Air Cargo’s Coronavirus Problem

This video was made possible by Curiosity
Stream. For just $12 a year, get access to both Curiosity
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of Majuro. Out of the myriad problems that emerged in
the world in Spring 2020, there is one that is quietly being solved—one that has to
do with the behind-the-scenes of a globalized, modern-day economy. Understanding it is easy. At its core, it’s a simple supply and demand
mismatch. You see, back in March 2020, when COVID-19
reached pandemic status, almost every airline in the world drastically scaled back its flying. It varied from region to region and airline
to airline, but the common trend everywhere was that, if any route got cut, it was almost
certainly a long-haul one.

In the era of quarantine periods, border closings,
and other travel restrictions, there is near-zero demand for long-haul, international travel,
so intercontinental flights were quickly removed from airline schedules. For example, in April 2019, about 500 roundtrip
flights per day would fly between Europe and the US, however, in April 2020, that number
was reduced to about 80 per day. That represents between an 80% and 90% reduction. Ignoring airline revenue, you’d think that
that would be a loss-free situation, though: it reduces carbon emissions, many governments
are covering the salaries of furloughed workers, it reduces airline expenditure, and nobody’s
riding in the cabins anyways, but that doesn’t consider what rides below the cabin.

On nearly every intercontinental flight, in
the belly hold, among the hundreds of passenger bags, there is cargo. In fact, 45% of the world’s air cargo is
carried in this method. Now, the math to explain the supply and demand
mismatch is simple. The proportion of cargo carried on passenger
aircraft varies from route to route, so 60% of Western Europe to US air cargo, for example,
flies on passenger planes. 80% to 90% of transatlantic passenger flights
are not flying, which means that about 50% of air cargo capacity in this market has disappeared
in a matter of weeks. The situation is less severe in other markets,
but, industry-wide, the overall air cargo capacity reduction was about 23% in March,
2020. So that’s the supply figure, but what about
demand? As a huge proportion of the world entered
various lockdown scenarios, economic forecasts plummeted.

The extent of the financial toll will not
be clear for a while, but it is clear that it is deeply negative. This all has an effect on air cargo demand. On a macro level, consumers are buying less,
which means less is shipped, which means companies are buying less, which means less is shipped,
which means suppliers are making less, which means less is shipped. On a micro level, different jurisdictions
worldwide differ on the exact details of their Coronavirus response, but in many places,
factories are shut down which means supply chains are cut. So, from an economic perspective, one would
predict that demand would almost certainly be down, but like all things in the age of
Coronavirus, there is another dominant perspective—that of public health.

From almost the moment COVID-19 emerged, it
became clear that it was a highly infectious virus, which means that a crucial component
of the safe treatment of an infected individual is the use of personal protective equipment,
or PPE. In this context, that means, masks, shields,
gowns, and more, which healthcare facilities always stock, but never in the quantity needed
to cover nearly universal staff usage for a long period. That means that, in order to reduce the risk
of staff exposure, nearly every hospital in the world needed more PPE.

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Purely by chance, it turns out that the number
one medical PPE producing country in the world was also the first country to experience COVID-19—China. Before the pandemic, the country produced
20 million medical masks per day, or about half of the world’s supply. By the beginning of March, though, this had
already been scaled up to more than 100 million per day. It was at exactly this time when, simultaneously,
China’s manufacturing industry started to inch back to life and the virus truly took
hold of the rest of the world.

With how fast COVID-19 ramped up, many hospitals
in hotspots like Italy, Spain, and the US were reusing masks and, even with that technique,
were down to only days of supply, so they needed supply from China, and other manufacturing
hubs, as fast as possible. In the logistics world, “as fast as possible,”
means air cargo. Thanks to this unprecedented and urgent demand
for PPE and other medical supplies, demand for air cargo only dropped by 15% in March,
2020. Considering air cargo capacity dropped by
23%, that means that there was an 8% gap between supply and demand. In the context of this enormous industry,
8% is huge, and so the laws of supply and demand followed their course. The cost to transport goods by air spiked,
especially in the crucial Asia to US and Europe markets. In the last two weeks of March, air cargo
rates from Hong Kong to North America jumped 27% above normal, while rates from Shanghai
to Europe increased by 50%.

Of course, after a supply and demand mismatch
economic forces push companies to increase supply, which is exactly what happened. Cargo airlines that could massively ramped
up their flights. Kalitta Air, for example, an American cargo
airline, brought some aircraft out of storage and increased its long-haul flying by nearly
50%. However, there is only so much that these
cargo airlines can do. They only have so many aircraft, so many pilots,
and so many mechanics so they can’t massively ramp up their operations in a short time. Who did have extra capacity, though, were
passenger airlines, and that’s where a small solution emerged. A plane with no passengers is not necessarily
an empty plane. An average airline earns 15% to 20% of its
revenue through cargo, but keep in mind what an average airline looks like. Most of the average North American airlines’
flying is domestic and short-haul, where little cargo is carried, so the proportion of revenue
coming from cargo on a long-haul flight is far higher. Consider too that, on a normal long-haul passenger
flight, a considerable portion of the cargo hold is filled with baggage so that 15 to
20% is derived from only some of the capacity on only some flights.

