As if the woes around the semi-conductor chip shortage weren't enough, capacity has been in short supply these days as the global shipping crisis continues to rage on. Senior Vice President of Global Air Kelly Blacker gives an update on what she's been seeing as airlines work to create capacity and take on increasing demand from organizations looking to fly instead of float.
Chris Parker: Hello everyone and welcome to the Expeditors podcast where you can hear about front-of-line topics in the logistics and freight forwarding industry through the lens of a global logistics provider. I'm your host Chris Parker and today's topic: the global air capacity shortage. Last time it was about not enough semi-conductor chips to move around the world and for this episode, we'll be covering the fact that there's not enough space to move those chips or to meet the increasing demand for air transportation as ocean continues to see delays and capacity shortages. There's a lot of empty shelves and rising prices out there, so today I've got our Senior Vice President of Global Air Kelly Blacker to talk about what has been going on. Kelly, welcome to the podcast.
Kelly Blacker: Thank you, Chris, it's nice to be here.
Chris Parker: Yeah, absolutely, I'm happy to have you. I want to get to know you a little bit more and for other folks here to learn more about you as well. What's your background, who are you, and what has been your journey at Expeditors?
Kelly Blacker: So I have been with Expeditors actually for 27 years. Variety of positions going all the way back to receptionist when I first started back in 1994. I've spent most of my time in the field throughout the US. I've lived in New York and Columbus, Ohio, Memphis, and I spent the last nine years actually in Atlanta. So being our District Manager there and Regional Vice President before taking on this role in August of 2020. Took on the air freight market right in the midst of this chaotic time that we are still in. I'm now based back in Seattle to help our air freight customers.
Chris Parker: For air, being Senior Vice President of Air, why do you care about air? What keeps you excited about what you do?
Kelly Blacker: Yeah, it's funny, one of my very first jobs 20 plus years ago was in air, air export. I actually got to work in the warehouse and label the freight, move it out. It's probably one of the most fun memories. But air moves fast, it's always changing, it's moving quickly. You're making quick decisions. Customers are making quick decisions. It's fun. I think it suits what I like to do in terms of being dynamic and fast.
Chris Parker: Mm-hmm (affirmative). Would you say then, without bias, that air is probably the coolest product out there?
Kelly Blacker: Absolutely. Completely objective and non-biased opinion.
Chris Parker: Sure. Well, let's talk about today now then. How are things in your neck of the logistics world? What's your day-to-day been looking like lately?
Kelly Blacker: Yeah. It's no secret we're still in the midst of the global pandemic and the impact on the air freight market. So as things just shut down a year ago we've been making our way back with capacity over time but we're still short. So my day is largely spent doing things like this, actually. Talking to customers about the market, trying to stay up to date on the latest and greatest with what's happening in the air freight market. That covers both capacity in what the airlines are doing to bring it back or take it down and what they can or cannot do as well as with our customers. You mentioned the semi-conductor shortage. There is a large material shortage happening and so productions are being delayed and that's going to have a ripple effect for us to be ready for. So I spend a lot of time understanding the supply chains of our customers and how that's impacting them. Then of course all of the other transportation services.
Kelly Blacker: Ocean is a large driver for air, and what's going on in the ocean market so staying up to date with that, understanding what's happening with ocean and the ripple that it's going to have on air. Then the ripple that both of those things have on the trucking industry which is also struggling right now. It's all one big circle. What starts it all is the demand and we should start seeing unprecedented demand and the impact of that on the supply chain.
Chris Parker: Yeah, absolutely. This capacity thing is a headache now. What was the big challenge for air before the pandemic happened?
Kelly Blacker: If we look back in time there's been ups and downs but I would say if you look at 2018, that was sort of the apex for air. It was the largest time globally for air cargo movement. Whenever you have surges in air freight you've got cost considerations. So I think with air it's always the supply and demand and the cost component of what that looks like. It's very expensive to move air so customers are always pushing the price down as much as they can but recognizing that there's still a cost to it. So 2019 was also a good year but not as much. As cycles go through traditional air freight products such as the pharmaceutical industry, the high tech industry, and it's sort of a, "What's coming out? What's needed? What's important? Do people need to air freight it or can they stick with ocean?" So there's a lot of volatility all of the time. Then of course this year has just put us in a tailspin. In regards to capacity for air, it's also largely dependent on travelers. The passenger network carries about 50% of the cargo and when that disappears, obviously there's a problem there. So until we really start to fly again, and that's international travel, we're going to continue to see the capacity shortage.
Chris Parker: All right, so you mentioned the reduced passenger flights impacting capacity. Where else did it all go? Where the heck did all the capacity go? I think that's on a lot of people's minds right now, right?
Kelly Blacker: Parked. It went away and parked in the desert, which is where it largely went.
Chris Parker: Yeah.
