moved by air for most of 2019, most recently down 8.2% in October, while many but not all of the specialty cargo products – pharmaceuticals, vulnerable/high tech and perishables – continue to show growth. As a group, specialty products grew 2.7% in the latest report. The general cargo numbers are much larger globally, roughly 66% of the tonnage total. To achieve overall growth, those big numbers would need to do a quick “about-face.”  

Domestic air cargo in the U.S. continues to be a relatively bright growth area moving in line with a stronger U.S. economy, but the largest domestic volumes – well over 85% – are flown by FedEx, UPS and Amazon, while U.S. airlines and niche operators service the rest of the U.S. E-commerce growth has been and will continue to be a key driver for North America, with that growth skewed to just a few players so far.

Looking at international air cargo, our analysis of U.S. trade data by mode since 2010, after the Great Recession ended in the U.S., has some eye-opening findings: 

• The value of U.S. trade by air has increased, with imports growing 50% in that period while exports have grown only 26% (based on a full-year 2019 forecast). 
  • In contrast, containerized ocean import value is up slightly less, at 45%, but ocean export value has risen 36%, 10 points more than air.  
  • Containerized ocean traffic is the closest surface mode competitor to air cargo.

• The gross weight of U.S. trade by air shows very different results. Import tonnage has grown 17% in the nine-year period, but export tonnage is actually down 4%. 
  • For containerized ocean traffic, volumes are up much more – 40% higher for imports and 34% more for exports.
  • U.S. export tonnage by air has barely grown since 2010, with positive y/y growth in only two of the nine years. 

Underlying these figures is the dramatic change in how shippers are using air cargo – increasingly for more valuable cargo. 

• In 2010, air imports averaged $110.63/kilogram (kg) in value and air exports averaged $114.48/kg in value. 
• Nine years later in 2019, air imports are up to $142.11/kg, a 28% increase, and air exports average $150.78/kg, a 32% rise. 

That suggests shippers are managing their spend tighter and being more selective about their use of air cargo.

Air and ocean growth and share shift

Air cargo is considered a premium transport mode. Depending on the market, it can range from five to 20 times more expensive, kilo for kilo, than surface transportation. Air cargo’s challenge is to overcome that initial large cost difference in competing with sea freight or trucking to make its value case by better meeting the overall needs of the end customer or project at a competitive total cost of ownership.

While some products will always use air 100% of the time due to sensitivity, extreme perishability or tight transit time requirements, much of what moves by air cargo is vulnerable to potential downgrading to surface or expedited surface modes under the right conditions.

The evolution of transport modes can work in a number of ways. New and/or highly desirable consumer products air freighted for product launches or while sales are hot ultimately see supply chain rationalization to surface modes to reduce costs and improve supplier margins as the product’s life cycle matures and competitors enter and create more price competition. Improvements in packaging, security, storage and shipping technologies for perishable, vulnerable and pharmaceutical products lengthen product shelf lives and enable less sensitive or shorter distance segments of that product to be safely diverted to surface modes. Company budget pressures and the need to achieve financial goals make use of air freight an easy target during recessionary and leaner times, forcing shippers or buyers to develop savings initiatives around surface transportation solutions.

Our review showed several examples within the U.S. trade data of a shift from air cargo to the containerized ocean mode: 

• Packaged retail medicines that moved 46% by air to the U.S. in 2010 are now moving 24% by air in 2019 (year-to-date).
• Fresh asparagus imports that moved 79% by air in 2010 are now moving 46% by air.
• Even vulnerable products like cell phones, with volumes air-freighted at 98% in 2010, have slipped to just under 94% this year.
• Electrical machinery, which moved 10.8% of its 2010 imports by air, is now at 7.7% in 2019.
• U.S. pharmaceutical exports were shipped 46.3% by air in 2010, but now stand at 38.4%, an eight-point share drop
• Overall, 14 of the top 20 two-digit air export HS codes saw shrinking shares for air in 2019 compared with 2010, indicating a shift in favor of containerized sea freight.  
• Similarly, 14 of the top 20 two-digit air import HS codes also saw modal share shift away from air in 2019 compared with 2010.

