Expert opinion: Air Cargo yields – Quo Vadis? Cargo business is booming but for how long?

The aviation industry has experienced a tremendous roller coaster ride since early 2020 when the effects of Covid-19 related lock downs and travel restrictions kicked in. In contract to the passenger business, people involved in air cargo may have much enjoyed the ride. However, with demand soaring and belly capacities being drastically reduced, yields at times skyrocketed up to ten times as high as they were in the pre-COVID phase. This has led to phenomenons like passenger aircraft being used for the transport of cargo alone – a development which was entirely unthinkable in the years before.

Now the air cargo industry is facing the question: what is going to happen next? Despite the widespread industry consensus that yields will decline to a more reasonable level but remain at a clearly higher range than in 2019, it is a fairly big crystal ball to look into. Currently circulating figures give justified cause for optimism, but there are also certain possible limiting aspects that should not be completely disregarded. So, let us try to break it down and examine major factors which have a substantial influence on the development.

Looking at capacity first, it is obvious that aircraft bellies are back in business – not only because COVID restrictions have largely been lifted but also because there is a flying public that longs for travel after two years of pandemic. Nevertheless, many airlines in Europe and the United States are cancelling flights for lack of manpower– effectively reducing cargo capacity. The resulting high seat load factors may also drive pay-load restrictions on some routes. As far as the trade between the Far East and Europe is concerned, the war in Ukraine and the consequential unavailability of Russian and Ukrainian airspace for western carriers and resulting detours around the south of this area effectively leads to capacity reduction.

On the demand side, the recent lock-downs in China took their tolls – factories were shut down and supply chains disrupted due to the unavailability of drivers and cargo workers. Also, the effects of surging inflation rates, e.g. in Europe, will very likely have an adverse impact on the demand side of the equation. At the same time, ocean freight is subject to the same effects but also to port congestion on the US West Coast and in North European range, which in fact reduces available capacities. As in air cargo, ocean freight operators are reporting record breaking freight rates.

From either perspective, the resulting assumption is that cargo yields in the industry will remain stable at or around the present level for the next year since the effects described above have the potential to balance each other - at least as far the longitudinal trunk routes connecting the Far East are concerned. On the North Atlantic, the industry has recently reported a drop of freight rates by about a third versus last year’s climax as restoring aircraft bellies has taken effect. Simultaneously, it remains to be seen what the odds are going to be in smaller markets, particularly in the north-south and vice versa trade. Since often there are commodities originating from these markets that, other than those originating from e.g. high tech, pharma or fashion industries, cannot sustain high freight rates due to their limited trade value.

One final factor remains. Recently various cargo news outlets reported declining demand and softening freight rates. What actually was left in the dark was the seasonality effect, driven by the summer vacation period in the northern hemisphere. There are good reasons to expect yields picking up again towards the traditional peak period in late Q3 and Q4, 2022.

There are several factors for further optimism. Contrary to current industry predictions, however, the current euphoria could be dampened slightly due to the possible limitations. The air cargo community experiences exiting times – and there are definitely signs to assume the party is not yet over.

Author: Christian Meyer, Managing Consultant in the Solution Group Infrastructure & Operations

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