After battling tight capacity and unprecedentedly high rates for more than two years, the air freight market finally reached its tipping point in 2022 and started trending down. The relatively acute downturn was much welcomed by shippers, but it did force carriers and forwarders into a sudden reverse gear. As the market goes through its post-pandemic reset, it continues facing opportunities and challenges brought by macroeconomic, geopolitical, and environmental uncertainties.
The turning point
Throughout 2020 and 2021, the entire air freight market revolved around a single key word: capacity. The lack of capacity sent freight rates shooting up to historic levels, spurred by unprecedentedly high usage of charter planes and producing the most lucrative few years for the industry. From 2019 to 2021, global air cargo revenue increased by almost 100%, passing a historic high of $200 billion in 2021.
Reluctant to turn down shipping orders and constantly lose revenue opportunities, carriers started making capital investments in response to the boom, including buying or leasing new aircraft and conducting passenger-to-freighter conversions. In 2022, as travel restrictions were lifted in more regions, air travel rebounded, making belly capacity on passenger flights more available to shippers.
However, this increase in capacity was not met by a matching uptick in demand. In fact, the exact opposite. Air cargo volumes fell 8% in 2022 compared to the previous year. Consumer demand had stalled, and retailers realized their previous adrenaline rush to stock up had led to inventory surpluses.
This new supply-and-demand dynamic turned the tables. During 2022, Drewry’s East-West Air Freight Index dropped over 30% and continued trending down. It became clear that the market was normalizing.
What is gone, and what’s here to stay?
It has now been over a year since the market pivoted and started resetting. As we look back at the extraordinary couple of years through a rearview mirror with mixed feelings, what do we see?
Carriers’ rush to build up capacity certainly cooled down. Maersk Air Cargo has temporarily parked several leased cargo jets and reduced flight activity in response to declining demand. FedEx was reducing flight hours by 8% and parking more aircraft earlier this year because of continued low demand. On the shippers’ side, supply chain leaders are aiming at resetting pricing as well as their strained carrier relationships by conducting large-scale air freight sourcing. These competitive sourcing events resulted in significant value capture for shippers through not only big rate reductions but also removal of some pandemic-triggered unique phenomena, such as the need for charter planes, overcapacity surcharges, and other accessorial charges. Furthermore, shippers are leveraging these market events to reset their supplier portfolio. They are rewarding those carriers and forwarders that were true strategic partners during the challenging times by giving them expanded business.
During the pandemic, as they faced skyrocketing freight costs, many heavy users of air freight realized that they were mismanaging some of their shipments. For example, they were overusing certain service levels or not planning their shipments effectively. This mismanagement was exacerbated in the capacity-constrained market, causing organizations to “bleed” air freight spend. Reflecting upon lessons learned, many shippers have started making operational changes, such as reducing the frequency of intracompany shipments while consolidating loads, rationalizing service levels on high frequency lanes, and standardizing transit-time requirements. These sorts of improvements should continue even though market conditions have changed. What shippers seem to be still struggling with is integrating their demand planning with their operational functions to make their air freight demand more predictable, which would, in turn, help shorten lead times, reduce spot buys, and control overall costs.
A new era
The shocks of the pandemic might be a thing of the past, but some systemic macroeconomic changes are still happening, which will likely have transformational impact on the cargo air industry for years to come.
During the pandemic, despite the turbulent market environment, the aviation industry took on an unprecedented “challenge of our generation”: global warming. In October 2021, the International Air Transport Association (IATA), which represents some 300 airlines comprising 83% of global air traffic, approved “Fly Net Zero,” a resolution to achieve net-zero carbon emissions by 2050. This commitment aligns the industry goal with the Paris Agreement of preventing global warming from exceeding 1.5°C.
The IATA has created a plan to enable abating as much as 1.8 gigatons of carbon dioxide emissions in 2050. The industry will seek to make these reductions at the source through actions such as:
Any emissions that cannot be abated at the source will be eliminated through carbon capture, storage, and credible offsetting schemes.
Needless to say, the path to aviation net zero is challenging and costly. However, as IATA General Director Willie Walsh says, it is a necessary strategic step humanity must make “to ensure the freedom of future generations to sustainably explore, learn, trade, build markets, appreciate cultures, and connect with people the world over.”1 To achieve these milestones, airline companies must foster close collaboration across the entire aviation value chain and be supported by government policies and incentives that develop the required infrastructure and technology.
Another potential transformational force to the air cargo industry is the ongoing reshoring movement. Running through all of the numerous “x-shoring” terminology being developed (including reshoring, nearshoring, and friendshoring), there is one clear theme: The manufacturing landscape is shifting from global to increasingly regional as companies restructure their previously far-flung supply chains. If manufacturing and the corresponding supply chains become regionalized in the future, demand for long-distance international cargo will likely shrink. Meanwhile, major air freight corridors (for example, the transpacific) will likely re-arrange, with new hubs expanding in places such as Ho Chi Minh City, Mumbai, and Bangkok. Correspondingly, regional air cargo will likely pick up, as supply chains get decoupled into country clusters.
Regionalization will also drive further growth of road and rail transportation. Mexico started 2023 as the United States’ No. 1 trading partner, with total trade increasing 12% year over year to $64 billion. Correspondingly, trucks entering the U.S. at Laredo increased over 9% year over year in January. Reshoring and nearshoring should also boost demand for regional, short-distance ocean shipping.
After nearly 50 years of offshoring, the world is once again standing at a crossroads of its industrial manufacturing history. The exact impact of reshoring is far from clear, but it is certain that the overall supply chain and corresponding international freight landscape will be reshaped over the course of this new era.
1. “Net-Zero Carbon Emissions by 2050,” Airlines, International Air Transport Association (October 4, 2021): https://airlines.iata.org/2021/10/04/net-zero-carbon-emissions-2050
Balika Sonthalia is a senior partner and leads global management in the Strategic Operations practice of Kearney, a global management consulting firm, specializing in procurement, supply chain, and logistics. 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 ican be reached at Balika.Sonthalia@kearney.com
Yan Sun is a principal in Kearney's Strategic Operations practice.