Episode Transcript
[00:00:00] Speaker A: These 767s were never intended to fly in the Pacific. It's not the right airplane for the Pacific.
[00:00:06] Speaker B: Those products need to be moved out of Taiwan that make the capacity even tighter out of like Thailand, Vietnam, North.
[00:00:15] Speaker C: America peaked in December 2024. By November last year it was down 33% year on year.
[00:00:22] Speaker A: It's going to take five to 10 years for, for this whole capacity situation to normalize.
[00:00:29] Speaker D: And what that's showing of course is not the average being achieved, but it's the marginal price for moving something.
[00:00:35] Speaker A: Today another incident could border on gross negligence. Right. So you have to really think hard about these aircraft ever flying again.
[00:00:51] Speaker C: Hello and welcome to Air Cargo Unpacked, a Freight Buyers Club Production brought to you by Ontegos Cloud, the freight forwarder profitability specialist. I'm Mike King and I'm joined today by my industry Insider co host Neil Joneshar.
[00:01:05] Speaker A: Thanks Mike. Coming up, a freighter supply crunch. The latest on Chinese New Year factory closures from demarco's Cathy Liu and what's behind this mini market peak. We've also got sharp analysis on de minimis policy impacts And Neil Wilson from Tacindex breaks down the latest rate data powering the Baltic air freight indices.
[00:01:27] Speaker C: Brilliant. And we might also look at how Maersk and Amazon, well, what they're doing with their freighters and what this US India deal means for demand. But first up, let's look at the freighter crunch. And we have to start with some sobering news from UPS. In late January, UPS confirmed it is fully retiring its MD11 freighter fleet. That means all 26 aircraft gone. Now this was already on, on the cards as part of a long term fleet modernization plan. But the timeline was dramatically accelerated after the fatal crash of UPS Flight 2976 in Louisville last November. Three crew members and 12 people on the ground lost their lives when the aircraft lost an engine on takeoff. The MD11 had been a workhorse for UPS on long haul international route since the early 2000.
Now it's done and FedEx and other operators have also grounded their MD11s for inspections in the aftermath. Neil, beyond the human tragedy here, what does pulling 26 widebody freighters out of service mean for overall air cargo capacity, particularly on those long haul lanes?
[00:02:36] Speaker A: Well Mike, we touched on this back in January if you remember and I think back then I mentioned that a number of these planes won't fly again.
And you know, unfortunately that prognostication is coming true. And so the MD11s, when you think about the collective of the MD11s. It's about 61 aircraft. They represent a little less than 10% of the wide body global freighter fleet. So if they all get grounded, there will be ramifications. You're taking 10% of the capacity out of the market. Now, integrators fly most of these aircraft, right? Integrators are actually doing okay. Their business is pretty strong. You look at the stock prices and all, both UPS and FedEx are doing quite well. So they've got to fill the gap. Cause you mentioned they've accelerated the retirement. They have to fill the gap. And so where's this capacity gonna come from? It's gonna come from the market.
Just as an example, Amerijet has two 767s that they are now flying for UPS, that they've dedicated to UPS and are based in Louisville. Those two airplanes would be in scheduled service in the Caribbean and Latin America if they weren't flying for ups. And that's just one of a number of examples of operators that are filling the gap for these aircraft that now will no longer fly. Now, I don't know what's gonna happen to the remaining 35, to be honest with you. FedEx still has a big decision to make, right? And then there are a few of these operating with other carriers out there. But look, when we look back on this tragedy, the first crash was really a horrific tragedy.
But I do think that anybody who puts these aircraft back in the air again, knowing the massive structural defect that exists, you know, another incident could border on gross negligence, right? So you have to really think hard about, about these aircraft ever flying again.
[00:04:27] Speaker C: So big implications, sticking with capacity. IATA's latest analysis, as reported by Damian Brett at Air Cargo News, paints a broad picture of a very tight market. The global aircraft order backlog has now exceeded 17,000 aircraft. That's nearly 60% of the entire active fleet and 11 times the number of aircraft delivered each year. IATA's head of industry analysis, Julia Seaman, says even if production accelerates in 2026, we're not looking at normalization until the early2030s. Neil, walk us through what's driving this and what it means for freighter supply, please.
