Transportation and logistics companies have witnessed an increased demand for their services globally since the onset of the pandemic, as people switched to online shopping in the wake of social distancing restrictions and lockdowns.
This is evident from the SPDR S&P Transportation ETF’s (AMEX: XTN) 25.5% gains over the past year, outperforming the benchmark S&P 500 index’s 22.29% returns. Popular logistics stock United Parcel Service (NYSE: UPS) gained 37.21% over the past year, while FedEx Corporation (NYSE: FDX) surged 7.3% over this period.
As the supply chain disruptions continue amid rising coronavirus cases and port delays, logistics companies are expected to generate robust profits as the shipping fees increase. Here’s what will shape their performance in the upcoming quarters:
Rising Covid-19 Cases
The rapid spread of the Omicron coronavirus variant might result in the re-imposition of restrictions regarding in-person shopping once again. Countries around the world have renewed lockdowns and social distancing restrictions to curb the spread of the highly contagious covid-19 variant. As a result, people are expected to resort to online shopping for daily essentials instead of going to the nearest convenience stores. Thus, popular logistics companies have announced a favorable outlook for 2022, with their revenues and profit margins projected to increase substantially in the upcoming quarters.
Port Delays and Increasing Shipping Fees
Due to the pandemic-driven restrictions, major ports across the globe are delaying the entry of international cargo carriers. In addition, the ongoing supply chain disruptions have caused shipping rates to increase globally. A recent report from the United Nations Conference on Trade & Development (UNCTAD) indicates that consumer prices can rise by up to 1.5% in 2022 due to increased container shipping fees. Global import price levels could increase by 11% due to the freight rate surge, while consumer prices in the United States alone could increase by 1.2%.
Shipping Container shortage
The port delays and increased sea freight have resulted in an unprecedented shipping container shortage worldwide. As of late October 2021, 600 freight-laden ships have been stuck in docks. In addition, twin ports in California have reported severe container backlogs. The Long Beach and Los Angeles ports account for 40% of the total sea freight entering the country. As the port delays continue with major countries announcing new quarantine requirements, the shipping containers are expected to remain in short supply in the upcoming months. Consequently, logistics companies are expected to hike their fees to account for the increased shipping costs in the near term.
Rising Consumer Spending
Rising wages and record low unemployment rates have caused consumer spending to increase manifold over the past few months, driving the demand for logistics and transportation services. Personal consumption expenditures increased 5.7% year-over-year in November 2021, the fastest increase since 1982. Retail sales increased 1.7% in October last year, beating the consensus estimates.
Despite the surging inflation levels and economic uncertainty, consumer confidence has remained high, driving the demand for logistics services. Moreover, as most people opt for e-commerce shopping in the upcoming months due to the social distancing and mask mandates and conveniences of online shopping, the demand for logistics services is expected to remain high in the months to come.
Bottom Line
To improve their performance and efficiency amid rising demand, logistics companies have been integrating artificial intelligence to track their packages better. In addition, many companies are currently devising drone-based delivery systems. Given their increased mobility and lower costs, leading logistics companies are expected to adopt drone-based delivery systems at least partly this year.
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