(Updated May 12, 10:15 P.M. ET with DHL Forwarding details on rail service)
The airfreight market is so saturated that companies without precommitments, or the stomach to pay premiums, are having difficulty finding aircraft to move their goods. And import cargo keeps coming, on top of record volumes for air and ocean shipping, further straining an air logistics system stretched by a shortage of equipment and airport labor.
Logistics professionals and analysts say capacity is rapidly tightening as more shippers turn to air for cross-border transport, sending air cargo rates sharply higher. The market is already running at peak levels five months before peak season normally starts.
Shipping demand is high across the board, from manufacturing and pharmaceuticals to e-commerce, electronics and food products. The IHS Purchasing Managers’ Index for the U.S. reached 63.7 before ticking down last week, showing the steepest expansion for the manufacturing sector since 2007. On a global basis, manufacturing reached a 10-year high in March of 55 (readings above 50 signal growth) and global export orders rose to 53.4 from 51 in February.
The PMI is a leading indicator for airfreight tonnage, which means that more manufactured goods are likely to be moved by air during the second quarter.
The International Air Transport Association now forecasts air cargo demand for 2021 will increase 13% from last year and be 2.8% above the 2019 total.
“There has been a big bounce back from the slowdown we saw in March with prices strengthening, driven by demand outstripping capacity in several markets, with some lanes recording higher pricing levels versus the highs seen in 2020,” said Gareth Sinclair, a revenue management adviser at price data provider TAC Index, in a monthly industry update.
The sticking point is the limited number of international passenger flights as travel remains muted over COVID concerns. Long-haul routes typically use widebody aircraft that collectively carry more than 50% of global volumes in their holds. But international travel demand through March was 88% below precrisis levels, with little improvement from the fourth quarter of last year, IATA reported last week. Even though there are about 1,100 pure freighters flying today — about 240 more than at the start of 2020 — it’s not enough to make up for the 39% loss of cargo capacity in passenger aircraft.
High load factors are a direct indicator of the constrained space for air cargo. Aircraft are 71% filled with cargo, based on a dimensional weight calculation, 10 points higher than in 2019 and 4 points above last year’s level, according to a new report from CLIVE Data Services.
Air cargo volumes grew 1% in April compared to 2019 after dipping 3% in March and was up 84% year-over-year. Growth accelerated in the second half of the month, with demand 6% above the same period two years ago, it said.
Most analysts are normalizing results against the two-year benchmark because 2020 was distorted by a rare pandemic that caused global trade to shrivel when economies shut down for public safety.
Although cargo throughput is nearly the same as in 2019, overall capacity is 18% lower.
And the capacity gap could widen because international airlines won’t augment their fleets as they normally do for the busy summer season, said CLIVE Managing Director Niall van de Wouw.
For its part, IATA said March air cargo demand exceeded pre-COVID levels by 4.4%, a slowdown from the heady 9% growth in February against the 2019 benchmark, but the highest March demand since measurements began in 1990. IATA also measured capacity at negative 12%. In North America, demand increased 17.5% from two years ago with only a 3.8% in capacity.
The air cargo sector completed its recovery from the depths of the pandemic in January amid a surge in COVID medical and e-commerce shipments. It’s a big difference from the passenger side of the business, which remains depressed notwithstanding pockets of domestic travel resurgence in large domestic markets like the U.S. and China.
IATA’s analysis broadly validates the strength of the air cargo market, but lags CLIVE by a month and uses a different methodology. CLIVE reports on cargo tons sold, while IATA reports on cargo tons flown. The former approach counts each ton once, while the latter does so each time the shipment is transshipped through an intermediate airport and reloaded on another airplane. IATA also calculates volume with a distance component — cargo ton kilometers — so if the share of the long-distance route increases the IATA numbers increase even if the same amount of tons are moved.
Supply chain challenges are particularly pronounced on major trade lanes.
Demand from Asia to the U.S. is 44% higher year-over-year, according to freight forwarder Flexport.
Volumes from China to Europe were 18% higher in April than in 2019, with load factors of 95% demonstrating aircraft are completely full. The outbound air flows were influenced by a 32% increase in Chinese exports, by value. Throughput dropped 10% from Europe to North America, but a 40% capacity shortage still resulted in an 87% load factor — 21 points higher than two years ago. In reverse, volumes fell 4% versus 2019, producing a load factor of 69%, or 19% points higher than in 2019, CLIVE Data said.
The trans-Atlantic routes are especially dependent on the large twin-aisle airplanes used on passenger networks because all-cargo operators tend to focus more on Asia trade lanes.
