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Middle East tensions have escalated since a U.S. military drone was shot down recently by Iran. Mistake or not, transportation movements via air and ocean are operating on high alert in this region and the result could mean not only delays in receipt of goods but also higher supply chain costs.
Earlier this year, Iran threatened to ‘close’ the Strait of Hormuz after the U.S. placed sanctions on the country. This waterway is vital for ocean freight and in particular for oil exports. In 2018, 21 percent of global petroleum liquids consumption was transported via the Strait of Hormuz.
The threats and attacks are taking a toll on oil prices. For the week ending June 21th, Brent crude oil had climbed by more than 8 percent since Monday, June 17, and by over 5 percent in just the past 36 hours, as of Friday, June 21. Since a recent attack on two tankers, insurance premiums are up by an average of 10 percent, but Very Large Crude Carriers (VLCCs) have been hit the hardest, with insurance costs doubling to as much as $200,000 per voyage.
Meanwhile, the Federal Aviation Administration (FAA) has issued a warning stemming from the recent downing of the U.S. military drone. “The FAA remains concerned about the escalation of tension and military activity within close proximity to high-volume civil air routes and Iran’s willingness to use long-range (surface-to-air missiles) in international airspace with little to no warning. As a result, there is concern about the potential for misidentification or miscalculation which could result in the inadvertent targeting of civil aviation.”
According to an Associated Press article, the latest warning would affect the area of the Tehran Flight Information Region. An FAA map showed that area extending from Iran’s southern border roughly a dozen miles out to sea along the Persian Gulf, the Gulf of Oman and the Strait of Hormuz.
Airlines responded with cancellations and reroutes. United Airlines canceled its service between India and Newark, New Jersey through September 1, while European airlines British Airways, KLM and Lufthansa noted they would reroute flights. Qantas Airlines said in a statement that it would also reroute flights to avoid the Strait of Hormuz and the Gulf of Oman, which would affect its flights to and from London. Etihad Airways also suspended operations through Iranian airspace and will use alternative flight paths on a number of routes to and from its home base of Abu Dhabi until further notice.
According to a CNN article, the additional miles flown to avoid such trouble spots mean higher costs for airlines, which together spend a total of $180 billion annually on jet fuel. Such higher costs could turn a flight from being a profitable one to a financial loss.
However, some analysts do not view the air changes with as much concern. A spokesman for the flight-tracking website Flightradar24 said that for the few airlines affected, they would simply take northerly or southerly routes to avoid the area. He estimated that 100 flights might be affected in a 24-hour period.
Regardless, the region has been one of risk for transportation and logistics providers for quite some time. I have always advocated supply chain risk plans for shippers, transportation and logistics providers and while one may not be able to completely avoid risk, the ability to reduce them as much as possible is important to avert unnecessary costs and delays. The airlines responded fast to the FAA advisory and it is hoped the same quickness in that response extends to airlines’ customers, passengers and cargo shippers alike including collaborating with customers to achieve satisfactory and timely alternative solutions.