Hello from London. I cover the airline industry’s response to coronavirus, and I am often asked why more carriers have not gone bust over the past year. Many have built up firewalls of cash from governments and capital markets to help them through the crisis. But one often overlooked part of the equation is that the air freight market is booming, and cash-strapped airlines are doing whatever it takes to tap into that.
The mood among airline bosses is turning sour here following mixed messages from the government over whether people should travel abroad, and there are no guarantees that passengers will come flocking back in time for the key summer holiday season. I went to Heathrow airport last week on the day the UK government lifted many of its travel restrictions. The lights were on and there were plenty of smiling staff, but Terminal 5 was disconcertingly quiet.
What was not visible from the airy departures hall, however, was that Heathrow is actually one of the UK’s busiest ports. Today’s main piece looks at the rise of air cargo, and how airlines have become creative to help meet rising demand even as their passenger operations wither.
Soaring cargo demand will continue to aid airlines
Cargo is the unglamorous side of the aviation industry. It won’t show you the world or reunite you with a loved one, and there is definitely no first class and champagne.
But the device you are reading this on almost certainly flew from manufacturer to retailer by air, as do many pharmaceuticals, fresh food and auto parts. Indeed, the industry has rarely been so important, as planes lumber into the sky day and night to deliver high-value goods that the conventional sea routes, beset by pandemic-induced logjams, are struggling to provide in time.
Demand for air cargo was supercharged first by the sudden rush for personal protective equipment during the first Covid-19 wave, and then more recently by the explosion of ecommerce and shipping delays.
Air cargo volumes hit an all-time high in March as the global economy recovered, helping to offset some of the industry’s Covid losses, according to the International Air Transport Association. Revenues from freight have been “the difference between life and death for some airlines,” said Willie Walsh, director general of Iata and an aviation veteran.
While cargo businesses have undoubtedly been a blessing, even they haven’t been immune from disruption over the past year. Half of all air freight normally travels in the belly of passenger aircraft, and rising demand comes just as thousands of jets have been grounded. The capacity crunch has been compounded by the fact that the wide-body jets best suited to carrying freight have been slowest back into the air as demand for long-haul takes longer to recover than shorter domestic or regional hops.
Cargo-only airlines such as DHL and FedEx have picked up the slack where they can, and many airlines have converted their jets into makeshift cargo planes. Emirates stripped out the seats from some of its Boeing 777s to turn them into freighters, while Air Canada is in the process of doing the same thing for some of its 767 jets. Virgin Atlantic, which normally trades off a glamorous jet-setting image, has run some of the most eye-catching cargo services. Earlier this year, the airline set up flights to Norway to carry fish and seafood, including salmon, cod and crab in the bellies of its 787 Dreamliners. It also reported an increase in cargo traffic on flights to Brussels as logistics companies turned to the skies to avoid the possibility of Brexit border delays. All in, the airline’s fragile balance sheet balance was boosted by £319m in revenue in 2020 from cargo, more than a third of its overall revenue.
Glyn Hughes, head of the International Air Cargo Association, told Trade Secrets that the rapid use of passenger aircraft to fill the gaps was “one of the most innovative things seen in this industry for decades”. “There was no process for it, regulations had to be set up, and ground handlers have never been faced with loading 1,000 boxes one by one inside a passenger cabin,” he added.
There is now a backlog of passenger planes waiting to be redeveloped into cargo carriers, and Hughes expects there to be a “strategic shift” in the industry given that passenger numbers are not forecast to recover until 2024 at the earliest. The optimism tallies with forecasts from Iata, whose economists note that “the underlying drivers of air cargo demand remain strong”.
Demand has historically been closely correlated with the new export orders component of the global manufacturing purchasing managers’ index. This gauge of factory activity rose to 54.7 in April, from 53.5 in March. A number above 50 indicates expansion compared with the previous month.
Iata also noted that the PMI data showed that supplier delivery times had grown lengthier, and, with seaports clogged up, businesses with sensitive just-in-time supply chains had turned to air cargo to help meet deadlines. While it is cheaper to transport goods by sea, many now expect it to take until next year for container shipping capacity shortages to ease. Air freight prices have risen sharply since the pandemic and these delays in delivery times are likely to mean rates are unlikely to fall back to pre-pandemic levels any time soon.
For Hughes, the biggest challenge will be maintaining supply lines as normal air patterns are fragmented by the collapse in passenger demand. He pointed to Latin America and Africa in particular, where supply lines were often poorly developed even before Covid hit. “The challenge now for cargo is how to establish global networks. That is crucial,” he said.
Trade links
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Yuan Yang has an interesting read on how China can solve its chips shortage. The answer, she says, is to stop trying to “de-Americanise” its supply chains.
The European Parliament’s Bernd Lange has a must-read tweet, which details a draft opinion on how the US and EU can collaborate more on trade. Regular readers will know that transatlantic tensions have not entirely disappeared despite Donald Trump vacating the White House, but Lange notes that there are grounds for co-operation on vaccines, workers and wages, and tech. Let’s see.
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Source: Economy - ft.com