Growing and re-growing the business

So in a sense, air cargo is reselling and replacing lost kilos on a continuous basis. Its growth depends on both the organic growth of the underlying products being shipped but also the ability to continually upsell those products to air. It has to keep proving its value proposition to win kilos from surface modes. Once shippers learn how to safely manage their supply chains using surface modes to satisfy their buyers’ overall needs, it can be difficult to fully reverse that in favor of air unless those chains are broken. 

That means air cargo also depends on new products of all kinds entering in early stages of their life cycles and maintaining growth in the air cargo mode as long as possible before stabilizing at some level. New pharmaceuticals, perishables and high tech consumer and other technology products often lead the charge in this area. Project cargo, which can involve substantial tonnages for energy or construction shipped over defined periods, also can help drive growth, but has its own ups and downs. It also must compete against sea transport and ultimately by definition come to an end.

While air cargo has been down in nearly all regions of the globe this year (other than Africa), faster air cargo growth can be expected from less developed countries, often for perishables or lower value manufactured goods such as textiles.

E-commerce continues to be a hot topic for the industry, which can clearly see the promise of consistent and steadily increasing demand whose time element fits perfectly into air cargo’s value proposition. As noted earlier, Amazon, UPS, FedEx and DHL Express set the pace here for North America, along with others in Europe and Asia. Other logistics providers and airlines are looking to develop this area, but many are trying to figure out the best way to play. There are numerous complexities to overcome to achieve speedy and seamless processes across multiple vendors and stakeholders, so progress in this area to this point is generally uneven. Whether enough airlines and freight forwarders can break through and ultimately carve out large enough niches in e-commerce remains to be seen. 

So turning the corner on 2019 and moving into a growth mode for air cargo in 2020 requires airlines and forwarders to arrest the general cargo decline and keep up the growth in specialty areas. That said, tonnage growth doesn’t drive everything. Yields matter a great deal as well. Faster growth of higher value products that have specialized requirements and handling needs can, if managed well, mean flatter volumes but still higher and more profitable revenue. But overall sustained higher volumes for general cargo normally comes with more economies around the world doing well and without too many tariff burdens that suppress trade. We will need to see much quicker progress in that direction than we saw in 2019.

Outlook for North America

For a mature economy like the U.S., what are the implications for air cargo of continuing along the current path? We see several outcomes:

• Despite various individual company efforts, e-commerce growth in the end leaves only a few clear winners among airlines and forwarders.
• Lack of significant U.S. export growth means continuing strong price competition as airlines and forwarders fight for whatever tonnage is available.
• Pricing pressures may grow over time as air cargo belly capacity continues to expand with more airlines flying newer and higher cargo capacity passenger aircraft like the Boeing 787-9, 787-10 and 777X, along with Airbus A350-900 and A350-1000 on more U.S. routes.
• Export shippers will benefit from the price competition, but airline cargo revenues will strain to grow.
• Airlines will need to work hard to differentiate service offerings to maximize revenue where they can from specialty products and value-added services supporting them.
• Even more pressure will fall upon freighter carriers to stay agile, moving routes and schedules around to hot cargo markets to keep flying profitable.
• Assuming tariff issues can be managed, import growth should continue to outpace export growth and help fill new capacity, but any new trade wars with Europe or elsewhere can put major tonnage at risk, and overall growth as well.
• U.S. trucking companies doing airport work will continue to see more traffic opportunities from airports to interior points and similar or only slightly greater traffic from interior points back to airports. 

The new decade and year 2020 are only a few days away. Time’s a wastin’ to get a start on growing back air cargo in the new year.

A slowdown in U.S. new car sales and the threat of trade war between the European Union (EU) and the U.S. are casting long shadows over the trans-Atlantic container trade. Even so, another year of 3%+ growth is expected by Drewry Maritime Research.

After expanding 5.4% in the first half of 2019, westbound trans-Atlantic container shipments increased by just 0.5% in the third quarter – the lowest quarterly growth since the last three months of 2016.

