Supply Chain Crunch Boosts Profits for Air Freight

Once considered a luxury, more firms than ever are turning to air freight to bypass supply chain disruptions. Since the pandemic, supply chain air cargo has enjoyed an unprecedented surge in demand from firms trying to avoid congested ports and seeking speedier routes to get their goods into consumers’ hands.

According to a McKinsey report, cargo airlines and freight forwarders were the only aviation sector subsets that made a profit during the pandemic. With global air cargo yields rising by 40 percent year on year in 2020 and 15 percent in 2021, the industry is experiencing some of its strongest years on record.

Although that boost is slowing down thanks to the return of passenger flights and increased pressure from inflation and fuel prices, most experts agree that air freight will continue to see higher than average demand for the foreseeable future as supply chains continue to experience snarls.

Air freight: From luxury to necessity

Before the pandemic, air freight was 13 to 15 times more expensive than ocean freight. These steep prices meant that air transport was limited to high-value, low-weight goods, like pharmaceuticals or luxury apparel, and perishables, such as food and cut flowers, that could not afford to sit around in a shipping container for long.

A considerable portion of that cargo was transported in the bellies of passenger aircraft. Once the pandemic hit and those spaces were no longer available, supply chain air cargo prices rose because of reduced capacity and increased demand.

In response, airlines seeking to make up for losses converted passenger aircraft to accommodate cargo and invested more in the cargo side of their business. The pivot turned out to be highly profitable for airlines and a lifeline for firms desperate to avoid crowded seaports and unreliable land transport.

By the end of 2021’s fourth quarter, supply chain air cargo rates hovered at around 3 to 5 times the price of ocean freight—making the tradeoff much more attractive to firms.

Ocean freight giants like CMA CGM and Maersk-Moller are investing heavily in their air cargo business—the former becoming Air France-KLM Group’s largest private shareholder. And airlines seeking to capitalize on supply chain air cargo’s price premiums are converting a growing number of passenger aircraft into cargo-only planes—sometimes prioritizing air cargo over less lucrative passenger routes.

Turbulence ahead: Softening demand and rising costs

Pent-up demand and ongoing supply chain disruptions currently have air cargo operators in a favorable position to pass on fuel price hikes to passengers and firms willing to pay more. In addition, the summer high season means more flights and, therefore, more space for cargo in the skies. However, that trend may not carry over into the second half of 2022 as consumers and firms start feeling the bite from inflation and increased interest rates.

The war in Ukraine poses yet another threat to supply chain air cargo. The conflict has contributed to reduced cargo capacity as Russian carriers—some of the key players in Asia-Europe air freight routes—were barred from markets. In addition, airspace restrictions mean carriers must take detours to avoid the war zone, making flights longer and less fuel-efficient.

Staff shortages remain a concern across the aviation industry. Since the start of the summer peak season, airlines have canceled flights citing mostly flight crew and ground staff shortages. Costs stemming from cancellations will impact airlines’ bottom lines, and the reduced capacity from cargo holds no longer available to transport goods could further inflate air freight prices.

Combined with record-high jet fuel prices, this reduction in capacity and efficiency could push air cargo rates even further and continue to curb demand.
There are some silver linings. The airline industry’s newfound appreciation for cargo means they’re likely to continue investing in their freight operations. Some of those moves are already apparent in the form of record-high cargo jet orders at Boeing and Airbus and increased demand for converting passenger aircraft into cargo planes. Increasing air cargo capacity could help carriers maximize profits and meet demand while keeping prices accessible for shippers.

Supply chain air cargo: Choosing security over efficiency

As with most trade-offs shippers have made during the pandemic; the decision to convert ocean freight into air freight will require weighing the opportunity costs of lengthier ocean shipments versus speedier but pricier air transport.

With a network of nearly 20,000 reliable carriers at your fingertips, CTSI-Global’s Honeybee TMS™ can help you make the right decision every time. Contact us and get better control of your logistics ecosystem.

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