Passengers make decisions on when, where and how they will travel. Cargo is indifferent to all three variables. Passengers will be asked to follow prescribed distancing, facial coverage and behavioral rules even as we wean our way out of the full impact of Coronavirus, Cargo has no such worries. The subtext of this is that cargo may take on a much more significant revenue role, not simply for airlines, but for airport revenues as well.
What the Coronavirus has done to our industry is in certain ways unprecedented, but it seems that the lessons of prior crises have been forgotten completely as airlines and airports struggle to understand what to do. Opportunism, and in some cases desperation, are driving a lot of the top floor decisions at airlines and airports as they struggle to understand what is next.
As projected by many industry analysts, the passenger side of the business will take a year to begin recover and get back to the business of flying, and at minimum, three years for the industry to return to a semblance of the revenue stream they enjoyed prior to the pandemic. On the cargo side, return to normalcy will come much sooner, and with a more substantive return on the dollar.
A list of future events could look list this:
- International airline routes will take much longer to come back vs. domestic. Passenger load factors will climb again once the crisis is well over, but will be lower than the 80%-plus level which was the norm before the crisis.
- There is even the specter of some countries closing their borders, or otherwise restricting the passage of tourists. They may allow business visas, but only after close screening with the usual monetary guarantees. In short, there will no long lines to get into the Uffizi Gallery in Florence, Italy.
- For the business traveler; hello virtual meetings, goodbye large travel budgets. Companies will flatten or even lower their travel budgets as airlines raise ticket prices and entry into foreign lands becomes a challenge. (Airlines may also be forced to adjust seating accommodation to extend distance between seats and the tried and true old rule of supply and demand will be another reason to raise ticket prices.)
- Consumers will be cash starved for a while, and overseas vacations will be a luxury, not an option. Domestic travel may even grow as those travels normally crossing the pond will fly overland to reach domestic vacation sites.
- Airlines may use this crisis to downsize staff permanently, and to refresh their fleets with more fuel- efficient aircraft.
- Not having a direct effect on passenger air travel, but perhaps having a residual effect on cargo is the trend of the centralization of manufacturing in the home country of the firm.
- The lessons learned by the U.S. with the withholding of generic pharmaceutical products by China, and learned by the Japanese in their sourcing of component parts in China are clear signs that countries may want to build a complete unit/and or product line, and not be dependent on other countries to complete the assembly of the finished product. * Stemming from the pandemic, the director of the U.S. National Economic Council, Larry Kudlow, said “Washington should pay the moving costs of American firms bringing manufacturing back from China”.
- In a recent story in the South China Post, it was reported that: “Last week, Japan unveiled a $2.2 billion dollar fund to tempt Japanese manufacturers back to the country or in special circumstances, to South-east Asia – as long as they leave China – in response to supply chain disruptions”.
- U.S. Water Heating firm, Bradford White, may have to halt production because a plant they relied on in Mexico to get component parts closed due to Coronavirus. The product is called essential in the U.S. since it supplies hospitals and nursing homes but no so in Mexico. Bradford White may now have to close their U.S. plant. Pulling component manufacturing out of Mexico now becomes a must-do.
Air Cargo and Logistics
Cargo revenue contribution can and will make a huge difference for airlines in the future when it comes to reinstating passenger routes, and it will have a significant impact on their choice of aircraft size and service frequency. Cargo’s financial contribution has always been critical to passenger airline profitability, but now will take on a critical role in decision making for boards in the coming years on which routes can resume profitably, and which aircraft is right to serve the demand anticipated.
The answer to the question where airports invest their dollars; passenger service facilitation versus cargo service facilitation may be reversed where cold storage, fast transfer, roadways and warehouses adjacent to runways becomes key factors in airport choice, not the traditional consultant calls and passenger surveys.
There will be a belly capacity shortage as the weakest airlines disappear completely and older, cargo-friendly passenger widebodies are retired. Airlines will strive to find profitable solutions to optimize their assets, in an environment where passenger yields and load factors alone cannot come close to providing the solution.
As airline fleets shrink and activity levels decline, airports will be seeking to retain and, hopefully, gain a greater share of the airline traffic and activity that will remain, and air cargo can and must play a central role in decision making.
There is much uncertainty as to what the future air cargo market will look like, but certain trends are evident. E-commerce demand will certainly continue to grow faster than anticipated; there will be a new tendency toward reshoring or near-shoring supply chains to reduce risk; and geopolitics will have an increasingly important impact on both demand and capacity.
How Government Can Directly Intervene
Governments must understand that all cargo widebody freighters that are available and controlled for crisis management are a national priority, and if they are not a part of military fleets then some form of program, such as the U.S. Civil Reserve Aircraft Fleet (CRAF), should subsidize commercial airlines to operate them so they are available in times of need, thus avoiding the deficiencies so well highlighted in the past months.
It is no secret that before the crisis, with declining passenger yields due to overcapacity, most international widebody routes would not be profitable without the contribution of air cargo. Going forward, the economics of air cargo must be addressed and recognized fully so that airlines can sustain vibrant and critical services, and not just during a crisis.
Airline and Airport Boardrooms Must Again Have a Strong Air Cargo Representation
How airlines and airports manage the next three years will determine how well-positioned they will be once the crisis is over, and may be “make or break” for many. Some argue that even after the crisis, sustainable operations will not be possible without government support.
However, relying on governments to support airlines or airports indefinitely is unwise and unrealistic. It is quite realistic for passenger airlines to restore air cargo professionalism – making sure that cargo professionals are hired, trained and heard in the boardroom.
Airports need to recognize that cargo handling facilities are important strategic assets, not simply real estate transactions. It is no secret that U.S. Midwestern airports are eating eastern coastal airport’s lunch. They are luring natural eastern airport business revenue away by their development of modern, cargo-centric facilities, and excellent roadway connections. Developers, ground handling companies and other logistics service providers which occupy these facilities must understand that the quality of the services offered is a crucially important marketing tool for the airports and their airline customers, and invest accordingly.
For cargo, we see less contact with packages with social-distancing required, and vigorous IT and AI intervention easier to install and operate which is not the case with passengers.
Airlines must realize that cargo is a core business now and invest in their cargo management, staff and training. Provide them the resources they need to deal directly with all stakeholders and principals in the air cargo supply chain at all levels.
The next three or more years will be an extreme challenge for the global air transport industry, and there will be many casualties along the way. There is very little management “wiggle” room anymore, and no time for trial and error. It is clear that, in an environment with greatly diminished passenger revenues and market and fleet uncertainties, air cargo can and should take on a much greater importance in planning and decision-making, for both passenger airline and airport managements, but how this is done cannot be left to chance.