Pivot point | CSCMP Quarterly Supply Chain Bulletin

COVID-19 rocked the global air cargo industry as much as any other logistics industry last year, causing limited capacity, service disruptions and rising costs. While carriers and middlemen have deployed creative workarounds and shippers have shown flexibility, the basic calculations of supply and demand remain daunting.

Overall air cargo volumes declined year over year for 2020 due to lockdowns at the start of the year. According to IATA, freight tonne-kilometers (CTK) have fallen by almost 11%. Despite the decline in aggregate demand, however, prices have skyrocketed as capacity has fallen even more sharply.

Before COVID, about 60% of the world’s air cargo was carried in the belly of passenger planes. That figure fell to about a third by the end of 2020, as the belly capacity of passenger flights fell 53% due to reductions and cancellations of flight schedules, according to figures from the International Air Transport Association (IATA).1 Airlines have responded by increasing both the size of their cargo fleets and their daily use, but even these efforts have not been sufficient, and the overall Cargo Tonne-Kilometers Available (ACTK) has recorded a decline. 23% net reduction for the year.

As a result, freight rates for the remaining capacity have increased. Drewry East-West’s average air freight rates for April and May 2020 were more than double the constant averages seen in previous years (see Figure 1). Although rates have moderated slightly since, they remain historically high. The average spot rate from Shanghai to North America, for example, peaked at $ 12.78 per kilogram in May 2020, then fell by more than half to $ 5.70 at the end of March 2021, or about 70 % above the March 2019 rate of $ 3.30.

[Figure 1] Average Drewy East-West air freight rate

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In response to limited capacity and sky-high tariffs, some freight forwarders and shippers of high-value and urgent cargo planes have chartered last year. Apple, for example, chartered more than 200 private jets to ship devices in 2020, a single-year record for the company. At the same time, it first shipped AirPods and other less urgent devices by sea, and increased its use of sea freight for older iPhone models to free up air freight capacity for it. ‘iPhone 12. Another tech company that chartered planes sold the excess capacity. to mitigate costs. The trend towards charters does not appear to be dissipating, as some freight forwarders suggest that they will continue to offer them as part of their ongoing service offering in the future.

Factors that drive demand

This response is not surprising given that in the second half of 2020 and the first half of 2021, the demand for air freight was strong and exceeded the return of capacity. The global boom in e-commerce as physical businesses closed and people were sheltered in place meant less freight was shipped as palletized loads and more was shipped as packages with fixed-term deliveries. As a result, shippers have shifted a significant portion of their cargo from full loads to air and underloads. At the same time, the need to quickly position drugs, hospital supplies and medical equipment further boosted the demand for air freight. Meanwhile, shippers of perishable goods, just-in-time parts and other urgent goods have flown from the ocean to avoid container shortages, unreliable shipping schedules and soaring tariffs. of maritime transport.

The repercussions of the pandemic will continue to affect air cargo demand and capacity for the remainder of 2021. Vaccines initially took up much of the available air cargo capacity, crowding out other time-sensitive cargo. While new vaccine approvals and the addition of production sites have already helped disperse demand in the United States, the extent and timing of vaccine distribution to the rest of the world remains uncertain. At the same time, air freight will remain a key resupply option as companies seek to alleviate sudden shortages and restart disrupted supply chains.

Air freight demand and capacity could also be affected by an increase in world trade. Air cargo capacity in North America declined less during the height of the pandemic and recovered faster than elsewhere in the world. But most of the growth in air freight demand has occurred elsewhere, notably in Asia, suggesting that even as capacity picks up globally, markets will remain tight.

However, the extent to which pent-up global demand will affect air freight in 2021 is currently unclear due to trade uncertainty. Relations between the United States and China are expected to remain static for the time being, as strategic and competitive differences compensate for broader economic interdependence. However, the United States could join the Trans-Pacific Partnership or otherwise accelerate the ongoing migration of trade from China to lower-cost countries in Asia such as Vietnam and Indonesia. If this happens, air freight will be key to alleviating longer maritime transit times and infrastructure constraints in these markets.

Meanwhile, Brexit-related customs clearance delays, along with global ocean equipment imbalances and port congestion, drastically increased demand for air freight and charter in the UK and EU in the early days. 2021. The container ship Ever Given blocked the Suez Canal for six days last March – also boosted demand for air freight, as shippers sought to bypass congestion delays and meet priority delivery commitments.

Pivot to freight?

Along with the volatility of demand, the industry has also seen a significant shift in the dynamics of passenger versus non-passenger freight. Case in point: Los Angeles, California area airports saw passenger traffic drop 67%, down from 9.2% to augment in tonnes of freight moved in 2020. Given freight capacity constraints and predictions that passenger traffic is unlikely to return to pre-pandemic levels before 2024, this trend is expected to continue.

Many airlines are not only expanding the size and schedules of their all-cargo fleets, but are also converting passenger planes into all-cargo operations. Up to September 2020, nearly 200 global airlines have converted some 2,500 passenger jets, representing around 10% of the global fleet.

Short-term conversions can take two forms: securing the cargo to the seats and covering it with a net or removing the seats completely. The permanent conversion involves eviscerating cabins, modifying cockpits, sealing emergency exits and installing cargo hatches, a process that costs millions of dollars and takes three to four months. Boeing expects two-thirds of the 2,430 freighters it will deliver by 2039 will be passenger-to-freighter conversions.

Such a pivot goes beyond modernizing equipment to rethinking routes, schedules and airport cargo handling operations, including the handling of dangerous and other specialized cargoes. It also involves changes in corporate culture and raises business model considerations regarding relationships with shippers and forwarders.2

Lessons learned

More than a year after the start of the pandemic, carriers have gained valuable insight into how and when to convert planes to freighters and are refining their relationships with major freight forwarders. For example, Ceva Logistics buys dozens of flights every week to guarantee space, an option that is probably not available to small freight forwarders. Indeed, we may see greater consolidation of freight forwarders in the future as others attempt to reach this level of scale, which means carriers will find themselves facing fewer freight forwarders with more weight. .

On the sender On the other hand, the lessons learned focus on the relative permanence of recent market changes. Significant capacity growth will not return until passengers do, suggesting a sustained reliance on all-cargo and charter capacity, as well as flexibility between modes. Laboratory distributor Thomas Scientific, for example, continues to benefit from a multimodal strategy including engine, ocean and air adopted last year as demand for COVID test kits increased.

Shippers have also learned about the benefits of adopting technology solutions. Most have made a faster-than-expected transition to digital air cargo markets, which offer convenient electronic reservation with space transparency and tariffs for up to 15% of global air cargo capacity. For example, the reservation platform WebCargo, which claims to have 22,000 users, reported a drop in revenue as COVID peaked in February-March 2020, but quickly recovered in June. Likewise, the transport company Kuehne + Nagel attributes to the digitization and automation of its reservation, invoicing and documentation processes an increase in its air freight volumes, despite capacity limitations.

While shippers are still learning from the pandemic and working to restructure their supply chains to increase resilience, the potential impact on air cargo has yet to fully play out. It is still unclear whether measures such as multimodal diversification and changes in contingency plans and security stocks will create new business opportunities for air cargo carriers or if they will only erode the volume. The “new normal” is still, for now, a work in progress.

Remarks:

1. IATA, Air freight market analysis: robust end of 2020 for air freight} (December 2020)

2. For more information on business model changes, see “Increasing air cargo to grow revenue”, Kearney: https://www.kearney.com/transportation-travel/article?/a/increasing-air-cargo -to-grow -reVEN

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