The 2020 holiday season has been unlike any other for the supply chain, with record e-commerce demand taking up cargo space both in the air and on the ocean, sending shipping rates from China to the U.S. through the roof. Now, with the U.K. granting emergency authorization to roll out the Covid-19 vaccine developed by Pfizer and BioNTech, making 800,000 doses available to the public starting in the first full week of December, the priorities within the supply chain are going to start taking a different shape, and it could affect how apparel may be shipped in the near term.
With the U.S. likely following in the U.K’s footsteps in the next few weeks, air freight is going to be dominated by vaccine transportation. Thus far, Pfizer has said it plans to deliver about 50 million doses this year and up to 1.3 billion doses in 2021. Moderna’s vaccine, which does not require the freezing efforts of the Pfizer vaccine, is expected to be administered in approximately 20 million doses in the U.S. by the end of the year, while the company remains on track to manufacture 500 million to 1 billion doses globally in 2021.
There are approximately 2,000 dedicated air freighters in use worldwide, carrying about half of all goods moved by air, according to the International Air Transport Association (IATA). The remainder typically is transported within 22,000 regular commercial jetliners.
Air cargo capacity crunch leaves very little room beyond vaccine
While the dedicated freighters were more than 20 percent over capacity in September, total air cargo volume including the commercial flights has tumbled this year. Global capacity, which the IATA measures in available cargo tonne-kilometers (ACTKs), shrank by 25.2 percent year over year in September (28 percent for international operations). That is nearly three times larger than the 8 percent contraction in demand, indicating a severe capacity shortage in the air freight market.
Airlines have converted nearly 2,500 passenger planes into cargo-only roles, but the job of distributing the vaccine would be easier if fleets were flying within their typical frequencies to their usual destinations, since that would mean less belly capacity is sitting idle.
“A lot of the vaccine is going to be moved in the belly of the passenger aircraft,” said Rick Helfenbein, former president and CEO of the American Apparel & Footwear Association. “The problem with that is there are limits to the amount of dry ice that you can put on board, so that overflow may park itself somewhere else, and it will certainly have some impact on air freight.”
Further exacerbating the capacity challenge, IATA estimates that 90 percent of international passenger traffic has disappeared since people aren’t flying commercially.
“As carriers adjust schedules to reflect falling passenger demand amid the resurgence of Covid-19, valuable belly capacity will be lost when it is needed the most,” said Alexandre de Juniac, IATA’s director general and CEO, in a recent statement.
These flights are pivotal in being able to transport the Pfizer/BioNTech vaccine, which has to be stored at minus 70 degree Celsius (minus 94 Fahrenheit) temperatures, and given the governmental priority of the shipments of these vaccines, apparel brands that typically rely on air freight to make quick turnarounds are likely going to be out of luck.
“The vaccines require rapid delivery, obviously, and what you don’t want to be doing is putting a vaccine in a refrigerated shipping container packing off for a four-to-six week ocean journey and hoping for the best when it gets there,” said Chris Rogers, research analyst, global supply chains at global trade intelligence firm Panjiva. “It will suck up all of the air freight. The apparel industry, namely the fast-fashion players, are either going to face much higher rates or more likely there just won’t be capacity available.”
The difficulties aren’t necessarily exclusive to apparel. A September survey from The International Air Cargo Association (TIACA) and Pharma.Aero showed only 28 percent of companies involved in supply-chain logistics felt well prepared to handle these vaccines.
“Amid the uncertainty of when a potential vaccine may start to be distributed, industries from technology and automotive to engineering and medical devices relying on the continuous availability of air cargo capacity for their day-to-day procurement and distribution operations are facing the challenge of anticipating the potentially disruptive impact on their supply chains,” said Mirko Woitzik, intelligence solutions manager at supply-chain risk management platform Resilience360.
New product launches, diversified vaccine origins add to uncertainty
But it is important to note that after an already tough year for the industry, apparel retailers have to compete in an arena that is filled with new product launches including the iPhone 12 and the Sony PlayStation 5, both of which are high-demand products that are being shipped via air.
And with more of the vaccines being produced in mass manufacturing centers for pharmaceuticals in regions such as Europe and India, this reality further reinforces the lack of availability ahead for air freight capacity.
“You’re going to find I think a lot of these air freight routes have been redirected as well,” Rogers said. “So it’s going to be quite messy.”
Given the limited availability and the fluid developments with Covid-19 vaccines, apparel players should prepare by keeping abreast of the latest developments regarding vaccine approvals around the world, while constantly assessing where potential vaccines will be manufactured and which airports could serve as import and export hubs, according to Woitzik.