However, a pickup in demand at the start of the fourth quarter saw the trade enjoy record year-to-date growth of 3.7% through October, with U.S., Canada and Mexico imports up 4.4%, 1.5% and 2.8%, respectively, compared to 2018.

Declining U.S. car sales

One reason for the slowdown during the second half of the year was a drop-off in shipments of motor vehicle components to U.S. plants, with American new car sales still in retreat from the 2015 record of 17.5 million purchases.

“Despite a strong economy, falling unemployment and rising consumer confidence, there has been a gradual decline in numbers sold and this year the figure is likely to total 16.9 million,” noted Drewry.

“One explanation for this trend is that after many years of strong sales, many American consumers are now driving vehicles that do not need to be replaced so often. Newer vehicles tend to be more durable and hold up longer than cars made even a decade or two earlier.”

WTO escalation threatens trade

The demand outlook on the trans-Atlantic headhaul trade is also being muddied by the threat of an escalating trade war. At the beginning of October, the World Trade Organization (WTO) authorized the U.S. to apply new tariffs of 25% on $7.5 billion of EU imports following a 15-year dispute over illegal aircraft subsidies granted to Airbus, the European aerospace company.

“The new tariffs went into effect on Oct. 18 and thus between the WTO’s decision and application date there was precious little time to fast-forward any shipments, unless it was by air freight,” said Drewry.

The analyst believes tit-for-tat tariffs could continue in 2020. It notes that the U.S. had originally sought permission to apply the tariffs to $11 billion of goods, which would have affected items ranging from “wine, cheese, yoghurts and olive oil to fine wool suits, jumpers, bed linen and even women’s nightwear.”

Moreover, the EU has threatened to retaliate against U.S. goods. “The WTO is expected to decide sometime next year on what tariffs can be imposed against the U.S. for its subsidies to Boeing,” noted the analyst.

Resin exports boost backhauls

Backhaul volumes from the U.S. to Europe between January and October rose by 2.9%, which translates into an additional 50,000 twenty-foot equivalent containers (TEUs) during the course of 10 months. “Almost two-fifths of those extra boxes were loaded with resin shipped out of the Gulf Coast, where gains to date have registered over 17%,” said Drewry.

“New resin plants have been established along the Gulf Coast, fueled by access to low-cost shale gas produced in the region. More capacity to produce resin is on its way and that should ensure that overall eastbound volumes should continue to grow in 2020.”

With so many unknowns on the headhaul trade, Drewry admits that making 2020 trans-Atlantic forecasts is tricky.

“When tariff wars come into the mix, forecasting future demand becomes a difficult science as one cannot be sure how consumers will react,” said the analyst.

“Given, though, the current strength of the American economy and high levels of consumer confidence, Drewry believes the headhaul trade will continue to grow next year by around 3%.”
More FreightWaves and American Shipper articles by Mike

Operators of B737 aircraft converted by Israel Aerospace Industry have begun flying the planes with loading restrictions after a safety notice two weeks ago from the Israeli government led to a halt in flights.

Alaska Airlines, Australian flag carrier Qantas and Indian low-cost carrier SpiceJet say they have returned the planes to service after a temporary grounding.

Alaska Airlines pulled its three 737-300 freighters from service for two days in mid-December and substituted for the lost capacity by utilizing B737-800 and 737-900 passenger planes as dedicated freighters, “combined with utilizing our larger passenger planes when possible for extra freight,” a spokesperson said. The airline also temporarily stopped accepting new shipments on routes used to supply Alaskan towns from the Pacific Northwest.

The converted freighters are operating again after an internal assessment, but Alaska Air is limiting the loads for the time being, the official said. 

Each aircraft has a 42,000-pound maximum capacity.

In a Dec. 12 airworthiness directive, the Israeli Transport Ministry said 47 aircraft (300, 400 and 700-series) had a defect in the rigid barrier wall that protects the cockpit from shifting loads during sudden deceleration. The defect was discovered during an internal examination of IAI’s facilities.

