When supply chains break down, one of the first options for time-critical shipments is airfreight. But businesses hunting for air transport to avoid the giant ocean bottleneck in the Suez Canal are in for a rude awakening: There are no spare aircraft.
Take a number and get in line, logistics experts say.
Or pay a premium for expedited service — on top of rates that typically are eight times greater than those for ocean shipping.
“Much of the available capacity has already been committed as we are seeing a huge spike in volume for the end of the first quarter,” Shawn Richard, vice president of global air freight at SEKO Logistics, said in an email. The increase coincides with China’s Qing Mei holiday in early April when factories ship more products before and after they close to keep up with orders.
The blockage of the Suez Canal by a container ship that ran aground is the latest body blow to international supply chains. Although the 20,000-TEU Ever Given was refloated Monday, it could take several days to clear the backup of 350 vessels waiting to transit the passageway and longer to reduce dwell times for vessels already on the way, according to maritime analysts.
Producers and retailers are still facing huge shipping delays and stockouts caused by supply constraints in ocean shipping, regional imbalances of shipping containers, port congestion, the Texas winter storms and the global shortage of semiconductors that has forced automakers to scale back production — a situation made worse by the recent fire at Renesas Electronics Corp.’s chip plant in Japan.
The squeeze in air cargo capacity that began a year ago means that mode has little room to act as a relief valve.
“The ability to absorb a problem has been stripped out of the system. All these things add up and each one makes it exponentially worse” in terms of maintaining fluid delivery schedules to manufacturing sites, warehouses and stores, said Dan Hearsch, a managing director for automotive and industrial at Alix Partners.
The Suez Canal closure is one of the biggest disruptions to global trade since the collapse of South Korean carrier Hanjin Shipping in 2016, which led to a 60% spike in container freight rates and pushed airfreight volumes up seven points, Jefferies equity analyst David Kersten said in a research note.
International air cargo capacity remains critically low because the pandemic has forced airlines to ground vast parts of their fleets, which provide more than 50% of the space used to move goods globally. Researchers say available aircraft space is still 15% below normal, despite a 26% influx of freighter capacity, as interest from businesses for cross-border transport continues to reach record levels.
Companies are still trying to catch up from COVID-related manufacturing shutdowns last year, as highlighted by the inventory-to-sales ratio at a 29-year low. E-commerce sales are booming at three times the pre-pandemic rate as homebound consumers spend money on goods rather than services, and another surge in orders is expected as people start cashing their $1,400 COVID relief checks from the government.
In response to anticipated ocean capacity issues as well as increased shipping activity during the next 30 days as brands race to restock inventory, San Francisco-based logistics service provider Flexport pre-booked a significant amount of air capacity from China and Hong Kong to Amsterdam; Frankfurt, Germany; and London Heathrow airports starting April 1, according to information provided by the company.
The weeklong closure of the Suez Canal is expected to further increase competition for scarce aircraft cargo slots. Demand for ocean-to-air conversion has skyrocketed this month as shippers, such as retailers with high-value goods and automakers, try to circumvent port congestion. Logistics providers say they are shipping products, such as hot tubs and exercise bikes, that never moved by air before. Import demand for personal protective equipment and COVID test kits made in Asia is rising again around the world, and researchers are forecasting double-digit growth in smartphone and computer sales.
Ocean shipping line CMA CGM notified customers that for cargo yet to be loaded on vessels, it is considering airfreight and rail service to prevent getting caught in the Suez gridlock.
Sold-out freighters
But options are limited.
Capacity tightness out of Asia has gotten severe in the past couple weeks. Mainland China and Hong Kong rates to the U.S. are approaching $7 to $9 per kilogram, depending on whether they are bound for the West Coast or East Coast, freight agents say. Departures from Taipei, Taiwan; Bangkok; and Ho Chi Minh City and Hanoi, Vietnam, are seeing end-of-quarter surges that are expected to continue through April, according to Flexport, a San Francisco-based third-party logistics provider.
The best hope for shippers is using a freight forwarder that rents entire planes, or sections, from freighter operators and has access to dedicated capacity.
But even bulk buyers, who often work through specialized brokers, say securing charter flights — either pure freighters or passenger aircraft temporarily moonlighting as mini-freighters — is extremely difficult.
