The Role of Planes in the New World of Logistics

2020 will be remembered as the year when global logistics changed drastically. We were used to using intermodal services, combining trains, ships, trucks, terrestrial vehicles and planes. It worked relatively well. When COVID-19 appeared, everything changed.

First, some countries closed their borders. Then, the priority on transporting healthcare devices, such as masks, gloves and disinfectants, put on hold some other less vital shipments, creating big backlogs in many industries.

On the other hand, e-commerce saw exponential growth throughout the year, adding more pressure on logistical systems across the globe. The price for a ship coming from China to America is five times higher than it was during peak seasons. On top of that, there is no space availability for the next year or so. Fear played its role and pushed everybody to book ahead at almost any price.

I think it will take a long time before balance and congruency are restored. According to McKinsey, companies will look to build resilience by improving supply chain management and transparency, minimizing exposure to shocks (pandemics, natural events, political decisions) and building their capacity to respond (improving and controlling purchasing and delivery systems and controls). Otherwise, they could be exposed to losses that could amount to 42 percent of their EBITDA year over year.

The commercial aviation sector also has been deeply impacted, especially by travel restrictions. Routes have been either decreased or canceled and many seats are not being sold. According to IATA, it will take at least until 2024 to get back to the same level of passengers flying around the globe. Most airlines are dealing with big financial problems, and many will not survive. They need to find new ways to use the capacity they own, restructure labor contacts like Aeroméxico just did here and, of course, adjust their operations to be more efficient in the usage of resources and be able to cut costs everywhere.

My point here is that commercial aviation has unused capacity and e-commerce companies are trying to acquire delivery capacity. Do you see where I am going?

A year ago, we saw Amazon dare to block third parties from using FedEx for their Christmas sales in the middle of a war to control the deliveries market and price. In retrospect, that action and the strategy to develop its own logistics system to manage all its product deliveries were beneficial to Amazon. FedEx did not put up a fight as other stores needed to change their delivery channels due to COVID-19. But the lesson was learned. Amazon continues to grow its ground and air fleet in order to reduce its dependency on other carriers. More than half of the sales on Amazon are made by third parties, which pay for logistics services from storage to deliveries.

Amazon moved from being a customer to being a big competitor for these services. Starting in 2021, the company announced the purchase of 11 Boeing 767-300s from Delta and WestJet that will be converted from passenger to cargo to service customers in the US. It is happening! Unused capacity in one market represents an opportunity to be used in another. Amazon maintains a balance between owning the planes and leasing them. In Mexico last year, it also increased the number of planes leased and it is literally running to open new distribution centers in Merida, Tijuana and a couple other key cities to extend its logistics network.

Mercado Libre is following the same strategy. It announced recently the investment of MX$1 billion in Mexico to create his own logistics network with the objective of offering deliveries on weekends like Amazon does. Initially, the network will have four airplanes. It will also boost its operations at Queretaro airport where it will establish a hub. This creates direct employment but it also represents an opportunity to boost the MRO industry in Mexico that has very good capabilities and expertise.

This is just the beginning. From my point of view, it can bring opportunities to either reassign aircraft for different functions instead of keeping them parked or increase the use of commercial routes to strengthen the delivery capabilities of e-commerce. A world of new ideas arises. For example, with the support of a third party (Canada’s Avianor), Kenya Airways just completed the first conversion of a 787 Dreamliner to cargo. I believe we will also see more and more old aircraft being converted for cargo operations. The price of oil is cheap compared to five years ago and those planes that were not profitable before are now back in the game.

Having said that, I predict that re-entry into service of inefficient planes, modification of commercial passenger airlines to cargo that the airline or a subsidiary will operate, sale of aircraft by airlines to logistics operators and leases to create new logistics networks will increase a great deal. But this is just using a little bit of what we have in our inventories. All of this is very good as most of those logistics chains will remain in the future and domestic and international commercial flights, although slow, will continue their recovery trend. Therefore, I foresee a blooming demand for aircraft in about two or three years, which will be good for the survivors manufacturing in Mexico for the industry.

I know the pandemic has put many projects on hold but we need to go back to innovation. Talking about logistics, carriers and deliveries, we need to go back to exploring the use of drones for what carriers call “last-mile deliveries” and the possibility of having unmanned flights over long distances to cut costs.

Regarding drones, I still believe we are about to see a boom in their use for deliveries. It is not only logistically efficient, but it might also increase sales. If I have the option to go to a store or to receive my order by drone, I would definitely use the second option, just to see it with my own eyes. A whole new industry for drone manufacturing, certification and control will arise sooner than later, and I am just focusing on one use that drones will have for now. The next step would be unmanned flights. In the long term, even commercial flights will have that possibility but, certainly, a good way to test their profitability, sustainability and on top of all, safety, is using them to transport goods with no human lives at risk.

The aerospace industry has played a key role in the evolution of logistics networks, especially when cutting delivery times is the objective. Now, forced by the pandemic and the new reality, commercial trends and delivery channels, planes and their new technology will have to face new challenges to connect the world once again.