Factors affecting air cargo
Following the pandemic, a sequence of events created a “perfect storm” of disruptions that impacted air cargo, all of which were interconnected and influenced by one another.
While struggling with other challenges, the Russian invasion of Ukraine had a detrimental impact on already weakened supply chains.
To start, suppliers of essential goods and raw materials, such as neon gas, steel, platinum, and titanium had to shut down, worsening the ongoing vehicle and semiconductor chip shortages. Crops and raw goods are short, pushing prices to increase, and the goods that can ship to the rest of the world will do so at higher costs.
On top of that, the high fuel prices are increasing the costs of travel and shipping for everyone, consumers and businesses alike. Then, the invasion forced cargo airlines to divert flights away from the region, adding to the time and costs to ship goods.
Both Russia and Ukraine are home to fleets with extra-large cargo capacity, and there are few options to replace them. Added to the ongoing issue of limited cargo space with passenger traffic still slow to return to normal, shipping rates may double or triple.
From the beginning of the pandemic, low air cargo capacity has been a problem for supply chains. With land and ocean cargo overwhelmed, air cargo became a viable solution, but the limitations on passenger travel and the variant strains of Covid-19 brought reduced passenger travel. With fewer passengers in the air, the bellyhold capacity is reduced, further limiting the available capacity.
Passenger freight also has limitations. Schedules for passenger flights don’t always align with the best routes to deliver goods, passenger flights don’t always serve key cargo trade routes, and not all cargo is suitable for the payload of passenger aircraft.
Rising shipping rates and inflation
The current air cargo situation is a confluence of many different factors, but the shipping rates are among the most noticeable. Shipping rates have been unstable since the beginning of the pandemic, but the rising fuel costs and Russia-Ukraine conflict only worsened the situation.
In addition, the economic rebound, increased consumer spending, and limited air cargo space further fuel the rising costs. Airfreight was once reserved for urgent, high-value shipments – with associated costs – but it’s now an alternative solution to the issues of truck driver shortages, port congestion, and other supply chain disruptions.
Shipping costs have a direct correlation with inflation as well, which is expected to increase through 2022. Inflation increases about 0.7 percentage points when the freight rates double, peaking after a year. It can continue up to 18 months, however, and likely will in the current climate.
Because shipping costs increased in 2021, inflation can reach as high as 1.5 percentage points in 2022. The conflict in Ukraine will also fuel global inflation, though how much remains to be seen as the situation develops.
The conflict may cause more significant disruptions to the supply chains in the future, pushing global shipping costs and fuel costs higher, and in turn, leading to increased inflation.