CMA CGM/WFS –sea shipping benefitting from air cargo capacity constraints
All,
We see this trend as supportive for container shipping in general. In previous downturns, air cargo was the first to recover, as companies restocked on certain key items in the early stages of the demand bounce back. The fact that air cargo is lagging sea shipping this time around suggests that the volume shifts are mainly capacity-driven instead of cost-driven. This impact is likely to persist until we see a more pronounced recovery in air passenger volumes, which could be at least 6 months away. We are long the 2021 and 2022 bonds of CMA CGM but hold no position in the WFS bonds.
Container shipping is currently benefitting from the severe capacity constraints of air cargo. As the charts from IATA show, companies are being forced to shift volumes that would have normally gone through air cargo to sea shipping instead.
After the significant reduction of “belly cargo” capacity under passenger flights, the process of converting more passenger aircraft into dedicated cargo aircraft is proceeding slowly. Jet fuel costs have fallen significantly, even underperforming the already beaten-down oil products environment generally. This should in principle encourage conversions. However, we understand that the conversion process is difficult to reverse once completed, which often means only older passenger aircraft are considered for conversion. And while most of air cargo is usually comprised of high-value lightweight items such as auto parts and electronics, a portion of it is driven by more “bulky” items such as fresh food and other perishables. The economics of these items do not always work for a dedicated air freighter without the additional passenger revenues that come with “belly cargo”, especially in an environment of abnormally high utilisation of air cargo capacity, as it is currently the case.
Unfortunately, as WFS has recently admitted on its results call, conversions are unlikely to significantly accelerate in the near term. This is encouraging volume shifts towards sea shipping, as CMA CGM confirmed in its latest results call.
As always, feel free to reach out if you want to exchange ideas on CMA CGM and WFS.
Juliano
Juliano Torii
2 Stephen Street
London W1T 1AN
E: jtorii@sarria.co.uk
M: +44 794 73 56 163 (preferred)
T: +44 203 744 7055