Airlines in scramble to deliver goods in time for Christmas

After the most devastating year in the history of aviation, airlines are scrambling to deliver goods and presents in time for Christmas.

With thousands of jets grounded in the wake of the pandemic and the collapse in passenger numbers, cargo capacity has been dramatically cut, just as an online shopping boom has prompted demand for air freight to soar.

It means companies are struggling to find planes to move goods around the world in the run-up to the busiest time of the year, putting the global supply chain under pressure.

“There aren’t enough cargo freighters in existence to meet the need for travel by air,” said Heathrow airport’s chief executive John Holland-Kaye.

Overall freight capacity has fallen 25 per cent year on year, according to global trade body the International Air Transport Association (Iata), while the cost of transporting goods by air on the Baltic Exchange has spiked again after rising to record levels in the second quarter.

With US consumers spending $9bn online on Black Friday last week, up 21.5 per cent compared with 2019, according to software group Adobe, the rush into ecommerce is straining the market to the limit.

The squeeze on supply chains and disruption to services prompted Amazon to urge customers to shop earlier than normal to make sure they meet their Christmas deadlines.

“It’s going to be tight for everyone . . . we will all be stretched,” Amazon’s chief financial officer Brian Olsavsky told analysts in October.

The capacity shortfall has been compounded because the aircraft best suited for carrying cargo, the large wide-body jets used for long-haul, are still mostly grounded, with demand for short flights returning more quickly.

It has forced the cavernous specialist cargo planes to take up the slack. They are transporting 80 to 90 per cent of the world’s freight this year, an increase from about 50 per cent, said John Peyton Burnett, managing director at air freight pricing group TAC Index.

Air cargo and courier companies such as DHL and FedEx have also kept flying to try to plug the capacity gap.

“We are anticipating the mother of all peaks [ahead of Christmas]”, said John Pearson, the chief executive of DHL Express.

Germany-based DHL uses a fleet of 280 aircraft, about the same number as British Airways, and has added a further 17 this year to help deal with the capacity shortages, as well as hiring 10,000 extra staff.

“It’s a bit like Brexit. It is preparation, preparation, preparation,” he said.

With more aircraft standing if needed, Mr Pearson is confident the complex web of supply chains connected by air will not break down.

Line chart of share of revenue from cargo and logistics (%) showing that cargo has become more important to airlines

US delivery company FedEx, which employs 500,000 people, is also adding an extra 70,000 seasonal staff to help cope with demand.

“I’ve been in this business for 40 years. I’ve never seen a more difficult operating environment from the one we are in,” FedEx Ground’s chief executive Henry Maier said on the group’s most recent earnings call.

Many airlines have stepped up too, launching cargo-only flights, with more than 2,000 aircraft adapted into freight workhorses this year, Iata calculates.

Emirates’ four-engine A380 superjumbos, which can carry up to 50 tonnes of cargo, have roared back into the air as makeshift cargo aircraft.

“We saw the opportunity and we knew our existing fleet of freighters wasn’t going to be sufficient to meet demand,” said Nabil Sultan, an executive at Emirates SkyCargo.

The Dubai-based airline has also stripped out the seats from 10 of its Boeing 777 planes to turn them into “mini freighters”.

“We’ve seen an increase in demand for shipping medical items such as PPE and medicines, essentials such as fresh food, and even in ecommerce as consumers moved online for their purchases,” said Mr Sultan.

This freight demand has put airlines including IAG, Lufthansa and Air France-KLM on course for their best-ever cargo results, although it will do little to offset the billions of dollars in lost passenger revenues.

Line chart of Baltic Air Freight Index showing that the cost of transporting goods by air has spiked again

It has also turned the industry’s economics on its head, according to HSBC analysts, as airlines for the first time plan long-haul routes around where cargo needs to be moved rather than where passengers want to fly.

Although less than 1 per cent of the world’s goods are flown by aircraft, it accounts for more than a third of global trade by value. Expensive items including electronics and expensive fashion are usually flown rather than shipped as are perishable foods, flowers and pharmaceuticals.

For lower-value products, rising costs risk pricing them out of the market. Items such as flowers were left on the tarmac as “prices went through the roof” earlier this year, said Mr Peyton Burnett of TAC Index.

“It gets so expensive to move a particular product, it is not worth it . . . there is always capacity in the market, you just have to pay for it,” he added.

Delivery failures for these lower-value items may be repeated as Christmas approaches, particularly if online demand increases and freight rates spike higher.

There will be an even greater challenge in the new year, as the need to distribute Covid-19 vaccines creates more pressures.

Vaccine distribution will probably present an “unprecedented challenge”, warned Iata’s head of cargo Glyn Hughes.

It was just as well that distribution was only expected in scale in the first quarter of 2021, he said, once the busy period was over.

“In a way, the timing is quite good,” he added, given that almost every aircraft would be full between now and Christmas.

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