The Air Freight Boom: Latin America’s Missed Opportunity?

The solution is in the air. This thesis belongs to the shipping giant AP Moller-Maersk. Yes, the world’s largest cargo ship company is looking in the air for a way out of bottlenecks in the face of the container shortage that has kept seaports congested since the beginning of the year. The idea seems paradoxical, but it has worked. Between the months of April and May, when protests broke out in Colombia that caused blockades and the closure of ports such as Buenaventura, the distribution platform for youth lifestyle brands, Accur8 Distribution, was unable to move its cargo for the Vans brand from Asia, where it was dammed. 

Their inventories in the South American country began to run low and the time to fulfill their commitments was running out. Faced with this challenge, the shipping company responded by using an alternative mode of transport in which it combines maritime with air and Accur8 was able to deliver its merchandise on time. “What we are doing is providing a solution to customers,” explains Juan José Ballesteros, Maersk’s product management director for the West Coast of South America. Maersk’s case is not the only one. The high demand for consumer goods and manufacturers eager for parts has large markets such as North America, Asia and Europe taking over the cargo flights that come to the rescue –literally– of the merchandise that has been stagnant in ports due to the crisis of port logistics. So much so that according to the International Air Transport Association (IATA), cargo planes flew more crowded this summer than at any time since it began keeping records in 1990. But the overall scenario is more complex because not all cargo can be transported by plane and because there are cargo whose costs they are relatively low and do not support the high prices of air freight, which, like ocean freight, is through the roof due to high demand. Within this complicated scenario, Latin America has lagged behind, and not so much because its needs are different, but because its capabilities are limited and have not allowed it to respond to the feverish demand generated by the e-commerce boom and congestion in the port terminals, according to experts. 

“Latin America is not being able to capture all the capacity. It is not following the growth of demand as Europe and North America are doing, ”says Ballesteros. According to the IATA August report, air cargo transport (measured in ton-kilometers) continued to grow strongly globally with 7.7% in the eighth month of 2021, compared to the same period in 2019, while Latin America maintains this factor in the red with -13.2% (a decrease compared to the previous month in which the drop was 9.8% and an improvement compared to June, when it registered -19.9%), with a reduced capacity in -27.1%. “Today the freight industry is more or less double what it was in 2019, but the amount of tons transported has not increased significantly. That shows you that there is a very large imbalance between the demand that has grown a lot and the supply that has been blocked in its capacity ”, says Andrés Bianchi, CEO of LATAM Cargo. A turbulent outlook even for multinationals like DHL, the largest global parcel company. “Adapting to this new scenario has been a challenge that we continue to face,” acknowledges Alberto Oltra, CEO of DHL Global Forwarding in South America. According to the company executive, the fact that the supply of space is below the level of 2019 while global demand has already recovered and exceeded what was achieved in that same year, has changed the dynamics of the market. “The competition has been tough as spaces are very tight,” he says. In the region, This imbalance is mainly due to the fact that most air cargo is transported in double-aisle passenger planes, and when restrictions were imposed due to the pandemic, airlines left their planes on the ground, affecting the available space. “At first it was not felt so much because the big economies were stopped, but when consumption explodes at a global level and spaces are needed, the slow recovery of passenger flights generated a cut in capacity and therefore an increase in prices”, he explains Nicolás Portenza, CEO of Eternity Group México, a Chinese cargo transportation company. 

