Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Good morning, everybody. First of all, a big welcome to the Expeditors' webinar on air market -- on a global air market update. And we try to highlight a little bit Europe because all the FMDs are European minded. So first of all, my name is Philip Dekker. I'm the Vice President for Air Product. I've been about 21 years within the company in various roles. Some of them -- well, most of them had been geo-related, which would mean that I have always owned the P&L. Prior to this job, I was the Regional Vice President for Europe South-West, which actually included Belgium, Luxembourg, Spain, Portugal, France and Switzerland. And there, I was overall responsible for operations, finance and sales. About 2.5 years ago, just before the pandemic, I have been asked to take over the role as Vice President for Air Product, which I've been doing. Was -- really good timing to start a new job straight in the heat of the pandemic. Now that all being said, again, today is all about an air market update, what we hope. And I'll introduce 2 of my colleagues further on. What we do hope to come out of this is that this would be an open discussion, okay? We try to make it as interesting as possible. But in order to truly gain, I think, momentum and take away some of the worries that you might have, please, please ask questions throughout the presentation. [Operator Instructions] But then again, I just want to make sure that throughout -- again, throughout the presentation, and this is pretty important for me, that you constantly post questions. Don't shy. Just ask. Fire away. We will always answer you in all openness and honesty. And we will tell you how we see the market, and not only how we see it, but also how our customers see it, that we talk with and that our airline partners see it. So herewith, I'll give the word to Robert and Ruairi. Robert, can you take -- can you introduce yourself, please?

So I'm the Regional Air Operations Manager for Europe. So I've been in the industry 21 years, with Expeditors, going on 12 years now. Prior to the regional roll, I was the Air Product Manager in Dublin. So yes, good morning. I'll hand over to Ruairi.

Hi, good morning, everybody. I'm Ruairi Kearney. I'm the Director for Air Gateways and Service Providers in Europe. So I'm 21 years with Expeditors this year. Always worked within the air freight departments, started off in Dublin as an air expert agent and moved to London to manage our London Gateway. And for the last 7 years, been in a regional role managing the Gateways, both inbound and outbound in Europe, and also the airline service providers. Thank you very much for joining today. We look forward to a good webinar.

Okay. So Robert, will you take it off?

Yes. So we wanted to start off to give you guys an update on the current state of capacity and how that's developed really since the start of the pandemic. So what we're seeing on this particular graph is if you look at the top graph, it's a snapshot of the last 2 weeks in June on how capacity compared against pre-COVID, so 2019. So you can see the overall percentage of capacity is down 4%, what -- that really varies significantly across the various trade lanes. And you can see a lot of red on that graph. But what's interesting then is what is making up that capacity. So if you look at the bottom graph, you can see the lines that represent 3 different types of capacity. And that's airline freighter capacity, passenger wide-body belly capacity and integrated capacity. So that's your small parcels, you're express for all parcels. So you can see how that's developed over time. So while that number of 4% doesn't look too low, you can see that freighter capacity has increased 18%. Passenger belly capacity is still down [ 22% ]. But the vast majority of the growth in capacity since the pandemic has been integrated capacity to deal with the strong e-commerce that we're seeing. So we want to go on to the next one. So this is giving you a look at how that capacity compares against demand. So the top graph is capacity. And what's different about this one than the previous one, this is year-to-date versus 2019. And the bottom is the same, output demand. So you can see how that varies. While capacity is -- seems like it's down a small amount, 4.1%, you can see the demand at the same time for the same period, it's up 6.1 -- or 6.6%. So there's still an imbalance, a significant imbalance, and that really is a lot worse on various different trade lanes of [Audio Gap]. A lot of passengers are never looked to travel. And this graph is really just showing a widebody aircraft, so not the small [ summer ] ones. So this would be for international long-haul flights. So what's happened is that capacity has decreased by 4% to 13% as a result of these revised schedules. 80% of that -- those adjustments really are related to Asia Pacific flights, so Europe to Asia Pacific. If you want to go on to the next one?

