Amazon Prime Airplanes Will Only Fuel This Hot Trend
Prime time.

The air cargo business is booming, thanks to improved global trade, and the impending expansion of Amazon.com Inc.'s (AMZN) Prime Air cargo carrier seems likely to fuel further growth.

In the first half of 2017, global air freight volume grew 10.4%, the strongest first-half performance since the industry's 2010 rebound from the global financial crisis and nearly triple the growth rate over the past five years, according to the International Air Transport Association.

IATA said air freight demand grew 11% in June, while capacity grew 5.2%, leading to higher yields for freight carriers. It also forecast 8% current quarter growth.

In the second quarter, American Airlines Group Inc. (AAL) , Delta Air Lines Inc. (DAL) and United Continental Holdings Inc. (UAL) all reported double-digit cargo revenue growth, with United citing 22% growth to revenue of $254 million, compared with 13% at American and 11% at Delta.

United benefits from being the leading U.S.-Asia carrier, from increased widebody service at its domestic hubs, and from building partnerships with freight forwarders despite the slow growth in recent years, said spokesman Charles Hobart.

"Now that business has picked up, and we are gaining an impressive share of the market," Hobart said. "Decision-makers at these large forwarding companies know and trust {us}."

Meanwhile, shares in Atlas Air Worldwide Holdings (AAWW) are up 20% year to date, partially because subsidiary Atlas Air is scooping up Prime Air business. By the end of 2018, Atlas Air expects to have 20 Boeing 767-300Fs flying for Amazon, up from six today.

Prime Air has said it will operate a cargo hub at Cincinnati/Northern Kentucky Airport, where it is spending $1.5 billion on new facilities. But entry into the airline business, even through the use of contractors, means that largely non-union Amazon confronts a heavily unionized workforce.

Hello Teamsters Union.

Atlas and its Teamster-represented pilots are in talks over a contract that became amendable in September 2016. Robert Kirchner, an Atlas pilot and chairman of Teamster Local 1224, said the current contract is inadequate and leads to constant workforce churn, especially given a global pilot shortage. "Our pilots are leaving in droves," he said.

Kirchner said an Atlas Boeing 767 captain earns about $185,000 annually, about two-thirds of the FedEx rate and 60% of the Delta rate. Additionally, he said, the union would like to cut back on pilot trips that sometimes last as long as 20 days. The carrier has sought to push the pilot group into arbitration, bypassing first-step negotiations, Kirchner said.

In a statement posted on its website, Atlas said it employed more than 1,700 pilots at the end of 2016, up from about 1,100 at the end of 2014. "We offer competitive compensation," Atlas said.

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Amazon CEO Jeff Bezos.
Amazon CEO Jeff Bezos.

Allegations of pilot shortages "have been part of an overall campaign from the pilots and their union to put public pressure on the company with respect to its next labor contract," the company said.

"As a cargo-focused airline that provides outsourcing services, our business model, daily operations and compensation structure differ" from FedEx and Delta, an Atlas spokesman said.

The business model includes long trips, the spokesman said, but 85% of Atlas pilot trips are two weeks or less in duration, while about 5% are trips of 17 days. Longer trips generally coincide with more consecutive days off.

"We have mutually agreed with the pilots' union on a process to proceed with negotiations for an updated labor contract and those negotiations have commenced," Atlas said.

On the Atlas earnings call last week, contract negotiations were not discussed, but Atlas CEO Bill Flynn challenged IATA's contention that even though global air freight shipments are high, cyclical growth period may have peaked.

"The global inventory-to-sales ratio has stopped falling," IATA said in a prepared statement, released just before the Atlas call. "This indicates that the period when companies look to restock inventories quickly, which often gives air cargo a boost, may be nearing an end."

Responding to an analyst question, Flynn said, "I disagree with what IATA put out today and they basically said the same thing in the prior month's report. Frankly, I {haven't} seen an optimistic or positive IATA report on airfreight in a long time."

Flynn said IATA numbers don't capture overnight cargo, missing, "a big chunk of what's being moved, {of} what e-commerce drives in terms of those movements.

IATA compiles statistics from carriers that provide scheduled air service, but some express freight is left out either because it is carried by non-scheduled charter carriers or because it is carried by non-IATA carriers.

Among the growth areas in cargo are shipping pharmaceuticals and other perishable goods.

For instance, at Charlotte Douglas International Airport, planning is underway for a cold storage facility, said airport director Brent Cagle. Cagle said the facility could be shared with Norfolk Southern which operates an intermodal facility, transferring goods between rail and truck, on airport property. "We're excited about the possibility of a multi-use cold chamber," Cagle said.

United's Hobart said, "Shipping pharmaceuticals and other commodities requiring temperature-controlled transport is the fastest-growing segment of the air cargo industry." He said United has 68 certified "TempControl" handling locations worldwide, and it outpaces industry growth in temperature-controlled shipments.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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