FedEx European hub changes to have major impact on airports and airlines

FedEx’s Jan. 19 announcement of plans to reduce its European workforce by between 5,500 and 6,300 by May 2023 has the potential to shake up the airport and contract flying landscapes. The changes would involve the implementation of a “dual hub” concept, which in plain English spells the beginning of the end for the current duplicate structure that exists in Paris and Liege. In the long term, this could well mean the end of services from Liege, with new services emerging in locations like Cologne or elsewhere. As the transition takes place, contract flying requirements will change in terms of operators, aircraft types and routes flown. In a nutshell, we expect the following results of the reduction during the next 18 to 30 months: Less activity at Liege; More activity in Paris, but the increase will be smaller than the decrease in Liege due to a change in aircraft mix. Turboprops and narrowbody flights could be replaced by larger aircraft; New intra-European feed and de-feed from Cologne, which is currently FedEx's second-largest intercontinental hub after Paris and before Liege and Stansted; A shift of some ASL contract flying from Liege to Paris, but more own-FedEx flying due to better traffic rights for U.S. carriers out of France compared to Belgium; and More opportunities for Germany based contract operators if more feed and de-feed opportunities from Cologne materialize. Background In its quarterly report of Dec. 17, 2020, FedEx stated that the cumulative costs of the TNT physical network integration were expected to total $1.7 billion by the time of completion in 2022. The $350-$575 million announced Jan. 19 would be in addition to this figure, bringing the total cost of integrating TNT to between $2.05-$2.275 billion. FedEx acquired TNT for $4.4 billion in 2016. While the job cuts will affect employees across Europe, Liege will be particularly hard hit with about 40% of the workforce, 671 out of 1700 employees, laid off. This number would not include ASL Airlines Belgium, which in 2019 employed 440 people. FedEx expects an 18-month consultation process. Overall, the plan is to have the whole process finished during the 2023 fiscal year, which ends in May 2023. Airport impact The main European air cargo hubs are: Leipzig (DHL), Cologne (UPS, DHL and FedEx), Liege (FedEx), Paris (FedEx) and East Midlands (DHL and UPS). FedEx has significant air operations out of three airport locations in Europe – Liege (LGG), Paris (CDG), Cologne (CGN) -- and further operations out of London Stansted (STN). All of these airports field intercontinental flights, but both Paris and Liege have large-scale intra-European operations. Currently, Paris has approximately 35 FedEx intercontinental flights per week, Cologne about 20, and Liege and Stansted have approximately 14 each. The chart below shows an overview of 2019 cargo movements for Liege, Paris and Cologne. Both Paris and Liege generated a similar number of cargo movements in 2019, but the aircraft mix at each one of these airports is different. At Liege narrowbody jets, primarily 737s, account for 60% of cargo flights, while in Paris narrowbodies – a more or less equal mix of 757s and 737s – account for 40% of movements. If the number of flights mirrors the planned 40% workforce reduction in Liege, then the airport stands to lose about a quarter of its total movements, about 6,400 flights, annually. While Liege has had strong growth in non-FedEx intercontinental services, it would take a lot of flights by Chinese e-commerce, Ethiopian and Qatar Airways to fill the gap. Shifting services from Liege would not necessarily lead to a commensurate increase in Paris. Together, Paris and Liege serve some 50 European destinations. There is a direct overlap on only about 25%-30% of routes, depending on the metrics applied. The interactive map below shows the routes that are served exclusively from Liege, Paris and those with services from both airports. One layer shows cargo aircraft movements in 2019 based on our European traffic database, and another shows FedEx operations for the week ended Jan. 17, the week prior to the announcement. Airports in red show direct routes served only out of LGG, blue only out of CDG, and yellow for routes served from both CDG and LGG. .embed-container {position: relative; padding-bottom: 80%; height: 0; max-width: 100%;} .embed-container iframe, .embed-container object, .embed-container iframe{position: absolute; top: 0; left: 0; width: 100%; height: 100%;} small{position: absolute; z-index: 40; bottom: 0; margin-bottom: -15px;} Overlap is not necessarily a bad thing and, with persistent labor issues in both France and Belgium, having redundancy makes good business sense, especially if volumes justify it. Geographically, Liege is a better location than Paris, but with less intercontinental connectivity than Paris or Cologne. This is important because international express yields are three to four times higher than on domestic or intra-regional shipments. It is also worth noting that, as a U.S. carrier, FedEx enjoys better traffic rights opportunities out of France and Germany than Belgium does. The figure below provides an overview of U.S. Open Skies Agreements with Cargo 5th and 7th Freedoms. In the case of the EU - the EU-US aviation agreement that was concluded over 10 years ago provided for unlimited 5th freedoms but also grandfathered existing 7th freedom rights that were available in previous Member State agreements with the US. The 5th Freedoms allow a carrier to serve markets outside its home country as a part of service that includes the home country, while 7th Freedoms allow stand-alone routes between third countries. However, better traffic rights also carry an obligation for FedEx to use its own aircraft and crews rather than subcontractors where traffic rights are available. Contract flying FedEx relies heavily on subcontracted airlift to serve intra-European markets. ASL Aviation Group is the biggest subcontractor, accounting for about 65%-70% of all intra-European flying. The remainder is either flown on FedEx metal or other subcontractors such as Swift/West Atlantic and Bluebird. FedEx signed a new 10-year agreement with ASL in 2019, so ASL is in a stronger position than other subcontractors. However, flying will need to shift between ASL entities, possibly in the order of 12-15 aircraft. ASL is an airline group with approximately 140 aircraft across multiple airlines, mainly in Europe. This includes ASL Airlines Belgium, previously TNT Airways; ASL Airlines Ireland, previously Air Contractors; ASL Airlines Hungary; ASL Airlines France; Safair of South Africa; and a stake in K-Mile in Thailand. ASL operates approximately 55 narrowbody aircraft in Europe, with FedEx as its largest client. The table below gives an overview of the three main airlines in Europe. In 2019, ASL Airlines Belgium accounted for 50% of group revenue. 2019 Revenue (% of Group)

