Air Cargo's Coronavirus Problem

Among the myriad of issues that arose in the world in the spring of 2020, there is one that is quietly resolved - one that has to do with the behind the scenes of a globalized and modern economy. Understanding it is easy. Basically, it is a simple mismatch between supply and demand. You see, in March 2020, when COVID-19 reached pandemic status, almost every airline in the world significantly reduced their flights. It varied from region to region and airline to airline, but the common tendency everywhere was that if one route was cut it was almost certainly a long-haul route.

 In an era of quarantines, border closures and other travel restrictions, demand for long-haul international travel is near zero, so intercontinental flights have been quickly cut from airline schedules. For example, in April 2019, around 500 round-trip flights per day would fly between Europe and the United States, but in April 2020 that number was reduced to around 80 per day. This represents between 80% and 90% reduction. Ignoring airline revenues you would think it would be a lossless situation, however: it cuts carbon emissions, many governments cover the wages of workers on leave, it cuts airline expenses, and no one is driving around. cabins anyway, but that doesn't account for what goes up under the cab.

Photo by David Preston on Unsplash

 On almost all intercontinental flights, in the belly baggage compartment, among the hundreds of passenger luggage there is cargo. 

In fact, 45% of the world's air freight is transported using this method. Now the math to explain the mismatch of supply and demand is simple. The proportion of cargo carried by passenger planes varies from route to route, so 60% of air cargo from Western Europe to the United States, for example, flies on passenger planes. . 80-90% of transatlantic passenger flights do not fly, meaning that around 50% of the air cargo capacity in this market is gone within weeks. The situation is less severe in other markets, but, at the industry level, the overall reduction in air cargo capacity was around 23% in March 2020.

So this is the figure for supply, but what about demand? 

As much of the world entered various foreclosure scenarios, economic forecasts collapsed. The magnitude of the financial toll won't be clear for some time, but it is clear that it is deeply negative. All of this has an effect on the demand for air freight. At the macro level, consumers buy less, which means less is shipped, which means businesses are buying less, which means less is shipped, which means suppliers are doing less, which means less is shipped . At a micro level, different jurisdictions around the world differ on the exact details of their response to the coronavirus, but in many places factories are closed, meaning supply chains are cut.

So from an economic standpoint, one could predict that demand would almost certainly be down
 But like all things in the coronavirus age, there is another dominant perspective - that of public health. From the moment COVID-19 emerged, it became clear that it was a highly infectious virus, which means that a crucial part of the safe treatment of an infected individual is the use of '' personal protective equipment, or PPE. In this context, it means masks, shields, gowns, etc., which healthcare facilities always stock, but never in the amount necessary to cover the near universal use of staff for a long time. This meant that, to reduce the risk of staff exposure, almost every hospital in the world needed more PPE. Coincidentally, it turns out that the world's leading producer of medical PPE was also the first country to experience COVID-19 - China. Before the pandemic, the country produced 20 million medical masks per day, about half of the global supply.

By early March, however, that had already been raised to over $ 100 million a day. It was exactly then that, simultaneously, China's manufacturing industry began to come to life and the virus really took hold of the rest of the world. With the speed with which COVID-19 increased, many hospitals in hot spots like Italy, Spain and the United States were reusing masks and, even with this technique, were reduced to just a few days of supply, so they needed supplies from China and other manufacturing centers. , as quickly as possible. In the logistics world, “as fast as possible” means air freight. Thanks to this urgent and unprecedented demand for PPE and other medical supplies, the demand for air cargo fell only 15% in March 2020. Considering the drop in air cargo capacity of 23%, this means that there was an 8% gap between supply and demand.

In the context of this huge industry, 8% is huge, so the laws of supply and demand have taken their course. 

The cost of transporting goods by air has increased, especially in critical markets from Asia to the US and European markets. In the last two weeks of March, air freight rates from Hong Kong to North America jumped 27% above normal, while tariffs from Shanghai to Europe rose 50% . Of course, after a mismatch between supply and demand, economic forces push companies to increase supply, which is exactly what happened. Cargo airlines that could massively increase their flights. Kalitta Air, for example, an American freight airline, has taken some planes out of the warehouse and increased its long-haul flights by almost 50%. However, there is little that these cargo airlines can do. They only have so many planes, pilots and mechanics that they cannot scale up operations massively in a short period of time. But that had the extra capacity was the passenger airlines, and that's where a small solution emerged.

