The Economics of Air Cargo

Jan. 25, 2022
The pandemic’s influence on consumer purchasing habits, coupled with its role in slowing production created a demand for goods and an opportunity for air cargo growth.
The Aviation Agency
Bryan Del Monte
Bryan Del Monte

While the COVID-19 pandemic has negatively impacted air travel for the last two years, opportunities for air cargo have increased.

With a background as an economist, Bryan Del Monte, president of The Aviation Agency, offered his opinion with on what we can expect from the cargo industry moving forward.

COVID’s Disruption

Del Monte said COVID-19 is as significant of a disrupter as World War II was for generations prior.

“When there’s economic analysis, political analysis, usually we talk about after the second world war. I think COVID is so significant and has caused so much disruption, that in a couple years we’re going to talk about ‘post-COVID,’” Del Monte said. “Eventually, the pandemic is going to reach some sort of steady state and become endemic. And the whatever that life looks like, we’ll talk about growth and things like that, the changes in society in terms of politics, economics, consumerism, etc., post-COVID.”

During the beginning stages of the pandemic, demand fluctuated significantly. With money pumped into the U.S. economy, Del Monte said demand went from being very high to cratering in four months before recovering to about 80 or 90 percent of that high within 12 months after the crater.

“A lot of things that were hidden to us as consumers suddenly became real obvious,” Del Monte said, noting various product shortages. “There’s only so many containers. There’s only so many ships. They can only go so fast. And when passenger airliners were essentially grounded, there suddenly weren’t flowers – tulips for Easter. Well yeah, because they used to fly on the undercarriage primarily of passenger airliners.

“So we suddenly understood this very complex, interconnected dance of how we get the stuff we want,” he continued. “Add to that, then suddenly a lot of people have – quite frankly – considerably more money in their pocket than they’ve have had at any time in the last five years, were buying stuff in a way that’s never been seen.”

Cargo Demand

The pandemic’s influence on consumer purchasing habits, coupled with the pandemic’s role in slowing production created a massive demand for goods and services.

“The demand for goods and services is at an all-time high,” Del Monte said. “I understand, anecdotally, people may say, ‘Well I’m not employed or life isn’t good for me.’ I’m not trying to discount that, but when I look at the overall system, we’re like right on the edge of out of control, which is a part of what’s causing the inflation. It why inflation is transitory.

“So long-term, the only thing that can really grow faster is air cargo. And air cargo should grow faster, I would think, than other forms of cargo transport. If for no other reason, you can build a cargo plane a lot faster than you can build a cargo ship.”

Reflecting this demand, Del Monte said cargo transport rates are currently “through the roof.”

“Will it stay at that tremendous height forever? No. At some point, things will equalize. But the demand for goods and services, I don’t foresee as an economist, any reason why suddenly there would be a contraction,” Del Monte said. “We’re way too reliant on the free flow of goods. In the past two years, air cargo filled in that gap.”

Del Monte pointed to four key drivers for air cargo demand:

  • E-commerce
  • Time-sensitive and high-value goods, such as pharmaceuticals, perishables and personal protective equipment (PPE)
  • Real GDP growth and merchandise trade volume pressure
  • Crude oil

In terms of supply and demand, Del Monte said the first three are placing positive pressure in the mid- to long-range term on air cargo.

“The thing you’ve got to worry about is crude oil, which is the last element of the puzzle. Air cargo rates are essentially correlated with crude oil prices,” Del Monte said. “What isn’t clear to me is what’s the price sensitivity, or as we would say in e-commerce, the price elasticity? How sensitive are people going to be to increases in prices?”

The price of crude oil has been more volatile in the last 10 years than it was in the 10 years prior, Del Monte explained, and it could become more volatile moving forward.

“It would seem to me that the volatility of crude oil is the biggest thing to look at. Through my eye, my business isn’t predicated on these projections, but I would feel pretty comfortable saying for the next two years, I would expect air cargo demand pressure to be favorable to increasing prices and cargo carrier operators – and then all the ancillary businesses that serve those operators. Because I expect crude oil to bounce around a lot, but I don’t expect the net overall price to change that much over the next two years,” he said.

A Capacity Crunch and Potential Solutions

With demand for cargo at record levels, pressure is placed on cargo capacity.

The key stakeholders in air cargo cannot make additional market. So, the challenge is finding new ways to help meet demand, Del Monte said.

“The pressure is, ‘Am I figuring it out for six months or a year, or am I figuring it out forever?’” Del Monte said. “Is it a short-term issue I have to deal with or is there a structural change in the market?”

Del Monte said he suspects cargo companies will take lessons from the pandemic and adjust their fleets and capabilities.

“I’m sure they’re trying to pivot,” he said. “I don’t see airlines throwing seats on the tarmac to put boxes in. My understanding is that many, many passenger airliners are just not all that efficient for the purposes of moving cargo. They are, however, changing what they have in their fleet.

“I would imagine that the airlines, especially for transatlantic and transcontinental travel, they’re going to want a piece of this growth as well. So, I would imagine, they will favor aircraft that makes ground service easier, so they can make that money,” he added.

Del Monte preached resiliency and ingenuity as the aviation industry navigates through the remainder of the pandemic.

“The advice I give our clients is this – you got to find a way,” Del Monte says. “If the client isn’t talking to you, they’re talking to someone else.”

Bryan Del Monte is president of The Aviation Agency. He has deep expertise in the aviation industry and has provided several expert predictions and insights over the past two years as we continue to navigate the pandemic.