Air cargo capacity concerns fade, but rates still rising

Date: Wednesday, May 20, 2020
Source: Journal of Commerce

Fears that the reopening of major economies will place further pressure on limited air cargo capacity are fading as airlines deploy growing numbers of passenger aircraft in all-cargo roles to supply countries battling the coronavirus disease 2019 (COVID-19). Even so, there has been no easing of sky-high freight rates.

The price per kilogram from Shanghai to Europe averaged $11.18 on May 18, up from $2.32 at the beginning of March and a 340 percent year-over-year increase, according to the TAC Index. On Shanghai-North America routes, TAC Index data show rates at $12.27/kg, up from $3.01/kg on March 2 and a 272 percent increase compared with the same week last year.

Travel bans have effectively cut available air cargo capacity from the east-west trades in half, with available capacity largely dedicated to the transport of urgent medical supplies, pharmaceuticals, food, and other essential goods. However, once the coronavirus is under control, the urgency of these shipments will decline and much of the personal protective equipment (PPE) will likely shift to ocean, freeing up freighter space for the return of demand for general air cargo and softening rate levels.

Passenger aircraft will continue to supplement this freighter capacity until travel bans are lifted, according to Glyn Hughes, global head of cargo at the International Air Transport Association (IATA).

“There are 1,200 passenger planes now carrying cargo, and there are more carriers looking at using passenger aircraft for all-cargo flights,” Hughes told JOC.com. “By the time passenger flights start to resume, the cargo capacity will already be quite sizable and there will then be a gradual replacement as passengers come on board.”

A volatile, uncertain recovery

In Europe, where countries are slowly emerging from their respective COVID-19 lockdowns, Lufthansa Group is so far the only major airline company to have announced post-coronavirus schedules. Subsidiaries Lufthansa, SWISS, Austrian Airlines, Brussels Airlines, and Eurowings plan to offer about 1,800 weekly round trips to and from more than 130 destinations worldwide by the end of June, the group said in a May 14 statement. Under the proposed schedule, the number of long-haul passenger flights, which have significant belly cargo capacity, will be expanded from five in the whole of May to 19 in the first half of June.

But as the focus shifts to recovery, there is a growing lack of clarity on what the recovery will look like. In a market update this week, the derivatives broker Freight Investor Services (FIS) highlighted some of the myriad questions currently hovering over the industry before concluding that volatility and uncertainty would remain the only real constants for the time being.

“Is there a normal cargo inventory scarcity? Where is there inventory oversupply, and in which industry sectors? And how much production will move out of China in the coming months?” FIS asked.

Planning flight schedules around such uncertainties remains difficult, and most airlines have only limited numbers of international flights. Cathay Pacific has grounded 96 percent of its passenger flights through May, and British Airways has only a few flights leaving Heathrow every day compared with more than 300 daily flights during normal, pre-pandemic scheduling.

This is placing crippling pressure on airline revenue and, in turn, profitability. IATA says the industry has never seen a downturn this deep before, and that full-year industry passenger revenues could plummet 55 percent compared with 2019, while traffic falls 48 percent year over year.

“This year we forecast the airlines will suffer a reduction in revenue of $314 billion,” Hughes told JOC.com. “In a traditional year, cargo revenue is 9 percent of the industry total. This year it will be closer to 30 percent.”

 

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