2019 Cargo Revenue Employees (2019) European Narrowbody Jet Fleet (Dec 2020)

Comments ASL Aviation Holdings EUR 1118m

n.a.

55

Includes ASL Belgium, France, Ireland, Hungary and Safair, of South Africa. ASL Belgium EUR 576m (52%)

EUR 567m 440 28

Approximately 60% (EUR 340m) FedEx. Most of the remainder is long haul. ASL France EUR 196m (18%)

EUR 89 389, incl 107 pilots 9

Cargo business is a mix of FedEx, Amazon and postal. ASL Ireland EUR 136m (12%)

EUR 88m 215 13

Amazon flying was moved to ASL Ireland in 2020, with some Amazon flying in 2019. ASL is the biggest contract airline and accounts for about one-third of European narrowbody freighter aircraft in service. At the end of 2020, Swiftair/West Atlantic operated 34 narrowbodies; Bulgaria-based Cargo Air and DHL subcontractor operated 10; and Avia Solutions Group subsidiary Bluebird operated six. Other companies include Cargo Logic Germany, Post Air Cargo of Italy, Titan Airways of the UK, Icelandair and Olympic Airways. Volga Dnepr subsidiary Atran and Aviastar TU also operate 737s and 757s, respectively. DHL operates 34 757s directly through European Air Transport in Germany and DHL Air in the UK. Cargo Logic Air, which is likely to expand in the next 12 months, is in a good position to pick up additional flying from Germany, if it should materialize. Swiftair/West Atlantic are likely to be hit hardest by any cuts to FedEx flying. Due to scope clause requirements in FedEx's labor contract with its pilots, additional medium widebody flying will likely be operated by FedEx directly, replacing narrowbody jets. However, there may be limited medium widebody opportunities on routes where there are traffic rights limitations.

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