Overview
It is estimated that about half of the air cargo carried worldwide is transported in the bellies of passenger jets rather than in dedicated freighters. As COVID-19 shuts down travel in regions outside of China, commercial airlines have had to ground their planes, shifting market dependence towards freight haulers. China alone has seen its air cargo capacity decrease by 39% in February 2020 relative to last year because of these passenger flight cuts. As of 11 March 2020, freighter flights have already been up by ~10% from 788 to 870 flights per week as compared to 4 weeks prior.
Data from TAC Index Ltd, which tracks spot market prices of major air cargo trade lanes, has already showed a drastic increase in costs, especially for routes into China, where it tripled ina. Amatter of weeks (see Figure 1).
Figure 1: TAC Index, comparing regional airfreight rates
Impact on shareholders
While some airlines like Cathay Pacific Airways, Korean Air Lines and ANA Holdings are able to capitalize on rising freight rates to partially offset their steep revenue losses due to decreased commercial flights, other airlines are in deep water. Singapore Airlines (SIA) has plans to cut 96% of its capacity that was scheduled up to the end of April and is currently in discussions with aircraft manufacturers to defer payment and deliveries of upcoming aircraft.
Airlines are not the only ones suffering amongst the slashing of flights worldwide. Small-medium enterprises reliant on e-commerce or international production do not have as much leeway to offset increasing production costs. For example, a small logistics company in Shenzhen, China which relies on air-transport to supply Amazon sellers in Europe and to import UK-made car parts for assembly inside China has seen prices triple. While airlines are able to supplement their lost revenue with the increased air-freight rates, these business owners have no choice but to take whatever flights are available, even if they cost higher and take longer.
Even though the drastic increase in transportation rates have yet to feed through to consumers as higher prices, it is hopeful to think that this will continue as the COVID situation worsens. If these inflated rates persist, business owners may not be able to resolve their bottom lines and generate returns without increasing their profit margins in the form of higher prices.
The Figures
Figure 2: List of cargo dischargers (Regions), July 2019 by tonnage - extracted from data.gov.sg
The NEA region has the largest share of cargo discharge per tonnage as of July 2019 (See Figure 2). As COVID-19 started its rampage in China, it is no wonder that a supply shock was induced due to the cancellation of flights in and out of the region.
Figure 3: Volume of Commercial Flights per day
Figure 4: Volume of Freight-Haul flights by two major service providers per day
COVID-19 has had a delayed effect on world-wide commercial flights as compared to flights to and from China due to the virus gaining momentum in other regions (such as Europe and US) only in March 2020. This has manifested clearly in the volume of world-wide commercial flights falling much later as compared to flights between the US and China (see Figure 3).
Meanwhile, flight volumes of FedEx Express and United Parcel Services (UPS) have remained relatively stable, staying true to their usual cycles (see Figure 4).
This only supports the fact that around half of the world’s cargo is carried on commercial flights. The driving force behind the rising air-freight rates are due to supply reductions caused by a reduced volume of daily commercial flights – and the numbers make this explicit.
Figure 5: Comparison of Aircraft Configuration Capacities
Depending on how the situation progresses, airlines may opt to revert to strategies adopted in the 1970s where combi-flights were more commonplace. Comparing the different carrying capacities of configurations of the Boeing 747-400(one of the largest aircrafts used by commercial airlines), it is possible for airlines to convert their passenger aircraft to either combi or full on cargo configurations in the medium-long term. This could possibly help to rescue their own bottom lines while also helping to control the surging air-freight rates.
Moving Forward
As COVID-19 spreads rapidly in the US and Europe, both major sources and destinations of freight to and from China, capacity problems may evolve to more demand-centric issues. The delayed impact on Europe and the US may see consumer demand fall as these regions introduce social distancing measures and even lockdowns as seen in Italy and Spain. While this may help to stabilize air-freight rates for companies in the middle of the supply-chain, airlines may be in trouble without this crutch to support their slashed revenues.
For Investors
A clear example of the recent impacts on the industry can be seen below. Freighting typically contributes only 5-10% of a commercial airline’s revenue. Although airlines are still able to offset their losses from cancelled commercial flights, its impact is limited – and investors realise this. On the other hand, dedicated supply-chain logistics companies like UPS are more shielded. On top of being able to benefit from the decreased capacities of belly cargo and higher rates, UPS and other integrated carriers(who have assets and people throughout the chain – from ground handling to freight forwarding) are able to be more adaptive and optimize their operations according to the changing demand funneling from COVID-19’s impact on consumer demand and on commercial airline capacity.
Figure 11: Comparing American Airlines Group and United Parcel Services