IAI Communications Manager Lital Ben Ari, downplayed the situation, saying the aircraft can fly normally with only a slight reduction in weight. “IAI was very conservative regarding the apparent damage. All experiments done by now show no problem at all in the rigid barrier. But we’re not done checking. In any case, no rigid barriers were replaced or are expected to be replaced in the future. Any damage that is discovered will require a minimal fix,” he told FreightWaves.

Ben Ari stressed that there has never been an accident involving the 9G barrier and that no additional oversight of IAI operations has been mandated. “All manufacturing, production and assembly process are completely open to the Israeli authority and checked on a regular basis by IAI and the authorities,” she added.

Alaska Public Media reported that Alaska Air was retrofitting the barrier wall in the three freighters.

Qantas Airways is operating its four B-737-400 freighters converted by IAI with some restrictions, in line with the airworthiness directive, a spokesperson confirmed.  

In a regulatory filing, SpiceJet, which operates three B737-700 aircraft that were grounded on Dec. 13, said it returned those aircraft to service on Dec. 23.

Software technology company SAP Ariba has helped modernize the supply chain of Spanish shipbuilding company Navantia by digitalizing the purchasing and procurement sections of its logistics. In its statement, SAP Ariba claimed that technological intervention had led Navantia to increase the efficiency of its purchasing processes by 52% while reducing its supply cycle time by 25%. 

FreightWaves spoke with Pat McCarthy, senior vice president and general manager of SAP Ariba, to discuss the impact his company has had on improving Navantia’s operations. 

McCarthy initiated the discussion by explaining that the fundamental problem traditional companies struggled with was the absence of digitalization, forcing them to work with paper documents and occasional email reports, making them hugely inefficient in the process. 

“There is no efficiency or effectiveness at scale as information is constantly learned or relearned due to communication channels being incredibly fragmented,” said McCarthy. “All of those communications within Navantia were one-to-one, which made them look at how they can collaborate more effectively with their suppliers and stay competitive in the market.”

SAP Ariba set about digitalizing Navantia’s supplier interactions and its internal infrastructure, which helped settle business processes at the point where they started. McCarthy explained that pushing forward the idea that everything that is done within the company will be reportable and accountable to the public was equally critical to the digitalization process, as Navantia is owned and run by the Spanish government. 

This helps with the brand image of Navantia, as the company maintains critical international business relations with countries like the U.S., India, Norway, Turkey, Brazil, Australia and Saudi Arabia. Digitalization bridged the gap Navantia had with transparency and traceability in its procurement processes, helping the company to march toward its transformative solution named Shipyard 4.0.

By automating communications with suppliers, Navantia can now confirm orders online, increase transparency in the bidding process and trace the volume of tenders and the number of suppliers involved in the process. The company also can continuously monitor its weekly progress, which can shed light on the areas of improvement and help increase efficiency. 

Still, the path to digitalization was not without its share of complexities. “I think change is hard. When you introduce technology, it has to be consumable by the persona. So if that’s someone in sourcing, the technology has to be built and applicable to a sourcing professional,” said McCarthy. “That was our goal with Navantia, to see if we were really addressing the persona — be it the sourcing professional, procurement professional or the supplier.”

The partnership with SAP Ariba has yielded great results for Navantia, with the shipbuilder planning to continue its association to gain ground in innovation across its supply chain. McCarthy maintained that the relationship SAP Ariba has forged with Navantia will keep appreciating over time and that there was “no end in sight.” 

Navantia understands that the future of its supply chain lies in sustainable procurement as it continues to focus on accounting for every dollar it spends. “Sustainable procurement is a huge topic for companies around the globe, particularly where public money is being spent,” said McCarthy. “Companies have always wanted to do good by procuring sustainably. But it is only now that the math, logic and financials have added up to make sure doing good is also good business.”

Among the different modes of freight transport, the trucking industry is possibly the only segment that remains localized and bound to specific regions, unlike the air or maritime sectors that are fundamentally more global. 