With the airline industry recovering very slowly and consumption accelerating due to e-commerce, the region has been overwhelmed. Electronic commerce “is being an important piece in the demand and in the lack of capacity,” says Portenza. And Carlos Ozores, vice president of the consulting firm ICF and director of Aviation for the Americas, endorses it. “The growth of e-commerce is tending to be much more dependent on air due to the promise that the seller has to deliver you in a short time,” he says. So much so, that during the pandemic e-commerce has reflected for the Colombian airline Avianca a growth of 12 times that transported in 2019. “It has been for us one of the products with the greatest increase in exports to Latin America and intra-Latin America” , acknowledges Gabriel Oliva, CEO of Avianca Cargo. A factor that can make the difficult Latin American scenario even more complex considering that the World Trade Organization (WTO) foresees that consumption will accelerate towards the end of the year and world trade will grow 9.5% in 2021. Given this, Alejandro Méndez, Vice President of Aeroméxico Cargo, issues a warning: “The capacity that we as airlines can provide to the monsters of e-commerce is very limited on some routes.” The lag of Latin America vs. the world These are challenging times for international logistics due to soaring costs and slowing down operations. Maersk’s product management director explains that the problem itself encompasses all actors in the chain. “There are fewer airline options, there are congestion in the hubs because the airports are operating with fewer personnel and, therefore, there are fewer flights and the cargo does not connect on time. There is a shortage of personnel, there is a shortage of carriers and that requires planning to be even more critical ”, describes Portenza. And in Latin America, where the restrictions to contain the COVID-19 pandemic have been more durable than in other regions, this reality has had a greater impact. “There has been a reduction in the number of people available for transport and warehouse logistics work and that is why capacity has been lost. The cargo cannot be prepared on time ”, acknowledges the head of LATAM Cargo.

For Eliseo Llamazares, leading partner in Aviation and Tourism for KPMG in Latin America, the equation that explains why Latin America has not grown so much in demand is simple: The restrictive measures have slowed down the recovery of the economy and the cargo business is fueled by economic growth. Furthermore, the fact that the restrictions have been so different within the countries of the region produced an imbalance between supply and demand. But it’s not the only thing that makes the stage difficult. According to Llamazares, the performance of air freight in Latin America has always been worse than in the rest of the world because for years airlines greatly reduced the volume of cargo planes. “Many of the big companies that had pure freighters, they switched to the transport of merchandise in the warehouse of commercial aircraft, which is much more efficient since the cost can be shared between passengers and cargo,” he says. Consequently, In Latin America, this capacity was substantially reduced, so much so that when demand skyrocketed in the midst of the pandemic, airlines had no choice but to convert some of their aircraft. With limited capacity, the logistical challenge for Latin America seemed large, if it were not for the fact that it is a region with a small air import, which moves mainly perishable products. 

“The cargo dynamics in South America is different from other regions due to the mix of commodities that move. Furthermore, while regions such as Asia and the United States transport finished products by air, what we export the most (by air freight) are perishable products, ”says Bianchi. Only Brazil and Mexico move large volumes by air, and neither country completely stopped its air operations during the pandemic. In fact, the performance of Mexico stands out as the only one with a performance similar to that of the large markets. According to the IATA report, the country experiences the same growth trend in cargo transport as other regions, with a 12% increase in the first half of this year. The association, in fact, estimates that at least 30% of the total income of Mexican airlines will come from freight transport, something that has not been seen for a decade. Nicolás Portenza, who directs the Mexico – Asia logistics corridor for Eternity Group, reports on this growth and how airplanes are transporting merchandise that would normally go by sea. “We have seen very high demand for a product from our importers in Mexico to meet the market, and despite the high cost of the air, it was decided to fly,” he says. Although, due to confidentiality, he did not reveal details of the clients who have chosen this route, he did comment that many industries are having record sales of household appliances, white goods, and that retail has had a significant consumer boom. “When companies need some components to manufacture, meet quotas, they have changed their operations to air,” he reiterates. In the case of Aeroméxico, the increase has been very marked by the transfer of auto parts. In fact, Méndez affirms that many of the “express requirements” that they have had to attend to in recent months correspond to this sector and with greater dynamics on routes that cover the Asian continent. “We are reaching destinations that we never thought we were touching,” acknowledges the VP of Aeroméxico Cargo. Some of the routes that they cover and that are not part of their passenger offer are the Chinese cities Shenzhen, Hong Kong and Wuhan, as well as the Russian capital, Moscow. This transfer of cargo from one modality to another has also been seen in DHL and, according to Oltra, it is a phenomenon that clearly responds to an urgency to replenish stock. “This represents a break for the sector since in 98% of the cases the companies try to minimize the logistical cost giving priority to the maritime transport”, says the CEO for South America of the German company. A sample of how the dynamics in general have changed. “Today the market is more spot and shipment by shipment […] and the possibility of hiring charters for its own operation has become a solution,” he adds. The Maesrk experience is no different. “We are ensuring air capacity with charter flights for flows from Asia to Central and South America,” says Juan José Ballesteros. According to the executive of the shipping giant, in his case it is a proactive rather than reactive strategy. 

