Ocean carriers seriously eyeing freight pie

Trade News

17 June 2022 • 20 min read

Ocean carriers seriously eyeing freight pie

Editorial Team

Ocean carrier powerhouses CMA CGM, Maersk, MSC, and others-- awash with cash from the past few years--are looking from the high seas up to the sky. They are keen to grab some of the air freight pie as a decent chunk of sea freight is buoying upwards, with shipping line – airline partnerships. Such players include CMA CGM – Air France – KLM, Maersk Air Cargo and MSC’s courting of Lufthansa.

At a time when deep-pocketed global corporate giants such as General Electric (GE), Nestle, Abbott and others are not hesitating to take the aerial route to rush out of stock products for meeting market demand across geographies, unlike the usual seaborne shipment mode, one can sit up and take note of the current congestion, costs and timelines involved with regular shipping lines, containers terminals and ports world over.

Amid acute infant formula shortage in the United States of America (USA), Swiss food behemoth Nestle is flying in additional supplies from across the Atlantic to replenish supermarket shelves. Likewise, owing to work suspension at its Shanghai factory in zero Covid strategies implementing China, GE’s healthcare wing employed air freight to deliver a dye in short supply in the US, which is crucial for medical scans and tests. Similar was the case with Abbott, which was flying in powdered infant formula from Ireland, following contamination shutting down its plant in Sturgis, Michigan, even as the US Department of Defense is utilising contracts with commercial air cargo lines in ‘Operation Fly Formula’.

Meanwhile, top shipping lines such as French CMA CGM, Danish Maersk and Swiss Mediterranean Shipping Company (MSC) did not sit quiet but eyed a plum business opportunity of catering to this rising air cargo demand by catapulting their shipping capabilities from the high seas into the blue skies as well.

After stuffing their coffers with record multi-billion dollar profits in the ensuing Covid years, ocean carriers are eager to capture the freight pie from the sky.

To better comprehend the emerging phenomenon, let us look at -

  1. What’s buoying freight from the sea to sky?
  2. Emerging shipping line – airline collaborations
  3. Boeing bullish on cargo aircraft demand
  4. Advantages of air freight

What’s buoying freight from sea to sky?

According to a World Bank note, air freight is 12 – 16 times more expensive than sea transport and 4 – 5 times pricier than road transport. However, the Coronavirus pandemic, unprecedented e-commerce demand, congestion at ports, shortage of shipping containers and several other factors skyrocketed shipping costs through ocean carriers.  

A Nasdaq report noted that container management is still sub-optimal with continuing lag in container ships’ movement at ports, resulting in limited availability of containers as well as a delay in loading and unloading operations. Amidst these conditions, demand is still high, which is fuelling the surge in prices.  

Maersk also observed that up to 15 percent of global containership capacity was out of circulation in 2021 due to congestion. Similarly, Kuehne + Nagel highlighted that nearly 80 percent of global sea freight was disrupted due to congestion in north American ports.

Shipping costs shot up to unprecedented levels, so much so that the gap between ocean freight and air freight has drastically narrowed, opening windows of opportunities for shippers and shipping lines.  

According to Ti Research, a strategic advisory services provider to the logistics sector, cargo owners have increasingly shifted from sea to air, bolstered by narrowed price gap which led to the air freight market doubling.

Incidentally, global freight forwarding market sprung up to its strongest growth in a decade, logging 11.2 percent growth, valued at around $285 billion while the global tradeshow was up by 13 percent to $28.5 trillion. For further insights, consider the Cargolux case. After struggling for years to break even, air cargo player Cargolux witnessed revenues of $4.4 billion and a profit after tax of $1.3 billion in 2021, as much as 70 percent greater than in 2020.

Moreover, easing global Coronavirus lockdown restrictions, booming demand for goods, propelled by economic stimulus packages in several countries, expanding e-commerce, rise in free trade agreements and other factors drove up growth and ultimately global digital freight forwarding market.

Despite these favourable conditions, ocean carriers missed out on a chunk of this demand to air cargo due to a shortage of carrier capacity and port congestion, including a mismatch between supply and demand.