However nucleated the trucking ecosystems might come across, they share certain traits and woes that are strikingly similar across geographies – like excessive fragmentation, lack of visibility and transparency, and general indifference to technology. 

Fragmentation creates an environment in which the adoption of common standards or practices is extremely arduous, furthering the issue of digitalization percolation as it requires stakeholders across the horizon to come together and adopt technology en masse. 

“Another primary issue with fragmentation is that it leads to massive amounts of siloed data,” said Lyall Cresswell, the CEO of Transport Exchange Group, a U.K.-based freight logistics company providing real-time decision-making solutions for businesses. “This is where we come in, democratizing that data and putting it across in a commonly accepted standard format for businesses to consume.”

Cresswell spoke of how small- and mid-sized companies in the trucking landscape are often caught in a “deer in the headlights” situation, where they struggle to adopt technology that could help them future-proof their businesses from disruption – both from an operational and financial perspective. 

“With digitalization initiatives getting more mature over the last couple of years, it is important for businesses to not hold back and look at making decisions. They aren’t necessarily making long-term decisions, as the technology might change. But it is critical to move in the direction towards change, as if they remain stagnant, the industry is just going to pass them by,” said Cresswell. 

In the context of price points on adopting technology into their operations, Cresswell contended that a majority of the solutions are available at a cost that isn’t unreasonable. This is due to the technology maturing over the years and in part due to the proliferation of startups that lower prices to gain market share in the space. 

“Technology is low-cost now as it’s all cloud-based today. We do see some high-end systems that companies might need help in setting up, but most of the time, cloud-based technology is something that you can plug and play instantly,” said Cresswell. That said, the trucking industry is chock full of traditional family-owned businesses that oftentimes do not grasp the relevance of technology, making it vital for developers to educate them on technology’s scope in improving their operations. 

Technology aside, it is hard for any company to accurately identify industry trends and future- proof their operations to address potential challenges. For instance, the Amazon effect that has virtually revolutionized the way logistics work today, was not a trend that was anticipated to scale this quickly until it actually arrived at the scene. In the same vein, technological disruption in the delivery sector via drones, last-mile delivery robots, and autonomous driving technology could alter the future of the transport landscape – all in quick time. 

Though these are trends that businesses have no control over, it serves them well to look at leveraging things under their control – like data streams, which can be used to create operational insights like predictive maintenance, dynamic pricing and capacity availability. 

“These are the kind of things that, as a small business owner, you’d have them in your head. But if you are a fleet with over 1,000 trucks, you will have to look at using that data, because without that, the information just partially resides in somebody’s head,” said Cresswell. “Future-proofing is about taking that data beyond traditional reporting and making use of that in an intelligent way to improve operations.”

The U.K.’s Civil Aviation Authority (CAA) has put a damper on the timing of expansion at London Heathrow, the country’s busiest airport. The CAA expects a third runway to open between early 2028 and late 2029, subject to planning permission, rather than the original target of 2026, saying a longer planning and construction period is needed to reduce upfront costs.

Following announcement of the delay, Zoe McLernan, policy manager at the U.K.-based Freight Transport Association, said, “While today’s announcement from the CAA will cause a delay to the new runway becoming operational, FTA is confident that, for the sake of UK trade, this will be only a short pause to allow stakeholders time to reflect and find a solution on charging and costs that works for everyone.”

The CAA decision is a Christmas gift, of sorts, to Willie Walsh, chief executive officer of International Airlines Group (IAG), parent of British Airways, the dominant carrier at Heathrow, with a major presence in the air cargo market.

Walsh had previously called on the newly minted government of U.K. Prime Minister Boris Johnson to commission an independent assessment of London Heathrow’s expansion costs. He has repeatedly railed against pre-construction costs that had been allocated prior to approval of the expansion.

But the CAA also gave the green light to spend up to  £2 billion on early construction costs before any planning permission is granted or the project’s final costs are known. The CAA’s decision was made before the election and without independent scrutiny, opponents charged, as the regulator based its decision on estimates provided by Heathrow Airport. IAG asserts the estimates have increased by more than 250% in the last two years.

