For several months, the industry has been talking about the increased demand for imports, tightening capacity for container shipping, and driving up the cost to ship via ocean containers. In addition, the backlog in receiving goods at certain U.S. ports has meant disruption along the supply chain. The surge in imports is far from over, and shippers are realizing they will have to find alternatives to shipping via ocean freight. 

Turning to Air Cargo

The trans-Pacific ocean trade route has been at its busiest for months as consumers continue to spend on actual goods over activities, events, and travel.  The limited space on these ocean carrier routes is putting pressure on logistics companies and shippers to find alternative ways to get items shipped on time. This results in paying top dollar to get spots on passenger or all-cargo air carriers. 

Supply chain bottlenecks in the ocean freight market mean that air cargo will be running high for the rest of 2021, most likely.  The usual summer slump might not occur this year as many businesses will shift from ocean to air to move goods as the delays at ports continue into the second quarter of this year. Additionally, personal protective equipment from Asia to the U.S. will remain strong, as well as the distribution of the COVID-19 vaccines by air will contribute to air transportation demand.

As a result of all of these factors, the global air cargo services market is expected to grow from $56.48 billion in 2020 to $64.98 billion in 2021, at a compound annual growth rate of 15%. As more companies rearrange their operations due to the COVID-19 pandemic, air transportation is only expected to grow over the next five years. 

Air Freight Rates Remain High

With ocean freight at its limit, and more shippers are turning to air cargo for their transportation needs, rates for air transportation will continue to increase. The Transportation Air Cargo Index, which measures the price per kilogram on the spot market to move freight, indicates that spot rates were higher than usual for January and February of 2021.  At this time of the year, spot rates usually fall for several lanes, for example, Hong Kong to North America. In fact, air cargo rates have been higher as compared to previous years since April 2020, in part due to the reduction in passenger airplanes.

The cost gap between air freight and ocean freight has narrowed, although the price of air transport is still higher for many goods. But with the delays occurring with ocean freight, the faster service and guaranteed capacity help offset the higher cost. 

Forecasting the Rest of 2021

For those manufacturers that are trying to forecast demand for the remainder of 2021, they are realizing that it is quite a challenge. Once restrictions ease and consumers can do more outside their homes, will the high demand for goods remain consistent?  Carriers are also in a bind when it comes to forecasting and importers are expecting huge rate hikes on their contracts.

As a result of the current conditions, some companies are looking to move their production to other countries and become less reliant on China. A survey by BDO USA LLP found that 24% of companies surveyed would like to move their supply chains to another country in the next year. If this occurs, there will be a change in the need for routes to and from Asia.  If some production moved to Europe or the U.S., Los Angeles would not have the import demand it has currently, and more imports would shift to coming through East Coast ports.  This too would shift freight pricing. 

With airlines taking on a large amount of debt to hold them over until passengers start flying again, some will need cash flow to pay down the debt. The growing cargo business is not enough to offset the entire amount of debt, however, will be a source of cash flow for many of the airlines. If demand for air cargo was not as high as it is, the airline industry would be in even more trouble. However, with the ocean freight at its max capacity, air cargo will remain strong this year.

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