As factories across China continue to come on line in the coming weeks after a month-long shutdown from the COVID-19 coronavirus outbreak, the manufacturing sector is scrambling to get parts across the Pacific Ocean.
Commercial flights—which carry 40 percent to 50 percent of all air freight from China—remain grounded and unable to meet the demands of the sector. But Kalitta Air, in Ypsilanti Township, Mich., is waiting in the wings and may see a boon in the virus' wake.
The coronavirus outbreak slammed China right at the Chinese Lunar New Year, when most automotive and manufacturing plants shut down between Jan. 24 and Feb. 2. But the government-mandated quarantines have lifted in most of China's provinces and some production has resumed, albeit not at full capacity. But with typical ocean freight taking six to eight weeks to reach U.S. shores on freighters, many companies are using costly expedited air freight.
"There is going to be lots of demand," said Brandon Fried, executive director of the Washington D.C.-based Air Forwarders Association. "Shippers are not going to have time for the next ocean freighter sailing out. They are going to run out to the airport to look for air cargo space."
Kalitta's fleet of 24 Boeing 747-400s, nine Boeing 767-300s and three 777 freighters provides on-demand freight and charter services and does work for the U.S. Postal Service and the U.S. Air Force as well as the auto sector.
Representatives, including CEO Conrad "Connie" Kalitta, did not respond to several emails and calls seeking comment.
"We see this whenever there are supply chain stoppages," Fried said. "Now all this cargo is just stacking up at the ports and will continue to, but when this situation subsides there won't be enough vessels to haul all that cargo. They will need to make up for lost time."
Air freight prices already have spiked from increased demand, rising to $3 per pound from $1.65 per pound in the last month, American Shipper reported on Feb. 25.
"You think you've seen (price) increases now, just wait for a few more weeks as capacity becomes rarer and rarer," Fried said.
Prices are expected to reach $4.54 per pound in the coming weeks.
Auto makers and suppliers are reeling, and they are having to make tough decisions, said Ann Marie Uetz, partner at Foley & Lardner L.L.P. in Detroit.
"Right now, they are all focusing on keeping the profitable lines running," Uetz said. "(General Motors) is going to continue to build trucks. They are going to keep those lines running at the expense of other lines, like maybe the Chevy Cruze. That's the planning going on right now."
Representatives from GM declined to confirm whether they are using expedited air freight or provide any specifics on how they are mitigating the effects of the outbreak.
Moline, Ill.-based Deere & Co., the maker of John Deere agricultural equipment, told investors on Feb. 21 that it anticipated spending $40 million on expedited air freight on exporting out of China in the first quarter of 2020.
But the automotive sector is expected to pay much more.
The price increases are a model of simple supply and demand. Demand is rising because if auto suppliers don't get parts to factories, those factories shutter and supply is constrained from the lack of available commercial passenger wide body aircraft.
On Jan. 31, Delta Air Lines, the dominant carrier at Detroit Metropolitan Airport, suspended flights between China and the U.S. until the end of April to stymie potential transmission of the coronavirus, only hours after President Trump signed an executive order temporarily barring entry to the U.S. by foreign nationals at risk of transmitting the virus. Competitors United Airlines and American Airlines and nearly a dozen foreign carriers quickly followed.
These airlines make not an insignificant amount of money by stuffing air freight cargo, such as car parts, next to passenger luggage in the cargo hold of commercial flights.
Delta Air Lines, for instance, recorded cargo revenue of $753 million in 2019 out of its overall $42.3 billion in revenue.
"These wide body aircraft ... a 777 is like a freighter with seats on top," Fried said. "These airlines make a lot of money (from freight). The discontinuance of those flights is going to hit their bottom line in a big way."
The NYSE Arca Airline Index, which tracks 16 air line carriers in North America, Latin America and budget carrier Ryanair, dropped more than 15 percent Feb 24-26. American Airlines (NASDAQ: AAL) shares closed Wednesday at $22.31, its lowest share price since before its 2013 merger with US Airways and United Airlines. Delta (NYSE: DAL) shares began slipping on Feb. 21, dropping more than 16 percent by Feb. 27.
"Every day we think we could be near a bottom, and every day we are not," Helane Becker, an airline analyst for investment bank Cowen Inc., said in a research note last week.
Kalitta, however, is likely flying high on new contracts, Fried said.
"Kalitta is not a scheduled carrier like DHL or UPS who have to worry about allegiances and contracts," Fried said. "You hire Kalitta, tell them what the mission is and they show up with a crew and a plane. This is the perfect application for them. It's a very large cargo hauling business and a perfect example of a company that is benefiting wildly from this."
Kalitta already has experience dealing with this particular coronavirus.
The company was contracted by the U.S. State Department to evacuate 201 Americans on Jan. 28 from the epicenter of the outbreak in Wuhan, China.
After leaving Wuhan, the Kalitta Boeing 747 landed at the Ted Stevens Anchorage International Airport in Alaska where passengers were screened for symptoms of the deadly virus, the Anchorage Daily News reported. All of the passengers passed the screening and the plane later departed to March Air Reserve Base near Los Angeles.
Last month, a Kalitta 747 evacuated 338 Americans from a Diamond Princess cruise ship that was marooned offshore at a port in Japan for several weeks.