The pandemic-era surge in air cargo demand is moderating as transport network logjams ease and economic headwinds loom. But constraints that have hampered efforts to increase capacity amid the recent e-commerce boom could also help offset a softening airfreight market—and potentially blunt impacts from an anticipated global slowdown.
Many operators are still scrambling to get their hands on equipment, while labor and feedstock shortages are complicating efforts to boost cargo capacity through passenger-to-freight conversions. Those bottlenecks, along with limited production of new freighters by Boeing and Airbus and the increased use of long-term contracts by some shippers to lock in air cargo space, could keep rates relatively stable even as pricing levels off from 2021’s record highs.
On a global level, airfreight capacity was still 10 percent lower in December — at the height of the holiday express season — than it was in the same month in 2019, before the pandemic, according to Deutsche Post/DHL Group. However, overall capacity is sufficient to support current demand and belly capacity has increased, according to DHL’s January 2023 Airfreight State of the Industry Report.
Market Overview
After a banner year in 2021, the airfreight market presents a mixed picture heading into 2023. In its most recent forecast, Boeing projected that air cargo traffic will grow by about 4 percent annually through 2041, as e-commerce networks and industrial production expand.
However, in 2022 industry-wide demand measured by cargo tonne-kilometers (CTKs) slowed, declining 8 percent for the full year compared to 2021, according to the International Air Transport Association (IATA). That figure represents a 1.6 percent decline compared to pre-pandemic levels in 2019.
Yet whether the glass is half empty or half full may depend on your standard of comparison. For example, while United Airlines reported that airfreight sales were down 35 percent YOY in the fourth quarter of 2022, cargo still accounted for a higher-than-usual share of the carrier’s overall revenue. United also logged $2.2 billion in cargo revenue, which, while down 7.5 percent from 2021, is nearly twice as high as pre-pandemic figures.
For its part, Delta Air Lines reported that its cargo segment notched record topline results. The company expects those revenues to increase further in 2023 despite lower rates “as increased capacity offsets the cargo yield environment,” the company said in its fourth-quarter earnings call.
Economic Uncertainty Ahead
The looming threat of a global recession is prompting caution as cargo operators monitor stagnating export orders and indicators suggesting high inflation could well persist in the coming year. “Any increase in volumes will only happen post recovery of the stronger economies, which is likely towards 2H23,” according to DHL’s December airfreight report.
German logistics company DB Schenker, for example, has reportedly reduced the number of flights on its freighter network as the gap between air freight demand and supply narrows.
“More capacity is coming to the market and consumer demand has dropped due to the high inflation,” Asok Kumar, executive vice president and head of global air freight for DB Schenker, told The Hindu. “Now yields are higher than pre-COVID but coming down because consumer demand is dropping.”
However, cargo operators that have shifted some business out of the more volatile spot market — where big pricing swings present deeper risks and rewards — could benefit if freight demand continues to downshift. Large retail, manufacturing and logistics customers that found themselves pinched by soaring airfreight rates earlier in the pandemic, when capacity was in short supply, are increasingly willing to lock in multiyear contracts to guarantee transport space. These long-term deals can provide stability for carriers in an uncertain economic landscape.
Investing in Capacity
Despite the cloudy economic outlook, carriers and freight forwarders with an eye on long-term growth are moving ahead with investments to expand capacity. Carriers have increased flight frequencies across all regions and are adding new freight schedules, according to DHL.
Operators are also expanding their footprints. DHL Express, for instance, is building a new gateway facility at Munich Airport that’s nearly seven times larger than their previous space. The company is also growing its partnership with Canadian carrier Cargojet, adding five Boeing 757 Freighters to the dozen that Cargojet already operates to service DHL’s global aviation network.
Newer entrants are also deepening their designs on the airfreight market. Ocean shipping giant Maersk continues to scale up its new air cargo business, adding a second Chicago-area hub and launching two weekly U.S.-Korea flights. Also Amazon has bolstered its logistics network by launching a European air cargo network, including a regional air hub at Leipzig/Halle Airport in Germany.
Established operators like DHL see the above developments as less of a threat than an opportunity, particularly when it comes to boosting network flexibility. For example, DHL has purchased cargo and belly space from other cargo and passenger operators with room to spare.
Evolving Outlook in Latin America
The Latin American airfreight landscape offers a somewhat more upbeat picture versus the pre-pandemic environment. While air cargo demand in the region was lower in January and in the fourth quarter of 2022 compared to year-ago levels, numbers are still higher than in 2019, according to WorldACD. Demand could increase further as a result of China’s relaxation of COVID-19 restrictions and as shifting macroeconomic conditions increase the likelihood of a “soft landing” for the global economy.
LATAM Cargo doubled down on its fleet after shifts during COVID-19 demonstrated the importance of freight revenue to the overall business. Before the pandemic, LATAM Cargo had a fleet of 11 Boeing 767 freighters. By adding another 10 Boeing converted freighters to the fleet, LATAM plans to nearly double its capacity, with up to 21 aircraft by the end of 2023. These medium-widebody 767 freighters are well-suited for certain markets in South America, where it’s less efficient to use large aircraft on some cargo routes. That fleet expansion has allowed LATAM to design and implement tailor-made long-term solutions for strategic customers on less-typical routes by leveraging the fuel-efficiency and optimal size of those aircraft.
That expansion will allow LATAM and its cargo subsidiaries to improve connectivity between North and South America and strengthen capacity from Colombia and Ecuador – key routes for that region’s flower industry. Additional flights will also support Chilean salmon exports and boost capacity between Brazil and markets in North America and Europe.
Challenges on the Horizon
Passenger-to-freighter conversions are a critical component of capacity-building strategies for LATAM and other operators amid limited production of new freighters by Boeing and Airbus. Competition for conversion slots is intense and the availability of feedstock for that work presents another potential bottleneck.
Operators scouting for those planes may have to wait longer or pay more than they expected. Labor shortages tied to the pandemic can also hamper those efforts — for example, if there aren’t enough staffers on shift for maintenance painting or other work.
Other areas to watch include the shifting of some cargo volumes from air freight to ocean as container shipping costs decrease from COVID-era highs and products that shippers had been flying to avoid transport delays move back to more affordable, but slower, modes of transport. However, some freighter capacity could be removed from the market as rising passenger travel demand expands the amount of available belly space — potentially crimping the profitability of freight-only cargo operations. Operators are also keeping an eye on labor talks at U.S. West Coast ports, which could increase air cargo demand if an impasse blocks the flow of imports through those gateways.
While the pandemic-era logistics boom may be receding, improving global economic forecasts could potentially bring bluer-than-expected skies for the air cargo market as China’s economy reopens and US inflation moderates.
Fiona Henderson is a partner with global law firm Norton Rose Fulbright. Based in New York, she is a banking and finance lawyer with extensive aviation sector experience advising lenders, investors, issuers and operating lessors on cross-border financing and sale and leasing transactions.
Jeffrey Weeks is senior aviation legal counsel at DHL Worldwide, where he provides legal and general commercial advice to DHL airlines and business groups across jurisdictions including Europe, Africa, Asia and North America.
Jorge Galvez is senior vice president of marketing and development for LATAM Cargo at LATAM Airlines.