A plane without passengers is not necessarily an empty plane. 

The average airline makes 15% to 20% of its revenue from freight, but keep in mind what an average airline looks like. Most of the average North American airline flights are domestic and short-haul, where little cargo is carried, so the proportion of revenue from cargo on a long-haul flight is much higher. Also consider that, on a normal long-haul passenger flight, a considerable part of the hold is filled with baggage, so that 15-20% comes from only part of the capacity on some flights only. Airlines quickly realized that it was possible to make a profit by flying an airliner without passengers. Now normally an A330 passenger, for example, has a capacity of 38,000 pounds or 17,000 kilograms of cargo in their hold. This is compared to the cargo version of the A330 which can carry 132,000 pounds or 60,000 kilograms of cargo thanks to its completely empty cabin. This means that the A330 passenger can only carry 29% of the cargo of his cargo counterpart.

However, given that freight rates have increased by almost 50%, that means flying these planes can earn around 44% more per flight than their cargo counterparts. Earning less than half that of freight airlines was certainly not worth flying passenger planes for freight, but there is more to consider. First, jet fuel prices are at an all-time low, largely in response to all-time low demand. The same gallon that would have cost airlines $ 2.20 in January 2020 costs around 40 cents at the end of April 2020, and those prices continue to drop. Under normal conditions, fuel is the number one cost for airlines, so this reduction by a factor of five significantly reduces the cost of operating a flight. This means that they have to earn much less than what a cargo airline does under normal conditions to break even.

Plus, most airlines pay their pilots and other staff anyway.

 In the United States, for example, airlines are required, as a condition of their government relief funding, not to lay off or lay off staff, so the marginal cost of staffing to operate an additional flight is minimal. Third, without passengers, airlines quickly innovated new ways of transporting goods. Many airlines have loaded their passenger cabins with cargo placed directly on the seats and secured to the seats. This greatly increases the complexity and loading time, but also greatly increases the capacity.

All of these conditions and circumstances combine to the point that, during that brief moment in time, the economy dictates that an airline can make a profit by flying an airliner without passengers. Major airlines like American Airlines, Air Canada, Lufthansa, and Air New Zealand started cargo-only flights - so much, in fact, that United Airlines, for example, had as many as dozens of passenger planes without passengers in flight. at the same time. around the world.

 It also created flights that had never happened before, such as a 16-hour non-stop trip from Sydney to Toronto by Air Canada. But it wasn't just the big airlines on the long flights. Small airlines also participated in the game. Air Greenland has started a link on a tiny Dash-8 propeller to carry coronavirus tests for processing at a Danish laboratory, Titan Airways has transported medical supplies to the isolated island of Saint Helena on an A318 passenger, and Wizz Air flew its passenger A321 to Shanghai via Kazakstan will carry medical supplies to Hungary. These circumstances have also led to a dramatic reshuffle of ranks and order in the world of aviation. The list of the world's busiest airports, in terms of annual aircraft movements, is normally led by Atlanta, followed by Chicago, Los Angeles, Dallas, Beijing and a number of other major major airports.

Normally you wouldn't expect an airport in the third least populous state in the United States to appear on the front pages of this list, however, for a brief moment in April 2020, it did. Anchorage Airport in Alaska has become the busiest airport in the world thanks to its strategic location. It has long been a busy cargo airport as it serves as a stopover point for cargo flights from Asia to North America. They stop here because it is more efficient for planes, on long-haul flights, to take less fuel and more cargo and refuel halfway than to fly nonstop to their destination. In addition, in some cases, cargo is sorted and exchanged between aircraft at Anchorage.

As of April 2020, the United States ranked number one in the world for new and total cases of coronavirus, so there was a huge need for medical supplies, which are mostly produced in Asia, so that hundreds of cargo planes per day passed through Anchorage on their way between Asia and the United States. So while all of America's other major airports fell into relative silence, Anchorage was busier than ever. There is one final problem facing the air cargo world, however. Beyond the short-term issue of excess demand, the long-term problem is that this demand will not last.

 Global demand for air freight closely follows global economic health. Each indicator suggests that the economy will not emerge from the COVID-19 pandemic, even close to the power of its entry, so there will undoubtedly be months and years slow for air freight. Once the urgent demand for medical supplies eases and buyers have time to switch to slower forms of shipping, the air freight world will almost certainly follow the fate of its fellow passenger carriers.

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