“Companies can anticipate logistical bottlenecks by activating contingency plans with their logistics providers, i.e., by routing shipments through other nearby airports,” he added.
All apparel companies must think carefully about the timing of their orders and deliveries, especially given the lessons already learned this year from taxing supply-chain constraints, particularly as holiday demands pulled shipping forward, according to Rogers.
“Next year, we don’t know how long the vaccine is going to take to arrive when it does, what the profile of delivery is going to be, and so on,” Rogers said. “You don’t want to be in a position in August of next year, when you start shipping the winter clothing that’s bulkier, when you’re facing those shipping challenges, so maybe what you’ll want to start doing is shipping sooner or spreading out your shipments over time so that we don’t do what we normally do, which is ship everything for a given season at the same time. You just have to take what the shipping cost is at the time and start shipping earlier.”
Shipping rates jump sky high
As capacity fills up and demand increases, so, too, do shipping rates. According to data from the Hong Kong-based TAC Index, air freight shipping rates between China/Hong Kong and the U.S have increased by nearly 46 percent between Oct. 12 and Nov. 9 to reach $7.40 per kilogram shipped, which is more than double the rate during the same time last year. In fact, these shipping rates increased nearly 69 percent from July 6, when rates were just $4.38 per kilogram shipped.
Between March and June, air cargo spot rates were initially driven up as governments raced to secure enough personal protective equipment (PPE) in their fight against the Covid-19 outbreak. While many passengers planes were reconfigured to cargo-only aircrafts to carry PPE shipments during this period, it remains to be seen how fast airlines and other carriers would inject additional air cargo capacity into the market, Woitzik pointed out.
“While many passenger planes remain grounded and could be reactivated, air cargo rates would likely have to reach a certain threshold for airlines to operate these planes profitably,” said Woitzik. “In addition, uncertainty also remains around how much capacity governments will secure by paying premiums, which could reduce the number of cargo-only passenger planes available on the spot market.”
Helfenbein noted that based on conversations he has held within the industry, the heightened shipping rates across both air freight and sea freight are likely to linger into the first quarter of 2021 and possibly even into the second quarter, especially if the vaccine is widely distributed.
Vaccine pushes more apparel into ocean freight
On the sea side, the vaccine’s distribution may not have as much of a direct impact on the apparel trade since it won’t be transported via sea freight. But as apparel’s place in air transportation becomes deprioritized and demand increases again, sea freight will likely be the sector’s best option.
Apparel imports via sea increased 10 percent in October, compared to much larger increases of 52 percent for furniture and 72 percent for major household appliances such as refrigerators, according to Panjiva. While the latter two sectors had been growing for the past four months, apparel imports had actually undergone a decline prior to the month, signaling that apparel makers are now trying to muscle their way in for extra capacity at a time when everyone else has already been doing so.
But as they seek out extra room in ocean freight, costs aren’t exactly going to be much more palatable. Like their air freight counterparts, container freight rates from China to the U.S are increasing as a result of an uneven distribution of containers to meet surging shipping demand from Asia to Europe and the U.S.
As of mid-November, the cost to ship a forty-foot equivalent (FEU) container from China to the U.S. East Coast topped $4,750, up 42 percent since July and a new record, according to Freightos data in Refinitiv Eikon. The China-to-U.S. West Coast rate is up nearly 50 percent in that same time span, to $3,878 per container.
“The container shortage is so severe that the agriculture export business to China is suffering right now because a lot of the shipping lines don’t want to carry agriculture to China,” Helfenbein said. “They’d rather bring the container over empty because they need the empty containers and it takes longer to unload them if they have agriculture exports on them. They’re really behind and they are struggling to move cargo in through the holidays. So the cargo is piling up, they can’t unload it fast enough, they can’t get them back to China fast enough and the rates have skyrocketed.”
The Global Port Tracker report by the National Retail Federation and Hackett Associates LLC said major U.S. ports imported 2.11 million containers in September, 12.5 percent more than the prior-year period and the highest monthly total in records going back to 2002.
In October, this total jumped remarkably higher as the earlier holiday season kicked in, according to John McCown, former chairman and CEO of ocean freight carrier Trailer Bridge Inc. and founder of Blue Alpha Capital. His McCown Report, which tracks total inbound container volume across 10 ports in the U.S., indicated that inbound containers increased 18.8 percent year over year, with volume from China coming in at a 26 percent higher pace.
“What the container shipping industry has done, and a big part of what’s made it more attractive, is that they have thick schedules,” McCown said. “The weather still impacts them, but the more you can deliver something when you say you’re going to deliver it, even if it’s a much longer supply chain, the more consumers value the channel.”