[00:05:06] Speaker A: Yeah, I mean, you know, absolutely, as you mentioned, you know, when you look at the backlog of aircraft, right, it's at the highest it's been in history, both in terms of actual aircraft, but as well as a percentage of the active fleet, which is quite remarkable. You know, it's not just 17,000 aircraft, but 70% of the active fleet. And the impact on cargo you know, could be actually even more impactful, more severe than the impact on the passenger side. Because the OEMs, both Airbus and Boeing, you know, are obviously their preference and priority has been to get the passenger aircraft out. And you saw the announcement by Airbus almost a year ago where they delayed the entry of the A350F because they have to focus on the passenger A350 1000, which is the platform. And so they said, look, let's not stress our operation, let's prioritize that and we'll delay the freighter. You know, you have the Triple 7X platform, right, of which the freighter was going to be part of or is part of, that's delayed by over five years. And they don't expect the first deliveries to go, I think it might be to lufthansa maybe in 2027 now. So the new aircraft are being delayed. And so now you turn to conversions, right? And what is the big widebody conversion that's happening right now? That's the triple seven 300. But there's a follow on impact here as well because as these passenger planes get delayed and deliveries get postponed, the airlines are holding onto that feedstock longer because passenger business is doing well. They don't have aircraft on ground, they don't have a lot of spare capacity sitting in the desert. Right. Everybody's using their airplane, so they're being forced to keep their aircraft longer. That reduces the feedstock. And the feedstock that is available is much more expensive.
You know, in that same IATA publication, they talked about how the half Life of a 777300 is now over $48 million, up from 27 million just a couple years ago. Well, when you think about the conversion costs, this puts the on ramp cost of a, of a converted 777 300, assuming that 48 million half life, right. At over $80 million.
That's a really expensive on ramp cost for a converted freighter that in many estimations can only hold 90 to 92 tons of net cargo. So you got a lot of cubic capacity, but you don't have a lot of payload. And it's a tough business case, right, other than for the package and maybe the integrators.
So lots of impacts here.
It's hard to believe that, you know, so many years past Covid, we're still talking about supply chain issues, major supply chain delays. But that is the excuse that all of these OEMs are giving for not having the aircraft ready, for not having engines and major components ready to go, right, to meet the production demand. But I think we're gonna be in this situation for years to come. I think it's gonna take five to 10 years for this whole capacity situation to normalize.
And until then you can look for a tight air cargo market where demand growth is going to exceed capacity growth for the coming future.
[00:08:20] Speaker C: So on a capacity from then, good for the haves, not so much for the have nots. Okay, let's pivot slightly. Time for our quick fire briefing where we ask industry leaders to give their take on something close to their heart. And today we're having a look at Chinese New Year. And who better to tell us about what's happening in China than Shanghai based Cathy Liu, VP Global Sales and Marketing at Dimeco Express Group.
[00:08:47] Speaker B: Hello Mike, Neil and everybody at Air Cargo Impact at the Freight Buyers Club. What we are seeing in the lead up to Chinese New Year, which officially starts on February 17, is that like this year we didn't see that much cargo is flowing before Chinese New Year and it's quite flat. And we see this will be lasting at least until the end of February. Because this year in China we have nine days holiday for the Chinese New Year which is longer than usual.
So we see that the factory is closing earlier it start from 8th of February. Some of factory already closed down so there's no order anymore.
Everything is going very slow down, doesn't matter air or ocean freight.
So what we expect that's this kind of white season will be the key topic for the entire February. Compared with the previous Chinese New Year period. This year's air cargo market is very slow because if you still remember last year this time because everybody is worried about the tariff by Trump.
So there's a lot of cargo front loading. Doesn't matter for air or ocean, start from end of December up to Chinese New Year time period.
So even during the Chinese New Year it's still very busy because all the shipments like to be moved into us as soon as possible. But this kind of case is not happening this year outside of China. I think there's some positive news is that you can see under China plus one that there's more factories move out of China into Southeast Asia countries.
So during this period we see the booming area is like Thailand, Malaysia, Vietnam and also for sure including Taiwan. So for those areas they have still quite number of orders out of those areas into US or into Europe. And Taiwan is mainly the market is for Europe and especially for the AI servers that from last year it's quite strong demand.
And we see this kind of a trend will be lasting until at least end of this year. And also under this kind of situation, all those Shermans, if they like to be transit in Taipei, the capacity will be very, very tight because most of the capacity already be used by Taiwan. AI vertical those products need to be moved out of Taiwan and that make the capacity even tighter out of like Thailand, Vietnam because they are normally they don't have freighter service from those origins into US under direct service.
So those origins they have to use other transit hub like Korea or like Japan and Hong Kong to move out their cargo.
