If you had to pick only one word to describe the airfreight industry in 2020, “fragile” would be a good choice.
Air freight’s interdependency on passenger flights to move freight means that it has faced opposing demand shocks this year. Passenger demand plummeted as nations closed their borders and airlines grounded hundreds of aircraft. At the same time, demand for time-critical personal protective equipment (PPE) for first responders surged.
Overall demand for air cargo declined by 20% in June, but capacity dropped by 34%.1 The result was drastic price increases for cargos that absolutely had to move, such as medical supplies to combat the pandemic. The monthly TAC Airfreight Rate Index (Figure 1) reported a 45% increase in May over the previous 5-year high, which occurred prior to 2019 tariff implementations. Anecdotally, a few of my clients reported rates in excess of $10/kg on individual shipments from China to the United States. I’d be surprised if this weren’t reflective of a broader trend.
Replacing these aircraft are more modern widebodies, like the 787 and A350 XWB. While the order book remains several years deep, airlines have cancelled over 800 orders for 2020 through June, or roughly 15% of Boeing’s total logbook. Almost 90% of the aircraft deliveries this year, however, have been widebody models. Depending on the configuration, the passenger and cargo capacities of the new planes are similar to the aircraft they are replacing. The impact on capacity in the market, however, will depend on the level of acceleration of retirements relative to new deliveries.
Meanwhile the pandemic disruption has impacted key airfreight routes throughout the globe. Shippers have reported circuitous routing for their shipments through new gateways. This has introduced longer transit times, both due to longer routes themselves and due to delays related to clearance of cargo passing through new customs jurisdictions. The shutdown of passenger flights has temporarily made Anchorage, Alaska, the world’s busiest cargo airport, rising from sixth to first place on the Air Cargo News’ “Top 20 Cargo Airports” list.
Another change worth noting is a general awakening to the value of resiliency in the design of a global supply chain. This will impact the use of air freight in several ways in the near term. First, the strategic importance of air freight as a safety valve has been proven during the first half of 2020. Few shippers with a global footprint will risk going without a robust air contingency capability in place. Second, Kearney’s 2020 U.S. Reshoring Index report, “Trade War Spurs Sharp Reversal in 2019 Reshoring Index, Foreshadowing COVID-19 Test of Supply Chain Resilience,” found a renewed focus on reshoring away from China to other low-cost countries (LCC), principally Vietnam. Because Vietnam has much slower ocean transit times than China (Maersk publishes a 22-day transit time to Los Angeles, California, versus 11-day service from Shanghai), the air option will be increasingly important contingency for Vietnam-manufactured goods.2
One trend that remains on pace is the adoption of digital freight platforms for bookings. After a short blip down during the peak of COVID-19 airfreight demand, Freightos’ Webcargo marketplace saw e-booking orders grow by over 700% in June 2020 with up to 15% of global airfreight capacity available on digital marketplaces.3 The principal features that made e-booking attractive before COVID-19, namely the convenience and transparency into rate and capacity, have even stronger appeal in a constrained market. Similar to other types of e-commerce platforms, digital airfreight marketplaces have reached a level of adoption in 2020 that was not expected to be achieved until years from now.
Volatility ahead
Given all the change and disruption happening in the industry, the big question on shippers’ minds is when we will get back to some semblance of normalcy. Many shippers have postponed airfreight negotiations with their forwarders, and many of our clients are asking us when they should follow through with their annual air tenders.
The short answer is we’re unlikely to see stabilization through the end of the year. COVID-19 continues to spread across much of the U.S., and many Americans will be reluctant to fly anytime soon. Both of these issues will factor into passenger demand and the reintroduction of widebody belly space into the market. The International Air Transport Association’s (IATA’s) own forecast is that passenger volumes will not return to 2019 levels until 2024.
If that’s the case, then we can expect quite a bit more volatility ahead. Shippers—recognizing the need for air freight as an expensive (but necessary) lever to enhance the resiliency of their global network—will need to be nimble to deploy it at a reasonable cost. However, the adoption of tools like digital marketplaces can provide more transparency to enable better decision making. Even the largest users of air freight are facing the same issues, so those shippers that make the best of the current situation will be those leveraging all the tools available.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modeling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.