Compared to sea freight’s growth of 6.6 percent, estimated around $156 billion, airfreight growth was gauged to have doubled up to 15 percent, amounting to $128 billion while the latter’s rates rose up by nearly 70 percent.

Amid this backdrop, air cargo dropped from being 12 times more expensive than ocean freight to just 2.5 times or ocean freight correspondingly became dearer in the past couple of years to narrow the gap so much, pushing traditional ocean shippers to not mind the slight premium on air freight.

Despite the tailwinds for air freight, it continues to suffer from capacity constraints. Forwarders have concentrated on augmenting air freight capacity on key trade lanes as demand outstrips supply. Its capacity is estimated to be still nearly 11 percent lower than 2019. It is estimated that sea freight moves about 2 billion tonnes of global cargo when juxtaposed with 60 – 70 million tonnes flown through air freight.

Emerging shipping line – airline collaborations

On realizing the rise in air cargo demand, following the historic narrowing down of cost between sea freight and air freight, many shipping lines are inking pacts with airlines to cash in on the demand. Let’s take a look at these developments: 

CMA CGM – Air France – KLM

The French shipping firm has signed an exclusive long-term strategic partnership in air cargo with Air France– KLM, flag carriers of France and Holland, to combine and complement their cargo networks for offering end-to-end logistical solutions, spanning the sea, land and air with a global footprint.

In a decade long partnership, Marseille-based CMA CGM will strive to take a 9 percent stake in Air France – KLM, valued at $252 million. In addition to ‘significant revenue synergies, the collaboration boosts the ocean carrier’s non-maritime logistical capacities by augmenting an air cargo division it started a year ago.

The three partners will operate an initial fleet of 10 full-freighter aircraft which will be augmented by 12 more on order. Six of them will be based at Paris-Charles de Gaulle airport and Amsterdam Airport Schipol, including the airlines’ existing belly capacity in 160 long-haul passenger aircraft. 

Both the partners will leverage their respective global sales teams under one voice, including Air France – KLM’s vast franchise, air freight capabilities and global cargo network, alongside CMA CGM’s large commercial network and global logistics platform for multi-modal freight services.

Equipped with an extensive full freighter and wide-body belly aircraft network, Air France– KLM serve 295 destinations across 110 countries via Paris and Amsterdam airports, fitted with cutting edge cargo facilities.

With teams manning 116 stations and covering a network of 390 handling stations spread across the globe, Air France – KLM’s commercial network happens to be one of the most resilient in the air freight realm, including expertise in lifting pharmaceuticals, perishables, express and others, plus one of the most advanced digital service solutions.

According to the International Air Transport Association (IATA), air cargo operations of Air France, KLM and Martin air, a subsidiary of KLM rank them at the eighth spot in global air cargo traffic. Earlier, CMA CGM acquired CEVA Logistics in 2019, which also offers air freight with an annual capacity of 3.6 lakh tons through 14 international gateways and 1,000 facilities in 160 countries.

Recently, CEVA Logistics won a prestigious multi-year contract from Italian Formula 1 racing ace Ferrari to be its team partner, which entails flying Ferrari equipment to Formula 1 races cross-country and cross-continent in a very short time-spaces.

In March 2021, CMA CGM created a new airline, CMA CGM Air Cargo, based out of Paris-Charles de Gaulle airport and dedicated to air freight. CMA CGM Air Cargo is equipped with four A 330 aircraft with a payload of 61 tonnes each, two B777s with a payload of 102 tonnes each and four more A350 aircraft slated to join its fleet in 2025.

The French ocean carrier is a unique shipping line whose air freight operations are spread across three entities: CMA CGM Air Cargo, CEVA Logistics and Air France– KLM. It also acquired Ingram Micro’s Commerce & Lifecycle Services (CLS), Colis Prive and GEFCO.

Maersk Air Cargo

On April 8th, 2022 Maersk announced Maersk Air Cargo as its primary air freight offering to serve the logistical needs of its customers. Maersk Air Cargo is expected to operate full-fledged from the second half of 2022.

