Global trade is (again) in a phase of major disruption. Yet the commentary around the most recent quarterly company announcements shows that while engaging in tactics, businesses are failing to develop long term strategies. Yet much of what is happening should not come as a surprise and is consistent with longer term trends that have emerged over the last 10 years or so.
The Times They Are a Changin’
We are going through a time of historic developments that could trigger recessions, change the future trajectory of the world economy and with it trading and travel patterns. People generally resist major charge and therefore hope that no fundamental shifts will occur – even when there is in fact evidence that such shifts are occurring.
Recent logistics company earnings calls underline the reluctance to think more deeply about how the future could change. Some examples:
- Maersk (18 Mar) still planned to reach targets in 2025 but would provide more guidance at the November [!] Capital Markets Day
- Kuehne and Nagel (24 Apr): no compelling reason to change guidance
- UPS (29 Apr): weak China to US lane to be offset by other markets
- DHL (30 Apr) implied that sanity will ultimately prevail, and the trade war will go away
- Maersk (8 May): there will be offsetting opportunities in other markets.
Most logistics providers are saying that their own customers are essentially waiting to see how their supply chains are going to be affected and if anything, have been pulling forward inventory. That pull forward is particularly evident in US import data as well as Chinese export data through to April.
None of this should really come as a surprise – trade relations between the US and China have been becoming more hostile at least since the first round of tariffs were imposed by the first Trump administration in 2018. The Biden administration did not roll these back but imposed additional restrictions including on semiconductor and equipment exports in 2022. While the current tariff rate rodeo may seem haphazard it is broadly consistent with the desire to rebalance relations with China (as well as other trading partners) and re-regionalise economic activity. Ironically the outcome is that China better prepared for the current trade war that it would have been five years ago.
The Times Have Been a Changin’ for a while now
Regionalisation of investment and slower growth in global value chains started 15 years ago. Some of this change in investment flows is due to geopolitical factors, but in other cases it is a response to improve supply chain resilience.
While the general trend up to 2015 in most supply networks was far-shoring and growth in global value chains, things changed thereafter. Our previous analysis on supply chain regionalisation provides more depth, but here are some examples with a high degree of relevance for the air logistics industry:
- Communication equipment manufacturing has become more China focused and concentrated
- Electrical machinery has gone from bipolar US and Germany centred networks to a tripolar one including China.
- Motor vehicle supply networks remain largely bipolar and centred on the US and Europe. The importance of China has increased as has the importance of Mexico.
- The network supplying the textiles and apparel sector has remained relatively decentralised, with China being the main pole followed by a distant second Vietnam. South Asian production locations have gained in importance.
Trade data indicates a slowdown in international trade kicking in much earlier. Up until 2008 long term growth in global imports of goods were tracking at around 7% but successively dropped to below 3%. The series below provides an overview of average 10-year growth rates. Note that the upward spikes in 2019 and 2030 are due to volumes in those year being compared to 2009 and 2020, respectively, where trade experienced large drops.
E-Commerce Traffic has Insulated the Air Cargo Business from Slower Growth
Long term international air cargo growth rates started declining much earlier than overall trade. Until the mid 2000s, international air cargo growth averaged around 7%, but successively dropped to around 2-3%. General air freight and mail volumes peaked in 2018, but overall air cargo traffic has benefited from increased cross border e-commerce traffic primarily of Chinese origin.
Traditionally airfreight consisted 80% of general cargo, 15% of express and 5% of mail. Express has traditionally grown faster than general cargo and mail has been declining. The big change came in 2017/2018 when cross border e-commerce traffic started taking off. By 2024 this mostly low value traffic accounted for around 15% of global air cargo volumes. We estimate that during this period about one third of transpacific air cargo comprised de-minimis type traffic – that is about 60 planes (about 10% of the global long haul freighter fleet). Express packages – a mix of about 40% business to consumer and 60% business to business – accounted for a further 20% of global air cargo traffic.
But E-Commerce is also the Achilles Heel of the Air Cargo Business
While supply chains are unlikely to adjust overnight, much of the spending related to cross border e-commerce is discretionary. Moreover, given that the average value per kg is in the order of about US$15 there is a longer-term incentive to shift to fulfillment model that involves use ocean freight and then onshore fulfillment (as opposed to picking, packing and dispatch at origin). The slower growth of Amazon’s air network is a case in point about network evolution away from more expensive modes. By comparison, DHL Express’ air network represents about 43% of total company costs – after offsets this is around $25-30 per shipment. With revenues of around $80 per shipment that is affordable, but not when shipment values are in the order of $25-$30.
Customers, Products, Network
In the past years carriers have removed capacity from North South air cargo markets as well as more traditional general freight markets to chase higher yields on Transpacific and Europe to Asia e-commerce markets. If large chunks of e-commerce traffic disappear then there will be a need to redeploy capacity. That is something companies should be thinking about but developing new routes and markets take time. Those companies that have thought ahead and already made steps in this direction will likely do better than those that have not.
More broadly, though companies should be conducting a thorough evaluation of which combination of customers, products and network will make sense going into the future. This includes asking serious hitherto neglected question about the exposure to individual markets (e.g. China and the US), particular lanes (e.g. China to the US) or particular products (e.g. e-commerce consolidation).