Driven by the demand from cross-border e-commerce, the air freight industry has undergone structural changes, providing a rare and significant opportunity for the air freight industry, especially for Chinese air freight and express delivery sectors.

At the 7th Cross-border E-commerce Logistics Trends Summit, Dai Jianbin, the Greater China Sales Director of Boeing Commercial Airplanes, delivered a keynote speech titled "Global Air Freight Trends in the Context of Cross-border E-commerce".

01 Global Air Freight Trends

From a weight perspective, air freight accounts for less than 1% of global trade, yet the products it transports represent about 35% of global trade value. From a national perspective, developing air freight requires relatively small investments but plays a crucial role in international trade and national logistics security.

With the continuous development of cross-border e-commerce, the composition of goods transported by air freight is also changing. In the past, air freight mainly consisted of goods with two characteristics: high value and high time sensitivity. However, through innovations and efforts from cross-border e-commerce platforms like SHEIN, TEMU, AliExpress, TikTok Shop, etc., many everyday products and clothing can now be transported by air freight. Air freight has become a key factor in the success of the business model of cross-border e-commerce platforms. The range of products transported by air freight has become wider, and the types of goods transported have become more diverse.

The global air freight industry is a sector with an annual output value exceeding $125 billion, mainly composed of four types of companies: express delivery companies (FedEx, DHL, UPS, etc.), passenger-cargo mixed airlines (China Southern Airlines, China Eastern Airlines, etc.), specialized cargo airlines (Cargolux, ATLAS, etc.), and passenger airlines that only provide cargo services in the belly hold of aircraft.

Chinese cross-border e-commerce platforms and logistics enterprises are exploring various transportation methods with low profile yet full efforts, utilizing various transportation resources to meet the growing transportation demand of cross-border e-commerce. This has also led to the diversion of cross-border e-commerce goods to all categories of companies, making cross-border e-commerce logistics enterprises relatively dispersed and not large in scale. This situation has prevented some key stakeholders in the air freight industry, such as major cargo airlines, aircraft manufacturers, airports, financial institutions, and government agencies, from proactively giving sufficient attention and support to cross-border e-commerce logistics.

It wasn't until 2023 that the emerging cross-border e-commerce goods stood out in the bleak air freight market after the pandemic, driving the recovery of air freight. The major stakeholders then fully realized the significant driving role of cross-border e-commerce logistics in the air freight industry, as well as the huge opportunities and challenges it brings to the air freight industry.

As an important part of international trade, the long-term development trend of air freight is closely related to the global economic situation. The driving factors for the long-term growth of air freight volume include:

Firstly, GDP, commodity trade, and industrial production are key factors driving the growth of air freight.

Secondly, under diversified and de-risking supply chain strategies, some Asian countries, such as Vietnam, Thailand, Malaysia, etc., are gradually increasing their market share from East Asia to the United States. The changes in the volume of international exports reflect changes in the global supply chain.

Thirdly, e-commerce networks have structurally changed air freight. The rapid development of e-commerce has led to an increasing number of goods being traded across borders through air transport, greatly promoting the growth of international air freight. Cross-border e-commerce parcels typically have characteristics such as small volume, relatively high value, and strong timeliness, making air transport their preferred mode of transportation.

With the cyclical changes and long-term growth trends of the global economy, the air freight market also experiences long-term growth amid fluctuations. Each economic fluctuation, such as financial crises, the European debt crisis, the China-US trade war, and the COVID-19 pandemic, has had a significant impact on the air freight market. However, analyzing quarterly data from the past decade or so reveals that the global air freight market has shown remarkable resilience. The harder it falls, the higher it rebounds, quickly recovering and achieving retaliatory growth after experiencing short-term shocks. For example, during the financial crisis, it dropped by about 22% at its lowest point and then experienced retaliatory growth of about 30% at its highest point.

