The e-commerce fuelled boom in US domestic air traffic appears to be over. This could have profound implications for the domestic air express business and the need for aircraft capacity in a market that is home to 43% of the world’s freighter fleet. Historically, there has been a strong correlation between growth in online shopping, overall economic growth and traffic moving through US domestic air express, e-commerce and general cargo networks. However, since late 2022 this relationship seems to have broken down – the market declined by 11% when the underlying fundamentals should have led to moderate growth in 2023 and we would expect about 7.5% growth in 2024 based on expected economic and e-commerce sales growth.
The US Domestic Air Cargo Market Today
Today almost about 90% of US domestic air cargo traffic consists of small package traffic, either moving through UPS and FedEx express networks, Amazon’s dedicated inhouse network or as mail uplifted on a variety of carriers. 90% of domestic US freight traffic is carried on cargo aircraft.
As of April 2024, the US was home to about 944 active freighter aircraft, about 43% of the world’s fleet. This includes 357 narrowbody, 517 medium widebody aircraft and 268 large widebody aircraft. While most large widebody aircraft (777s and 747s) are operated on international routes, around two thirds of medium widebodies (mainly A300s and 767s) and almost 90% of narrowbodies (mainly 757s and 737s) are operated domestically.
Between 2010 and 2021, US domestic air cargo traffic measured in freight tonne kilometres grew on average by 4.3% per year. Volumes peaked in the 12 months ended March 2022 and most recent data shows the same traffic level as five years ago.
These declines are reflected in UPS and FedEx package as well as USPS postal spend figures. FedEx package volumes today are where they were in 2017, while UPS overnight and deferred volumes are the same as at the end of 2018. Note, not all of FedEx express and UPS overnight and deferred shipments will move by air, but the series provides a decent proxy of what is going on in their domestic air network.
Figure 4 – UPS US Domestic Overnight and Deferred Quarterly Shipment 2015- 2023
USPS meanwhile has been successively reducing its spend on air transportation and shifting volumes into its ground network. FY 2023 (ended September) spend on air transportation was only 5.3% higher than 5 years earlier and 16% lower than the FY2021 peak.
E-Commerce Growth Has Left Air Cargo Growth Behind
Growth in online shopping is often cited as the primary driver of e-commerce growth. We find there is substance to this – statistically there has been a strong correlation between the growth in e-commerce, growth in the overall economy and growth in air traffic. Not all small package traffic is business to consumer (B2C) online shopping – for the express market the B2C share is about 40-50% today but was substantially lower 10-20 years ago when the primary driver was B2B parcels and documents.
The chart below shows the development of quarterly inflation adjusted e-commerce sales, compared to the overall economy and air cargo growth. The data is expressed as an index. Online shopping has grown much faster than the need for air. As the e-commerce share has increased from 4-5% to 15-17% of total retail sales it has also outpaced growth of overall spending.
While most of the corresponding increase in package volumes has been in ground networks, the demand for air capacity has nonetheless benefited. As the e-commerce share has increased the amount of traffic moving through US domestic air networks has also gone up. The chart below plots e-commerce as percentage of total retail sales against US domestic air cargo traffic levels for Q1 2010 through to Q4 2023. As the e-commerce share grew from 4% in 2010 to over 10% in 2019 air cargo also grew, although the incremental impact declined as e-commerce penetration increased. In other words, air benefited strongly in the “early” days of e-commerce but not any more as online shopping took on a more prominent position in the overall retail landscape.
Air Cargo Traffic Has Veered Away from E-Commerce Growth
Growth in the overall economy and e-commerce sales have generally been a good predictor of US domestic air cargo traffic. That makes a lot of sense – growth in overall economic activity means more B2C package (and document) shipments, growth in online shopping means B2C packages. The chart below shows actual domestic FTKs compared with what our forecast model would have predicted.
For the period between 2017 and 2019 we would have come in below actual growth. This was the period where Amazon was significantly expanding its dedicated air network which now is more mature (and in the last year even dropped in terms of output). For 2020-2021 we would have also come out lower, but that of course was during the crazy COVID period driven surge in online shopping.
2023 is what really sticks out though. We should have seen a moderate growth in traffic, but we saw closer to an 11% decline. For 2024, we would predict an increase of 7.5%. This could be an indicator of a fundamental change that has taken (or is taking) place in the e-commerce landscape.
Goodbye, Air?
So, what is happening? Fundamentally it boils down to the point that air products are too costly for a lot of what is moving by air. Average domestic per package yields for FedEx and UPS overnight and deferred are in the order of $23 and $19 respectively. Mostly customers receive free shipping or shipping at a discounted price, so there is constant pressure to reduce costs. In the most recent 12 months, 45 million packages disappeared out of FedEx and 75 million packages out of UPS’s domestic express networks, respectively, compared to a year earlier.
However, there also appear other factors at play, including:
- Cross border e-commerce eating into the market share of domestic e-commerce. Last year the number of Section 321 shipments entering the US increased by 383 million (or about 56% compared to a year earlier) thanks to a surge of shipments being purchased through platforms like Shein, Temu and of course also Ali-Express.
- More same day delivery requires distributed inventory. Air works for overnight but not for same day as express and other hub-based networks are not set up for same day delivery.
Lastly, as the e-commerce market takes a more prominent position in the overall retail landscape the underlying distribution starts looking a lot more like the traditional retail distribution network – lots of warehouses close to destination markets and less need for long haul movements.