[00:11:45] Speaker C: Neil, an interesting market or a bit of a damp squib, how would you call it?
[00:11:51] Speaker A: Well, you know, Kathy certainly has a bird's eye view of the market and I would overall agree with her assessment of where things stand with respect to cny, which we're only a few days away from the official start of the holiday. So I, I, I what, what did you call it Mike? A damp squib? I, I haven't heard that one before.
[00:12:10] Speaker C: I think I almost said squid to be honest Neil.
[00:12:13] Speaker A: Yeah, but, but squib, squib, squid. You know it, it sounds about right to me.
So I, I think when you look at this cny we sort of anticipated a CNY like this and if you remember back in January talked about how this holiday was much later in the winter than it was in 2025 where it was in January.
So we didn't have any break after Christmas. We just, we're bang. We were right into, you know, priming the pump for cny. But we also had another very important backdrop to last year's cny, right? We had Trump taking office and the threat of these massive tariffs. So you got a lot of shippers front loading, front loading, right, doing everything they can to get product in ahead of what was going to be a major sort of tariff announcement in the early spring.
And so that helped fuel a pretty strong pre CNY peak.
We don't have those issues, right? We don't have front loading this year. There's no new tariff threats this year. What's out there is known. And of course the removal of de minimis has already sort of impacted e commerce volumes and I think we'll talk a little bit more about that a little bit later in the show. But there's a little bit more certainty to how things are going to play out this year than we had in 2025. And I think that's led to a dampening sort of effect on, on, on this year's, you know, CNY now, you know, I think folks are taking close to a month off in China. Right. Because factories started to close at the end of last week.
You know, you won't see cargo priming the pump until early March.
Right. Because this holiday ends on the 24th, 25th. People come back, cargo doesn't start flowing until early March. So you're talking almost a month off where you're going to see volumes, you know, quite depressed and I'm sure crazy rates in the market and things like that. Hopefully a lot of aircraft are going from for predictive and preventive maintenance and things like that, you know, during this period. But it's not all doom and gloom at all. You know, Southeast Asia is very strong. Exports out of Malaysia, Taiwan is booming, you know, Indonesia, Philippines, you name it. Right. A lot of lot of manufacturing. Vietnam, I forgot to mention.
So again, if we look back to the capacity discussion, we just have we don't need for demand to be exemplary or off the charts for us to have a continued strong air freight market. Demand growing in at 2 to 3% is going to allow us to still have a robust year when it comes to air cargo. And you know, with verticals like AI and all fueling this industry as well, we're not solely dependent on E commerce either. So I think it's going to be a decent year for air cargo in 26, even though it wasn't a super impressive pre CNY period.
[00:15:03] Speaker C: Yeah, it'll be very interesting to see what's happened next month when we do our IATA World Cargo symposium because that's just coming as we're coming out of this lull in demand that we're expecting. So we'll come back to this and see how that's all played out. But for now let's turn to the markets and see how what all this has been doing to rates.
Joining us is Neil Wilson, editor of Tacindex, the leading global price reporting agency on air freight rates and calculating agent for the Baltic air freight indices. Neil, last month we discussed whether we'd see a typical mini peak ahead of Chinese New Year. We just got Neil's view. So what are you seeing in terms of where those rates have gone, Neil?
[00:15:45] Speaker D: Well, thanks Mike. Good to be back on. And yeah, to pick up from our conversation last month we were talking about whether there would be because you'd seen on the ocean side rates were rising higher and earlier than normal and we were looking out for whether they might be the same thing on the air cargo side. I guess what we've Seen is like a modest bounce. It's not unusual. We talked about last time that obviously you get a big peak, even Thanksgiving, Christmas period, you get a more modest one. I had a Chinese New Year when the, the factories shut down and that's kind of what we've seen. The rates were falling or flat most of January and then they rose.
If you look at this BAIO, it's our global chart, they rose just over 4%, 4.1% in the final week of the month through until the 2nd of February. So there was a modest firming up of the market.
If you look at the next of the BAI 30 chart, which is the outbound Hong Kong index, it's a bit less visible there, it looks more flat, but that's an average. And underlying that the spot rates were rising over the last few days. We'll come on to that in a bit. We've got some separate charts to highlight that and then the other one to look at here that's relevant is the Bai 80 which is the outbound Shanghai, which Hong Kong is number one for air cargo. Shanghai is gaming also very important and in that one we saw a steeper fall in early January but also a bigger bounce in late January and ending the month up nearly 9% year on year from where it was before.
