(UPDATED: March 3, 2022, 9:30 a.m. ET regarding Finnair)
Airspace restrictions from the economic war between the West and Russia over the invasion of Ukraine is adding logistical complexity and cost for the air cargo sector and passenger airlines still coping with COVID-related ups and downs in business activity. The conflict is also driving up the price of fuel, which represents a quarter or more of airlines’ cost base.
The European Union, Canada, the United Kingdom, and Baltic and Nordic states in recent days have barred all Russian-owned, -registered and -controlled aircraft from overflights of their territories. Russia has responded, banning three dozen airlines from its airspace.
The new rules will require carriers to take more circuitous routes to avoid airspace around Russia, as well as Ukraine, Belarus and Moldova, to avoid the possibility of accidental missile strikes.
Routes over Russia between Asia and Europe are optimal for many airlines in terms of the shortest flying time and fuel consumption. Swinging north, or more likely, south through the Middle East and up into Southern Europe will be less efficient but can be done by many carriers without too much difficulty, according to air logistics professionals.
“It by no means shuts down an air corridor between Asia and Europe. It just gets a little more complicated to fly it,” said Neel Jones Shah, a former cargo chief at Delta Air Lines (NYSE: DAL) who now heads global airfreight for Flexport, a fast-rising freight forwarder headquartered in San Francisco.
Some airlines are canceling flights because of the additional transit times while they figure out how to adjust to the new circumstances.
Finnair said it is canceling passenger and cargo-only flights to Seoul, South Korea; and Shanghai and Guangzhou, China, through Sunday. Flights to Hong Kong are canceled until the end of March. It resumed flights to Tokyo the following day, March 2, saying the four-times-weekly connection was too important to cut. The airline continues to operate flights to Thailand (from Helsinki and Stockholm), Singapore and Delhi using alternative routes that lengthen flight time by about an hour.
The company said it is withdrawing its financial guidance for the first quarter and demand expectations for the first half of 2022 because of the negative impact the Russian airspace closure could have on air traffic between Europe and Asia.
“Bypassing the Russian airspace lengthens flight times to Asia considerably and, thus, the operation of most of our passenger and cargo flights to Asia is not economically sustainable or competitive,” Finnair CEO Topi Manner said in a statement.
Virgin Atlantic said avoiding Russia would add 15 to 60 minutes on flights between the U.K. and India and Pakistan, according to the BBC.
The U.S. government is considering whether to block Russian carriers from its airspace, but hasn’t made a decision yet. Reuters reported Tuesday that EU officials are talking with the Biden administration about extending the flight bans.
Kazakhstan has increased in popularity as a stopover point in recent days. Reuters said flights to Almaty airport have tripled as airlines look for economical detours between Europe and Asia.
Jones Shah predicted most freighters will take the southern track, noting that the Middle East is a good place to refuel and that airports in Dubai, Abu Dhabi and other locations have plenty of capacity to take more flights.
Middle Eastern carriers such as Qatar Airways, Emirates, Etihad, Saudia and Turkish Airlines could pick up market share out of China, where they already operate about 20 to 25 flights per week, Seko Logistics said in a customer notice.
If the U.S. closes its airspace to Russia too, and Russia hits back, the polar routes most effective for reaching Asia will be off limits to American aircraft. That would force them to fly a slightly more southerly route, adding 30 to 45 minutes of flight time, Jones Shah said.
“It’s not that big a deal. It’s manageable,” he said.
The war has sent the price of oil above $100 per barrel, and the extra fuel burned on less direct routes will come at a higher price. The price of jet fuel increased 3.8% to $111.13 per barrel for the week that ended Friday and is up nearly 60% in the past year, according to the International Air Transport Association.
Many logistics companies and carriers have suspended shipments to and from Russia because of increased export technology controls, denied Russian entities and banking restrictions.
The Ukraine war is also reducing cargo capacity at a time when the supply of air transport is still struggling to catch up from pandemic-related cutbacks by passenger airlines, which historically provide about 50% of available cargo space in the holds below the passenger cabin.
The primary losers are shippers with heavyweight and outsize cargo that don’t fit well in regular cargo jets. Ukraine-based Antonov Airlines is continuing some operations with five AN-124 super-jumbo jets, but two of the aircraft plus a smaller freighter were not able to escape before hostilities erupted. And the company’s behemoth AN-225, which was undergoing repairs, was reportedly destroyed last weekend.
Western companies also have lost access to Russian cargo specialist Volga-Dnepr, which operates a dozen AN-124s and five Ilyushin-76 freighters, and its Boeing 747-dominated subsidiary AirBridgeCargo because of airspace and banking sanctions against Russian companies.
The large airlifters were increasingly busy hauling general cargoes during the pandemic because of the overall shortfall in transport capacity and because Volga-Dnepr and Antonov Airlines offered below-market rates in many cases.
The deficit of ultra-large freighters could be a boon for Airbus, which has launched a new airline using special supersize jets designed to carry huge aircraft sections that will now be available for commercial charter. The Beluga transporters have the largest interior cross sections of any transport aircraft in the world.
Airfreight rates are starting to rise again because of the loss of available aircraft, along with the possibility of more flight suspensions. The capacity squeeze at the moment is modest because COVID restrictions have tamped down factory production in China and the expected shipment surge following the Lunar New Year holiday, but conditions are expected to become more challenging in the coming weeks as demand rises, air cargo experts say.
Chicago-based Seko Logistics predicted air cargo rates will be 30% to 50% higher this month than in February.
Airlines could also be the beneficiary of cargo diversion from China-Europe freight rail users because the lines go through southern Russia and Siberia. The mode has seen significant growth in the past year because of persistent ocean shipping congestion and air delays. Flexport has stopped booking freight on transcontinental rail because of the transport uncertainty, CEO Ryan Peterson said on Twitter.
For passenger airlines, the conflict is another impediment to completing their recovery from the financial tailspin caused by the pandemic and diminished travel. Carriers report that bookings are significantly growing and they are returning many aircraft to international service for the summer season, but uncertainty created by the Ukraine war has clouded the positive outlook.