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pexels photo 6778573

Airlines soon realized that there was a possibility
of turning a profit flying a passenger plane with no passengers. Now, normally, a passenger a330, for example,
has capacity for 38 thousand pounds or 17 thousand kilograms of cargo in its belly hold. That’s compared to the freighter version
of the a330 which can carry 132 thousand pounds or 60 thousand kilograms of freight thanks
to its completely empty cabin. That means that the passenger a330 can only
carry 29% as much cargo as its freighter counterpart.

However, considering that freight rates have
risen by as much as 50%, that means that flying these aircraft can earn about 44% as much
per flight as their freighter counterparts normally do. Making less than half as much as cargo airlines
clearly would not make flying passenger aircraft for cargo purposes worth it, but there is
more to consider. First, jet fuel prices are at an all-time
low, largely in response to all-time low demand. The same gallon that would have cost airlines
$2.20 in January, 2020 costs about 40 cents in late-April, 2020, and those prices are
continuing to drop.

In normal conditions, fuel is airlines’
number one cost so having that drop by a factor of five reduces the cost to operate a flight
dramatically. That means that they need to earn far less
than what a cargo airline does in normal conditions to break-even. In addition, most airlines are paying their
pilots and other staff anyways. In the US, for example, airlines are required,
as a condition of their government relief funding, to not lay off or furlough any staff,
so the marginal staffing cost to operate an additional flight is minimal. Thirdly, with no passengers, airlines have
quickly innovated new ways to carry cargo. Many airlines have loaded their passenger
cabins with cargo placed directly on top of and fastened to seats. This dramatically increases complexity and
loading time, but it also dramatically increases capacity. All of these conditions and circumstances
combine to the point that, for this brief moment in time, economics dictate that an
airline can turn a profit flying a passenger plane without passengers.

Big airlines like American Airlines, Air Canada,
Lufthansa, and Air New Zealand began cargo-only flights—so many, in fact, that United airlines,
for example, had up to dozens of passenger-less passenger planes airborne at the same time
all around the world. This also created flights that have never
happened before, like a 16-hour nonstop cargo-only trip from Sydney to Toronto by Air Canada. But it wasn’t all just big airlines on long
flights. Smaller airlines too got in on the game. Air Greenland started a link on a tiny propeller
Dash-8 to transport Coronavirus tests for processing in a Danish lab, Titan airways
flew medical supplies to the remote island of St Helena on a passenger a318, and Wizz
Air flew their passenger a321’s to Shanghai via Kazakstan to transport medical supplies
to Hungary. These circumstances have also led to a dramatic
reshuffling of rank and order in the aviation world. The list of the world’s busiest airports,
in terms of annual aircraft movements, is normally headed by Atlanta, followed by Chicago,
Los Angeles, Dallas, Beijing, and a number of other major hub airports. Normally, you wouldn’t expect an airport
from America’s third least populous state anywhere on the first pages of that list,
however, for a brief moment in April, 2020, that was the case.

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Anchorage airport, in Alaska, became the world’s
busiest airport thanks to its strategic location. It has long been a busy cargo airport as it
acts as stopover point for cargo flights from Asia to North America. They stop here because it is more efficient
for aircraft, on long-haul flights, to take less fuel and more cargo and refuel halfway
through than fly nonstop to their destination. Also, in some cases, freight is sorted and
exchanged between aircraft in Anchorage. In April 2020, the US ranked number one in
the world for new and total Coronavirus cases, so it had a tremendous need for medical supplies,
which are overwhelmingly produced in Asia, so hundreds of cargo aircraft per day passed
through Anchorage on their way between Asia and the US. So, while every other major airport in the
US fell into relative silence, Anchorage was busier than ever. There is, however, one final issue that the
air cargo world is facing. Beyond the short-term issue of too much demand,
the long-term issue is that this demand will not last. Global air cargo demand closely tracks with
global economic health. Every indicator suggests that the economy
will not emerge from the COVID-19 pandemic even close to as strong as when it entered,
so there will undoubtably be some slow months and years for air cargo.

Once urgent demand for medical supplies eases,
and buyers have the time to switch to slower forms of shipping, the air cargo world will
almost certainly follow the fate of its passenger-carrying colleagues. On the exact same day as this video goes out,
we released a brand-new, hour-long documentary called, “The Final Years of Majuro.” It’s about the isolated nation of the Marshall
Islands and, specifically, what life is like when you know your nation is coming to an
end—when where you live has an expiration date.

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