“We do this transfer in a coordinated way with the client and for that we ask for great planning,” he assures. The “mutation” of airlines to respond to demand Airlines in Latin America have done their best to adapt and respond to high demand. Many of them responded by transforming some of their passenger planes into cargo planes. Even so, capacity remained limited because, first, that adaptation cannot be done with all models, and second, the modifications fail to decompress much of the load. “If a commercial airline takes a Boeing 787 airplane and makes modifications to it to turn it into a cargo plane, it would be able to fly between 30 and 40 tons. That is half of what a Jumbo 747 can carry ”, says the CEO of Eternity México. Now, from a business point of view, it has been a great opportunity for airlines because it has allowed them to alleviate the impact that the pandemic had on the airline industry. And the ones that have known how to take advantage of it best –according to the consultant Carlos Ozores– are those that carry the cargo business in their DNA, such as LATAM and Avianca. The numbers of the Colombian holding show the good results. During the pandemic period, Avianca Cargo increased the use of freighters by 19% and cargo flights by 13%, compared to 2019, with an increase in frequencies in the markets of the Southern Cone. These are the highest levels of cargo fleet utilization for the airline, according to the company’s chief. “We quickly adapt to new market conditions, modifying our network according to demand, increasing frequencies to Europe up to seven flights per week and launching a new multimodal maritime and air service to improve our connectivity”, explains Oliva. Between January and August of this year, Avianca saw its capacity decrease by 30% compared to 2019, mainly due to the reduction in passenger flights, but the load factor increased 8 points to 68.4% and revenue per ton-kilometers available (ATK) increased 70%. “The high demand has been constant in all markets, however, the most representative have been concentrated in flower routes, specifically from Colombia and Ecuador to the United States, with a growth of 21%”, adds the head of the cargo unit of Avianca. In the case of LATAM Cargo, at least half of its cargo capacity came from passenger planes, so the restrictions caused it to lose a good part of it. Given this scenario, Andrés Bianchi details, they focused on three points in order to meet the demand: increase the utilization of the cargo fleet, maintain as many passenger flights as possible, and fly cargo-only passenger aircraft. These measures have allowed it to keep the business afloat, which in August of this year registered an occupancy of 61.9%, which represents an increase of 7.4 percentage points in relation to 2019.

“We have seen in our cargo planes that It is typical of the maritime sector and that it moves by air only in urgency, such as certain parts of cars, tires… we have even carried a brick charter ”, says Bianchi to exemplify how the business is moving. Amid this boom, LATAM Group announced a plan under which it expects to gradually add 10 Boeing 767-300s over the next three years, to total a fleet of 21 cargo aircraft by the end of 2023. “The cargo business has weathered the crisis very well, so much so that LATAM will double its fleet within two years. This is because they recognize the opportunity that exists in this business and that a slower recovery of long-range international flights is coming ”, comments the ICF vice president. Although Bianchi affirms that the plan was devised before the pandemic, he acknowledges that the fact that the business is going through a very auspicious moment, “makes it important to execute it well and quickly.” Unlike Avianca and LATAM, Aeroméxico does not have the cargo business in its DNA, so its effort was focused more on adapting this model. “We are a cargo division of a passenger airline, therefore our planes fly depending on the demand for passengers. But at the beginning of the pandemic, it was not flying and there was a need to transport cargo. That led us to start with a model that previously did not exist in the [Aeroméxico] group, ”highlights Alejandro Méndez. Thus, in March 2020 Aeroméxico carried out the first cargo charter flight in its history. At the time of the interview for this report, Méndez reported flight number 398 and assured that it would reach 400 charters before the end of the week. “We do not adapt airplanes, what we did was load the cargo in the passenger cabin and fly,” says the executive. The historical gap in maritime and air prices is reduced Historically, maritime transport has been more competitive than air. And it continues to be the case, the gap between the two modes has not been reversed, but it has narrowed. The increase in maritime freight prices has been so exponential since the beginning of the pandemic – in the order of 800%, according to Portenza of the Eternity Group – that it has cut the difference with air, which has seen its prices increase between 100% and 120% depending on the route. “Now the difference, which was 12: 1, has gone to 6: 1,” says Gabriel Oliva. 