Among other things we highlighted last time that I think worth touching on again is that different pops of the market remain strong. Taiwan remains a standout, obviously related to the AI and semiconductor export.
And so both the Taiwan US and Taiwan Europe routes continue to look strong versus the year again up here on.
[00:17:40] Speaker C: You Neil, you, you guys track both the, the standard BAI indices and, and BAI Spot. Can you explain the difference between them and what they're telling us about the market or why this is important to anyone making pricing decisions?
[00:17:55] Speaker D: Yeah, so yeah, this is, this is a good question. So like, you know, you've got one set of indices, why have you got another set? What do they show you? And, and, and what I would say is that the reason why we do this is because they show you different things and when you look at them together that informs you much more about what's going on. So the existing BAI outbound indices, the global one, Hong Kong, Shanghai and others, Frankfurt, London that we do, they are based on actual airway bill data.
So that's telling you really what the average rate being achieved is by the border being paid to the airline but of course disguises a multiple range of prices being paid any one time because you have a blend of, of spot and contract activity, and that's what we see. So let's just highlight here we have our Hong Kong US Lane, for instance, which is obviously a very big and important one. Maybe less volume than a year ago, but it's still big and important.
And that is really showing you the average rate when you run that across the chart. And I'm going to overlay that now with the BAI spot. Now, this is based on a different methodology.
And here we have the Hong Kong US east coast and Hong Kong US West Coast.
This is based, it's daily and it's based on an expert panel methodology rather than actual air we built prices. So it's major airlines and forwarders on these lanes who are telling us what their price is day by day. And what that's showing, of course, is not the average being achieved, but it's the marginal price for moving something today or tomorrow. And that typically moves in a more volatile way than the overall index because the overall index is reflecting a large amount of contract business that was agreed months or a long time ago where the price doesn't change or it resets occasionally based on benchmarking.
So the spot, I think there's often a widespread spot in the overall index and it tends to show that the rate rises above the average when the market's going up and is below the average when the market's going down. So it's a good market direction indicator as well as potentially a risk management tool if you can do contrast based on how it's going to move.
So more on that in future sessions, hopefully.
[00:20:20] Speaker C: And Neil, just to finish, where can people find Tacindex Next?
[00:20:24] Speaker D: My senior colleague Peyton found TAC Index will be at the IR to World Cargo Symposium in Lima next month. And then in April we'll be doing our third annual TAC Innovation Summit in Hong Kong, which we always have a little kind of mini event in the week of the Hong Kong salons, which is a good time to be in Hong Kong. Thank you.
[00:20:45] Speaker C: Thanks to Neil Wilson at Tacindex for that excellent analysis of air cargo markets. Me and the other Neil. Mr. Jones Shah will be back with you shortly to share some insight into one key market. And we'll be covering a couple of interesting news stories that also caught our eye. Stay with us.
[00:21:05] Speaker D: Boost your EBIT by 10% in just a few months. Sounds like another empty promise, doesn't it? Maybe. We'll tell you it's magic. A sprinkle of fairy dust and poof. Your profits soar. But here's the deal. No fairy Dust. Just proven results.
We've slashed late billing by 80%, recovered millions in missed revenues and cut cash cycles by five days for some of the world's biggest forwarders. Real numbers, real impact, real fast. If you are ready to find out how we do it, visit www.ontegos.cloud.
[00:21:39] Speaker C: Welcome back, Neil. Cathy at demer when we were chatting away told me she expects E commerce and AI shipments to stay strong this year though. E commerce into the US took took a hit after the minimus ended and the numbers back that up. Demand data from rotate shows E Commerce tonnage out of China by destination.
North America peaked in December 2024. By November last year it was down 33% year on year.
But then if you look at Europe, that was up 22% over the same period. Both Europe and Asia bound volumes are now significantly larger than North America. That's a dramatic rerouting. What's driving it, Neil? And is this the new normal for Chinese E commerce flows, do you think?
[00:22:28] Speaker A: Well, you know, it's hard to call anything the new normal because it seems like every year we have a new normal when it comes to E commerce. And you're exactly right. The numbers are dramatic. I can't think of any vertical where year on year one big market would be down 33% and one big market would be up 22%. I mean it's never happened in the history of air freight, you know, any vertical I can think of. So it's, it's a bit nuts when you think about these numbers. But you know, E commerce and I, and I said it last time and I feel at times like a bit of a broken record. But it's E commerce is like a raging river. Right? Yeah, there's all this product making its way out of China for the most part and a few other countries. But if you put up a dam somewhere, it's going to find its way around that and it's going to get to the markets it needs to get to.
