How cross-border e-commerce is propelling air cargo industry

Cross-border e-commerce boom drives air cargo growth and demands fleet modernisation along with capacity expansion.

How cross-border e-commerce is propelling air cargo industry
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The e-commerce air cargo sector is experiencing an unprecedented surge and is expected to grow remarkably in the coming years. According to Andre Majeres, the Head of E-commerce, Cargo, and Mail Operations at the International Air Transport Association (IATA), e-commerce’s share of total air cargo volumes is projected to rise significantly from 20% to 30% by 2027. Speaking at the World Cargo Symposium (WCS) in Hong Kong between 12th and 14th March 2024, Majeres further highlighted that the exponential expansion of online shopping drives this increase.

SOURCE: McKinsey & Company

In 2023 alone, an astounding 2.6 billion online shoppers worldwide made 30% more purchases than the previous year. This surge in consumer activity propelled e-commerce sales to reach a staggering $5.7 trillion in 2023, with expectations of surpassing $8 trillion by 2024.

“We expect the demand for general cargo and e-commerce to increase, which will require more dedicated air freight,” said Atlas Air’s CEO Michael Steen in an interview with The STAT Trade Times at the IATA’s Hong Kong symposium. Other airlines, including Astral Aviation, have also observed e-commerce air cargo demand.

At the Flower and Perishable Logistics Africa 2024 conference in Nairobi last month, Astral Aviation’s Chief Commercial Officer mentioned that 40% of their cargo is e-commerce packages. During the same event, Saudia Cargo’s Regional Sales Director Africa, Ken Mbogo, also stated that they have seen increased demand for freighter capacity due to heavy competition from e-commerce businesses.

“E-commerce is what drives air cargo,” said Majeres during a presentation at the Hong Kong event. “Today, approximately 1 out of 5 packages in air cargo comes from e-commerce (companies). Soon, that number will increase, and 1 out of 3 packages will come from e-commerce,” Majeres added.

Similarly, Dimerco Asia Pacific Monthly Freight Report for March to April 2024 notes that air freight is growing due to e-commerce in South China but faces challenges in Europe due to the Red Sea crisis and labour strikes at Lufthansa. Despite those challenges, airlines have sold out all Year 2024 Block Space Agreements to destinations in the United States and European Union.

Kathy Liu, Senior Director of Global Sales at Dimerco, predicts a promising future for air freight in 2024. The e-commerce sector’s optimistic outlook drives this demand. Liu added, “The optimistic outlook for the e-commerce sector fuels this surge in demand.”

SOURCE: McKinsey & Company

At the Hong Kong Symposium, Ludwig Hausmann, Senior Partner at McKinsey, mentioned, “Air freight is used despite 10-20 times the cost of other modes of transport, speed being the primary reason.” Apart from speed, other factors that contribute to choosing air freight include value, special requirements, reliability of on-time delivery, and overflow from different modes of transport. During the same event, Majeres also highlighted that there is now more access to the Internet and online stores than ever before, which is a positive sign for the e-commerce sector.

Tsunami of e-commerce growth

The sector is bracing itself for what Majeres describes as a “tsunami of e-commerce growth,” with parcel shipments expected to skyrocket from 170 billion in 2022 to a projected 256 billion by 2027. Despite this surge’s operational challenges, it also signifies substantial opportunities for air cargo operators. The e-commerce logistics value is projected to soar to $2.4 trillion by 2032, reflecting the immense potential of this burgeoning market. Global e-commerce logistics value, estimated at $386 billion in 2023, is expected to reach $2.4 trillion by 2032 - a compounded annual growth rate of 22.6%.

Global e-commerce logistics value is growing rapidly. To capitalise on the potential of the e-commerce air cargo sector, stakeholders must remain innovative, focus on warehousing and related services, and prioritise operational excellence, digitalisation, sustainability, safety, and security. Adopting new technologies such as ONE Record and supporting sustainability initiatives are crucial to meet the evolving demands of this dynamic market.

Speaking to The STAT Trade Times, Michael Pakula, CEO of BoxC, shared that with the help of technology, carriers can create new products, such as e-commerce small parcel shipping programs. This results in increased asset utilisation, improved return on investment, and the ability to offer a new product to existing and new customers. Furthermore, it promotes sustainability by reducing excess capacity and allowing cargo carriers to ‘virtual zone skip’ for increased efficiency.

