By Glyn Hughes, director general, TIACA
It is always amazing to realise how quickly external factors change and how they impact the air cargo industry.
Two years ago global inflation rates were running away in double-digits, consumers were being hit with energy costs that had gone up by double in many countries and mortgage rates were on the up as central banks pulled the central bank interest rate increase lever to control inflation.
With the consumer getting hit in both pockets their discretionary spending power evaporated. And with air cargo moving many commodities that fall into the category of discretionary spend we saw the industry hit hard with reduced demand and the consequential drop in yields as capacity was returning with increasing passenger demand post-Covid-19.
Supply/demand
But that was then, and this is now…as we look at November 2024. With a vastly different backdrop of 10 months of consecutive double-digit growth in demand but with capacity growth of less than half that rate the focus is now on securing capacity to satisfy that growing demand. Yields rose throughout the year and systems are preparing for stress points expected during Q4 and into 2025.
Another difference between November 2022 and November 2024 can be seen on the high seas. In November 2022 an average of 2,000 ships per month were passing through the Suez Canal. Following the outbreak of armed conflict in the Middle East, that number has dropped by more than 66%. With alternative sailings around the Cape of Good Hope taking up to two weeks longer and costing significantly more in terms of fuel burn and crew costs, many urgent shipments turned to air, placing even more pressure on the desire for supply/demand equilibrium.
So, as we head into 2025, we can expect significant focus on how to satisfy demand to keep the ultimate customer happy, how we deal with changing regulations focused on border management, how we continue to support the dramatic growth in e-commerce, how we address trade imbalances, how we tackle sustainability and how we must continue to focus on attracting the next generation of industry leaders.
But with that complex and challenging situation lets now throw in two more significant factors which will influence air cargo in 2025 and beyond.
Expiration of the ILA agreement
Firstly, the date of January 15 looms large and near. This represents the date that the interim agreement signed with the International Longshoremen’s Association (ILA) expires. And if a new agreement is not concluded then the strike that lasted three days back in October will likely resume.
The ILA represents 45,000 workers across 36 US east coast and Gulf ports. The interim agreement which was accepted by all parties addressed the financial aspects of the labour negotiations but the key issue that still needs addressing is the use of automation. In an effort to protect its members’ jobs the ILA is rejecting the port terminal operators desire to move towards automated cranes to improve productivity and operational efficiency.
If the strike resumes, the consequential shift for some urgent or perishable shipments from ocean to air will place further stress on an already tight compacity situation. Although the scale of the passenger sector recovery on trans-Atlantic services does mean that there is a growing amount of belly capacity available.
Tariffs
Then we move forward five days, January 20, as that reflects the inauguration of the next US president. Incoming President Trump has already notified key US trading partners that he will sign executive orders upon his return to the White House that would see the imposition of tariffs on goods imported from those countries. He indicated that a 25% tariff would be imposed on goods coming from Mexico and Canada as a penalty measure to motivate the governments there to address illegal cross-border migration and drug smuggling.
He also indicated that a further 10% would be imposed on goods coming from China to motivate the government to crack down on illegal fentanyl smuggling to the US. This is on top of the threatened tariff plan of up to 60% on goods to address current trade practices. Currently, two-thirds of goods imported from China to the US are subject to some form of tariff. The situation has steadily been increasing over the last two presidential terms.
So, what might the implications for air cargo be following the imposition of these new tariffs?
Be prepared
Firstly, a tariff is by definition a domestic tax which most likely raises the final price of the goods to the consumer, it is therefore inflationary and reduces the discretionary spending power of the consumer.
The vast majority of trade between the US and Mexico and Canada is transported by road so the impact on air cargo is expected to be minimal, except for the fact that every additional dollar that a product increases potentially is a dollar taken away from other purchases so we could see consumer activity slowing.
As to China, manufacturers may explore different options to try and overcome the negative effects of such tax situation. They could shift the place of production to a jurisdiction not subject to tariffs, in this case, beneficiaries could be other countries in south east Asia. This would accelerate the China plus one strategy and could actually increase demand for air cargo as diversified production sites would require greater supply chain support.
Another scenario could materialise if the cost to market in the US of Chinese imported goods goes beyond the price the US consumer is prepared to spend then we could see products shifted to new markets, again this could benefit air cargo as its likely multiple new markets would be opened up.
Either way, the air cargo industry must remain agile and prepared for whatever challenge materialises.
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