“There is zero charter capacity available,” Brady Borycki, executive vice president for global business development at Wen-Parker Logistics, told FreightWaves. A cargo charter that was offered between Hong Kong and the U.S. was immediately snapped up this week for $1 million, which roughly translates to $10/kilo for customers with shipments onboard, he added.
Korean Air has no availability until at least mid-April and Cathay Pacific is sold out until May, said Marc Schlossberg, executive vice president, air cargo sales and marketing, for Unique Logistics International.
New COVID health measures in Hong Kong have significantly reduced Cathay Pacific’s cargo capacity and created operational challenges for FedEx (NYSE: FDX) and UPS (NYSE: UPS). Pilots who domicile in Hong Kong must quarantine for two weeks, which limits the supply of crews to fly aircraft. FedEx, which has its intra-Asia hub in the city, says the rules have added operational cost and complexity. Other carriers avoid changing crews in Hong Kong and China, but that often requires an extra stop in Seoul, South Korea, Tokyo or Guam, and slows transit times.
Freight forwarders report they are starting to see an uptick in the number of flight cancellations by Chinese-based carriers that are being forced to put their freighters through heavy maintenance checks required every few years, or a certain number of operating hours. Aircraft undergoing these deep inspections can be out of service from one to six weeks, depending on the type of mandatory service required, which could add to cargo delays.
Trans-Atlantic shrink
No major trade is immune from the lack of aircraft supply, according to purchasers of freight transportation.
U.S. exports to Europe, Latin America and Asia are strong, with demand outpacing capacity in all markets. It can take seven to 10 days from the time of booking for a shipment to get loaded on a plane. European export demand to the U.S. and Asia is twice what it was in prior months, with similar backlogs before cargo moves out on planes.
Meanwhile, trans-Atlantic capacity is actually decreasing due to the lack of travel demand as Europe deals with another wave of COVID-19 outbreaks and government lockdowns. Traditionally, airlines would now start expanding flight schedules for the summer season. Cargo capacity is down about 26% from pre-pandemic levels, with widebody belly capacity down 65%, compounded by the departure of one-time charters.
The biggest drop-off appears to be in the United Kingdom. American Airlines, for example, is not adding a third route to Heathrow, and British Airways has dropped a flight to New York.
Some widebody aircraft that normally would operate across the Atlantic are now being dispatched to regional routes between the U.K. and Europe, notably Germany, Belgium and Luxembourg, because of the huge cargo delays at land borders caused by Brexit and requirements for new customs documentation, Edward DeMartini, vice president of air logistics business development for North America at logistics giant Kuehne+Nagel (CXE: KNIN), said during a virtual briefing for customers last week. Shippers, especially automakers, have been forced to charter widebody aircraft to get cargo out of the U.K.
The upcoming wave of bookings is expected to send rates soaring even higher, freight managers predict.
Meanwhile, major U.S. and European airports such as Chicago O’Hare, Los Angeles and Amsterdam are experiencing congestion that is delaying the ability of businesses to collect their goods by up to four days or more, depending on the location and the specific warehouse operator involved, according to several forwarders. Some of the problems relate to labor shortages, including for truckers.
There is some light for shippers at the end of the tunnel in the form of potential increases in passenger traffic, and associated belly capacity, as more people receive COVID vaccinations.
Throughput at U.S. airports has exceeded 1 million people for 19 consecutive days, and domestic carriers say they are seeing strong signs of pent-up demand for travel. Carriers are adding new routes and flights, mostly to sunshine destinations for leisure travelers.
American Airlines (NASDAQ: AAL) said its seven-day moving average of net bookings is 90% of the 2019 level and that it expects the trend to continue through the second quarter, although seat capacity is still about 40% less than this time two years ago.
Most of the anticipated growth is within North America and the Caribbean, with international routes that support large cargo volumes expected to take longer to resume — unless there is enough high-yield cargo to offset limited passenger revenue. But United Airlines (NASDAQ: UAL) recently announced it will fly more than 100% of its pre-pandemic schedule to Latin America and resume flights between Chicago and Tokyo as well as New York/Newark and Milan and Rome, and restart service between Chicago and Amsterdam. In total, United plans to operate 52% of its overall schedule compared to May 2019.
If the Biden administration relaxes more international travel restrictions, it would be a signal to airlines that they could start adding some widebody flights for summer travel.
Click here for more FreightWaves/American Shipper stories by Eric Kulisch.
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