Air Cargo Capacity Comes Back
For more than two years, demand for air cargo vastly exceeded supply. But now, at the end of 2022, air freight capacity is approaching pre-pandemic norms. What happens now?
Anyone who has taken an introductory economics course has likely learned about the forces of supply and demand. If not, the post-2020 air cargo market could provide a lesson.
A combination of factors threw air cargo capacity for a loop in 2021. On one hand, U.S. retail sales reached $5.6 trillion in 2020, and then added another $1 trillion in 2021, the Census Bureau found.
On top of that, data from healthcare improvement firm Premier Inc. shows that hospitals spent more than $3 billion on personal protective equipment (PPE) in the first two years of the pandemic.
Many PPE products had to be transported from overseas. Unfortunately, this coincided with sharp declines in international air travel. While U.S. imports rose 20.7% in 2021, according to the U.S. Bureau of Economic Analysis, data from the International Air Transport Association (IATA) shows that global passenger traffic in 2021 was only 58.4% of 2019 levels.
Lower Capacity, Higher Rates
“When the passenger airlines stopped flying internationally, it sucked a lot of capacity out of the system,” explains Neel Jones Shah, executive vice president and global head of air freight at Flexport, a San Francisco-based freight forwarder and customs brokerage.
“Supply was nowhere close to meeting demand, so rates went up by three or four times what they historically were,” Shah adds.
More than a few conditions have changed since then. For one, many airlines added additional freighters to their fleets or converted passenger planes to mitigate passenger travel shortfalls in the wake of the pandemic.
“Airlines looked to cargo to limit their losses during COVID,” says Robert Burdette, vice president of strategy at Shapiro, a Baltimore-based customs brokerage. “They had to find ways to get the most use out of each airplane.”
More Capacity Here to Stay
Additional cargo capacity won’t go away after air travel normalizes, Burdette warns. Domestic airlines transported 674 million passengers in 2021, according to the Bureau of Travel Statistics. That’s 82.5% more travelers than in 2020, but still 27.3% fewer enplanements than in 2019.
Enplanements continued to grow in 2022. Domestic U.S. revenue passenger kilometers (a measure of actual passenger traffic) climbed 7% annually in August 2022, peak travel season, IATA reports. Global revenue passenger kilometers rose 67.7% annually that month, to reach 73.7% of 2019 levels. Air travel will recover to 94% of pre-pandemic levels in 2023, then reach 103% of it in 2024, IATA predicts.
These numbers indicate that passenger plane belly capacity—which accounts for 54% of air cargo capacity, according to Boeing—will be readily available within two years. When that happens, Burdette explains, airlines could become saturated with excess supply.
“A lot of alternatives to passenger aircraft were put in place during the pandemic,” Burdette explains. “Those aircraft won’t be thrown away. It will be interesting to watch the airline industry deal with its excess capacity.”
Cargo Booking Earns Instrument Rating
It isn’t just a capacity glut that has made cargo space easier to come by. Electronic booking options proliferated in 2020 and 2021, enabling shippers and freight forwarders to compare rates and see different carriers’ availability in real time.
“Digital tools such as CargoNet and cargo.one gave freight forwarders the ability to see a carrier’s rates over several days, and make quicker decisions with fewer emails,” says Cindy Cargain, air cargo pricing supervisor at Shapiro. “These tools are like priceline.com for air cargo. They have made shippers and forwarders much more efficient at using and rating that capacity.”
In addition to cutting down the time it takes to reserve capacity, booking platforms also give shippers an opportunity to find and work with new carriers, explains Brennan O’Dowd, CEO and co-founder of 7LFreight/WebCargo, a rate management and booking platform.
Prior to the pandemic, the main way to book space with an air carrier was by going to them directly. Once freight capacity went online, shippers and freight forwarders could see and compare a wider variety of options available to them. O’Dowd likens it to using a transportation management system to look for capacity in the trucking market.
“Online booking tools give freight forwarders visibility into pricing and capacity from carriers that they might not have used in the past,” O’Dowd says. “Right now, around 40% of global capacity is available on the 7LFreight platform for users to be able to book with. Using this technology, shippers are able to leverage available capacity in a much more intelligent way.”