Heathrow officials welcomed the decision to proceed, minimizing the delay. “It increases certainty for our local communities and for job creation, increased trade and lower airfares that expansion delivers. We will now review the detail to ensure it will unlock the initial £1.5 billion ($1.95 billion) to £2 billion of private investment over the next two years at no cost to the taxpayer,” the airport authority said in a statement. 

Heathrow officials have continuously lobbied to get the expansion as quickly as possible.  

The third runway is the main driver of expansion costs at Heathrow. Higher project costs would affect all airlines because Heathrow likely will try to recoup most of the money by raising landing charges, which airlines could pass on to shippers. 

The International Air Transport Association, which represents IAG and other carriers, favors a third runway, but is concerned the price is inflated and would make the U.K. a less attractive destination for people and goods. Airlines already complain that Heathrow is one of the most expensive airports in the world to operate at.

IAG-controlled airlines have a significant presence at Heathrow. British Airways cargo operations are dominant at Heathrow. Airport officials maintain that IAG’s objection to expansion stems from its aim to maintain that dominance.

A Sept. 12 report prepared by WPI Economics, an  economics and public policy consultancy, and commissioned by Virgin Atlantic, charges that IAG fills 55% of takeoff and landing slots at Heathrow. The next largest airline is Germany’s Lufthansa with 8% and the Virgin Atlantic/Delta alliance with 7% The report notes that the proportion of routes out of Heathrow on which IAG faced no competition has increased from 18% in 2005 to 39% in 2019.

Walsh has repeatedly charged that, while Heathrow continues to quote a figure of £14 billion for the required investment, he estimates the true cost at almost double that amount.

“We need a fresh look at the environmental viability and total cost of expanding Heathrow. The airport has a history of spending recklessly to gold-plate projects and paying guaranteed dividends to shareholders while minimizing the environmental significance of expansion,” said Walsh.

“Boris Johnson wants to make Britain more competitive. Allowing an expanded airport that is considerably more expensive than our European neighbors would be an own goal as we need to compete on the world stage,” Walsh said, referring  to soccer players who accidentally score for the opposing team.

IAG notes that Heathrow’s proposed early construction costs have risen from £650 million in April 2018, to £1.6 billion in later that year and £2.8 billion currently. Proposed planning costs alone have nearly doubled from £265 million in 2017 to around £500 million.  

Though the logistics and transport segment is ubiquitous and a several trillion-dollar market globally, the industry is extremely unorganized at the macro-level, contending with massive fragmentation, siloed operations, visibility woes, and substantial political and regulatory intervention. This chaos leads to inefficiency within supply chains and sets the stage for a variety of cyber threats like impersonation and opportunistic attacks, with stakeholders losing millions of dollars during the ordeal.

Mimecast, a cyber resilience company, published a threat intelligence report that highlighted the sophistication behind the attacks on supply chains and sought to quell those risks by keeping stakeholders informed about future trends based on threat actors’ current behavior, events and technology. FreightWaves spoke with Carl Wearn, head of e-crime at Mimecast, to understand the implications of such cyber threats on supply chains. 

“Cyber threats are mainly opportunistic attacks. The transport industry is going to be targeted heavily due to third-party risks that are a bigger part of supply chains than in other businesses and also because state-sponsored actors want to degrade the transport systems of their rival states,” said Wearn. 

Opportunistic attacks are when hackers spot vulnerabilities in a system’s defenses and exploit that to gain control. Malware and ransomware programs are a common occurrence in the transport industry, like in the case of NotPetya cyberattack that paralyzed container line Maersk by wiping out data from 4,000 servers and 45,000 workstations. 

Mimecast’s numbers show that the transport, storage and delivery sector was subject to the maximum normalized opportunistic attack threat volume in the third quarter of 2019, accounting for 9% of the total attacks registered.

“The transport sector is something that virtually every business accesses at some point. Attackers are going to be looking at a weak link in any supply chain – whether that’s suppliers or vendors – and are going to attack that link to compromise and gain access to the enterprise,” Wearn explained. 