Hence, IATA claims that air freight is becoming more competitive. The increase in rates is a simple effect of the law of supply and demand. But more is also being paid to move planes with just half their capacity, explains the CEO of LATAM Cargo. “As a result of the pandemic, commercial flights are canceled and there is not enough cargo fleet to respond, therefore, the only option has been to fly passenger planes without passengers… but since I can’t carry cargo on the seats, you end up flying only with the hold. So you are paying the cost of moving the entire plane, using only half the capacity ”. In the case of LATAM, until August 2021 the cargo rate had risen almost 60% compared to 2019. Very similar to the 50% on average that they have seen reflected in Aeromexico. According to Juan José Ballesteros, at the peak of the pandemic the air freight rate went from US $ 4 to US $ 20 per kilo, and is currently between US $ 7 and US $ 12. It is not very different from what it reports. Nicolás Portenza, from Eternity. “At the air level, the rates for the Asia-Mexico route in the pre-Covid season ranged from US $ 4 in low season and from US $ 6 to US $ 7.5 per kilo in high season. Right now we are flying cargo with rates between US $ 12 and US $ 14 per kilo, ”he says. And can the market pay the high costs? Yes, because the operation covers it. “It is still a business for importers to fly and comply, because eventually the final consumer pays for it. There is an inflationary impact on the destination markets because they are costs with a significant increase compared to what happened years ago ”, explains Portenza. Alberto Oltra, from DHL, acknowledges that this impact on the final cost of the product is inevitable when prices have doubled, but also warns that if rates continue so high, nearshoring may occur (that a company decides to transfer its business processes to a geographically close foreign country). “This situation would have an effect on local economies, where the production of goods intensifies, as is already happening with some auto assembly plants in Mexico, which have returned to produce there, ”he highlights. For better or for worse this condition will not clear up anytime soon. Analyst Carlos Ozores indicates that airlines in the region will place emphasis during their recovery on single-aisle aircraft, which are smaller and have less cargo capacity. “(Therefore) there will continue to be a gap in space available for cargo planes,” he says. The truth is that this rise in airfares has represented a great relief for airlines. In the last year and a half, the cargo business went from being between 5% and 10% of total revenue to a much more relevant part (between 30% and 40%), making it a valuable source of cash and a way to offset part of the losses in the airline industry, which IATA estimates will exceed US $ 48 billion this year. “The cargo business has worked as a countercyclical compensation for what has happened with passenger flights,” acknowledges Bianchi. Before the pandemic, cargo represented approximately 10% of LATAM Group’s revenues, and in the last semester they accounted for 40%. 