Yes. So this is the IATA cargo index -- rate index. It's a blended rate -- average rate level from all regions globally. And as expected, you can see, in 2020, we had a huge spike in our costs at the start of the pandemic and things started to stabilize out. Throughout 2021, we've seen a gradual -- more gradual increase in rates across the year. And then into 2022, we've seen that the rates have stabilized relatively well, but at the higher -- at the elevated rate levels. So we do see that the rates have softened slightly in the early part of the summer in Europe, but North America rates continued to increase. If we move to the next slide, please, Valentina. I don't think it's going to be a surprise to anybody to see this graphic, which is the aviation fuel price. So at the start of the Ukraine war, we've seen a huge spike in fuel costs, at the highest level it has been for over 12 years. The costs continue to increase, and carriers are reacting to that by increasing their fuel surcharges but also some carriers are also reintroducing fuel surcharges again. What we also have seen is fuel shortages in certain airports, which are impacting mainly charter operations going Europe to Asia as they stopped off -- previously stopped off in ex-Soviet states. And those Soviet states have had their fuel restricted -- ex-Soviet states have their fuel restricted by the Russian conflict. So that is putting further pressure on the fuel prices, and we do see them continuing to increase. If we move to the next slide, Valentina. The purchase and manager index, this is always a good indicator for us of what demand will do in the following 3 to 6 months. So what we've seen is that the export orders are declining in some of the main countries. And with the exception of North America, the index is showing some decline. That indicates to us in the next 3 to 6 months, we'll see a limited growth on demand. It's not yet shown a contraction in demand. It's just shown limited growth in single-digit figures expected for the next 3 to 6 months. And the next slide, please, Valentina. And then just the last one, in global air demand. If we talk about the consumer sentiment, what we are seeing, and this goes right back to that crisis in 2008. We've seen demand follows customer sentiment pretty closely as well. And what we've seen is that in recent times, concerns over inflation and the ongoing war in Ukraine has really led consumer confidence to dip. And that again will impact on what we see in demand in the coming months.

