In June 2022, The International Air Transport Association (IATA) released the April 2022 data for global air cargo markets. The data revealed a drop in demand and contraction in capacity, due in part to the ongoing effects of the Russia-Ukraine war and the Omicron variant of COVID-19 in Asia.
According to the report, global demand fell 11.2% and global demand is down 1% compared to April 2021. Capacity was 2% below 2021, and both global capacity and international capacity decreased slightly in April compared to March.
As expected, the demand for air cargo capacity is expected to continue well into 2023, and possibly longer.
Factors Affecting Air Cargo
The COVID-19 pandemic may be “over,” but its effects are still rippling through the supply chain industry. As noted above, new challenges from the Russia-Ukraine war and the variant’s effect in Asia are compounding the issue.
The Russian invasion of Ukraine had a detrimental impact on already vulnerable supply chains. In over six months of conflict, the effects of the Russian invasion are still significantly impacting global supply chains.
Early on, the suppliers of essential goods and raw materials−such as neon gas, steel and platinum−shut down in the wake of the conflict. This added to the vehicle and semiconductor chip shortages that were already in effect. Other raw goods are facing shortages, leading to widespread price increases for goods that could be shipped to the rest of the world.
The dual effects of high fuel prices and inflation are increasing the costs of shipping on the entire market, both for businesses and consumers. The conflict also forced cargo airlines to divert flights over the region, adding a lot of time (and by extension, costs) to shipping.
Cargo space is already at a premium, and both Russia and Ukraine own fleets with extra-large cargo capacity. There aren’t suitable replacements, leaving a considerable void in air freight capacity that’s hampered by minimal air passenger traffic. Shipping rates could double or possibly triple moving forward.
Low air cargo capacity has been an ongoing problem for supply chains. Both land and ocean freight are overwhelmed, leaving few solutions beyond air freight. But with air passenger travel reduced and the Omicron variant devastating Asia, there are fewer passengers in the air and lower belly hold capacity.
Even if air passenger travel rebounded completely, there are limitations that prevent it from single handedly solving the issue of air capacity. Passenger flight schedules aren’t necessarily aligned with the most efficient routes for goods, they may not serve key cargo trade routes and not all cargo is appropriate for passenger aircraft payload.
Rising Shipping Rates and Inflation
While there are many interconnected factors and limitations impacting air passenger travel and cargo capacity right now, the shipping rates are both a cause and a symptom. Shipping rates have been volatile since the start of the pandemic, and compounded with rising fuel costs, they’re only getting worse.
Though we may be feeling the effects of COVID-19, the economy rebounded and saw increased consumer spending. With more shipments going out, limited cargo space is at a premium.
Air cargo was once limited to urgent, high-value shipments, and the costs reflected this. Now, it’s an alternative solution to address port congestion, truck driver shortages and other challenges in the supply chain. That comes at a higher cost, however, which is only exacerbated in the wake of current problems.
Shipping rates are directly correlated with inflation. Overall, inflation increases about 0.7 percentage points when freight rates double, reaching a peak after a year. These rates can continue up to 18 months, which is expected in the current market.
Given the increases in shipping costs in 2021, inflation may reach a high of 1.5 percentage points. The ongoing Russia-Ukraine conflict is also a factor in global inflation, but the full effects remain to be seen. It’s a vicious circle of more disruptions, higher global shipping rates and fuel rates—and by extension, increasing inflation.
Air Cargo and Passenger Air Travel in 2022
On the whole, cargo capacity always increased faster than its demand. Air passenger traffic was generally higher than air freight capacity, which was limited to appropriate high-value shipments.
As air passenger traffic decreased throughout the pandemic, the cargo capacity followed suit. This was one of the earliest stresses on the supply chain, leaving it still vulnerable as air passenger traffic rebounded.
Now, with air passenger traffic decreased and capacity constrained, the effects may be more pronounced. The demand for consumer and industrial goods isn’t slowing, either, leaving little by way of relief.
Cargo carriers and logistics companies often relied on air freight to circumvent issues of ocean container shortages or port congestions, labor shortages or limitations on rail cars. Air freight is in high demand, but it’s since fallen in line with the disruptions and challenges facing other shipping methods.
The Russian airspace squeeze, decreased passenger flights, circuitous routes, and the inflated cost of fuel and shipping leaves little option for bellyhold cargo space. Until these situations resolve, air freight will still be in high demand.
Managing Volatility
Disruptions and obstacles are nothing new to the logistics industry. In the face of these unprecedented challenges, shippers have to become creative in delivering goods for their customers.
If air freight is the solution to current demand, regional air cargo offers a viable solution for regional shipments. Shippers can also consider options like third-party logistics companies and freight forwarding. These companies have the solutions to manage shifting market conditions and obstacles.
Third-party logistics provider DB Schenker leverages an established network of 54 charter cargo flights that connect the markets in America, Asia and Europe, for example. Agile in the wake of obstacles, DB Schenker is always searching for alternative airports for transportation and innovative solutions to bottlenecks or obstacles.
Looking Forward
The shutdowns may be over, but we’re still feeling the effects of COVID-19 well into 2022. They’re not likely to let up soon, especially with new challenges brought by the Russia-Ukraine war, reduced air passenger travel, high shipping costs, inflation, and the still-unresolved shortages and congestion in major shipping routes. We expect the demand for air capacity to continue into 2023.