Apart from opportunistic attacks, companies also witness impersonation attacks, a tactic used by threat actors to infiltrate domains, websites, mobile applications, and social media profiles to con organizations into transferring money, compromising sensitive data and/or installing malware. 

Wearn explained that for companies to protect themselves from such attacks, it is essential to work with a cyber resilience solution, which can help secure their brand, domain and also securely archive their data. 

Nonetheless, human error accounts for about 90% of all breaches. “The key to securing a network is to create awareness and training for employees, making sure they realize the kind of phishing attacks that are out there and what they entail,” said Wearn. “A lot of attacks that take place were identified to have happened over vulnerable Windows and Mac systems that were outdated.”

For critical information like invoices or instructions coming down from senior executives in the company, it makes sense for employees to verify decisions by means other than just email. Wearn pointed out that people might be far too trusting of mediums like email, which can be exploited by threat actors to gain access to the system. To avoid complications, it is beneficial to cross-verify critical instructions via a face-to-face meeting or a phone conversation. 

For more than a year, FedEx Corp. (NYSE:FDX) executives have been kicking the financial can down the road, saying the problems plaguing the company are transitory in nature and a worsening picture will soon reverse itself.

On Dec. 17, the can kicked back. The Memphis-based giant posted fiscal 2020 second-quarter numbers that were, in the words of Deutsche Bank analyst Amit Mehrotra, “breathtakingly bad.” Nothing worked, especially the headline number of $2.51 in adjusted earnings per share, which included a 51-cent-a-share tax benefit, that was 28 cents a share below the $2.79 estimate on Barchart.

Alan B. Graf, Jr., FedEx’s longtime CFO, called the results “horrific,” a word CFOs rarely utter on quarterly analysts calls. In what has become an oft-quoted description over the past 24 hours, Graf said the company had “hit bottom.” Analysts who thought the bottom had been plumbed a few quarters ago are taking Graf’s forecast with a grain of salt. As Bascome Majors, the pithy analyst at Susquehanna Investment Group, put it in the headline of his Dec. 18 research note, “the night seems to go on incredibly long.”

Those waiting for the night to end will need patience. Capital spending will remain at $5.9 billion per annum, the company said. This is  beneficial in the long term as, among other things, it includes bringing on far more efficient freighter aircraft. However, it will restrain free cash flows at least through fiscal year 2022, Majors estimates. FedEx continues to work through its perpetually challenging integration of European carrier TNT Express, acquired in 2016 for $4.8 billion in cash. Full physical integration won’t occur until fiscal 2022; until then, FedEx will operate two networks in Europe. The integration, which has included the $300 million to $400 million expense of rebuilding TNT Express’ I.T. networks and customer base following the 2017 “NotPetya” cyber-terrorist attack on its operations, will have cost $1.7 billion by the time it’s complete.

Then there is e-commerce. FedEx is pouring billions of dollars into re-engineering its physical network to meet the growing demand for business-to-consumer (B2C) traffic. As it works toward improving service levels, it has been met by a lower-yielding mix of traffic, and by intensifying competition, most notably from Amazon.com Inc. (NASDAQ:AMZN), which is building out its own shipping network at lower delivery price points.

Amazon, and the myriad disruptions it has caused, isn’t going away. This has led Ravi Shanker, a Morgan Stanley & Co. analyst (NYSE:MS) and a bear on FedEx and rival UPS Inc. (NYSE:UPS) shares because of Amazon’s encroachment, to contend that FedEx’s challenges are structural rather than cyclical.  FedEx and Amazon ended their U.S. air and service relationships earlier this year, and Amazon threw another log on the fire Dec. 18 by blocking certain third-party sellers using its “Prime” product from using FedEx Ground for their deliveries.

FedEx executives did not pooh-pooh the results. Even the relentlessly upbeat Raj Subramaniam, the company’s president and chief operating officer, said he was “not pleased.” Chairman and CEO Frederick W. Smith acknowledged that the company underestimated the large cumulative startup costs of Sunday service, which starts at the turn of the year, handling online orders of heavier weighted, non-conveyable items, and taking on last-mile parcel deliveries that had been the province of the U.S. Postal Service (USPS). FedEx announced earlier this year that all of its former USPS business would be in-sourced by the end of 2020. 

