Like other major segments of the logistics sector, air freight has been buffeted in recent years by pandemic-related disruptions to the supply chain, rising fuel costs, and an uncertain macroeconomic environment. It has been a time of both unusual prosperity and unusual challenges—and the future holds both new opportunities and new uncertainties.
This report will offer a brief review of recent developments in air freight, followed by a snapshot of the current state of play and some thoughts about where the industry is headed next.
The recent history of air freight can be summed up by two simultaneous realities: acute constraints in supply and an astronomical increase in demand.
This confluence is hardly unique to air freight—it more or less sums up the experience of the entire supply chain industry over the past three years. If anything, the air sector has benefited from the fact that these supply and demand pressures have been even more acute within other transit modes.
For example, extreme volatility in both the ocean and ground transport markets has driven up demand for air freight. The mode is increasingly being viewed as a viable (if costly) option for shippers that would not have previously been inclined to see air as an alternative to water or land.
As a result, the air-freight sector took on an expanded role in global supply chains in 2021. As volumes and prices have risen in tandem, so have revenues. Air-cargo volumes rose by 18.7% and revenues soared to a record $175 billion in 2021, up by 36% from the previous year. (See Figure 1.)
Soaring revenues can make up for a lot of problems—but those problems still exist. Air carriers have incurred steep declines in passenger revenue due to coronavirus-related downturns in travel. High fuel prices have also taken a toll, as has a worker shortage. Capacity remains insufficient; available cargo tonne kilometers were 11.4% lower in 2021 than they were two years before, when the virus was just beginning to spread. (See Figure 2.)
The declines in air travel and the shriveling of capacity are related phenomena; before COVID-19, some 60% of all airborne freight traveled as “belly cargo” aboard passenger flights. As the pandemic led to travel restrictions, airlines cut back on passenger routes just as e-commerce skyrocketed on rising demand from homebound consumers. This convergence of factors has continued to define the trajectory of the air-freight sector.
Innovative ideas increase
The present condition of the industry reflects, by and large, a continuation of these trends. Port congestion and shipping backlogs remain with us, and air capacity is still relatively limited, indicating that prices and revenues will remain high for another year at a minimum. Air-cargo revenues are expected to total around $169 billion in 2022, down just a bit from 2021, but still a healthy 30% higher than in 2020. (See Figure 1.)
But to say “2022 is like 2021, just a bit less so” would not quite capture the moment. We are increasingly seeing innovative ideas to create more capacity and more options for everyone from shippers to freight forwarders to third-party logistics firms (3PLs). Those responses are being shaped by such factors as the density and frequency of a given route; the kinds of products being carried; and numerous other variables.
One approach has been to scramble for what limited capacity remains in the bellies of planes. A proven means of securing such capacity is by entering into block space agreements (BSAs), which airlines commonly sell to freight forwarders seeking to reserve cargo space. However, one of the signs of ongoing capacity limitations is the relative unavailability of BSAs on important trade routes.
This shrinking supply of BSAs—which is unlikely to increase anytime soon—is putting particular pressure on forwarders, especially the medium-sized and smaller ones that make up somewhere between 60% and 70% of the freight-forwarding market.
With belly capacity declining and BSAs hard to come by, the result is a marked uptick in spot-market rates; they’ve been at all-time highs.
So, how are forwarders and shippers responding? One unusual development we’ve been seeing is forwarders increasingly showing openness to long-term contracts in order to ensure access to cargo capacity.
But a far more widespread response to capacity scarcity is a rising interest in charter flights. A charter ensures a far higher level of control over timing and access than a BSA, which may be available for only a limited window and, even then, cannot ensure long-term access. We are seeing companies demonstrate greater and greater interest in acquiring an extended charter-flight access—six months, say—and running shuttle after shuttle along key commercial routes. During the pandemic, there has been more than a tenfold increase in charter flights. Logistics service provider DB Schenker, for example, has gone from chartering 210 flights for its clients in 2019 to 2,333 in 2021.
However, the heightened level of certainty and control that chartered flights provide comes at a cost. Charters are expensive. A single flight from East Asia to North America now runs about $3 million. These are lot more expensive when compared to standard options. But an increasing number of forwarders and third-party logistics firms are willing to pay the price. Air-charter usage by 3PLs is expected to increase by somewhere between 20% to 30% in 2022.
Another response to current supply-and-demand dynamics is consolidation. Some logistics firms are simply buying air-freight companies and bringing capacity in-house. For example, the shipping company Maersk bought Senator International, which provides air freight among other services, for $644 million.
Other companies have stopped short of buying such capacity outright, and are instead obtaining it through formal partnerships. While such alliances can be tricky to manage, they also provide a means of gaining access to much-needed capacity. DSV, a major European transport and logistics services company, forged partnerships with the air-cargo companies Atlas Air and Cargolux. Freight forwarder Flexport also reached a long-term charter agreement with Atlas Air to increase its air-cargo capacity by 50%.
Some companies are simply building their own dedicated air-cargo capacity. Maersk—in addition to its activities on the mergers-and-acquisitions front—has launched its own freight wing, Maersk Air Cargo.
For e-commerce players, the control of air capacity is vital to their ability to provide same-day or next-day delivery. Amazon’s fleet of leased or owned freighters is now in excess of 80 planes and growing. Similarly, Cainiao, the logistics company associated with Chinese e-retailer Alibaba; the Chinese logistics company SF Express; and the online marketplace Mercado Libre are all also growing their fleets and extending their integrated logistics offerings deeper into the supply chain.
Some passenger-air carriers are seeking to add more freight capacity by acquiring new cargo planes and by converting older passenger aircraft into freighters. Alaska Airlines—the fifth-largest passenger airline in the U.S.—announced it was converting two of its midlife narrow body Boeing 737-800 planes into cargo planes, having already converted three smaller Boeing 737-700s to cargo.
Another dynamic in the current air-freight market needs to be mentioned: rising fuel costs. Before the pandemic, fuel constituted about 10% of overall operating costs for the airborne-freight sector. Now, it’s more like 25% to 30%. Such inflation eats into profitability and compromises any bid to increase flight capacity.
Near-term to mid-term outlook
It is doubtful that belly-cargo capacity will recover to pre-pandemic levels anytime soon. Meanwhile, demand is likely to remain strong, especially along trans-Pacific routes. These factors, along with continued congestion in the seaborne market, mean that freight rates are likely to remain high.
A future trend worth noting is the accelerating momentum toward greater sustainability—partly to address growing concerns from consumers and corporate customers, but also to gain greater control over rising and often unpredictable fuel costs.
An increasing number of routes are using at least some form of sustainable aviation fuel, though there remains a cost premium that, for the moment, curbs broader adoption. Our current estimate is that it will be another decade before sustainable air fuels are available at the necessary scale.
But the air-freight sector has some strong incentives to get sustainability right. Shippers are under growing pressure to reduce emissions, and the lower carbon footprints of ocean, rail, and road freight could make those modes more attractive again once their capacity is restored. To retain the advantages it has won during the pandemic, the air-freight industry would do well to double down on its sustainability efforts—and thereby keep more of the customers it has been gaining during these turbulent years.
Balika Sonthalia is a partner in the Strategic Operations practice of Kearney, a global management consulting firm, specializing in procurement, supply chain and logistics. She leads the Deliver Tower within the practice, focusing on distribution strategy and design, omnichannel supply chain, and supply chain resilience. Balika holds a bachelor’s degree from SNDT Women’s University in Mumbai and an MBA from Carnegie Mellon University’s Tepper School of Business. She is based in Kearney’s Chicago office and can be reached at Balika.Sonthalia@kearney.com