A Chance of Turbulence in International Markets
As of October 2022, cargo space is readily available in import and export markets. But that could change, cautions Bogen Chi, director of air freight at C.H. Robinson, a third-party logistics provider headquartered in Eden Prairie, Minnesota.
In Europe, for example, travel protocols were mostly relaxed during the spring and summer months, and belly space flooded the market.
Even as cargo volumes sag (data from benchmarking index Xeneta shows air freight shipments from Western Europe to North America fell 1.4% between mid-March and late April), capacity climbed by 21%.
But availability to and from Europe could tighten as passenger travel demand falls in the fourth quarter. Assuming cargo demand remains steady, this would create an environment where capacity is stretched and spot rates rise, warns Chi.
Meanwhile, capacity nearly reached pre-COVID levels during the summer of 2022 in the trans-Pacific, according to IATA. Between flagging demand for goods and lower instances of ocean conversions, cargo space has been consistently available.
That said, “the market can and has shifted on a dime in the past 18 months,” says Chi.
One example of this is “zero-COVID” policies. While countries like Japan have reopened for international travel, China continues to pursue policies to check the spread of disease. As of October 2022, the U.S. Embassy to China warned that all travelers are subject to a minimum 10-day quarantine upon entering the country. This discourages travel, which, in turn, reduces the number of flights to or from the region.
“Think about how many business people, or families, fly to Asia every year under normal circumstances,” Chi explains. “That has almost come to a halt. Airlines are operating fewer flights to the region as a result. Why would they want to operate such an expensive plane if it is almost empty?”
Goods Demand Has a Soft Landing
Domestically, two factors impact the demand side of cargo capacity. The first is inflation. Prices rose 8.2% year-over-year in September 2022, the latest in a series of increases that kicked off in summer 2021. Food and fuel costs accelerated particularly rapidly, which led some consumers to cut back on other expenditures.
This directly impacts volumes, and in turn, demand for air cargo capacity, notes Wally Devereaux, vice president of cargo and charters for Southwest Airlines.
“Not everything that moves on aircraft is affected by economic conditions,” Devereaux says. “But certain items fall into the discretionary spend category. When the economy softens, you’ll see reduced demand and lower volumes for those types of products.”
Second, after two years of robust goods spending, consumers are venturing back into the world of experiences.
“Our air cargo operations grew 16% from 2020 to 2021,” notes Jim Szczesniak, chief operating officer for the Houston Airport System. “It was a result of the ‘Everybody’s buying stuff from their couch’ phenomenon. Passenger traffic took a nosedive during that time, but now it’s returning.”
Loosening restrictions on travel means that budgets are once again shifting toward vacations and restaurants. According to travel website Expedia’s 2022 Travel Trends Report, 68% of Americans planned to “go big” for their next vacation.
What it adds up to is greater belly capacity, but less of a need for it.
“We’ve seen a real shift in consumer behavior toward service-oriented experiences as opposed to product-oriented experiences,” says Shah. “Demand for air cargo could stagnate through 2023.”
There’s a forecast of clear skies, with a slight chance of headwinds for air cargo markets.
Visibility Takes to the Skies
Following the initial COVID outbreak, Collins Aerospace responded to shifting market dynamics by making it easier to convert passenger planes into freighters. The Charlotte, North Carolina-based aerospace systems provider began offering packages that could, for example, allow airlines to remove seats and add tie downs and additional firefighting equipment. In one week, an airline could reconfigure a passenger airplane into a freighter, says Joe Virtanen, senior manager of cargo systems business development at Collins Aerospace.
As travel restrictions ease, and passenger traffic returns, aerospace manufacturers are shifting their focus toward visibility. Cargo planes will utilize Internet of Things technology and automated data collection to monitor the location and status of shipments, and avionics for pilots to observe cargo while in flight.
“In the future of cargo aircraft, you’ll be able to track a shipment from the cargo loading system, to where it sits on the plane and what condition it’s in, all the way to the final destination,” Virtanen says.