I think, unfortunately, you look at the markets, we've been in the pandemic for 2.5 years, so Robert kicked it off a little bit with alluding back to the time it all started. Then you have Ruairi talking about the Ukraine and then Russia war and the fuel. And it's been 2.5 years now that we've all been in this situation. I think that if you go back a couple of months ago and you would ask Ruairi, Robert or myself, how is it going? I think we would have told you like, hey, we're getting the grips on this, okay? We know what to do. We know where the difficult markets are. We know how much allocation is available. We know the rate that comes against it. And we can predict fairly accurately what's going to happen over the coming 3 months. Now unfortunately, I'm not the one that's going to bring you to good news because now you have also inflation around the corner. Everybody feels it. When you go and gas up your car at the gas station, you see the bill that you need to pay or the electricity bill. Now in the inflation, if you believe KPMG or PwC, if you believe their studies, then the peak of the inflation is only expected in the autumn of this year, which means that, progressively, you will see that with -- especially within Europe, that things get tougher. And with things, I mean like if you look at the airports, you look at the labor challenges that we have at the bigger airports, and the impact it has had on the airline or in the aviation sector as a whole, because it's not only the airport, it's the ground handlers, it's everything that's surrounding it. And I think over the last 2 to 3 days, we've had messages coming in from airlines, cutting flights or giving us a -- let us saying they are apologizing for delays because they don't have the staff to handle the cargo properly, okay? If you turn on the news today, you also see that some of the airlines, even in the leisure travel and the shorter haul, are canceling flights more and more. So the forecast that we have over the coming months in Europe, it's not too positive. When we talk to customers, and I've been talking recently to some of the bigger retail customers, you clearly see or you clearly feel that they all feel that there is less buying from customers by itself. That also has an effect on your inventory levels, which means, normally, inventory is high. And again, that all comes into play when you look at air freight in general. So you have pandemic. You have Russia-Ukraine war. You have the fuel that rose. And now you have the inflation that's around the corner. So when you would ask us, okay, what does that predict us towards the future? I'd say if you look today and you look at the transatlantic, so the U.S. market, so Europe, U.S., then we see that there is pressure on the rates, okay? We also see that if you -- passenger wise, there is an increase. So people are traveling, but it's all leisure travel. People are traveling to Florida or to Las Vegas or to San Diego remains to be seen how that is going to evolve once the summer is over, okay? If you look at Asia, you all know that if you look at Japan, Korea, Taiwan, heavily congested markets. You look at Asia today, and you -- again, Shanghai, for example, there is again an increase in COVID cases. So everybody is looking at that. Does that also mean there's going to be again restrictions being put down on air freight or on ocean freight or on any transport mode that comes around, right? So Valentina, please go on to the next slide. So what can we expect for Q3 and Q4, right? So I think that's the main question that's being asked. Now geopolitical issues continue. We don't see any resolvement pretty soon about Russia and Ukraine, right? The fuel cost, exactly the same. We don't see it going down anytime soon. Travel by itself, leisure travel, yes. Business travel? And why is business travel so important for airlines? If you look at the revenue stream for an airline, 20% today comes out of the cargo, okay, in general, okay? And 80% comes out of passengers. Passengers are still not flying as they used to. And there also, the prediction is that it's going to take us years before it goes back to the same level. There is an environmental shift. So everybody is talking about sustainability. Now what does that mean? And at what expense, right? Different airline partners we talk to are at different levels. Some are really well advanced in the sustainability. Others, they have no clue what they're talking about, okay? There is also a difference in the cost that comes with it. So there, the question is, our customers, your customers, are they willing to improve and pay for sustainability, okay? Labor challenges, I explained that. Today, a big part of the job that Ruairi, Robert and myself have -- is looking at contingency. What if an airport goes on strike? What if there is less capacity available because of labor shortages in Frankfurt, in Milan, in Paris, in Amsterdam, in the bigger airports? How can we go around that? And how can we make a contingency so that you are safeguarded, right, that we give you continuous service at -- if it's possible at all, at a set rate? COVID, in talking to our Asian colleagues also there, I think there is a big difference. You look at COVID and the restrictions. Europe has become, at the moment, and I'm touching -- has become pretty, I would say, neglectable. The cases are rising again, but no government is putting extra restrictions in place. If you look at China, totally different story, okay? There, you see an outbreak, and the government will put immediately restrictions into place. So how is that going to play? Let's wait and see how that goes. How is the ocean market going to evolve? I think that's also important for you all. I think most of our customers that we talk to say air freight, Philip, air freight, we don't have a forecast for air freight because it's not our preferred services transport mode, okay? So we like to do ocean. Now how is ocean going to evolve? Is it going to stay as busy as it is? Are the rates going to stay high? Or is there going to be an impact? And are you going to see that reflecting down in air freight as well? And how is the supply chain going to adjust? When you look or when we talk to, I would say, 90% of our customers, very seldom do we have a customer that's going out for a 12-month RFQ. That's rare nowadays. They have 3-month validity, 6-month validity. 12 months, doable? Absolutely. But I'd say it's almost coherent with giving you 12-month rates and allocation if you have proper forecast. And with that, if you have a good forecast, you can lock yourself in. What we do see nowadays is that when you have shipments that are substantial in size, just for an example, if you have a 5-tonne shipment and if the 5 tonnes is really urgently needed at a destination, and if it's critical, that -- then our suggestion would be split up that shipment. Don't make a 1 tonne -- a 1 shipment of 5 tonne, but make 2 invoices and give us the ability to have 2 different shipments. We can do some risk mitigation for you. We can book it on different airlines, still maintaining the same transit time. So that means if something would go wrong or if there would be a delay, then at least you have part of your shipment arriving in time. Now I also understand that, that is easier said than done. Not all customers are able to do this internally from compliance reason or purely because of ease. But again, think about it and think about how we need to change and how we can help you giving you a reliable service.

