The airfreight industry is under pressure from rising costs and shrinking profit margins. Airfreight companies are being squeezed by the ongoing rise in prices for fuel, labor, and other operational costs.
The air freight is a cost that has been increasing for many years. This has led to a squeeze on the finances of finance chiefs around the world, as they have to deal with the additional costs that come from increased airfreight rates.
In order to satisfy high customer demand despite continuing manufacturing delays, retail finance executives are paying more to transport products by air rather than by sea.
Backlogs at global shipping ports, as well as local lockdown measures in countries like Vietnam, where the Delta-variant is on the rise, are pushing store executives to rush shipments that were previously scheduled for ocean freight. Alternative means of transportation are more expensive, increasing inflationary pressures that finance executives are already dealing with.
According to Clive Data Services, an Amsterdam-based monitoring company, aviation freight rates have risen as airlines continue to fly fewer foreign passenger flights than before the epidemic. Passenger flights are used by logistics firms to transport part of their customers’ products.
VF Chief Financial Officer Matt Puckett is a writer.
VF Corporation photo
According to Clive Data Services, the worldwide average cost for air cargo—which includes both passenger and freight flights—was $3.39 per kilogram this month, up 6% from January and 14% from a year ago. As a consequence of supply-chain constraints across the world, container transportation costs have risen in recent months.
Chief Financial Officer Matt Puckett said VF Corp., which owns clothing brands including North Face, Vans, and Supreme, expects to spend an extra $35 million on airfreight this fiscal year compared to the previous fiscal, or $25 million more than it had budgeted.
About a quarter of the products produced by the Denver-based business are made in Vietnam, where manufacturing facilities have been temporarily shut down and employees are unable to get to work owing to local transit restrictions. Airfreight can help mitigate some of the delays caused by the lockdown orders by saving time on delivery.
To meet consumer demand, VF decided to pay more for airfreight, which is offered by logistics companies such as FedEx Corp. and United Parcel Service Inc. VF typically uses ocean freight to ship its goods from the region, but decided to pay more for airfreight, which is offered by logistics companies such as FedEx Corp. and United Parcel Service Inc. According to Clive Data Services, cargo transportation rates from Southeast Asia to the United States have increased by 24% in the last year, reaching $7.66 per kilogram.
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“In the near run, we’ll have some higher product prices to ensure we can obtain what we need,” Mr. Puckett said. VF earned $324.2 million in the second quarter of this year, compared to a loss of $285.6 million the year before.
According to Ike Boruchow, a managing director at financial company Wells Fargo Securities LLC, other retail businesses are choosing for airfreight rather than waiting for maritime goods. He predicts that some of these shops will raise prices in the coming months to compensate for the increased delivery expenses.
Carter’s Inc., a children’s apparel company, stated on July 30 that it is committing “many years’ worth” of airfreight expenditure in response to manufacturing delays in Asia. A request for comment from the business was not immediately returned.
Mr. Puckett said that VF intends to increase pricing for new goods in its 2022 product lines. He declined to give details, but said the hikes would be approximately in line with inflation.
Farfetch Ltd., a premium retailer, has chosen not to raise prices in order to attract more consumers, according to Chief Financial Officer Elliot Jordan. Higher shipping and airfreight expenses have eroded the company’s profits, with gross profit margins in its online marketplace falling to 53 percent from 55 percent a year ago in the quarter ended June 30. “Paying for shipping is a significant hardship for consumers, so we absorb part of it and decrease our gross margins,” Mr. Jordan said.
Farfetch’s CFO, Elliot Jordan.
Farfetch’s marketplace is used by upscale brands and boutiques to sell directly to customers. The business takes a 30% share of the selling price and offers a variety of services, including delivery. According to Farfetch, over 85% of purchases are delivered worldwide from Europe.
The business is looking for methods to offset the cost increases, such as keeping additional goods for consumers at warehouses it leases from third-party logistics companies in countries such as the United States, the United Kingdom, Italy, Hong Kong, and mainland China. Mr. Jordan expressed his thoughts.
According to him, the goal of the approach is to decrease the distance that shipments must travel to reach consumers. According to him, Farfetch is trying to expand its stock in order to reduce the distance—and shipping costs—that deliveries and returns must traverse.
Farfetch anticipates shipping costs to continue to be a drag in the third quarter. The business wouldn’t say how much it spends on shipping or air freight.
Kristin Broughton can be reached at [email protected]
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