Kelly Blacker: The components of capacity, let's talk about the freighters first. Of course, those never went away, they've been there, and they have increased their capacity quite a bit over the last 18 months. There's been some additional freighter capacity but not much. It's not that there was an influx of traditional freighters. Those freighters are now loading more. The load factors are higher. If you think of the contour of the plane and how to get the cargo in, it's higher now. Block hours, flying more. So both of those things increase capacity and so the freighters have taken on a lot of that. On the passenger side, the passenger aircrafts have put in cargo-only flights, passenger freighters. But they can only do that where they know for sure that that cargo will ride and that cargo has to make up for the loss of the passenger revenue.
Kelly Blacker: So something that people may not realize, number one like I said before, the passenger planes moved about 50% or more of the cargo globally. Also, the passenger revenue makes up, depending on the airline, between 70 to 90% of the revenue. So with all of that gone, that cargo cost has to cover it and if it doesn't they'll take down the plane they can't afford to fly because already the financial impact to the airline industry has been tremendous. There's no recovery yet. They're still in a financially bad situation. So the planes got parked. As demand has increased, flights have been put back in, but there's still a percentage that is parked and will remain parked either because we're not traveling internationally or because it's time to retire those aircraft. They might be less efficient. It's time for airlines to evaluate their entire fleet and look to the future.
Kelly Blacker: So the overall industry is going to be smaller for a few more years, I think. There's data that shows the ordering of new aircraft got pushed out into the future, into 2023, 2024. So we're really looking at a constrained market for the next couple years. The estimates are that we won't have the same level of pre-pandemic capacity until about 2024.
Chris Parker: As you and I were preparing for this interview, you mentioned something about this ecosystem of transportation. I think of ocean impacting air. What does that relationship look like and what is happening between those different modes?
Kelly Blacker: On the air freight side, in a normal market, you've got some traditional things that move mostly air. Like I mentioned the pharmaceutical, high-tech industry, maybe AOG type shipments. The bulk of our consumers goods move ocean. So when you have the capacity situation that we have and demand that we're seeing in ocean, the ocean market is not having the containers in the right place, not being able to get loaded, not being able to get your containers, then all of those other industries shift over into air as well. Your general goods, whatever it might be. Automotive, home goods, everything might shift over into air so we see that conversion. The challenge is very small amount of ocean has a big impact on air in terms of total capacity. There's really no comparison. So we're seeing some of that now but everything is so congested. There's also an element of shifting the smallest amount companies can in terms of that cost.
Kelly Blacker: Another phenomenon that we're seeing is the cost comparison between air and ocean is shrinking. So there's been some recent publication out that air typically is about 12 times higher than the cost of ocean, get it down to component level. Now it's actually shrunk down to about six times just due to the increase in the ocean cost and inability to get loaded. That's another factor evaluating cost and trying to get things faster. You're going to see a surge in air as well.
Chris Parker: Another thing that I'm thinking about here is time, right? Ocean is traditionally a slower mode of transportation which lends itself to why it's a cheaper mode of transportation and air is definitely those time-sensitive shipments. It's just a faster mode. How does that affect the equipment needs and the trucking needs at the end when they're receiving into their destination? What has the impact of that looked like?
Kelly Blacker: That's actually a really great question because one of things that we are seeing due to the increase in the demand, really on the Trans-Pacific Asia into the US is really what's getting hit the hardest although also into Europe is also there as well, is the US infrastructure. You can see that on the ocean side the ports are struggling mightily, but so are the airline hubs as the cargo comes in. So without the passengers, the freighter companies, and the passenger flights that are moving just cargo, they're largely going to fly to the hub. They're eliminating some of those offline points that would be filled with passengers. So they're flying into the hubs and some of the reasons for that, landing rights, of course, the ease of getting in and out, but also return cargo. You've got to get to a place where you can easily get the bulk of the return cargo. That's going to come from the hubs.
Kelly Blacker: So the hubs are getting inundated with cargo. Again, the word unprecedented gets overused these days, but I'm going to use it again. Coming into those places and they're getting really overloaded so we're seeing some significant congestion in the US traditional gateway locations. So there's just too much cargo. It starts with the airline ground handlers and trying to unload the aircraft and get that turned around and make it available for us. They can't handle it as well, they don't have the capacity, warehouse capacity to turn it quickly. Labor is also an issue. Equipment is also an issue in terms of forklifts and things like that to get the cargo mode. Then it compounds into the CFS operations, same issue, lack of warehouse capacity and labor and just being able to do that throughput. Then you get into okay, it's finally ready, now come get it. We're faced with a trucking challenge as well, making sure that we've got that trucking capacity to get it out of the facility. So it really is each domino that falls makes the next step in the process more difficult and right now we're seeing the result of that on the destination side and being extremely congested.