Go to the next slide, please. I see there is also a question popped in the chat box. In general, when negotiated, what is the rate validity given by airlines these days? So a regular business for one year. Well, if you have a regular business for one year, as I alluded to in the beginning, a regular business with a pretty good forecast, if you say like, hey, every week, we have this amount of freight, or every month, we have this amount of freight, you can get a 12-month validity. That's not an issue. The only issue that we still have today is when you don't have a forecast. So if you would tell us like, hey, on a yearly basis, I have 100 tonnes to ship to a certain destination, but it can be that it's one month, nothing in the other months, 50 tonnes, yes, then that becomes really difficult. Airlines are absolutely willing to negotiate in advance. That is not a problem whatsoever. Hey, I have a different question again. Considering the current challenges you are facing at the airports, as mentioned, sound a bit risky to split a 5-tonne urgent shipment? Well, it's true if what you say, if you look at it from a one airport point of view, now as you all know, as a forwarder, we work via different gateways, not only via different gateways, but we also have the ability to ship direct. So we have Milan as a gateway. We have Frankfurt as a gateway. We have Amsterdam as a gateway. And we have London as a gateway. That doesn't mean that we cannot ship direct out of Madrid, Bucharest, Paris, wherever the customer is located. What we try to do -- so an airport that is at risk, how do we monitor that? Okay. We see it at dwell times. And with -- dwell times would mean if freight get stuck at an airport for X amount of time, then it's considered as a backlog, right? Now the moment we see the light going orange, then we know, okay, we have a problem here. And we need to start looking for various solutions. Now how do -- does a forwarder -- how do we do procurement for you? When a forwarder does procurement, we procure most of the time almost a year in advance. So our yearly procurement is done, just to give you a broad idea, goes into effect the 1st of April and ends on the 31st of March next year. That is for 60% of our global capacity which we actually handle today. We lock that in with the airlines. That means 60% is locked in. So X amount is locked in via it in Milan or via Frankfurt. If we notice that one of these airports, again, goes into difficulties, then we need to take that away and need to work via different airport. And that's the contingency is all about. Now if you have 5-tonne shipments, then I'll stop that. If you have a 5-tonne shipment and something happens to your 5-tonne shipment as a whole because of market circumstances, you are stuck. And you are stuck for 1 day, 2 days, 3 days, depending on how bad it is and how well the airline is performing or the ground handler, okay? With the current -- another question, with the current rate volatility, how are you managing your GCPA volumes? These have been against the forecast for a specific customer base. Well, as I explained, 100% of our freight, 60% is negotiated into the GCPA volumes. So that means we have 40% left. So we don't put all our eggs in one basket. If we would put 100% of the volume that we handle into the GCPA discussions, we would be stuck as well. Are you experiencing lead time increase due to COVID outbreaks? In which regions mainly? No. Not at the moment. I would say there was -- Shanghai was difficult, but is opening up again. But then there are parts of, again, outbreaks. Beijing became difficult. You looked at Hong Kong at a certain moment, where you had delays, but that's opening up again. So it all has to do with certain pockets of regions there, you see, but we only noticed that in Asia for the moment. When you go U.S., when you go Middle East, when you go India, when you go Africa, there, we don't encounter any delays due to COVID. So I hope that answers a little bit of your question. And if not, please keep on asking. Just to give you an idea because that was also one of the questions from Lauren in regards to the GCPA. So what we've done? So when we look ourselves in for 60% of our capacity, just to make sure that we can service our customers, we also look for supplemental capacity, okay? Because we have -- so if you consider the freight that we handle as 100%, then every business unit, every company, you yourself, your senior management is expecting growth. It's no different for Expeditors. We have what we call the business that we handle today being 100%, but then we expect growth. And for that growth, we seek supplemental capacity, supplemental capacity. So we are not stuck on the now-a-day market. We have everything in our own control. And this is just purely an example. So Expeditors has 2 charters a week, round trip between Asia and Europe. That's an extra 200 tonnes one way. So Europe, Asia, 200 tonnes; Asia, Europe, also 200 tonnes. So that is supplemental capacity that we buy and lock ourselves into, also until the 31st of March next year, enable to offer our customers consistency. Now we can play with this, okay? To give you an example, we can purely use it for new business. But we can also use it if an airline or an airport goes into difficulties. So again, if Frankfurt or Milan has difficulties on the ground, then we go to a different -- or we can service you through these charters that are ours and that go to Liege, which is a smaller airport, as you all know. And that is purely because of contingency reasons and to cope with growth or with unforeseen circumstances as long as we can keep on servicing you.

