Covid-19 ~ Influences to Air Cargo Capacity

November 2020, Singapore.

The air cargo industry continues to adapt to weekly changes in capacity and schedules as demand rises in the lead up to what many believe will be a historical peak season. Collated from public sources, this article aims to help support awareness of key drivers and to assist in planning for the months ahead.

As Europe battles to contain the surge in Covid-19 cases, the US also reached a new high in daily infections last week. With a silver bullet to beat Covid-19 unlikely (warns the UK vaccine chief) the outbreaks will continue to determine the reintroduction of airline schedules as country border restrictions and government regulations are changed, imposed or relaxed.

Industry sources OAG & IATA have both reported that scheduled International flights planned for the remainder of the year are still well short of 2019 levels. This is a critical metric as the majority of air cargo is traditionally carried within scheduled passenger flights. Establishment of travel corridors or bilateral agreements will influence air cargo schedules and trade lane capacity significantly (as I write Hong Kong & Singapore are finalizing such).

As OAG also reports, global flight schedules are still currently -45% down on the prior year, although the return of domestic flights is influencing this number. Reviewing the countries with no domestic market paints a more bleak indication with both Singapore & Hong Kong facing drops of over 90% to passenger schedules.

Downsizing costs remains a priority in the era of curtailed passenger demand for airlines who continue to burn cash and reorganize their networks of staff, aircraft and routes. Collectively the share price for worldwide airlines is down 48% in the first half of 2020. A quick google of any major airline will indicate the challenges they have to simply survive the pandemic, particularity with passenger numbers forcasted to be years away from returning to previous levels.

Notably, often overlooked by management that prioritises passenger revenues, air cargo operations are now shining stars for most airlines, contributing financially in a critical period and importantly highlighting the role the airline plays in worldwide distribution of products and services to consumers.

While cargo capacity has slightly increased in recent weeks (also driven by cargo-only aircraft), it has not completely covered the shortfall left by flight reductions from passenger aircraft (which of many are parked in deserts and runways around the world). Latest insights published from Accenture Seabury indicate that cargo capacity is -20% YoY with notable differences on trade-lanes (e.g. Transpacific capacity has stabilized mainly from China, while Intra-Asia continues to be impacted).

Data from World ACD also paints the commercial realities of the changes the industry is going through which varies based on region and demand influences. However, simply put airlines are handling a lot less cargo for much higher yields, with the anticipation that pricing will increase further over the next couple of months as we head into the traditional peak period. We can expect the lack of supply to deliver a surge in pricing, likely through until at least the Lunar new year in early 2021.

A glance over air cargo industry publications Air Cargo News or the Loadstar quickly emphasizes the current market and challenges ahead! Marketplace/eCommerce promotional periods, consumer technology product launches and traditional last quarter demand is going to make for one of the strongest peak seasons on record (with many companies forecasting to plan for 30-50% growth). Most Asian origins are already starting to feel the pinch with rates increasing and congestion becoming apparent across most origin (& transit) cargo points. It's fair to say for many the next few months will be entertaining ...

While not to be forgotten in the background, the planning is already underway as the industry embarks on an ambitious program to supply the Covid-19 vaccine distribution (when ready). Depending on the source you read there are various estimates on the amount of predicted capacity required at this early stage (IATA estimates transporting doses to the global population could potentially require the equivalent of 8,000 x 747 freighters). As we await notification of a vaccine trial being successful, one thing is for sure, that this will not be a short term rush, we can expect that this product distribution alone will influence the air cargo market for several years to come across all geographies.

My view is that the air cargo market will continue into 2021 with much ambiguity considering the various factors that will influence the supply and demand triggers worldwide. For those engaging in the Airfreight market, collaboration is the key consideration for the year ahead with the following recommendations.

• An open and realistic dialogue is important between partners, recognizing that previous business, as usual, has been replaced with a new operating normal.
• Forecasts (while always important) will be especially critical as service commitments need to be re-calibrated with the reality of changing flight schedules. Remain flexible in planning, bring forward orders where possible and provide a buffer for anticipated congestion.
• In light of capacity constraints, also be open to other transportation models that could be used such as Sea-Air or routing via alternate airports to avoid potential congestion. Undertake reviews, do some trials, be flexible and continue to review supply chain decisions.
• Set clear expectations on what is considered a normal flow and be open on the understanding of how excess or overflow sales are managed in case of spikes. Plans are often made from regular base volumes (allowing for a % spike in peak periods).
• Review budgets and allocated expenditure for Airfreight which is generally going to see an increased procurement cost year on year. Businesses may also be potentially required to air freight more product in light of shorter inventory cycles or quick changes in consumer markets (e.g. regulations will impact level foot traffic on the high streets and consumer confidence to spend).
• Stay in close communication with key partners, the market is moving by the minute and collaboration will help navigate any potential hurdles along the way and allow quicker reactions as regulations, capacity and services adjust.

Sources:

• https://www.accenture.com/sg-en/insights/travel/coronavirus-air-cargo-capacity)
• https://www.aircargonews.net/
• https://www.ft.com/content/a2901ce8-5eb7-4633-b89c-cbdf5b386938
• https://www.iata.org/en/publications/economics/
• https://www.oag.com/coronavirus-airline-schedules-data
• https://theloadstar.com/
• https://worldacd.com/trends