The FDA and British government approvals of Covid-19 vaccines marks the beginning for the upcoming Herculean logistical effort required to inoculate billions of citizens worldwide. For this reason a robust global supply chain will be required at each stage from manufacturing to final delivery.
This global inoculation effort is unprecedented. Past inoculation efforts have been country-specific or regional to combat epidemics, not pandemics, and not without its share of complexities and inevitable difficulties. Even if one uses those earlier efforts as operational templates, the sheer depth & breadth of the forthcoming global distribution effort is far more overwhelming logistically, economically and politically. It’s one thing to have an approved and safe product, it’s another to manufacture it to scale and safely distribute it globally requiring the most stringent requirements.
Just imagine trying to supply vaccines to one city, akin to the 1947 Berlin airlift which took place over many months and saved German citizens from starvation. A similar logistical effort but on a global scale will be required to save the world from economic collapse. For this reason this is why air cargo is a key component in the critical path of this supply chain/distribution process.
Investment Opportunities in Air Cargo Transport
The major airlines will play a major role in the transport of vaccines worldwide and investment in any specific airline stock will provide a good return on investment based on a growing and long-term sustained demand for worldwide distribution. The following are the types of air companies that will literally do the heavy-lifting:
The following three major US airlines at the forefront to transport the vaccine worldwide are:
1. American Airlines [NASDQ: AAL]
2. United Airlines [NASDQ: UAL]
3. Delta Airlines [NYSE: DAL]
The three major airfreight cargo companies who already specialize in transporting pharmaceuticals but now must do it at scale as a priority are:
1. Fedex [NYSE: FDX]
2. UPS [NYSE: UPS]
3. DHL [OTC MKTS: DPSGY]
My investment preference is Air Transport Services Group (ATSG: NASDAQ) because of their broad-based worldwide provider of air cargo. According to their website, “ATSG is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft.” Their services encompass four tenets: (1) leasing, (2) operating, (3) maintenance, repair and overhaul and (4) flight & ground support. Furthermore because of their wide range of services they have more aviation logistic partners.
However the following are present-day aviation logistical challenges against the background of a strong demand that far exceeds supply:
Air Cargo Freighter Shortage
Securing the numerous mothballed aircraft configured and certified for air cargo (cargo freighters) is easier said than done. Even if all the available air cargo freighters were in operation right now, their numbers fall far short of what is required for the global transport of the vaccine.
To offset this shortage air companies are converting passenger jets to cargo freighters, the best suited being wide-bodied, long haul models. One such example is the conversion of the new but economically disappointing passenger A-380 which has a 50-ton cargo capacity.
Furthermore these large aircraft can only fulfill cargo flights between major hubs with long runways that can handle this type aircraft. Smaller air cargo aircraft will be required to transport the vaccine to secondary urban areas, non-urban areas and more remote areas.
Qualified Pilot Shortage
Another challenge is the severe shortage of pilots. Because of lockdowns and an almost cessation of air travel, many pilots were either furloughed, let go (younger pilots) or offered early retirement packages (senior pilots).
The next step is to (re)hire pilots who are experienced flying air cargo freighters and train those who haven’t. Unlike a truck driver who can learn quickly on a different model truck without passing a regulatory-mandated check ride, pilots must be certified on the particular type of air cargo aircraft. The shortage of air cargo freighters and qualified/certified pilots compounds the problem to distribute the vaccine at scale.
The following chart entitled Thousands of US Pilots Face Furlough This Fall provided by CBS News and presented by Statista, an online statistical firm, highlights the challenge of pilot callbacks to meet the surge in demand for vaccine air delivery. What should not be overlooked are the critical support services required including maintenance personnel who are also on furlough.
Stress Test for Global Supply Chain
Air cargo comprises less than one percent of transported goods with pharmaceuticals being one of those goods that are usually air shipped. Pharmaceutical companies have established supply chains but they are not designed for mass global distribution. For this reason its architectural structure must be heavily modified, expanded and made a priority over the shipment of regular prescription drugs such as those for high cholesterol, high blood pressure, and anti-depressants.
Early Pandemic-Related Company Investment Recommendations
With respect to pandemic-related products & services and stock recommended track record, my earlier SA article entitled SA article 25 March 2020 entitled USA: A Brutal Coronavirus Economic Reset published 25 March 2020, I was extremely bullish and recommended a strong buy for Moderna Inc. [MRNA: NASDAQ] in the biotech section who had just begun developing a vaccine. Present-day their vaccine is on the cusp of FDA approval and their stock price has exploded from $27.13 on 25 March 2020 (the publication date of my article) to $125.73 on 22 December 2020.
The logistics and air transport are unlikely to provide the explosive returns as Moderna, I believe that it’s immediate to long-term prospects for steady growth are excellent.
Because of the aforementioned aviation logistical challenges I forecast that these air transport equipment and professional services shortages will push back the overly ambitious mass distribution and inoculation schedule well into the late summer and fall of 2021. I project that this transportation demand will continue unabated well into 2022 particularly to lesser developed countries and geographically difficult to reach regions.
Ironically the approval of additional vaccines in late winter and spring will not ease the distribution problem because they will offset the difficulties in the mass production of upcoming newly-approved vaccines. This will create an even larger ready-to-ship inventory which will outstrip the increased availability of air cargo transport equipment and professional services not to mention the stockpiling of vaccines. For this reason the need for air cargo transport services will continue well into 2022.
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The Cerulean Council is a NYC-based think-tank that provides prescient, beyond-the-horizon, contrarian perspectives and risk assessments on geopolitical dynamics and global urban security.