Image source: Boeing

From the above trend chart of air freight growth, it can be observed that air freight is in a phase of rapid recovery. Combined with data from consulting firms such as WTO Global Trade Outlook and S&P Global Market Intelligence, it is evident that global trade, industrial production, and retail businesses are gradually recovering in 2024 compared to 2023. This signals the potential recovery of volume growth in traditional air freight.

Simultaneously, the inventory destocking cycle in the United States has ended, and it is now entering a cycle of inventory buildup. The impact of the destocking cycle on the demand for air freight is particularly significant. When companies are in the destocking phase, the demand for air freight cargo significantly decreases. Conversely, when companies need to replenish inventory, they often rely on air freight to transport goods quickly and efficiently.

Moreover, traditional air freight businesses, such as the transportation of mobile phones, computers, and semiconductors, are also important drivers of air freight demand. Especially in the semiconductor industry, semiconductor production in Taiwan, China, has emerged from a downturn and is showing signs of recovery. This implies that traditional air freight is likely to enter a phase of recovery in the foreseeable future.

In the scenario of the recovery of traditional air freight combined with the rapid growth of cross-border e-commerce, there will be both significant opportunities and challenges for international air freight. The extremely limited increase in air transport capacity will disrupt the balance of freight supply and demand, leading to price increases and hindering the healthy development of cross-border e-commerce.

However, according to IATA data, in 2023, global capacity increased by 11.3% while demand decreased by 1.9%, clearly indicating an oversupply situation. But why did a shortage of air freight capacity occur in the second half of 2023, leading to skyrocketing charter prices reminiscent of those during the pandemic?

An important factor here is the limited support provided by increased belly hold capacity for cross-border e-commerce goods. In 2023, the industry saw a significant increase in belly hold capacity, but the increase in freighter capacity was minimal. Freight flow differs from passenger flow, and thus, the available belly hold capacity may not effectively meet the demands of air freight.

Image source: Boeing

In summary, the demand for traditional air freight in 2024 is highly likely to show a trend of recovery and growth, coupled with the rapid growth in demand from cross-border e-commerce, which will drive rapid growth in air freight demand. On the supply side of capacity, so far, there has been minimal increase in the capacity of large freighters, making it difficult to generate truly effective capacity increments.

Delays in the delivery of large freighters, as well as delays in obtaining certifications for large passenger-to-freighter conversions, coupled with the retirement of hundreds of aging large freighters, will pose many challenges to the supply of large freighter capacity in the coming years. Even during this year's traditional air freight off-season, there has been a significant increase in freight rates.

Both air freight companies and cross-border logistics companies need to make advanced predictions for capacity arrangements in 2024. How to seize the opportunities of demand recovery while coping with the challenges of capacity supply will be the key tasks for the coming years.

02 Opportunities for Chinese Air Freight

Amazon, with its strong e-commerce demand, complete logistics system, and the characteristic of being suitable for freighter transportation due to the relatively long distances between economic centers in the United States, has established a strong domestic air transport network in the United States and formed a fleet of over 100 freighters, mainly composed of 767s. This provides a guarantee of rapid delivery and timely fulfillment for Amazon's e-commerce services in the United States, establishing an insurmountable moat for Amazon's mid-to-high-end e-commerce services in the United States.

In November 2023, Amazon's package volume exceeded that of FedEx and UPS, demonstrating the powerful force of e-commerce logistics. This provides immense room for imagination for e-commerce logistics, especially cross-border e-commerce logistics.

Of course, many people wonder why Amazon doesn't establish an intercontinental air transport network. Possibly due to different market positioning and different choices in business models, Amazon has not centralized its demand for cross-border e-commerce freight. A stable and controllable intercontinental route network is not currently a core concern for Amazon.

In contrast to Amazon, SHEIN, TEMU, AliExpress, TikTok Shop, and other cross-border e-commerce platforms, based on China's manufacturing capabilities and mainly serving mid-to-low-end customers in Europe and the United States, logistics costs roughly account for one-third of the total cost. Their survival and development rely more on sufficient air transport capacity and reasonable air freight prices compared to Amazon.

