During the global pandemic, there has been a cargo boom – a significant upward trend in air cargo. A part of this results from disrupted supply-chains that have required more rapid shipments, increasing demand. Another part of this is the convenience of online ordering and next-day home delivery of items rather than physically shopping at stores, which also decreases demand, albeit primarily domestically. From a supply standpoint, air cargo has taken a large hit in available belly cargo capacity as international flights have been slashed during the pandemic, and are just now coming back, albeit quite slowly, for international operations.
From a supply-demand balance standpoint, demand for air cargo has increased, while supply has decreased. These are perfect conditions to create a cargo boom and demand for more freighters. Both OEMs and converters are responding to the demand, whether with new models like the Airbus A350F or new cargo conversion programs, including the 777-300ER. But the critical question that needs to be asked is whether the new demand will still be there when the new aircraft arrive, or if demand will return to more normal levels and new deliveries risk overcapacity in freighters?
Let’s look at the forces driving the cargo boom, and the timelines for factors influencing both demand and supply.
Air cargo has traditionally been most effectively been utilized for high value-added items, as ocean freight remains much less expensive, with of course much slower delivery times. But during the pandemic, ocean shipping has become constrained at US West Coast ports, with both Los Angeles and Long Beach having ships moored off-shore waiting to unload for days or weeks since the pandemic hit full force in March of 2020 and facilities were closed. Since re-opening, they have been running at near capacity but have been unable to catch up with demand, a problem that remains today. These delays, in both components and finished goods, have created supply-chain shortages that on occasion can only be solved through air cargo to meet the demand for finished products in a timely manner. To make it worse, there is now also a buildup of ships off China’s ports trying to get the export shipments underway.
When is this problem likely to be resolved? That short answer is certainly not before 2022, and perhaps not until 2023, depending on what happens with the pandemic. The highly contagious Delta variant has, with other factors, kept employment levels down, making it difficult for stevedores to make inroads with the backlog of vessels parked offshore. But by 2024, it is expected that the pandemic will have run its course and ocean shipping will return to normal logistics flows.
Certain cargo, such as vaccines, of course, can both spoil and some require special handling and temperature controls. These pharmaceuticals, which we all hope are temporary and not permanent fixtures, require air cargo. But this will likely be a one-time or two-time occurrence that won’t linger.
Online shopping is expected, however, to remain a permanent pattern in the patchwork quilt of American societal evolution. The convenience that spurred the growth of Amazon and has spurred big box retailed Wal-Mart to aggressively compete indicates the long-term success of online shopping. It is quick, it is easy, and it is competitively priced, and you can do it from anywhere on your laptop or even smartphone. This demand isn’t going away and has created its own cargo boom for package express carriers.
But this demand is primarily for last-mile service, a boon to FedEx, UPS, DHL, and Amazon PrimeAir, who need to deliver to virtually every house, anywhere. Demand for regional flights to smaller cities could mean an increase in regional airline belly cargo and more turboprop and regional jet flights to meet the increasing demand from outlying locations. The online shopping world is feeding the package express carriers, who can plan their capacity growth within their hub and spoke networks with wide-body, narrow-body, and regional aircraft. But we don’t expect shopping to turn into a cargo boom for additional wide-body cargo aircraft.
Yes, products must flow from factories to the warehouses from which they will be delivered, but when capacities are back to normal and ocean freight becomes timelier, this may not have as significant an impact on intercontinental freighter aircraft. Unless the product is highly valuable or has a spoilage issue, the cheapest way will turn out to be the best for shippers and buyers, and that typically means ocean freight.
Supply has been constrained, particularly from countries with travel restrictions due to the pandemic, including flights to and from China. What were once daily frequencies are now weekly, and the impact of the reduction in belly cargo capacity has been significant. But the trend is beginning to reverse. Emirates is expecting more than 50 A380 aircraft in service prior to year-end. A relaxation of border restrictions from the EU and US is resulting in flights returning to trans-Atlantic schedules later this year. The result will be a slight gain in capacity as we approach the October schedule change, with more extensive changes likely in December 2021 and April 2022 schedules. By fall 2022, airlines expect that most routes will be operational again and that by late 2023-early 2024 traffic will have returned to pre-pandemic levels.
Those increases in capacity will provide substantial room for belly cargo, perhaps obviating the need for some stand-alone cargo aircraft. This will occur just as new conversions enter the market and just before new models from Airbus (A350F) and Boeing (777-8F) begin deliveries.
The Bottom Line
A good part of the air cargo boom during the pandemic appears to be unsustainable long-term. With belly-cargo supply increasing and ocean freight getting back on track near the end of the pandemic, we may suddenly find ourselves with an oversupply of cargo aircraft. If an airline doesn’t have one on order that will be delivered soon, it may arrive too late to serve the current bubble in air cargo demand. New cargo aircraft ordered today will likely be delivered just as the cargo boom ends in 2023-24. Is it too late to order wide-body aircraft for intercontinental cargo growth? In our opinion, it likely is. While this doesn’t mean that there will not be a success for new models from the replacement market, the economic dislocations caused by the global pandemic won’t remain forever and need to be factored into analyses of potential demand.