Rates shoot higher
Shipping rates are steadily climbing with demand outstripping supply in many areas. The China and Hong Kong markets are leading the way on price strength, while others are more dynamic. In some cases, prices are even higher than during the PPE rush of spring 2020 when air cargo capacity worldwide contracted more than 40%.
The Baltic Air Freight Indices showed an increase of almost 17% in April from March largely driven by China and Hong Kong exports.
By the end of April, shipments from China/Hong Kong to the U.S. jumped 60% from March to $8.56 per kilo, according to the TAC Index. Prices are up 8% versus last year and 153% versus 2019. The Hong Kong rate is $8.65/kilo compared to $4.91 on March 1 and is approaching the highest level seen last year of $8.81 in May.
WebCargo data shows rates from Asia to the U.S. climbed as much as 25% last month.
To Europe, airlines are charging $4.89 — nearing the high for the year, but down 92% from 2019. Trans-Atlantic outbound rates to Europe recovered at the end of April, but are still below the March high of $2.13. The Europe-to-U.S. trade lane is more volatile and varies by origin-destination pairs, the TAC Index reported.
The rate environment is producing 50% higher yields than normal and large cash flows for airlines, including United Airlines (NASDAQ: UAL) and all-cargo carrier Atlas Air (NASDAQ: AAWW), which generated 74% and 34% higher cargo revenue, respectively, in the first quarter than in 2019. IATA data shows
Some airlines are taking advantage of the big scramble for container space by forcing companies to trade up from basic service to priority, similar to how business class is sometimes expanded at the expense of economy class on passenger flights, the TAC Index said in a regular notice.
Freighter operators are exacerbating the tight capacity on the trans-Pacific westbound by light-loading aircraft in the U.S. to get them back to China as quickly as possible because of the high rates there, said Edward DeMartini, vice president for North American airfreight development at logistics provider Kuehne + Nagel, during a recent virtual briefing for customers. Normally, all-cargo aircraft load up as much as possible and make a technical stop in Anchorage, Alaska, to refuel. Now, many carriers are only taking 40% of their normal capacity so they can make a direct flight from the mainland to China, he said.
“This has led to less actual capacity available in the U.S.-China lane than is reported in some of the third-party capacity reports and data,” he said in a follow-up email.
Persistent demand imbalances and higher rates will likely encourage carriers to allocate more airlift to the North American market, where yields are higher, and enable passenger airlines to offer more cargo-only flights because the higher operating costs would be covered, Bruce Chan, vice president of global logistics at Stifel investment bank, wrote in a monthly note.
The pressure on supply chains is expected to increase in the coming weeks as more cargo shipments line up to move through an air logistics funnel that’s very narrow.
Experts are predicting a surge of inbound ocean volumes for the remainder of the year as U.S. companies continue to dig out from last year’s inventory hole created when the global economy shut down for COVID while consumers, flush with cash from federal stimulus checks and savings accumulated during the pandemic, keep spending on merchandise.
Inventory levels are at their lowest level since 1997 and the inventory-to-sales ratio is near all-time lows. Forward bookings for container shipments are reaching all-time highs, businesses have to reserve slots weeks in advance because there aren’t enough containers and vessels to move all the cargo, carriers are skipping some port rotations and it can take containers a week to clear congested terminals after arrival.
Transit time for cargo moving from Asia to Chicago is 18 weeks, experts say, and some companies are already locking in orders for holiday purchases to make sure they arrive in time.
Imports at U.S. container ports hit a new record this spring and volumes are on track to beat 2020’s full-year total of 22 million twenty-foot equivalent units (TEUs), which was up 1.9% over 2019, despite the pandemic, according to the monthly Global Port Tracker report released Friday by the National Retail Federation and Hackett Associates.
The maritime mishap that blocked the Suez Canal for six days and a weeklong strike by dockworkers at the Port of Montreal added to shipping delays.
What is happening in the ocean space is spilling into airfreight. Automakers and other shippers are converting some shipments normally moved by ocean to air in an effort to avoid the massive backlogs so they can keep assembly lines open and store shelves stocked.
And airfreight capacity is threatening to tighten even more.
Airlines are starting to devote more space to COVID vaccine shipments. Seabury Consulting, part of Accenture, forecasts vaccine shipments moving by air will peak in mid-to-late summer.