Chris Parker: Yeah, it absolutely is like this massive ecosystem where everything is interlocked and connected to each other and one little thing- well, this has been a big thing, but it's also having exponentially larger impact as it goes on. What are some surprising ways that COVID caused this shortage or has impacted the infrastructure of air freight?
Kelly Blacker: I think of the things I just said in terms of airlines shaving off the connecting locations. So airlines have really paired down shipping to the hub locations. Also, the emphasis on cargo. Again, the passengers have always made up the bulk of the focus because that's where the revenue comes from, so of course, that's going to be the case. The cost to move goods, and this is across the board, has always been pushed down, how can we get things moved at a less cost. So transportation costs are being pushed down over the course of time. If that cost goes down, then your ability to invest in infrastructure at the hubs, at destination, gets pushed down or delayed. So what we're seeing now is a resurgence of the focus on cargo. Cargo is saving the airline industry right now, therefore, it's getting more attention and more focus and hopefully, that will translate as we look into the future and more focused on cargo. What we've seen is airlines scale back a little bit on cargo if you look at the last ten years or so and focus more on the passenger side and less on the cargo side. We're having our moment now and let's see if that translates to the future. To be determined, I think.
Chris Parker: You're saying that cargo is the focus now and passengers not so much. I've been hearing, call me crazy, but I've been hearing that cargo is now riding in the place of passengers. We now have cargo actually sitting in airline seats that are flying out there. How are airlines trying to add capacity? It sounds like they're clearly getting very creative.
Kelly Blacker: Yeah, they have. Google it if any of you here haven't done that, it's kind of neat to see the cargo on the seats. But yes, that's exactly what they've done. On heavy cargo routes, the airlines have been able to put in cargo-only flights, calling them "preighters," passenger freighters. Preighters. There are some that have actually done a full conversion where you take the seats out and you just make it a freighter but less of that and more of using their existing flights to accommodate the market. The good part is it adds some capacity back but the negative or the output of that is it's a lot harder to load and unload. You've got to individually strap in the cargo to the seat or the overhead bin so you don't have your big ULDs that can just be loaded on and off really quickly. So again, at the destination side, I talked about some of the congestion. That adds to it, now it takes longer to unload and get that stuff turned around. That adds more time and more congestion.
Chris Parker: I imagine too the depalletization that you have to do in order to strap that freight in? I'm thinking about when I see a pallet get put together, they have to tear that apart, and then put it back together at the destination. That's going to cause even more delay and stress and constraint, no?
Kelly Blacker: There's always cargo that moves lose, not everything has been built up; there's always cargo that comes in loose and you're seeing that because you're right it has to be loose cargo to fit up there and it has to be of a certain size and a certain weight. So it does limit some of what can be put up there but there's always enough, especially these days, to keep as much as we can palletized on the lower deck part of the aircraft, or on the freighters, and then put the lose cargo in the seats. I don't want to mislead because it is happening, we're seeing a lot of passenger freighters, and some airlines have done a great job of adding that, but it hasn't been enough to overcome the loss of the capacity of the flights that are still parked.
Chris Parker: Right. So what does our side as freight forwarders look like? What kind of position are we finding ourselves in between the needs of our customers and then securing the capacity that carriers can provide?
Kelly Blacker: Yeah, that's really the biggest thing we're focused on right now. We work with the carriers on long-term strategic relationships. We try very hard to partner ourselves in a unique way. From that side of it, during the pandemic, we kept that same philosophy or focus. So the commercial carrier, they're hurting. They're not doing as well so we try to stay with them and partner with them and try to support them as best we can. So I guess on the carrier side the main focus that we have is trying to secure capacity because there's just less of it, the customers' capacity. So all of the other conversations in regards to price and whatnot are less important now than making sure we have capacity. I think the forwarder industry as a whole is in that position of trying to get as much as we can in the right time and right place to service the business.
Kelly Blacker: We talk about the struggles on either side, customers are trying to get the goods in. People are ordering, demand is not going down, inventory to sales ratios are historic lows. PMI still very high. There's all these indicators that show that that demand is going to continue and they're under a lot of pressure to get the goods in and try to get them back on the shelf. So trying to play to both to make sure that we're doing as best we can to support the carriers as well as get the capacity for our customers. But I think our biggest role in that is obviously the facilitation of the movement by helping the market understand the levers that are happening, why are we in this situation, due to the pandemic and the cost pressure that's been coming for a long time. We pushed the price down so low for so long that it's got to rebalance itself and then the sheer demand. People have got some disposable income and they're spending it. There's no end in sight.
Chris Parker: Let's hope there is at some point, someday, that there is.
Kelly Blacker: Maybe you could strike that.
Chris Parker: Hey, we're on this ride forever. So there are organizations like the International Air Transportation Association, IATA, keeping a close eye on the situation. You mentioned earlier that we were looking at to return to pre-pandemic levels of capacity by 2024. Now I had read that that was an estimate from at least a year ago. You're saying that that's still the same. Why hasn't that estimate changed or could it change?
