In air cargo bull market, United flies dog food and mayo

Air cargo is typically reserved for high-value or lifesaving products, such as vaccines and perishable food, that can afford the premium rates. But with supply chain disruptions a fact of life during the pandemic and ocean rates seven to 10 times higher than pre-crisis levels, the price gap has narrowed, creating even more demand for air shipping.

Average global cargo rates in 2021 were 2.5 times higher than in 2019, but the disparity was much steeper on key trade lanes from Asia to Europe and North America — especially during the peak shipping season when retailers are rushing orders to stores in time for the all-important holiday shopping period. 

China-U.S. prices set a new December record of more than $16 per kilogram, while China-North Europe rates climbed 40% from November to mid-December to more than $8 a kilogram, according to Freightos, an online marketplace.

United’s fourth-quarter cargo performance was 130% greater than in 2019 and $208 million better than during the third quarter, when cargo revenue soared 84% from two years prior. 

Cargo revenue-ton miles, a metric for measuring volume, dipped 2.1% during the quarter from 2019 to 870 million — a reflection of the fact that the airlines’ total capacity remains stunted with part of the passenger fleet still grounded. It carried 166 million COVID vaccines in the last three months of the year.

The $2.4 billion in full-year cargo revenue was more than double the amount Delta Air Lines (NYSE: DAL) reported last week. 

United was one of the most aggressive passenger airlines pivoting to cargo at the start of the pandemic. It operated more than 14,000 cargo-only flights, about 40 per day at one point, but phased them out as international passenger demand increased last summer. When the delta variant dragged down passenger bookings, the airline temporarily reallocated a handful of planes to the Cargo division.

No auxiliary freighters are listed on United’s January flight schedule, but Broquet said the Chicago-based carrier can quickly add them when the opportunity arises, as it did in December when it operated 14 dedicated cargo flights for drugmaker Pfizer (NYSE: PFE).

Capacity choices

And there is the potential for United to have a significant amount of new cargo capacity this year with the reintroduction of 52 Boeing 777-200 widebody aircraft that were grounded by regulators after a midflight engine failure in early 2021. Enginemaker Pratt & Whitney has resolved the technical issue that led to the malfunction, and United expects the planes to rejoin the fleet this quarter, CEO Scott Kirby said in the earnings report.

United is also waiting to take delivery of 10 Boeing 787 Dreamliners that have been delayed by the pandemic and production problems at Boeing (NYSE: BA). 

The airline’s cautious approach to matching capacity with demand means total available passenger seats this year will be less than in 2019, but the higher-gauge aircraft will increase utilization and reduce operating costs, Kirby said.

Despite the temptation for near-term business, United won’t be investing in pure freighters as some airlines have done. Krems has seen the ebbs and flows the industry for decades and doesn’t want to be caught with an asset he can’t keep filled all the time.

“I don’t want to own freighters, but I like to have access to freighters,” the cargo chief said in the podcast, noting that United has wet lease arrangements with All Nippon Airways, Lufthansa and Asia Pacific Airlines to operate freighters on its behalf.

“Lots of people with dollar signs in their eyes are looking at freighters. But you need to know how to run a freighter airline, how to deal with customers, different markets, the network and how to do that long term. And when market gets softer, then how do you make money? For us, it makes sense, short term, on certain lanes.”

Many freight forwarders complain that airlines are routinely breaking contracts so they have to rebook at high market rates. Krems said that United could have made more money doing that but has instead opted to maintain relationships with strong partners. About two-thirds of the airline’s cargo capacity is pre-committed to customers and the rest is put on the spot market.

“We want to keep the relationship going in good and bad times,” he said on the podcast. “Yes, we could have asked much more. I’m not saying long-term contract rates aren’t changing, but we won’t take contracts off so we can sell space to whomever. I can’t abandon customers who stuck with us. [Other companies] were not there when I needed you and now I have friends that I work with.” \

In a message to customers on Wednesday, Krems said United anticipates “only minor disruptions” at some airports due to remaining restrictions on low-visibility landings due to 5G cellular towers. On Tuesday, telecom companies rolling out next-generation wireless broadband agreed not to turn on base stations near airports in many cities.

Overall, United had a fourth-quarter adjusted net loss of $500 million. On a full-year adjusted basis, United lost $4.5 billion, as performance was dragged down late in the year by weather- and omicron-related flight cancellations. Operating revenue of $8.2 billion was 25% below the 2019 benchmark.

Earnings per share of negative $1.60 beat analysts consensus by a wide margin

The first-quarter outlook calls for operating revenue to remain 20% to 25% below the 2019 level, with passenger capacity down 16% to 18%. But United gave no profit or loss guidance.

(Correction: An earlier version of this story misspelled CEO Scott Kirby’s name)

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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