Air cargo 2021: The good, the bad and the ugly

A white and green plane loading pallets of cargo through side door.

The air cargo industry has officially recovered from the depths of the pandemic, with volumes in January 1.1% above the 2019 level. The bad news, according to the International Air Transport Association, is that freight capacity lost ground for the first time since April, dropping 5% on a monthly basis, because passenger airlines pulled back on flight activity in response to COVID outbreaks and widespread travel restrictions.

The amount of available airlift for cargo in January was 19.5% less than 2019, according to IATA’s monthly market report. That’s the bottom line from the 49% plunge in international bellyhold cargo capacity combined with a 29% hike in freighter capacity.

The limited space is putting pressure on cargo owners and logistics companies experiencing reservation delays and paying top dollar to guarantee spots on passenger or all-cargo carriers because of the heavy flow of cross-border trade.

Since hitting bottom last April, the air cargo market has seen a V-shaped recovery, while airlines’ passenger business is still in a depression. 

Figures released by London-based CLIVE Data Services, which has access to more current data, generally dovetailed with IATA but didn’t show positive volume growth until February. Load factors remain very strong, with aircraft nearly 70% full on average and month-over-month volumes climbing 7% despite February being three days shorter than January.

“If we normalize for last year’s Leap Year, we can see a 2% growth in global volumes compared to February 2020,” Niall van de Wouw, CLIVE’s managing director, said in the company’s monthly analysis.

But comparisons are colored by the fact that factories were mostly closed last year in China as the coronavirus outbreak swept through the country, while this year many factories stayed open because authorities discouraged holiday travel for Chinese New Year to contain the virus. As a result, airfreight volumes only dropped 30%, compared to the normal 60%. Volumes from China to Europe, for example, were nearly five times greater in February 2021 than a year earlier.

(IATA and CLIVE are using 2019 as the primary benchmark because figures for 2020 are widely distorted by the pandemic and make 2021 growth look abnormally high.)

Economic fundamentals and supply chain bottlenecks across all transport modes strongly indicate the airfreight market will run hot and heavy for the rest of the year, without the usual spring and summer lulls. Many businesses are shifting to air from the ocean mode to move goods because of extreme shipping delays from port congestion and overwhelmed vessel operators.

And demand for air transport shows no sign of abating. 

Global manufacturing and export orders have exhibited strong growth for several months, according to the Purchasing Managers’ Index. Retail inventory-to-sales ratios remain relatively low, with many shippers turning to air cargo to refill stocks of critical, or fast-selling, products. The National Retail Federation forecasts U.S. retail sales growth of 6.5.% to 8.2% compared to the five-year average of 4.5% growth. The International Monetary Fund expects 5.1% growth in 2021, while economists say U.S. gross domestic product will expand 4.5% to 5%. And the pandemic turned e-commerce into a runaway train, growing 28% globally and 32.4% in the U.S., according to eMarketer and the U.S. Department of Commerce.

Additionally, exports of personal protective equipment from Asia to Europe and the U.S. remain strong and pharmaceutical companies are rapidly increasing deliveries of COVID-19 vaccines, with airlines playing a key role in transporting doses around the world.

North America led the way among major air markets with 8.5% growth in international demand in January, surpassing the 4.4% year-over-year gain in December. Much of the activity was out of Asia across the Pacific or via hubs in the Middle East. International capacity for the region fell 8.5%. 

Performance varied by trade lane, with Europe-to-Asia and certain emerging markets reporting weaker export demand amid COVID-19 outbreaks.

The disparity in supply and demand has led to market volatility and high rates, according to analysts and logistics operators. Rates are more than double pre-pandemic levels on major trade lanes and in February whipsawed quickly on a weekly basis, according to TAC Index, which tracks rates paid by freight forwarders. Yields for air carriers are 79% higher than in February 2019.

There were “big ups and downs and since the relative pricing level is so much higher than in previous years, the impact can be massive,” said Robert Frei, TAC Index business development manager, in an email. Forwarders that need to book shipments on the spot market could potentially take an 8% to 10% loss in gross margins. 

Cargo’s passenger problem 

The outlook for the airline industry as a whole, however, is grim.

Passenger traffic in January was 72% below 2019 and down 2.3 points from December as the spread of COVID curtailed travel, IATA reported this week. The impact was most notable in domestic markets. While international business has been depressed for 10 months — still only 15% of the volume two years ago — airlines enjoyed a limited recovery on short-haul routes last fall. In January, domestic demand was down 47.4% from pre-crisis levels, a 4.5-point slide from December, largely due to stricter domestic travel restrictions in China. 

Forward bookings for the summer are down 78%, but officials are cautiously optimistic that increased vaccinations, at least in developed countries, will bring back more customers in the second half of the year.

IATA recently downgraded its outlook for the year because of the worsening situation, saying it expects the industry to have negative cash flow through 2021 after previously estimating airlines would collectively break even in the fourth quarter. The trade association now estimates airlines will burn through $75 billion to $95 billion in cash this year, up from the earlier estimate of $48 billion. Actual losses will depend on to what extent governments loosen travel restrictions once the vulnerable parts of their populations are vaccinated. 

Chief economist Brian Pearce said airlines depleted their cash pool by about $150 billion last year.

The growing financial pressure increases the possibility that some airlines could fail. Airlines have borrowed heavily to maintain truncated operations — $60 billion by U.S. carriers alone — but will need additional aid from governments so they have sufficient resources to support demand when economies reopen, IATA officials said during a virtual press conference. Any assistance, they add, should come in the form of direct grants, or tax and fee reductions, because loans will only slow the ability of carriers to recover.

The U.S. Congress is considering a third round of grants, worth $14 billion, to prevent layoffs of airline employees.

“Airlines are going to be burdened with a lot of debt. … Some will need to use cash flow to pay down that debt, which means not a lot of free cash flow to invest in fleet or new products,” Pearce said last week.

IATA officials urged governments to build and share their restart plans along with benchmarks that will guide them so the industry can prepare to help support economic recovery. Global standards to securely record test and vaccination data in formats that will be internationally recognized are also critical to restarting international travel, they said. 

“The growing cargo business is not enough to stem industry losses, but it is a vital lifeline of cash for many airlines. If air cargo was not doing as well, the industry as a whole would be in even deeper trouble,” IATA Director General Alexandre de Juniac said.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.


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