In the case of Avianca Cargo, so far in 2021 it has had an increase in its freight income of 19%, and these represent 32% of the total income of the holding company. For Aeroméxico, the reality is not very different, although its levels are below those of LATAM and Avianca. “In 2019, cargo represented 6% of the Group’s total income. In 2020 it was 16% and today it is in the order of 13% ”, explains Méndez. That is why the IATA forecasts on this factor are quite optimistic. According to the agency, revenues from the global aviation sector from the transport of goods have doubled to 30% of pre-pandemic levels and are estimated to rise to a record $ 175 billion in 2021. A resilient and necessary business for the region One of the realities that have emerged in the midst of the crisis in the airline industry and the boom in demand for cargo flights, is that Latin America is in debt in this business, so it is imperative to increase its limited capacity in these times of high consumption driven by e-commerce, a phenomenon that will not stop until at least 2024, according to data from the Statista Digital Market Outlook. In fact, for Eliseo Llamazares the great hopes for the region are precisely in e-commerce and he hopes that it will become a significant source of freight transport. “Just as Amazon is an important player in the United States, in Latin America we have Mercado Libre taking its first steps in the air cargo market and it can become a significant player,” says the KPMG analyst. In any case, the important thing now is that the industry not only begins to create strategies to sustain itself in this situation, but also projects how to benefit its distribution chain in an increasingly demanding world, considers Oltra. DHL’s leader for South America believes that the implementation of technology and continuous improvements such as those they have been implementing to track shipments at each stage and online quotes is essential for this. In other words, companies must adapt and prepare for the times to come. Above all, considering that it is a business “resistant to shock like that of the pandemic”, assesses the ICF consultant. For this reason, in recent months the demand for aircraft conversion has increased, which shows the interest of airlines in this market. “What LATAM is doing only indicates that it is preparing for a ‘V’ growth of the economy,” says Llamazares, who insists that airlines should take advantage of economic growth and develop the cargo business. And in Aeroméxico they are considering it. Although Alejandro Méndez could not reveal details of what they plan to do as an airline group, he acknowledges that the new scenario has led them to rethink the need to maintain this model. “We are evaluating it very seriously. The niche is there, it is not an occasional demand, it will continue there. 

This is a requirement that has to be met and we have to be there ”, says the vice president of Aeroméxico Cargo. What he did advance was that they are betting heavily on the transport of pharmaceutical products, a niche in which they want to be leaders; and for this they are making the necessary operational and infrastructure adjustments. But it is not a job only for the airlines. The other reality is that the region lacks an adequate airport and logistics infrastructure that allows it to generate greater cargo capacity. In this regard, Méndez states that the Mexico City International Airport -the main one in the country- is a clear example of these challenges. “The space issue is a serious matter, we have structural limitations that become bottlenecks and prevent us from taking advantage of opportunities,” he says. And he is not the only one with this critical view. For Andrés Bianchi, it is necessary “to have better airports, greater warehouse capacity and authorities more open to listening to proposals for improving productivity that would make the business work better.” For now, this dynamic of high demand will continue for at least one more year, according to experts’ estimates, but the region will remain limited with a slow growth rate. “In Latin America we will continue to see a lower expansion than other markets,” says Llamazares. The cargo business in Latin America will grow, but still not enough to close the gap with other regions. Globally, IATA estimates that air cargo demand will close this year at 7.9% above 2019 levels and that in 2022 it will grow by 13.2%. And if last summer was a record period for the transport of air cargo, the Christmas season is coming as the biggest challenge. The International Air Cargo Association (TIACA) has warned: “We face unprecedented challenges in meeting the demand for air cargo services forecast for the fourth quarter of the year.” Given this, urged governments to streamline ad hoc freight permits and initiate planning. “Resources and capacity will be a problem, also handling, the space of the facilities, delivery and drivers,” warns Steven Polmans, president of the organization, through a statement released last September. At Maersk they are aware of this challenge and have been preparing for it. “We believe that this campaign (the last quarter) may come 30% stronger than last year,” says Ballesteros. In general, he adds, it is a very demanding period on the west coast of South America because fruit shipments coincide with the Christmas season. “In Chile, the cherries campaign is going to be critical towards the end of the year. This is demanding not only maritime capacity, but also air capacity ”, he comments. To face this challenge, the airlines will not be able to count on the recovery of air traffic that will allow them to absorb this peak in demand, so we are on the verge of a strong rise in demand on a capacity that is already quite overextended. 

SOURCE: America Economy

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