Warnings that the air cargo system would be overwhelmed after COVID vaccines were approved for use late last year didn’t materialize because most initial distribution occurred within regions producing the drugs, such as the U.S. and Europe, where truck transport plays a large role. Any exports were in small batches. But as immunization levels rise, more vaccines are being designated for less developed countries. China has recently increased exports of domestically produced COVID vaccines and Reuters reported last week that Pfizer (NYSE: PFE) has begun exporting U.S. vaccines to Mexico.
“We always foresaw that as the distribution in the U.S. [neared its peak] the focus would move internationally. That’s exactly what’s happening and certainly through the balance of the second quarter, and particularly into the third quarter, the volume ramp of vaccine export out of the U.S. will be significant,” Robert Walpole, vice president of cargo at Delta Air Lines (NYSE: DAL), said in an interview.
Delta, he added, expects to be particularly busy supporting vaccine distribution to markets in South America.
This week marks the start of export season for perishables produced in the U.S. Fresh produce is yet another commodity that will now try to squeeze into limited aircraft holds, especially with shippers having difficulty securing outbound ocean containers. And seasonal shipments of corn, soybean and other seeds from South America to North America are in full swing.
Another potential drain on airlift is the U.S. troop and equipment withdrawal from Afghanistan scheduled to be completed by Sept. 11. Equipment, material and infrastructure is being moved to bases in Europe and the U.S. The military will rely on its own fleet for the majority of the airlift, but in past withdrawals has used commercial partners to supplement their capabilities. Kuehne + Nagel’s DeMartini said Defense officials could secure Russian-built Antonov An-124 superfreighters operated by Volga-Dnepr Airlines and Antonov Airlines, or possibly specialized 747s, because they can lift heavy pieces of equipment such as tanks and armored vehicles.
“That is going to have an impact on other project-related capital goods movement around the world and it could mean that those people who would normally use an Antonov, perhaps to move a crane, are going to have to shift their focus to Boeing 747s with nose-load capability, and therefore take some of that 747 freighter fleet out of the normal air market,” he said.
Humanitarian flights pouring into India to deliver relief supplies, such as oxygen machines, for overwhelmed hospitals combating a huge COVID outbreak killing thousands of people per day also represent another draw on capacity. Some flights from Asia are being shifted to India.
Experts say global cargo capacity won’t be restored until international traffic, especially business travel, comes back. European carriers IAG Group (CXE: IAG) and Lufthansa (DXE: LHA) are currently dialing back capacity projections to only 25% and 40% of pre-pandemic levels, respectively because of the limited progress in reopening.
But there are some promising signs the situation could soon improve.
The European Union said it sees the potential to open travel this summer to U.S. tourists that have been vaccinated and officials might even accept paper vaccination cards as proof. EU officials also recommended that vaccinated travelers from low-incidence countries to Europe be welcomed within its borders by the end of May, but no final decision has been made. The U.K. reopened travel for nationals to 12 different locations starting on May 17. The U.S. and the United Kingdom are also discussing how to implement a no-quarantine travel corridor for people who test negative like the one that opened between Australia and New Zealand but was quickly suspended when case counts increased. Italian officials say they want to open borders by the end of May and France has set June 9 as the day for resuming cross-border travel for people with a health pass.
Hong Kong authorities last month ended quarantine requirements for fully vaccinated local aircrews returning from overseas trips and quarantine exemptions for returning cargo crews have been extended to six countries. The new rules should help Cathay Pacific, a large combination carrier, put more aircraft in the sky after two months of having limited numbers of pilots.
Some third-party logistics companies are increasingly using multimodal options and block trains from Asia to get around bottlenecks.
U-Freight Group said its intermodal rail service between China and Europe, which offers a competitive alternative to airfreight in terms of price and is considerably faster than ocean, has picked up volume since the Ever Given was stuck in the Suez Canal. The logistics provider consolidates cargo in Zhengzhou and Shanghai for daily service that operates to and from Malaszewicze, Poland; Hamburg, Germany; and Liege, Belgium.
CEVA Logistics is experimenting with a new train-ferry service from Xi’an, China, to Immingham, U.K., via Kaliningrad, Russia, where the cargo is reloaded on a vessel. The company is aiming for port-to-port delivery times of 18 to 20 days, with final delivery in 25 days. The service cuts transit time by more than half.
On May 12, DHL Forwarding said it launched a rail-sea service on the same route used by CEVA to support a 17% increase in U.K. imports from China.
CEVA, a division of shipping line CMA-CGM, said it also added a premium express block train from Xi’an to Duisburg, Germany, and continues to develop block train connections from there to other parts of Germany, Spain, Italy and France.