Commerce, Volcanic Ash and the International Air Cargo Business

| About: Guggenheim Airline (FAA)
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I went to my Korean grocer today. The bin where the endives usually sit was empty. All I got was this wrapper with some nice recipes. My endives come from Brussels. The ones I wanted are probably sitting in an Antwerp warehouse rotting.

We can go a long time without endives. But there are other things that we will need that are not going to get here if the volcano continues to block air traffic from Europe. It's impossible to predict how an act of god will turn out. Still, I’ll try.

There are only three possible outcomes. Either the eruption continues at its current level, or it could increase in size, or it goes dormant. Two of the three possible outcomes are bad news. Absent anything else, the Base Case has to be that the damn thing continues.

Looking at charts of past performance of a stock or a market really does not provide an answer to what may happen next. But looking in the past is the only guide we have, so we use it. That the volcano blew ash for two full years 190 years ago is of little relevance today, but I will use it. Therefore a conservative Base Case would be for a continuation of the current ash production for at least three-months, alternatively it would belch periodically for several years.

If that were to happen a question to ask is how far will the ash cloud move? Once again there is reason for concern on that. In the northern latitudes the prevailing winds are referred to as the “Westerlies”. These winds are influenced by the Jet Stream. This stream of air circles the globe in an erratic pattern. It ranges from 4 to 7 miles from the surface of the earth. It can be as large as 1,000 miles wide and three miles deep. It moves at speeds up to 300mph.

This first picture shows generally the position of the Westerlies:

The following picture is difficult to read, it shows the jet stream position as of February 2010. Notice that it goes from Europe to Russia, over Asia, the Pacific and right over the US. There are reports that the volcano is spewing ash nine miles into the atmosphere, well into the range of the jet stream. The Base Case has to assume that this has some influence on air traffic north of the equator. Gulp.

It is not reasonable to assume that there will be a shutdown of air travel. As of yesterday only a small portion of the northern hemisphere has been impacted. Even that area will begin some flights in the coming days. While it is likely that ash particles will ultimately circle the globe that does not mean that air traffic would be severely affected. It is equally reasonable to assume that the level of interruption will not be “0” either. The Base Case has a range of 10-40% in curtailment. I will use the mid-point of 25%.

The international air cargo business soared from 2005 to 2007. Then it tanked with everything else. It was recovering strongly in the 1st Q of 2010. I have some data from IATA from 2005. I checked it with recent tonnage and insured customs values in Miami and London. I think this data is representative of what the market for global airfreight shipments were prior to the eruption. If anything, it would understate the pre-volcano numbers.

The 2005 total was $3.25 Trillion. That comes to 35% of the total global trade of $9.2T. Total world GDP in 2009 was ~$60T. So the value of the goods shipped by airfreight comes to 5% of the total. That ain’t hay.

The Base Case knocks the impact down. It comes to about $1trillion per year, call that $100b per month on average. It is still 1.5% of total GDP. It is enough to make a difference.

What’s in those cargo planes? Everything. The US total domestic/international number was a staggering 82 million tons in 2009. Think of flying 50 million Ford Taurus’s someplace. What’s in those containers? Electronics, microchips, pharmaceuticals, medical devices, gems, cash/checks (tons of it), on-time parts delivery and an amazing volume and value of food products.

This smoker is worth watching. It could change a lot of things. Let’s hope it goes back to sleep for another 200 years.