Philip, the answer for question that -- from Eva. So regarding airlines billing and actually the rates for 12-month validity, how do you secure the airline doesn't claim force majeure the new situation, of course? So even in that situation, we can get rates locked in at current rate levels -- current market rate levels, no problem for 12 months. What we can't do is predict market conditions. And if the airline continues to fly, we do a very good job of making sure the carrier honors those rates and capacity for us. If, for some reason, they kind of fly to that destination or the air space closes around that destination, then of course, there's not a lot we can do regarding a force majeure situation. But if the carrier continues to fly, we always do a great job of keeping the carrier to their commitment, in the same way as we keep our commitment to the carrier to turn up with the business every week. So that's how we would deal with the 12-month validity on rates.

There's another question from Bram. So you mentioned the rate developments over the last 3 years and you mentioned the market outlook for the next 2 quarters. What if you combine these 2, how will rates develop in 2023? I wish I had the absolute -- the golden answer here. That's a little bit -- that's what we're all expecting. Now do we -- or personally, okay, if I look at it personally, do we expect the market to soften up? I truly hope so. Will it go back to the levels it was pre-pandemic? I don't believe so. It will also depend on which lane segments we are talking about. We definitely see or we definitely expect a quicker softening towards the U.S. Then we see a softening towards Asia, okay? Now again, today, what we do notice is that there is pressure on the rates going into the U.S. and there is pressure on rates out of Asia. So those are 2 lanes where I go like, there is pressure now. Again, if tomorrow, for example, just to give you an example, Bram, if tomorrow, the ban on Russia gets lifted, okay, which mean that the Russian carriers, being AirBridge, could reinstall all their freighters, that would have an immediate impact on the whole market. Not only on allocation that comes available, but it would also push rates down. Now if the ban is going to stay and the war is going to stay, that also means that the way they fly today, it needs to be around Russia, which is 2 hours longer, extra fuel, less belly load capacity. So then the rates remain a little bit impacted. And we've clearly seen that. You haven't seen the rates drop any way outbound into Asia, U.S. yet. Now again, personally, I do foresee that rates in '23 will soften. The question is, when is that going to be? Is that going to be Q2, Q3? I hope we can give you the good news. I truly hope so. Okay. So Valentina, maybe next slide. Thank you. Herewith -- and just a summary of what Robert, Ruairi and myself talked about. We divided it into supply chain demand, perform, spend and plan. It's just a summary. It relates back to the whole discussion. And hopefully, this can be useful for yourself. When we talk to customers and our ask is always the same. Give us your data, give us your forecast, so we can lock yourself in, so we can -- so we can give you the service that you're looking for. And 90% -- 95% of the time, the answer has always been, Philip, we can't give you a forecast. Even if I ask, okay, but if you look at your historical data, if you look over the past 5 years, even if possible, on how you ship, we understand that you'll have ups and downs in that markets where you shipped to in the past might not be in use today anymore. But if you have an important market or an important customer at a certain destination, even if you lock yourself in for half of the freight what we used to have done, that would be a big benefit for everybody, for the airline, for us and for yourself, okay? The difficulty today is, and it's kind of -- when a customer comes to me and says like, hey, Philip, I got 30 cube every week, and you need to give me the space. Every week, I got 30 cube, let's say, to Singapore, okay? If I would have the 30 cube available today just to give it to you, okay? I wonder about our procurement. I would not be happy. I would talk to Robert and Ruairi and I'd say, how come we have 30 cube available because that would also mean that we are paying for 30 cube which hasn't been filled. So do we have availability on the lanes and the allocations that we've negotiated with airlines? Absolutely. Do we have, like I explained, supplemental capacity available? Absolutely. That's a risk investment that we as a forwarder do, okay? But in order to be better at it and to serve you all better, I think the discussion should be also like, okay, what can we do to help you? Is there a change in the way that you're doing procurement? Is there a change in the way that you're forecasting certain transport modes? Is there a way that you're going to step away promotion and you want to do it air or from air to ocean? So what can we do better to help you? Because at the end of the day, and we truly understand that, when your customers looks at you, when you use air freight, the customer will not point a finger at Expeditors if anything goes wrong. The customer will point a finger at yourselves. So we understand that Expeditors becomes an extension of your company. We become one if we serve you. And we just want to make sure that we serve you according to your expectations and to your requests and that we serve it in the best ability. And that means, again, good transit times, good solid rates, and if possible, lock yourself in and ourselves in for the longer term. So you have that visibility, not only for customer-wise, but also for your budgets. Any other questions? Okay. Imre, I think it's yours.