Kelly Blacker: I definitely think it could change but I would say it hasn't changed yet. If you consider the ability to bring in new aircraft, that takes a long time anyway. You're looking at a couple years to bring in new capacity. In terms of the capacity that is still parked, some of that will continue to return, but some of it will never return. Again, like I said before, that'll be retired, moved on, less-efficient aircraft. Looking to the future you've got both of those things combined in regards to total capacity. The other big piece is the travelers. There are parts of the world that were more heavily dependent on passenger aircraft. The Trans-Pacific is where a large amount of the freighters have always been so that's going to rebound fast if we look at total capacity. But going into Europe for example, a lot of leisure travel, a lot of business travel there, so a lot more passenger flights going into there. That needs that to return. Other markets like Latin America, the South Pacific, same type of thing. So parts of the world will recover more slowly until we start to travel again.
Chris Parker: Got you, got you. If we were to look back at this shortage compared to other capacity shortages that have happened in the past, will this be seen as a hiccup 20 years down the line or will this have surpassed previous challenges and previous shortages? Now I know that it's kind of different because this is a global pandemic that happened, but how do you think we'll look back on this?
Kelly Blacker: History will define us all but if we look at two really big historical events, 9/11, that happened in the United States but that did have global ramifications where all air travel stopped for a period of time but it was a very short period of time. So in terms of the movement of goods, not as much of an impact as it did have on travelers. I think travelers were a lot more hesitant to return at that time. Then the financial crisis in 2008, 2009, which was another big dip in the global scale of things. Sometimes we don't recognize that that actual recovery took a little while in regards to getting things back to pre-levels. But my estimate is that this is much much greater than either of those two things as we think about global supply chain and the fact that it's impacting everything, it's not just an economic thing that happened in the 2008 financial crisis, this is an economic things, it's consumer behavior change, it's how we order goods change. So there's a lot more going on this time and that will have a longer ripple effect.
Chris Parker: What would you say companies are doing strategically in order to keep things moving? What is proven successful for various organizations?
Kelly Blacker: I think it's going to take a while to sort through that. It's hit us all really hard so there's more of a reactionary thing happening. It hit us hard in that the world just stopped and then it hit us hard again when the world reopened and started really buying on a big scale. So both of those things, we weren't necessarily ready for. I think customers are right now just trying their best to get the goods where they need to go through any traditional means they can. Sort of a short-term fix is trying to pull orders up. We're about the hit the holidays again, and try to pull those orders sooner than they would normally ship as best they can. If we look to the long term I think there'll be discussions again about shifting production. We were having those conversations pre-pandemic and I think that will start to pick up again about where manufacturing takes place. Maybe it comes closer to the distribution networks and then bringing inventory in closer to where the goods ultimately need to be. I think that's probably one of the biggest things because e-commerce took off at a much faster pace than the world had previously anticipated. We're ordering like crazy from an e-commerce standpoint so I think getting those inventory levels closer to the distribution networks will likely be a long-term change.
Chris Parker: All right, so last question to wrap this all up is, what helps you sleep at night? What aren't you worried about right now?
Kelly Blacker: I feel like whatever I say here people will have a different opinion. We'll try to say it the right way, but this is a global thing that occurred. Every country, every person, has been affected by this in varying degrees. So I would like to think that globally we can come out of it together maybe a little bit more connected, understanding that when something happens in one country it affects so many other things and this was a really good reminder to all of us how interconnected the world is. So I'm not sure that helps me sleep at night but I think it is maybe a positive that comes out of this. Personally, you think about all of the damage that this has done to businesses and people and individual lives, it's really sad to think about. On the other hand, the positives, we've all been given a moment to reflect, a moment to slow down, and for me a moment to spend a lot more time with family and my kids and just being around more. That's been a huge benefit. So that's definitely helped me sleep at night to just be more connected to the people around me.
Chris Parker: Yeah, what a gift to be told to stay where you are and then you can start asking yourself, "Who am I? What do I care about? What's important to me?"
Kelly Blacker: A lot more self-reflection than ever before.
Chris Parker: Well, Kelly thank you so much for chatting with me about this today. If people wanted to get into contact with you to talk more about this and learn more, where can they find you?
Kelly Blacker: I'm very available. We're not traveling so much yet, still at home and local, so I'm absolutely available through Expeditors if you want to make a phone call or send an email. I am also on LinkedIn, Kelly Blacker. I am on Instagram as well. Those are the only two social media platforms that I use but I'm available and active on both of those.
Chris Parker: Excellent. Well, Kelly, thank you again so much, and yeah, have a great day, take care.
Kelly Blacker: Thank you so much, Chris.
Chris Parker: Thanks for listening to today's episode. If you've got any questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.