No stopping sky-high air cargo prices on ex-China routes

No stopping sky-high air cargo prices on ex-China routes

Sustained demand for personal protective equipment from coronavirus-hit countries and air cargo space constraints is driving up rates on the major trades. Photo credit: Shutterstock.com.

Air freight prices this week soared past $10 per kg on routes out of China as demand for vital medical supplies to combat the coronavirus disease 2019 (COVID-19) continued to consume all available capacity.

With demand for personal protective equipment, pharmaceuticals, and essential food products outstripping capacity, the sky-high prices also reveal the heavy impact of losing so much belly space on China-Europe and trans-Pacific trade lanes.

Close to half of total air cargo capacity was withdrawn from the key China to Europe and North America markets with the grounding of passenger flights in March as the coronavirus started to spread rapidly around the world. The scheduled passenger flights flying multiple daily and weekly flights provided the backbone of postal services, e-commerce shipments, couriers, and manufacturers using just-in-time strategies.

According to the International Air Transport Association (IATA), global air freight volume fell over 15 percent in March year over year while capacity tumbled 23 percent, and the space constraints have persisted through April. In response, air freight prices continue to hit new highs every week. Shanghai-Europe rates this week are up 313 percent year over year to $10.45 per kg, and Shanghai-North America rates are up 226 percent to $10.55/kg, according to the TAC Index. 

Rate marketplace Freightos said in an update that the price of air cargo is so inflated that the Australian government is subsidizing air exports, and the United States Postal Service has taken the rare move of shipping mail to Europe by ocean. 

“Some observers anticipate high air rates even after the shutdown ends, as many passenger flights and their cargo capacity will likely stay canceled even as other restrictions are lifted,” Freightos noted.

By any mode necessary

As the major economies in Europe and North America begin taking small steps toward reopening retailers and manufacturing that have been shut for weeks, attention is now shifting to the recovery. When infections slow, countries will start building up stocks of medical supplies and the urgency will be removed from the shipments, likely shifting them to ocean. 

An emerging concern, however, is that even as the coronavirus outbreak is brought under control, it will still not result in the resumption of international passenger flights, triggering a radical adjustment of operations to suit weak demand for long-haul travel and trying to rebuild balance sheets devastated while fleets of planes remained on the ground for months.

Stan Wraight, co-founder of Strategic Aviation Solutions (SASI), noted in a recent white paper that international travel would take much longer to return than domestic routes, and he warned that some carriers would not survive.

“There will be a belly capacity shortage as the weakest airlines disappear completely and older, cargo-friendly passenger widebodies are retired,” Wraight noted. “Their retirement in particular may result in a permanent reduction in global air cargo capacity.”  

Travel bans imposed in March grounded 80 percent of all passenger flights and almost overnight cut 35 percent of global air cargo capacity that was carried in the bellies. It was even more of a blow on the passenger heavy east-west trades, where below-deck cargo space comprises more than half the available capacity.

Denis Choumert, chairman of the European Shippers’ Council, said shipping goods by air has never been more challenging for shippers. Writing in The International Air Cargo Association’s (TIACA) latest update, he said shippers of non-essential products that were still active were finding little residual capacity left in light of demand for emergency transport of medical supplies, with average rates four times normal levels at this time of year.

“The drop in capacity and increase in rates has created a bonanza in the air cargo industry, with opportunistic ad hoc flights and abandonment of regular cargo networks. This keeps shippers in the dark on which solutions might prevail in the near future,” Choumert said. 

Wraight expressed the same sentiment. “There is much uncertainty as to what the future air cargo market will look like, but certain trends are evident — e-commerce demand will certainly continue to grow faster than anticipated; there will be a new tendency toward reshoring or near-shoring supply chains to reduce risk; and geopolitics will have an increasingly important impact on both demand and capacity,” he said.

But Wraight believes air cargo will play a vital role as airlines try to grow revenue from international operations while struggling with fewer passengers because of new seating arrangements that enable social distancing, fewer flights, smaller planes, and the resulting higher ticket prices that will discourage travel.

“In such a bleak revenue environment, passenger airlines will be desperate to generate revenue from any source, particularly on international widebody operations,” Wraight wrote. “It is no secret that before the crisis — with declining passenger yields due to overcapacity — most international widebody routes would not be profitable without the contribution of air cargo. Going forward, the economics of air cargo must be addressed and recognized fully so that airlines can sustain vibrant and critical services, and not just during a crisis.”

Alexandre de Juniac, IATA’s director general and CEO, said air cargo would face significant challenges in what will be a slow recovery. He pointed to a World Trade Organization forecast that listed as an optimistic scenario a 13 percent fall in trade in 2020, with the pessimistic scenario resulting in a 32 percent drop. 

“To keep the supply chain moving to meet what demand might exist, airlines must be financially viable,” de Juniac said. “The need for financial relief for airlines by whatever means possible remains urgent.”

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.