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With $5.9B Profit, Maersk Invests in Air Freight

Maersk is turning its attention to the skies amid surging air freight demand and rosy quarterly profits.

Global air cargo demand rose 9.1 percent in September compared to two years earlier, the International Air Transport Association (IATA) reported Wednesday.

IATA said the latest data showed demand for global air cargo markets continued to be well above pre-crisis levels.

Capacity remained constrained at 8.9 percent below pre-pandemic levels. IATA said several factors were impacting global air cargo demand, including supply chain disruptions and the resulting delivery delays that have led to long supplier delivery times. This typically means manufacturers use air transport, which is quicker to recover time lost during the production process, it noted.

In addition, the inventory-to-sales ratio remains low ahead of the peak year-end retail events such as Single’s Day, Black Friday and Cyber Monday. This is positive for air cargo, however further capacity constraints put this at risk, IATA said.

The cost-competitiveness of air cargo relative to that of container shipping remains favorable. Pre-crisis, the average price to move air cargo was 12.5 times more expensive than sea shipping. In September, it was only three times more expensive.

“There is a benefit from supply chain congestion as manufacturers turn to air transport for speed,” Willie Walsh, IATA’s director general, said. “But severe capacity constraints continue to limit the ability of air cargo to absorb extra demand. If not addressed, bottlenecks in the supply chain will slow the economic recovery from Covid-19. Governments must act to relieve pressure on global supply chains and improve their overall resilience.”

To relieve supply chain disruptions, including those highlighted by the U.S. on supply chain resilience on the sidelines of last weekend’s G20 Summit, IATA is calling on governments to ensure that air crew operations are not hindered by COVID-19 restrictions designed for air travelers. They should also implement the commitments made to restore international connectivity, which will ramp-up vital cargo capacity with “belly” space and provide innovative policy incentives to address labor shortages where they exist.

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Looking at regional performance, Asia-Pacific airlines saw their international air cargo volume increase 4.5 percent in September compared to the same month in 2019. This was a slowdown in demand compared to the previous month’s 5.1 percent expansion.

“Demand is being affected by slowing manufacturing activity in China,” IATA said. “International capacity is significantly constrained in the region, down 18.2 percent versus September 2019. Looking forward, the decision by some countries in the region to lift travel restrictions should provide a boost for capacity.”

North American carriers posted a 19.3 percent rise in international cargo volume in the same time frame. New export orders and demand for faster shipping times are underpinning the North American performance, IATA noted. International capacity was down 4 percent compared to September 2019, a slight improvement from the previous month.

European carriers saw a 5.3 percent hike in international cargo volumes in September compared to the same month in 2019, on par with August’s performance. Demand was strongest on the large North Atlantic trade lane, IATA said, while performance on other routes was weaker. International capacity was down 13.5 percent from September 2019.

Middle Eastern carriers experienced a 17.6 percent rise in international cargo volume in September from two years earlier, an improvement compared to the previous month. International capacity was down 4 percent.

Latin American carriers reported a decline of 17.1 percent in international cargo volume in September compared to the 2019 period, which was the weakest performance of all regions. Capacity in September was down 20.9 percent on pre-crisis levels, an improvement from August.

African airlines saw international cargo volume jump 34.6 percent in September, the largest increase of all regions for the ninth consecutive month. International capacity was 6.9 percent higher than pre-crisis levels, the only region in positive territory.

With air freight a crucial enabler of flexibility and agility in global supply chains, allowing companies to tackle time-critical supply chain challenges, Maersk said it aims to increase its presence in the global air cargo industry.

With that in mind and to accelerate its product offering integrating logistics, ocean, rail and air operations, Maersk said it intends to expand its global air network by acquiring Senator International, a company with an operational air freight platform of own-controlled capacity and operations across Europe, Asia, South Africa and America.

In addition, Maersk is purchasing two new B777F and leasing three B767-300 cargo planes. To operate and manage this added capacity, the cargo airline Star Air–and internal air cargo operation of Maersk established in 1987–will become a key vehicle supporting Maersk’s logistics offering.

“As a global provider of integrated logistics, Maersk is improving the ability to provide a one-stop-shop and end-to-end logistics capabilities to our customers,” Vincent Clerc, executive vice president of Maersk and CEO of Ocean & Logistics, said. “We have strengthened our integrated logistics offering through e-commerce logistics acquisitions, tech investments, expanding our warehouse footprint and, as a natural next step, we are now ramping up our air freight capacity significantly and creating a broader network to cater even better for the needs of customers.”

Senator has built an air freight operation centered around own-controlled capacity using 19 weekly flights across its network. Senator operates a significant part of its business through a dedicated air bridge with own controlled capacity that aligned with Maersk’s air freight strategy.

“Senator’s own-controlled air product started in 2016 and has proven to be a success story,” Tim-Oliver Kirschbaum, CEO at Senator, said. “Our customers honor our reliability, particularly in challenging times during the pandemic. By joining Maersk, we strongly believe that we will be able to deliver an even broader portfolio with own-controlled air capacity, as well as also in other modes of transportation.”

The German company brings a technology advantage with its Cargo Wise One core operating platform, a cutting-edge, easy-to-use single system that will accelerate the integration with Maersk’s Air and LCL (Less than Container Load) products.

The enterprise value of the transaction is approximately $644 million. The transaction is subject to closing conditions and is expected to close in the first half of 2022.

Maersk’s ambition is to have approximately one-third of its annual air tonnage carried within its own-controlled freight network. This will be achieved through a combination of owned and leased aircraft, replicating the structure that the company has within its ocean fleet. The remaining capacity will be provided by strategic commercial carriers and charter flight operators.

As an in-house aircraft operator, Star Air will operate and maintain owned and leased aircraft for Maersk, while continuing to operate air cargo for its current customers. As an integral part of building the own-controlled air capacity, Star Air has purchased two new B777 Freighters to be delivered by Boeing in 2024 and leased three B767-300 Freighters that will be operational next year through Cargo Aircraft Management.

“The market leading efficiency and incredible range of the 777 Freighter will provide Maersk the flexibility to profitably operate the airplane across its large air freight network while helping to deliver on its sustainability objectives,” Ihssane Mounir, Boeing’s senior vice president of commercial sales and marketing, said.

Achieving carbon neutrality is a strategic imperative for Maersk. In Air, Maersk will have similar ambitions as on Ocean, including forwarding business where the company is involved with carriers that offer SAF (Sustainable Aviation Fuel)-based solutions, as well as own fleet, where Maersk is committed to explore carbon neutral fuels for the Star Air operated fleet of aircraft in line with IATA guidance.

On Tuesday, Maersk delivered record third-quarter earnings, as revenue grew 68 percent to $16.6 billion and earnings before interest and taxes (EBIT) was up almost five times to $5.9 billion.

“In the ongoing exceptional market situation, with high demand in the U.S. and global disruptions to the supply chains, we continued to increase capacity and expand our offerings to keep cargo moving for our customers,” CEO Søren Skou said. “Our integrator strategy is key to supporting our customers’ end to end logistics needs by designing a more stable Ocean business, strongly growing our logistics offering and relying on automated and efficient terminals.”

While noting the Senator acquisition, Skou said it added “even more flexibility to our customers’ supply chains.”

But the core of Maersk’s business, ocean freight, did quite nicely in the quarter. In Ocean, results were driven by high freight rates “in an exceptional market situation,” the company said, with revenue almost doubling to $13.1 billion and EBIT improved by $4.4 billion to $5.3 billion.