Embracing digital is a path to recovery for aviation and logistics in Alberta
By ATB Financial 10 March 2021 6 min read
In the past two years, we have seen the growth of digitization, the expansion of supply chains and the rise of environmental, social and governance awareness. For aviation and logistics leaders in Alberta, these are some of the key indicators they must pay attention to as the province moves into recovery from the COVID-19 pandemic, says Chris Murray, Managing Director, Institutional Equity Research, ATB Capital Markets.
With economic uncertainty continuing throughout Alberta’s economy, ATB and MNP have partnered in a comprehensive content series to deepen insights around the challenges and opportunities of recovery first discussed at The Alberta Economic Recovery Summit. The series will share local perspectives on how to address challenges across key sectors, including agriculture, aviation and logistics, energy and cleantech, financial services, technology and data, tourism, petrochemicals and aviation and logistics. Today we examine the forces shaping the future of the aviation and logistics sectors.
The pent up demand for consumer travel
Without a doubt, the global pandemic has been a tremendous blow to Canada’s airline industry. Recently, former CEO of Air Canada, Calin Rovinescu described last year as “the bleakest year in the history of commercial aviation.”
While the larger tier one carriers—such as WestJet and Air Canada—have been able to raise capital in public markets, there is a growing urgency for direct provincial and federal financial support, says Murray. Continued travel restrictions for international destinations and talk of travel limitations within Canada is adding further financial pressure on airlines.
“The pandemic has done a lot of damage to balance sheets. There's no way around it. So the question is how to get things restarted? When can companies actually start serving the biggest demand driver, which is consumers,” he says. Government financial support will be part of the solution and the other is a successful vaccination rollout effort.
“It all comes back to consumer behaviour and vaccines. When you get right down to it, until we really get widespread vaccinations across the country, we’re not going to see travel come back in a big way,” says Murray.
The good news is that some studies suggest there is a pent up demand for travel after months of lockdown.
"The first thing everybody is going to do after they get vaccinated is head to the airport. There is tremendous demand for wanting to get back out and go travelling. Of course, it has to be balanced with safety requirements going forward."
Managing Director, Institutional Equity Research, ATB Capital Markets
Even though the short-term outlook for the airline industry remains uncertain, the indicators of coming government financial support and widespread vaccinations by September of 2021 are positive.
E-commerce accelerating the demand for cargo space
“E-commerce was a big surprise for 2020. In Q2 2020, e-commerce spiked from about 4% or 5% of total retail sales to around 13% or 14% in Canada. Those numbers have started to come back down, but e-commerce accounted for 8.5% of all retail sales in 2020,” says Murray. A recent report from investment firm MGroup expects e-commerce to comprise about 25% of global retail sales by 2024.
Canadians of all demographics are getting comfortable with shopping online. Even retail sectors that were historically entrenched in brick and mortar shopping—like grocery or clothing—saw people buying online like never before.
“E-commerce is one of those growth engines. We’re really expecting to see e-commerce growth double between now and 2020 in Canada,” says Murray. “For industry leaders, how do you address your digital infrastructure? How does this change how you deal with your supply chains?”
When it comes to shipping products purchased online, a portion of the air freight capacity used to move products across borders comes from passenger aircrafts. The drop in consumer flights means a reduction in freight capacity at the exact time demand is on the rise.
As a result, says Murray, some airlines have started to build up the cargo side of their businesses. Carjojet recently raised $365 million to expand its fleet and routes to capitalize on the growth opportunity in domestic and international air freight.
Digital is table stakes now
E-commerce is only one example of the disruption digital technology is bringing throughout every sector of the economy, including aviation and logistics. Digital tech—from mobile apps to engineering to artificial intelligence—is not new, but the pandemic has accelerated the use of tech to both make businesses more financially sustainable and keep up with consumer expectations.
“For anyone who has a consumer-facing business, you better be prepared to deal with digital and the changes it brings. Digital tech is not just for big business. It is table stakes and the trick is you have to go do it now,” says Murray.
One example is Air Canada’s recent partnership with IBM to update the Aeroplan loyalty program to create a better mobile app experience and greater personalization for members. Murray says technology like artificial intelligence (AI) and machine learning is already being deployed by industry leaders to deepen understanding of consumers. “The use of AI can be as simple as learning to craft the perfect email offer for individual customers to drive sales and then tailoring those emails on the fly to keep sending the right message to drive engagement,” he says.
Aside from use cases in marketing, digital tech is proliferating in the manufacturing of airplanes to improve fuel efficiency, improve safety, better manage maintenance and repairs and drive environmental targets.
Labour shortage is not where expected
The Alberta Economic Recovery Summit, leaders identified labour as one of the challenges to recovery for the aviation and logistics industry.
Murray says there are two sides to the labour question for the sector.
First, there will be a need for labour to support the rise of ecommerce. “There is going to be increasing demand for jobs doing fulfillment, last-mile delivery, and other roles related to ecommerce,” he says. For example, in late 2020 Walmart Canada announced it would be hiring 10,000 people to support its booming e-commerce division.
Second, he says, is the expected shortage of pilots, flight attendants, and airline mechanics will not happen as quickly as anticipated back in 2019. “One of the questions we asked a lot heading into 2020 was can the airline industry maintain its growth without more talent. Now, there are a lot of pilots, flight attendants and others available. They are going to be there for the next five or six years, so the labour issue is now an opportunity,” says Murray.
ESG should not be ignored
Alongside the rise of digital, aviation and logistics leaders must focus on environmental, social and governance (ESG) policies. When thinking about choices and growth opportunities coming out of the recovery, part of the decision is building these systems and industries for the next generation, he says.
“If you have any sort of public market exposure, you have to be prepared to be able to defend your company and your practices from an ESG perspective. And consumers now have a tendency to gravitate to brands that have a positive ESG perception around them too,” says Murray.
One area within the logistics industry that is likely to benefit from a desire for greater ESG practices is ground vehicles, he says. There is a really big move to electrification for deliveries within cities. For example, Amazon says it will have 10,000 electric vehicles doing deliveries in cities by 2022. “It’s not a joke. It’s coming and companies need to prepare,” he says.
Where should executives focus?
Murray says executives should focus first on protecting their core businesses through the short-term challenges related to COVID-19. Second, they should ask themselves how can they apply these digital technologies to their businesses right now.
“Where is your business case? One of the things that we’re expecting is we are going to get past this pandemic. But recognize that consumer behaviour has changed around digital,” he says. “So when demand comes back—and it’s going to come back a lot faster than anyone thinks—how are you using digital to accelerate your recovery?”