The global spread of the COVID-19 has had an enormous impact on the aviation and air travel industry all around the world. In 2020, the number of passengers in aviation dropped by an unprecedented (-60%) or 2,699 million passengers compared to 2019. This resulted in $371 billion loss of passenger operating revenues by airlines around the world [ICAO, 2021]. The contraction of the airline industry has also had extremely severe socio-economic consequences as millions of jobs in travel industries were lost and many airline companies went bankrupt or underwent restructuring. Although we already can see a reversal of the downtrend in travel industries in 2021 as travel restrictions are being lifted in most parts of the world, it is expected that it will be no earlier than 2024, when the passenger traffic recovers to 2019 levels [IATA, 2020].
In the meantime, the calamities in the global airline industry and other consequences of the coronavirus crisis of 2020 increased the attractiveness of air cargo services. On average, the costs of shipping one kg of cargo by air transport relative to ocean shipping nearly halved since November 2020 [Freightwaves.com, 2021]. Ocean transportation still remains to be the cheapest and by far the most widespread means of cargo transportation around the world. The average price of sending cargo by maritime transport is six times lower compared to air traffic rates. The maritime transport accounts for nearly 80% of the global merchandise trade by volume and roughly 70% by value [UNCTAD, 2020].
The spread of the new coronavirus infection in 2020 and unprecedented restrictive measures taken by many countries all over the world caused serious disruptions in supply chains that had negative effects on travel industries global trade. The drastic changes in the behavior and lifestyle of billions of people around the world have also caused sharp swings in consumption patterns. For instance, starting from the second half of 2020 there has been a tremendous increase in demand for a wide range of manufactured goods as people started to spend much of their time at home trying to maintain social distance. Home utensils, equipment, furniture and other goods typically used at home started to sell like hotcakes. A sudden surge in demand for these types of goods in online markets quickly started to deplete inventories, and many major sellers had no other option than to order air freight delivery of goods due to very small maritime fleet capacity available and heavy port congestion. Therefore, a substantial amount of goods that usually had previously been shipped by maritime transport started to be delivered by airfreight. The sudden increase in demand for electronic equipment and household items starting from fall 2020 was one the main factors that drove the prices of maritime transport upwards.
This might seem a rather unsettled factor for keeping the price difference between air and maritime cargo transportation low in longer-term perspectives because production would respond, rebuilding the inventories and maritime traffic would finally adjust to the existing demand for cargo transportation. However, there are reasons to expect further gradual shrinkage of the difference in competitiveness between maritime and air transport in the global trade of goods. First of all, the supply chains do not seem to recover as rapidly as they were expected because the situation with the pandemic is still uncertain. Countries are locking down and opening up unpredictably, causing disruptions in supply chains globally. Moreover, the recovery phase of the global demand is likely to continue further as many countries do not want their economies to contract and keep stimulating consumption at any costs.
It should also be noted that airline industries around the world underwent serious changes in order to survive during the pandemic. Generally, the measures of adjustment taken by airline industries to meet the global decline of demand for air traffic increased the attractiveness of air cargo transportation services. Many carriers have spent a substantial amount of their resources to switch to cargo transportation converting passenger planes into freighters. A sharp contraction of passenger flow in 2020 led to a 69% drop in passenger revenue. On the other hand, cargo revenues grew 27%, which completely changed the business model and priorities of airline companies during the peak of the crisis [Bcg.com, 2021]. Tight financial conditions and change of revenue sources during the pandemic have made carriers and logistics companies to adjust by optimizing the costs in many ways. For instance, unlike previously, the freighters started to use smaller airports more frequently instead of major hubs in order to station closer to final producers and final consumers. This in turn is not an option for marine carriers that are tied to sea ports. In order to keep revenues coming in, some airlines have started to offer sightseeing flights that allowed customers to enjoy flight experience and yet not going anywhere. The combined effect of all measures taken to bring down the transportation costs of cargo-oriented supply chains have had a substantial positive effect on air transport, making it more competitive than before. Therefore, air transport is likely to remain a good option for at least some industries as long as container shipment prices stay high.
Although air freight and ocean shipment are not full competitors in cargo transportation, there are certain industries where the first option is as viable as the latter or even better in terms of providing returns. Typically, air freight is quite a good option for delivering commodities with high value and small mass. For example, manufacturers of electronic equipment, aerospace components, semiconductors, fish products, fruits and vegetables, and pharmaceuticals often use air freight services. Consequently, increased competitiveness of freight carriers would entail higher viability of air transportation for greater number of industries. A rising value of time in the economy and increasing popularity of on-time delivery to customers is another important factor that will favor airfreight carriers in the near future. Many recent studies find that same-day delivery is becoming very popular and more people are willing to pay extra charge for it [Conveyco.com, 2021].
Among other things, the COVID-19 pandemic has set very important trends in global transportation and mobility. The reducing difference of competitiveness between air and maritime transportation of cargo will certainly have important implications for global trade and landlocked countries in particular. The continuation of these trends would eventually help these countries to partially overcome their perennial challenge and improve their positions in the global trade, providing them with better access to geographically distant markets. These processes should also be understood as a policy making guidance. In this light, strategies of investing in logistics and particular industries with high capacity to export using air transport will have greater chance of success for landlocked countries.
References
Bcg.com (2021). Digital innovation will take air freight revenues to new heights. Retrieved from https://www.bcg.com/publications/2021/digitization-in-air-freight-value. Accessed on 18.09.2021.
Conveyco.com (2021). 14 Statistics that Show the Importance of Same-Day Delivery. Retrieved from https://www.conveyco.com/delivery-statistics/. Accessed on 17.09.2021.
Freightwaves.com (2021). Stranger things: Air cargo becomes value play over ocean freight. Retrieved from https://www.freightwaves.com/news/stranger-things-air-cargo-becomes-value-play-over-ocean-freight. Accessed on 18.09.2021.
International Air Transport Association (2020). Recovery Delayed as International Travel Remains Locked Down. Retrieved from https://www.iata.org/en/pressroom/pr/2020-07-28-02/ Accessed on 17.09.2021.
International Civil Aviation Organization (2021). Effects of Novel Coronavirus (COVID‐19) on Civil Aviation: Economic Impact Analysis. Retrieved from https://www.icao.int/sustainability/Documents/Covid-19/ICAO_coronavirus_Econ_Impact.pdf. Accessed on 17.09.2021.
UNCTAD (2020). Review of Maritime Transport 2020. Retrieved from https://unctad.org/topic/transport-and-trade-logistics/review-of-maritime-transport. Accessed on 16.09.2021.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.