BoxC is an e-commerce logistics management platform that allows businesses to manage all aspects of international e-commerce logistics. BoxC’s Pakula also emphasised that technology is vital in providing supply chain partners with the data required to meet internal and external compliance. Technology is the only way forward to maintain and improve transit times by reducing choke points in the global supply chain. Sharing data between all parties in the supply chain, including cargo carriers, improves the supply chain's and assets' safety, enhances transit times, and helps regulatory authorities better identify bad actors.

In addition, Astral Aviation’s Patricia said, “Airlines and producers must work together to ensure efficiency, customer convenience and the right pricing strategy. Moreover, we need more players in the e-commerce industry to invest in African e-commerce terminals.”

The growing market presents numerous opportunities for investors willing to adapt to the shifting landscape. Hong Kong, an important centre for e-commerce, is witnessing a notable rise in air cargo volumes. To meet the increasing demands of e-commerce logistics, Hong Kong is collaborating with industry leaders like Alibaba and taking initiatives to enhance its supply chain infrastructure.

Alibaba Group Holding is expanding its “five-day delivery” service to compete with rivals such as Temu and Shein and take advantage of the growing market. Customers shopping on AliExpress can expect to receive their packages within five days through Cainiao, Alibaba’s logistics arm. Alibaba has also introduced its delivery service in countries like Germany, France, Portugal, Saudi Arabia, and Mexico.

Factors affecting this surge in e-commerce air cargo

Consumer spending remained strong in 2023 despite inflation and high-interest rates. The US GDP grew by 3.3% in Q4 2023, exceeding expectations. Annually, there was a 2.5% increase in 2023, mainly fueled by strong consumer and government spending. Core inflation remained stable at 2.0%. These positive economic indicators suggest a promising outlook for a ‘soft landing’ scenario.

Majeres presented in Hong Kong also revealed that during times of crisis, such as pandemics, wars, or supply chain disruptions, consumers tend to seek better deals due to the impact on their cost of living. He further highlighted that 34% of consumers shop online at least once a week, while 79% do so monthly. In 2023, 30% of consumers bought more goods online, with 26% prioritising the speed of delivery in their purchasing decisions.

Worldwide retail sales increased from $26.4 trillion in 2021 to $29.7 trillion in 2023 and are expected to reach $33.7 trillion by 2026. However, growth is slowing down. In contrast, e-commerce retail sales grew from $3.3 trillion in 2019 to $5.7 trillion in 2023 and are expected to hit $8 trillion by 2027.

In cross-border e-commerce, 80% of the goods are flown by air, creating a lucrative opportunity for e-commerce air cargo partners.

SOURCE: McKinsey & Company

According to Hausmann, the four main channels for cross-border e-commerce parcels are Express, Forward-located inventory, Commercial Parcel/Direct Lane, and Postal. However, Majeres noted that e-commerce shipments via postal service are losing relevance and slowing down.

SOURCE: McKinsey & Company

SOURCE: Expert Interviews a, X23 model

Hausmann further added that forward inventory presents a burgeoning opportunity for logistics companies within the evolving e-commerce landscape. Forward inventory is increasing due to the consumer demand for fast order fulfilment and the need for e-commerce businesses to remain competitive.

Unlike traditional supply chains, forward inventory involves strategically locating goods closer to the consumer before making a purchase decision. This approach speeds up delivery times and enhances customer satisfaction. Logistics companies can invest in efficient warehousing solutions and inventory management systems to offer forward inventory services and position themselves as essential players in the e-commerce logistics market.

The rise of e-commerce players and the Chinese influence

SOURCE: McKinsey & Company

“For e-commerce shipments, the busiest origin globally is China. It was even the busiest before Shein and Temu, who have made this origin even busier,” said BoxC’s Pakula.

In the presentation at the IATA symposium in Hong Kong, Majeres pointed out that 70 wide-body freighter departures per day (equivalent) are just exporting e-commerce from China.

