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Tangled supply chains – and the outlook for air freight

Global supply chains are clearly in something of a tangled mess, particularly in the key area of container shipping.

According to Maersk Line director Neil Ashby, speaking at the recent Multimodal 22 conference in the UK, some 10% of current container capacity is being lost right now simply due to port congestion.

Indeed, according to regular data published by Oceanic Investment Management, congestion – defined as when vessels are chartered or employed but are stopped waiting to load or unload, or to cross canals and other pinch points – has increased markedly in the past 18 months, and is still higher this year than a year ago.

According to Oceanic CIO Cato Brahde, one of the longest-running hedge fund investors in the shipping sector, this looks like being a problem for some time going forward.

Perhaps reflecting this, there are obvious major problems in the supply chains for key sectors – such as semiconductors, which have been hitting production in big industries like car manufacturing.

Julian Walker, chief commercial officer at Associated British Ports, told the Multimodal audience for instance that UK exports of cars are down about 46% from this time last year

– and car imports also down some 35%.

But to what extent does that offer opportunity to the air freight sector – long regarded as a relatively smaller if far from insignificant dimension (certainly by value) in the total freight market? To what extent, in short, could air freight ride to the rescue?

Geopolitical developments and other major events in recent years – from Covid pandemic lockdowns to closure of the Suez Canal and war in Ukraine – have certainly heightened awareness about the capabilities and possibilities of air freight.

If you need something moved urgently from A to B and other ways of moving it are not functioning normally, then sending by air is one option – if an expensive one.

Obviously, air freight might not be the answer for all types of goods or commodities, such as with heavyweight materials.

Certain types of goods can also be dangerous to carry, such as lithium batteries, though in most cases can probably still be handled by air through appropriate controls and safety procedures.

Beyond that, there are also widely held objections to the huge carbon footprint of the airline industry – though increasing use of sustainable air fuel (SAF) will hopefully see that issue increasingly resolved over the coming years.

There is also a lot of complexity to the air freight sector. The Covid pandemic, for instance, may have highlighted the attractions of air freight as an alternative. But it also came with a sharp reduction in air freight capacity – as the huge reduction in passenger plane traffic removed a lot of bellyhold capacity from the market.

Some airlines responded during the pandemic by increasing their air freight capabilities, such as through conversions of passenger planes to handle freight.

And over time more capacity has gradually come back on stream as passenger traffic picked up again – notwithstanding the recent spate of cancellations of scheduled flights by many airlines across the industry.

According to data from IATA, the airline industry trade association, air cargo volumes rose 18.7% in 2021 – back above the pre-pandemic peak, but not quite above the biggest ever year IATA had recorded, which was back in 2010. Though then fell back again in Q1 this year as lockdowns came into effect in various parts of the world, notably in key export markets like China.

Perhaps of more interest are the Baltic Air Freight Index (BAI00) numbers collected by TAC Index on industry pricing activity, which most recently showed a rise of 31.9% in overall air freight prices year-on-year to 20 June, 2022 – though with considerable regional variations by outbound location.

Net of any fall in volume, this no doubt reflects a considerable increase in the dollar value of air freight being transported.

On the other hand, the cost of jet fuel had also gone up by a whopping 120-130% over the same period, according to data from Platts – depending on which region you were looking at. So, if anything, the profit margins for air cargo carriers overall seem to have come down.

At first sight, this might look surprising – if one might be expecting a rise in demand given the problems with containers and other modes of transport.

On the other hand, there is no doubt plenty of complexity behind the numbers. For instance, the inability to move either components or manufactured goods by container – whether they be personal computers or mobile phones – does not necessarily mean they can be moved by air instead.

Local lockdowns in key manufacturing centres such as Shanghai have hit both production and the ability to move things on the ground – whether to local ports or airports.

Another theme which came up repeatedly at the Multimodal event was an ongoing move from ‘just in time’ production systems to ‘just in case’ – accelerated by fears about vulnerabilities to long and over-extended supply chains during the pandemic.

While most industry participants do not anticipate the world moving over entirely to a ‘just in case’ approach – with manufacturers hoarding stockpiles of inventories – there has clearly been a significant move in that direction.

So there is a likelihood that inventories are now pretty high in many sectors – notably in consumer goods like textiles. At the same time, following the onset of the Ukraine war, soaring fuel prices and fast-rising inflation in a stagnant global economy, there is also an expectation that consumers are likely to become more cautious – if not be more cautious already.

Against that, there is still a sense that production levels and supply will rise as the year goes on through Q3 and Q4 – notably in important manufacturing centres like China.

And so – if container congestion continues to be a problem, which it looks like it will be – then air freight carriers could yet be well placed to take advantage.

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