Air cargo market: Rationality returns, but for how long?
Ocean-to-air conversions, spike in COVID cases could renew pressure on air freight capacity
Current and lagging indicators show the air cargo market is continuing to stabilize after a three-month bubble that saw transport rates quintuple for China export routes. Despite the apparent slow-down in shipments of personal protective equipment, shortages of face masks and other medical supplies at U.S. hospitals could make the correction short-lived.
Air freight volumes are picking up as the recovery in global economic activity spurs cross-border trade in more typical goods for manufacturers and retailers. CLIVE Data Services reported that volumes for the last week of June were 12% higher than the final week of May. And global airfreight demand improved in June, falling 25% on a year-over-year basis compared to the 31% dropoff in May from 2019.
The recent figures square with last week’s historical data from the International Air Transport Association, which showed air cargo progressed from a 25.6% year-over-year decline in April to a 20.3% fall in May. World ACD, another market tracker, said May volume fell 29% from last year’s level, but improved 11% versus April.
Meanwhile, outbound capacity from China has increased after extreme shortages in April and May due to high demand for medical gear used in the COVID-19 response, helping to move down rates more than 70% to about $4 to $5 per kilogram for Europe and the U.S., according to logistics companies and market researchers. Prices are still significantly higher than normal, especially for the slower summer season, but are more manageable for purchasers.
London-based CLIVE Data Services said global capacity crept up 1.5% in the second half of June, but that load factors reached 71% in June, the highest level since the company began measuring the industry’s weekly performance in 2018. CLIVE analyzes the volume and weight characteristics of cargo flown based data from a representative group of international airlines.
“We are starting to see a more recognizable air freight market following more logical economic principles and more logical rates” compared to the spring when governments insensitive to price orchestrated massive purchase and transport efforts to rush hospital gear to front-line workers, CLIVE Managing Director Niall van de Wouw said in a statement accompanying the report. “The dynamic load factor in June was at a level we did not even see during normal peak Christmas periods, resulting in yields that are still well above the 2019 levels.”
The Belly Factor
The supply-demand equation will be influenced in the coming months by how many aircraft passenger airlines place back into service as travel demand, which disappeared with widespread lockdowns, begins to increase.
The European Union has opened its borders to travelers from many countries – with several notable exceptions, including the U.S. Airlines are responding by gradually restoring passenger schedules. Leading into the July 4th holiday, American Airlines (NASDAQ: AAL) on Thursday reported its highest passenger traffic since April.
Still, most of the capacity increases are coming in domestic markets. Industry executives expect customer interest in international travel to remain low. Long-haul international flights typically utilize widebody aircraft, which are most useful to shippers and would make the biggest difference in alleviating capacity shortages.
“One of the things I’m absolutely convinced of is that nobody is going to be taking international trips this year. It’s a painful process right now, people are uncomfortable with it, there are quarantines all over the place,” said Neel Jones Shah, global head of air freight at San Francisco-based freight forwarder Flexport and a former cargo chief at Delta Air Lines. “I think you’re not going to see any real resumption in passenger flying until, the earliest, April 2021. “We’re going to be in an under-capacity situation in the transpacific for the foreseeable future. I just don’t see that turning around anytime soon.”
Some logistics managers say the demand to move personal protective equipment by air has cooled down significantly as manufacturing output has caught up with demand. As a result, healthcare supply chains have built up enough inventory of face masks and hand sanitizer to supply retailers and medical facilities through regular channels and use less expensive ocean freight. The reduction in volume, they claim, has resulted in some passenger airlines reducing the number of cargo-only flights being offered.
But several U.S. airlines contacted by FreightWaves said they haven’t dialed back mini-freighter operations. Ground handlers at U.S. airports report flights are still pouring in with COVID-protective gear and other logistics companies have booked full, or partial, charters loaded with hospital garments into August.
American Airlines is offering 83 cargo-only flights on the Asia-Pacific lane in July compared to 88 in June, but the capacity difference will be made up by transitioning to more scheduled passenger flights, said airline spokesperson Kristin Rademacher.
PPE Stockpiles Dwindle
Meanwhile, the U.S. has recorded record numbers of new COVID-19 cases in recent days. Hospital intensive care units in many cities are almost full as healthcare workers begin to sound the alarm about shortages of personal protective equipment.
The Federal Emergency Management Agency (FEMA) recently estimated that demand for N95 respirators would outstrip production and imports through August and distributors continue to limit the size of orders customers can place, the Wall Street Journal reported.
Several hospitals in Michigan and nursing homes in Arizona are down to a seven-day supply of N95s, according to state and federal officials.
And medical equipment distribution companies have warned Congress that stockpiles of critical supplies are dwindling, and prices for raw materials are increasing dramatically in the absence of a coordinated federal plan. FEMA ended Project Airbridge, an emergency program to provide free airlift to healthcare suppliers importing personal protective equipment, last month, saying it had achieved its purpose of accelerating deliveries by air until enough supply was in the pipeline to fulfill orders in a regular timeframe.
Another trend that bears watching is shippers beginning to shift ocean bookings to aircraft because of the capacity constraints faced by container lines. Ocean carriers have created an artificial supply shortage during the pandemic by skipping many port calls, leaving shipments to wait at least another week for the next vessel. The blank sailings, or cancellations were intended to balance vessel capacity with the downturn in trade, but have continued even as demand picks up, especially on the trans-Pacific trade lane, driving up transport rates. Companies that need to maintain inventory stocks are moving some orders back to airfreight, according to logistics experts.