The use of air freight soared during the coronavirus pandemic, as shippers leapfrogged over bottlenecks plaguing surface transport networks to get their goods to free-spending consumers.
Yet even as those bottlenecks start to ease, demand for planes to move cargo is still growing. The trend is squeezing shippers’ bottom lines, lifting the fortunes of airlines and boosting the most carbon-intensive form of freight transport.
Global air passenger traffic is forecast to be about a fifth lower than 2019 levels in 2022, according to the International Air Transport Association. Yet air cargo volumes will be 11.7 per cent higher than in 2019, and 4 per cent more than in 2021, the airline trade group estimates.
How long reliance on costly air shipments lasts has become “a multimillion-dollar question”, said Todd Ingledew, chief financial officer of luxury brand Aritzia. The Canadian company forecasts its profit margins will be as much as three percentage points lower this year than last due to higher costs from expedited air freight from overseas manufacturing sites, he told analysts earlier this month.
Levi Strauss, the jeans manufacturer, said higher air freight costs “to support delivery of seasonal merchandise” took 0.8 percentage points off its gross profit margin in the latest quarter, while Lululemon Athletica’s margin guidance for its current quarter included 1.5 percentage points of “pressure from air freight costs due to port congestion and capacity constraints”.
Gap took a $50mn charge from air freight this quarter, which contributed to the apparel retailer cutting its profit expectations as it ousted chief executive Sonia Syngal earlier this month. Another apparel group, PVH, took a $12mn hit in its latest quarter related to air freight.
Air freight is much more carbon-intensive than shipping by sea. In 2019, ships moved nearly 350 times more cargo than planes but accounted for only five times more carbon dioxide emissions, according to the International Transport Forum.
But air freight is faster and has proven more reliable than alternatives as ports have been backlogged, truck drivers have been scarce and warehouses have filled up during the pandemic. Demand lept ahead of last year’s holiday season as retailers scrambled to stock shelves.
Global supply chain pressures have declined from a peak in December, but they remain historically high, according to an index published by the Federal Reserve Bank of New York.
Industries such as fast fashion have long relied on air freight to keep up with the latest trends, said Zvi Schreiber, chief executive of logistics booking service Freightos. Now a wider range of companies are shipping by air: for example, the safety and technical equipment manufacturer Brady has said it shipped crucial parts by air in its latest quarter.
A recent decline in the cost of air transport will provide some relief for shippers. The average shipping rate from Shanghai to the US, for example, has fallen by about 50 per cent from its peak in December, but it is still more than double 2019 levels, according to Baltic Exchange data.
Even as shippers suffer, sustained demand for air freight enabled Delta Air Lines to earlier this month report its highest second-quarter cargo revenue ever, with revenue from air freight increasing 46 per cent compared to 2019.
“Supply chain disruptions are still pretty significant. I don’t see them being resolved in a material way for the next 12 months,” said Ed Bastian, Delta’s chief executive. “So I think the outlook for air freight should be fairly, fairly good.”
Cargo as a share of global airline revenue more than tripled between 2016 and 2021, said Marie Owens Thomsen, chief economist at IATA, though she said that the share is likely to drop as passenger demand bounces back to pre-pandemic levels.
Others are also placing large bets on the elevated demand for air freight lasting. US aircraft manufacturer Boeing said it plans to increase the number of its freighters in use by 80 per cent over the next two decades. Airbus, Boeing’s main rival, plans to expand active freighters by half by 2041.
The pandemic has demonstrated the “strategic importance” of air freight, said Darren Hulst, Boeing’s vice-president of commercial marketing: “This isn’t just a blip in terms of shipping versus air. They’re complementary, in many ways, but I think air has proven itself.”
Ocean shipping lines are also buying into the air freight boom. Denmark-based Maersk announced a new air cargo wing in April, while France’s CMA CGM has ordered six planes for its nascent air shipping division since November 2021.
“We’ve shipped things by air through this period that never used to be shipped by air,” Owens Thomsen at IATA said. “Things will normalise at some point in time.”
Some US importers are betting that their need to circumvent congested shipping lanes will last well beyond the next holiday season. Harmit Singh, chief financial officer of Levi Strauss, said he expects higher air freight costs to continue until at least 2023.
“We’re assuming [air freight] is going to remain where it is for the rest of the year,” Abercrombie & Fitch finance chief Scott Lipesky said during the company’s last earnings call. “A lot of us are optimistic that we’ll start to see a little bit of relief in the back half, but who knows?”
Additional reporting by Steff Chávez in Chicago
Source: Economy - ft.com