The scarcity of capacity and the rise in freight rates pose threats to their business growth and the survival of their business models. Whether through strategic partnerships or self-built capacity, having sufficient capacity with controllable costs is a key factor in the rapid development of cross-border e-commerce platforms.

Boeing Commercial Airplanes Greater China Sales Director Dai Jianbin

In the past six months, the average annual growth rate of international cargo volume in mainland China has exceeded 30%. Most of the cargo carried by domestic airlines comes from e-commerce platforms, and the capacity is far from meeting the demand for international air freight. The long-haul capacity of Chinese cargo airlines is far less than one-third of the demand for air freight in mainland China.

A large amount of air cargo can only be transported through detours, with over 3 million tons of goods passing through regions such as Hong Kong, Taiwan, Japan, and South Korea. E-commerce platforms such as SHEIN, TEMU, AliExpress, and TikTok Shop have to allocate significant financial, human, and material resources to aviation freight capacity, despite it being unfamiliar but highly dependent.

Certainly, the shortage of international air freight capacity is both a challenge and an opportunity. Before the pandemic, air freight was the least visible sector of civil aviation. In a market environment where main base markets are relatively poor, and operating freight airlines record losses or marginal profits year after year, this is the general impression of some freight carriers.

Chinese cargo airlines have extremely weak capabilities in transporting high-yield goods. However, with the expansion of cross-border e-commerce, China's current fleet of large freighters is not enough to meet the capacity demand of platforms like SHEIN or TEMU, two cross-border e-commerce giants. There is a tremendous development opportunity for Chinese cargo airlines, express delivery companies, and cross-border logistics companies.

Taking YunExpress under the Yuntu Group as an example, YunExpress has utilized its self-purchased 777F freighters to open dedicated small package cargo routes from Shenzhen to Paris, with six flights per week and a stable service ensuring a delivery time of 3 days, exceeding the delivery time of some international major express companies. In addition to basic cross-border e-commerce cargo, YunExpress has also begun targeting high-value-added international express services, providing better services at half the price. This e-commerce logistics express model will gradually expand and replicate.

Therefore, whether it's large cross-border logistics companies like YunExpress, major domestic express delivery giants such as SF Express, China Post, YTO Express, and ZTO Express, or logistics companies of large platforms like Cainiao, all have the opportunity to leverage the opportunities presented by cross-border e-commerce goods to expand international air freight routes and develop comprehensive international e-commerce express services. Perhaps in the next five to ten years, China may see several express logistics giants capable of competing comprehensively with FedEx and UPS.

Cross-border e-commerce will fundamentally change the landscape of both domestic and foreign air freight. Shippers are shifting from American retail giants to Chinese e-commerce platforms. The purchasing power of air freight capacity is transitioning from import-export traders and foreign retail giants to more Chinese cross-border e-commerce platforms or their logistics providers. This change in freight procurement will catalyze the demand for Chinese air freight capacity and lay a solid foundation for Chinese cargo airlines to play their due role and gradually increase their market share.

Therefore, the shortage of large cargo aircraft capacity in China has already constrained the development of Chinese cross-border e-commerce and the export economy. China needs over a hundred large cargo aircraft to avoid limiting the development of cross-border e-commerce and export economy due to inadequate capacity.

In the coming years, the Chinese air freight industry not only needs support policies from the government to promote the rapid development of the air freight industry, matching China's export economic strength, but relevant enterprises also need to seize the rapidly developing market opportunities of Chinese cross-border e-commerce. They should not only develop air freight networks to support the development of cross-border e-commerce but more importantly, utilize the opportunities presented by cross-border e-commerce to develop and strengthen express delivery capabilities, achieve overtaking on the curve, and establish several express companies surpassing FedEx and UPS.

We look forward to the rapid development of the Chinese air freight industry, which can match China's export economic strength, against the backdrop of global capacity renewal and continuous market demand growth.

End

Cross-border E-commerce Logistics Bai Xiaosheng