Can-kicking is a hard habit to break, however. Because the Cyber Monday ordering extravaganza occured at the start of FedEx’s fiscal third quarter, the company didn’t reap the benefits of the additional business during the second quarter even though it absorbed significant costs in the period, Smith said. Shanker disputed Smith’s argument, saying that if Cyber Monday activity was going to contribute materially to FedEx’s fiscal third-quarter results, the company wouldn’t have announced Dec. 17 a further 15% cut to its already-lowered fiscal 2020 outlook. Thus, it strains credulity to believe the second-quarter results would have dramatically benefited by Cyber Monday falling earlier, Shanker said.

Smith also said the global economy is running on two tracks, with U.S. e-commerce demand remaining strong while domestic and international industrial production have shown virtually no growth for more than a year. FedEx’s business has long tilted toward the business-to-business deliveries that are linked with industrial activity, so demand weakness in that segment would certainly weigh. However, Shanker and other analysts noted that the company made essentially the same macro comments in its fiscal first quarter, when its results were nowhere nearly as weak.

In comments that will likely give economists and trade analysts pause given FedEx’s relevance to global commerce, Smith and other executives said the world needs to prepare for a very different trading environment than what has existed for the past 70 years during a long cycle of multilateralism.

It can be argued that FedEx is doing what any prudent business would do under the circumstances. It is upgrading its physical infrastructure in the U.S. and abroad. The company is reducing global miles flown by 6-8% in response to declining international airfreight demand as it awaits deliveries of more efficient and productive equipment. It is availing itself of the generous depreciation benefits, at least through 2022, that are embedded in the 2017 tax law. Sagging operating margins at FedEx Ground will rebound as the impact of hub modernization costs ebbs, and the network starts to build suitable B2C package density, company executives maintain.

The problem, as Wall Street and investors see it, is that this narrative has been on the table for five quarters, and the company has disappointed with each report. Two figures tell the story: A year ago at this time, the consensus earnings estimate for FY 2020 stood at $20 a share. Today it is around $11 a share.

The second? FedEx’s share price slid by more than 10% Dec. 18, closing down $16.37 a share to $146.86 a share. In mid-January 2018, shares traded near $275 a share.

UK manufacturing exports remain weak, industry group says

A survey by the powerful Confederation of British Industry (CBI) indicates continuing weakness in the U.K. manufacturing sector in December, with exports taking a heavy hit, primarily driven by the weakness in motor vehicle production. Participants anticipated that output will fall at a slower pace in the first quarter of 2020.

More than 40% of the 289 manufacturers surveyed said that total order books and exports worsened compared to November and remained below their long-run averages.

Output volumes in the three months to December fell at the quickest rate in a decade, with output expanding in only six out of 17 subsectors. The headline fall in output was primarily driven by the motor vehicles subsector, chiming with the recent weakness in global car sales. 

“With manufacturers reporting that output is declining at a pace not seen since the financial crisis, alongside another month of softer order books, it is crucially important to rebuild business confidence in this sector,” Anna Leach, CBI deputy chief economist, said in the survey report.

Electronic engineering and aerospace were the main growth areas for the sector. Manufacturers reported that stocks of finished goods were above adequate. 

Respondents expect output prices to pick up somewhat in the next three months. 

“These disappointing figures are reflective of the widespread weakness in the global manufacturing sector and the impact of continued Brexit uncertainty in the run-up to the general election,” added Tom Crotty, chair of the CBI Manufacturing Council.

Prime Minister Boris Johnson won a mandate in last week’s general election to follow through on pulling the United Kingdom out of the European Union early next year. The government will then have to rejigger trade rules with EU member states and countries around the world, leaving companies in a continuing state of uncertainty about tariffs and access to markets. 

Crotty called on the new government to work with the private sector raising productivity, addressing skills shortages and climate change and improving sustainability.