The Danish carrier’s new air freight company emerged after transferring in-house aircraft operator Star Air, whose operations have been subsumed into Maersk Air Cargo.

Maersk’s dedicated air cargo airline chose Billund, Denmark’s second-largest airport as its freight hub, from where it will deploy a controlled capacity of five aircraft, which include two new B777F and three leased B767 – 300 cargo aircraft.

It will also add three new B767 – 300 freighters to serve US-China operations. These operations will initially be run by a third party operator. Eventually, Maersk aims to carry one-third of its annual air tonnage within its own controlled freight network.

It is targeting to achieve this by a melange of owned and leased aircraft, mirroring the existing structure in its ocean fleet while the balance capacity will be met by chartered flight operators and strategic commercial airlines.

MSC & Lufthansa eye ITA Airways

Swiss ocean carrier heavyweight MSC and German Lufthansa airline together are interested in acquiring a stake in ITA Airways. Both the companies evinced interest with the Italian government to this end in January.

The Italian government wants to sell the airline by June end and has set a deadline to receive binding offers by May 23. Besides MSC –Lufthansa, The U.S. Certares Fund along with Delta and Air France, and Indigo Partners investors have shown up as suitors.

Though MSC and Lufthansa had asked for a 90-day exclusivity period back in January for fine-tuning their acquisition attempt, Italy did not relent and went ahead with a market-based approach. According to the Mediterranean nation’s economy minister Daniele Franco, a new buyer is expected to be at least 52 percent owned by a European entity.

Incidentally, the German airline wants a minority stake in the purchase while the Swissshipping line is expected to take the majority stake in their bid. Onfructification of this deal, Lufthansa envisages creating close commercial cooperation with ITA. Privatisation of ITA, successor airline of erstwhileAlitalia, will result in a reduced financial burden on the Italian state.

Boeing bullish on cargo aircraft demand

After a prolonged downside to demanding due to the Coronavirus pandemic and 737 Max model woes, Boeing, the top American aircraft manufacturer, is zeroing in on cargo business in the light of increasing airfreight demand. From 12 lines transforming passenger aircraft into freight planes, as many as 22 have proceeded to be so since the start of the Coronavirus pandemic.

Alaska Air Group, America’s fifth-largest airline, made preparations to convert two midlife Boeing 737 – 800s into cargo aircraft, even as three Boeing 737 – 700s have been earmarked for freight in its fleet.

According to an Investopedia report on Boeing, aircraft volumes have accelerated in the past six months, building on the initial demand driven by e-commerce in the early stages of the pandemic.

AvalonHoldings Ltd, an aircraft leasing company highlighted that air cargo is expected to reach $150 billion in the current year, even as traffic is expected to double by 2040. Similarly, the Bureau of Transportation Statistics in the UShas projected the share of domestic and international airfreight to rise to 10percent in 2020 from 6 percent in 2018.

In January, Boeing struck a $20 billion deal with Qatar Airways for nearly 50 of its 777-8, a new dual aisle jetliner, when it unveiled the model’s cargo version. Hindered by delays, Qatar airways is not likely to receive the cargoplanes until 2027, which prompted Boeing to salvage that order by agreeing to transform a third of an existing order of 60 777 – 8 passenger aircraft into cargo planes.

Advantages of air freight

  1. It is the fastest mode of freight transport. As transit times are shorter, cargo must move quickly through the airport, unlike other forms of shipments.
  2. Air freight is generally deployed for time-sensitive commodities which may also carry high value per unit merchandise such as production samples, pharmaceuticals, fashion garments, documents, electronic consumer goods and perishable agricultural and seafood products among others.  
  3. Air freight is also deployed to ship emergency spare parts and inputs needed for just-in-time production.
  4. Deploying air freight gives competitive advantages such as producers agreeing for short order times to avoid traditional shipments which may face delays in production or cargo clearance.
  5. Empowers diversifying strategy as manufacturers can ship products with shorter shelf-life, including offering bankable delivery of smaller volumes. On successfully establishing a market, manufacturers can set up supply chains using a mode of transport inexpensive than air freight.

In some airports, all transactions are conducted electronically to clear cargo within a couple of hours round the clock.

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