[00:23:15] Speaker D: Right.
[00:23:15] Speaker A: And these E tailers are really, really smart at how they promote their product and how they enter new markets and get people sort of hooked on their product. And so, you know, you've seen it, right? The US put up this wall. Well, it bypassed and you had a lot of volume ending up now in Latin America, Latin America, E commerce penetration rates are half of what they are in the US and so they started promoting their products heavily in Latin America up and down from central down to the, the tip of Argentina and Chile. Right. And they've been able to dramatically grow, you know, market share in that continent you mentioned Europe up 22%. Africa is probably even up more than that. Right. And so there, all these flows find a home. Europe has talked about action on de minimis and things like that. Right. Coming up. And so we'll have to see, you know, and we will have. What I can assure you is that we're going to have another new normal later on this year or in 2027 because of, you know, other regulatory action that gets taken.
[00:24:19] Speaker C: Great, Neil. Let's just fly through a couple of quick stories to finish. First up, from Eric Coolish of Freightways, Maersk Air Cargo is dropping its 767s on Trans Pacific, ending the Amerijet partnership and selling three freighters to Amazon. They're going all in on 777s for long haul. What's going on?
[00:24:37] Speaker A: Well, I mean, look, you know, I know Amerijet very well. I was on the board for several years. And so I know this company well. And the bottom line is, you know, when it comes to the Amerijet Mayer Steel, is that these 767s were never intended to fly in the Pacific. It's not the right airplane for the Pacific. It's a regional freighter that they tried to adapt into a long haul freighter. Um, you know, now during COVID you would have made money in the Pacific using an atr, right? I mean, that's because yields would have allowed you to make money. But you know, as this market has normalized, you know, the 76 with this multiple stops and, and all of that just becomes uneconomical, you know, in order to fly in that market. And I don't have any data that proves or disproves this, but I, I suspect Maers was not doing well with these flights, which is why, you know, you shut them down. They started operating some of these flights into South America, try and shake things up a little bit. But at the end of the day, I just think it was the wrong aircraft for the mission that they were trying to fly. And word is, is right, these aircraft are going to go to Amazon. Amazon's going to buy these. But to the capacity discussion that we had before, right? This is another example of three airplanes that were sort of available to the market are now going to end up in a closed loop for Amazon. Now, some of that capacity may end up in the hands of some third parties as Amazon builds its own air cargo business. Right? But for the most part, these aircraft are going to be in a closed loop. So that's three additional aircraft that were in the market that will no longer be. And look, this move wasn't a surprise. You know, Maers told amerajet back in September that they were going to cease operations. I think given the tepid cny, they probably moved it up a little bit because, you know, heck, there's, there's no business, you know, really coming out of China right now. But, but Joe Mazali, who's the CEO of amerjet America is going to be just fine. He's really turned that company around and I, you know, they're doing really great. Their scheduled service is, is, is booming. So they'll be just fine.
[00:26:40] Speaker C: That was a proper analysis, Neil. Thanks for that. Another quick one for you. And from Air Cargo Week, our old friend Brandon Frieda. The air forwarders association is welcoming a U S India trade deal with tariff reductions.
Details and timeline are all a bit vague on this one, but I guess just generally good for air cargo markets.
[00:26:57] Speaker A: Absolutely. I mean, first and foremost, I would never disagree with Brandon.
And in all seriousness here he is correct. Just really quickly. Shippers hate uncertainty. It paralyzes decision making. Right. When you don't know what's coming, you don't want to make long term decisions because you could be horribly wrong. And so it just creates this paralysis. And so even bad policy is better than lots of uncertainty, to be honest. And so, you know, with the tariff situation now normalizing, remember we went from 50 to 100, back to 50. I mean, you know, you buy Russian oil, you pay double, you know, all of this sort of stuff. Now that we've gotten back to now an agreement, I think the tariff rate is going to be 18% or something like that right now. People can start to make decisions, they can start to prime the pump again. And overall this stability will be good for air freight, it'll be good for import and exporters on both sides of this deal.
[00:27:52] Speaker C: That's all for this episode of air cargo unpacked. Big thanks to Antigua's Cloud for sponsoring and Karen Ball and Tom Matthews for their production skills. I'm Mike King.
[00:28:01] Speaker A: And I'm Neil Joneshaw. We'll see you next month.