Thank you, Philip. Yes, I would like to introduce shortly as well. So my name is Imre Turcsik, I'm the District Sales Manager of Expeditors' Hungary Budapest office. And joined the company in year 2000, not 2020, sorry, for mistyping. And I have a [indiscernible] in Budapest office. I started at the air export department as an exporter guy. Later, I became a local account manager, key account manager position. And around 13 years ago, I started to be DSE, District Sales Executive. And 3 years ago, I was appointed to the Sales Manager for Expeditors. So first of all, I would like to thank everybody to participate on this webinar. And I would like to share some thoughts about it. So when I started to work for Expeditors 22 years ago, I've heard a very, very interesting sentence from one of our founders, Mr. Peter Rose. The sentence was this, we are not in the shipping business, we are in the information business. As I mentioned to you it happened really a long time ago, but it is still our company description. But today, and I guess all of the webinars in the past are a great example, how serious did we take it. I don't think that I should highlight why it became extremely important in this crazy days. But Expeditors is unfortunately not a [ Fortune direct ] company, and we have really no crystal balls. What we can -- how we can support our customers is the market intelligence and more than 40 years business experience that we gained in the last few years. We believe that this kind of supports extra mile or we can call it anyhow as we want is extremely important to build a strong relationship with our partners. Expeditors is going to organize more webinars this year in different kind of topics. So your feedbacks are very important to us. We would like to ask you to send your comments and your thoughts about these webinars by the survey that we are going to share with you at the end of this call. So finally, I would like to thank you again to participate on the webinar. And now I can see that we have got some time, nearly 20 minutes. So if there is any further questions, please, as Philip mentioned, don't be shy, and let's go, and please ask us, and we are going to answer, too. Thank you.

Seems like no more questions. Well, I -- first of all, again, I want to thank everybody for joining this webinar. It's been our pleasure. And I just want to make sure that you have an open-door policy. So Alessandro, is it possible to have the slides? Yes. If you fill in the survey, you can ask to get the slides, and you will get them into PDF form. So that was good. So again, thank you very much. Truly appreciate it. If any questions, just make sure you would have an open-door policy at all times, which means that feel free to reach out to Robert, Ruairi or myself or via the people that you know at Expeditors. Just pop out any question, even it's just information wise or you need something extra for your senior management to present. Most of the time we have those presentations available or the info that you are looking for. So never hesitate to ask, okay? And I thank you for the trust shown in Expeditors for everybody. And I wish you all a pleasant day.

Thank you, everybody.

Thank you.