The air cargo industry is facing capacity constraints and significant increases in air freight rates as a result of the Ukraine crisis, potentially impacting global demand growth, according to law firm Reed Smith.
Commenting on the situation, Christopher Jackson, aviation partner at Reed Smith, said: “When considering the ramifications of the crisis in Ukraine, it’s difficult to see beyond those directly affecting the people of Ukraine and the desperate struggle that they are now facing. The fact that this situation will clearly affect us all, in one way or another, must, therefore, be put into perspective.
“With that in mind, it’s clear that the aviation industry, as it gradually emerges from the impact of the Covid-19 pandemic, has been thrown another global catastrophe to deal with. It has been noted by a number of commentators that the air freight industry has been a beneficiary, in many respects, of the pandemic. However, the situation in Ukraine is likely to have a much less positive impact on the industry.
“In the short-term, the crisis has given rise to capacity constraints, as Russian cargo operators (such as AirBridgeCargo) are forced out of UK, EU and now US airspace; and over-land and shipping services are also affected, as economic sanctions (and restrictions on Russian ships docking at ports) start to bite.
“Together, this is likely to give rise to significant increases in air freight rates. The retaliatory closing of Russian airspace to all of the EU countries, the UK and Canada means that many operators of flights between Europe and Asia face much longer flight times (as they bypass Russian airspace) and, therefore, increased costs, which will only compound the issue.
“The impact is such that Finnair Cargo has decided to cease operating flights to East Asia for the time being, and it would seem likely that other operators will follow suit. Whilst most operators will be protected by fuel hedging for a time, the sky-rocketing cost of fuel caused by Russia’s actions in Ukraine will inevitably exacerbate the situation.
“These capacity constraints and increased costs will affect consumers and companies alike, as any issues with a company’s ability to access supplies will ultimately lead to delays in the production of goods and increased prices for those goods. This, set against a backdrop of inflation across Europe and general political and financial market instability, may well impact the growth of air cargo demand.
“It’s worth noting that manufacturers in the aviation industry are likely to be particularly affected by supply chain issues. Russia, for example, is a large and important exporter of titanium (a metal used extensively by the manufacturers because of its strength and light weight). The current situation is therefore forcing the aviation manufacturers to shore up their supply chains.
“There is then, of course, the issue of unfulfilled aircraft orders for Russian operators. Boeing’s website indicates that, as of 31 December 2021, there were six unfulfilled 777F orders for Volga-Dnepr. Clearly Boeing will not proceed with any such unfulfilled orders and, to the extent already built, will have to find homes for those aircraft which, in the current environment, could be problematic.
“All that said, the current circumstances may also present opportunities for industry participants to benefit from increased air freight rates and depressed pricing for certain freighter aircraft types brought about both by the pandemic and, potentially, the crisis in Ukraine.
“If past experience is anything to go by, what is certain is that the air freight industry will rise to the challenge now facing it.”