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Trade War Reaches Down the Supply Chain, Pinching Freight Carriers

The disruption caused by the U.S.-China trade war has impacted the global freight industry and resulted in volatility in cargo freight rates, analysts from financial services firm Cowen Inc., said on a conference call Monday.

Rising costs have been an issue for all retailers and a significant headwind to margins over the last number of quarters,” Oliver Chen, retail and luxury analyst at Cowen, said.

Jason Seidl, airfreight and surface transportation analyst, said, “The word for the day is that things are down, but they’re down from just a phenomenal year in terms of the trucking, rail and logistics space. We started seeing shippers pull forward freight in about September last year and that pull forward continued to escape the tariffs through January.”

That inflated last year’s results a bit and took away some of the freight demand from most of 2019, Seidl said. He and Helane Becker, airlines analyst at Cowen, cited a shift in sourcing driven largely by the trade war.

Seidl said, “Once multinational corporations make a change in their supply chain, it’s permanent.” He added that even if tomorrow the U.S. and China end their trade war, “people aren’t going to redo their supply chains again.”

Becker said airlines are seeing a decline in cargo volumes, especially from Asia. She said this is for two major reasons: “The first is that capacity between the U.S. and Asia is down for U.S. airlines, as they’ve been reducing capacity in the market. For example, American is no longer flying between Chicago and Beijing and you can imagine that without that wide-body aircraft going between the two countries, there’s a fair amount of capacity that’s out of the market.”

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And as for the second, she said: “The trade war between the U.S. and China has caused several manufacturers to source differently. We’re definitely seeing manufacturing moving to Sri Lanka, to India, Taiwan and Vietnam to avoid tariffs.”

Becker noted that Cowen hasn’t seen container manufacturing move out of China, but demand for new containers is down from year-ago levels because many shippers pulled forward goods last year to avoid tariffs that were going into place this year, while shipping companies are taking ships out of service to retrofit engines with scrubbers to comply with IMO 2020 mandates for low-carbon fuel, so ship capacity is down.

Also impacting the air freight industry is the rapid rise of e-commerce and the demands it brings. Becker noted that with new contracts with carriers such as Atlas Air, Amazon will eventually have access to 200 aircraft, compared to FedEx’s fleet of 681 with another 155 on order and UPS’s fleet of 552 with a further 29 on order.

“Also know that FedEx Express started Amazon as a client earlier this year, so the volume, which we estimate was 85 million domestic packages a year has moved on to a combination of UPS, the Postal Service and Amazon,” Becker said. “Last-mile delivery is very expensive and inefficient…It’s been shown that the faster you get it there, the better the chance it won’t be returned, and that’s very costly.”

She said that’s why pick-up in store has become so popular, and why FedEx and UPS use Staples, Walgreens, CVS, Dollar General, their own stores and other third-party locations to allow people to pick up or drop off their packages to reduce costs.

In the trucking sector, Seidl noted that last year there was a spike that caused concern among retailers, but that has now turned around and spot truck freight prices are down around 20 percent. Contract truck rates are generally holding steady at the moment. Rail pricing is up, he noted, in excess of 3 percent.

For retailers, this should mean a flattening of truck and rail freight prices for the rest of this year, moving into 2020.

Becker said higher fuel costs are putting pressure on air freight costs and should lead to the standard 5 percent rate increase in January that FedEx and UPS usually impose. She said with a high rate of pilots retiring, there is wage pressure that tends to raise costs and rates, and “overall pressure on infrastructure costs, and that has to be borne somehow.”

“And if people are going to do all their purchasing online, that has to somehow be delivered,” Becker added. “We just see costs going up…especially in wages and benefits.”