Studies show that Chinese fashion brands like Shein and Temu rule over cross-border e-commerce. Atlas Air’s Michael Steen informed The STAT Trade Times, “What we see now is an explosive growth of new (e-commerce) companies entering the market. Temu was largely unknown to the market, but now the combination of Temu and Shein represents roughly 3% of total air freight growth in 2024.”

Adding on that point, Hausmann said in a different context that Temu accounts for 7% of the share in most recent cross-border e-commerce orders, as opposed to 0% in 2022.

China’s e-commerce has grown tenfold in five years. Shein, a fast-fashion brand, doubled profits to $2 billion, outpacing competitors. It’s seeking approval for public listing in New York or London reflecting China’s regulatory attitudes towards overseas-listed companies. Shein’s operations in China require regulatory approval, highlighting the critical role of air logistics in its supply chain. Alibaba’s Cainiao faces challenges raising funds closer to home, highlighting the importance of efficient air logistics in global business operations.

As a result of this surge in demand for low-cost, fast-fashion Chinese brands in the US, Europe and the Middle East, aviation companies are launching new routes. For instance, Saudia Cargo recently launched regular flights to Riyadh from Shenzhen, China. Atlas Air’s Steen also informed, “We have set up a dedicated air bridge for Alibaba-Cainiao, connecting China with America and South America.”

However, the surge in e-commerce shipments from China to the United States was facilitated by the de minimis rule. The de minimis rule allows e-commerce shipments from China to enter the US duty-free if valued under $800. This has sparked controversy and legislative action in the US, with bipartisan bills proposed to lower thresholds or close the provision.

Chinese e-commerce companies have experienced rapid growth, but concerns over forced labour in Xinjiang have raised doubts about product origin and ethics. The complexities of US-China relations and the potential impact on small businesses and consumers further complicate the issue and raise concerns about e-commerce air cargo.

Businesses are facing uncertainties related to potential changes in the de minimis rule, which could lead to increased customs scrutiny and delays in package clearance. Legislative efforts, geopolitical dynamics, and economic considerations will shape cross-border e-commerce and trade relations between the US and China.

Majeres’s presentation at the symposium indicated that consumers are mainly satisfied with parcel tracking and delivery location but are unhappy with customs due to slow shipment release.

SOURCE: McKinsey & Company

According to IATA, global air cargo demand increased by 11.9% YoY in February 2024, marking the third consecutive month of double-digit growth. The market was driven by buoyant international traffic, booming e-commerce, and capacity constraints in maritime shipping. Asia-Pacific airlines reported the highest demand growth at 11.9%, while North American carriers saw the weakest growth at 4.2%.

According to Atlas Air’s Steen, the demand for air cargo will increase by around four to four and a half per cent this year. However, the industry may need more capacity due to a capacity shortage. Steen explained that there are currently 650 wide-body freighters operating globally, with Atlas Air operating 10% of them. Out of the 650, around 120 freighters are over 30 years old, and the usual lifespan of an aircraft is between 30 and 35 years. This indicates that around 120 wide-body freighters must be retired soon from the global fleet.

It is concerning that there will not be enough new production rate growth or converted aircraft entering the market to compensate for the loss of cargo capacity. Freighters are responsible for carrying 60% of the total cargo volume, with the remaining 40% held in the bellies of passenger planes. However, only 50% of passenger aircraft’s belly capacity is used for freight due to various factors such as network changes and changes in travel patterns.

As manufacturing units move to locations with inadequate belly capacity, there is a growing demand for freighters. The increasing volume of e-commerce cargo also drives the market. However, there is a critical need for fleet modernisation to address capacity constraints and ensure continued efficiency and reliability in airfreight services. Many aviation companies, including Astral Aviation, plan to modernise their aircraft in the coming years. Sanjeev Gadhia, CEO of Astral Aviation, stated that they have a 5-year aircraft modernisation plan to enhance efficiency and sustainability goals.

The shift in supply and demand dynamics requires a strategic response to ensure airfreight services’ continued efficiency and reliability in evolving market conditions. Although Patricia of Astral Aviation mentioned that “all airlines are prepared for it (surge in e-commerce air cargo),” only time will tell whether the rise of cross-border e-commerce packages is a boon or a bane for the air logistics sector.

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