Airlines adjust routes after 'de minimis tariff' causes China-US air cargo to plummet

Industry data shows that air freight capacity between China, the U.S., and Canada dropped by nearly a third this month after a tax exemption was removed for low-value goods leaving China. This has impacted a major revenue stream for Asia’s largest airlines.

Air cargo carriers such as Cathay Pacific and China Southern have benefited from the booming volume of ecommerce from China to America, led by fast fashion retailers like Shein and PDD Holdings Temu.

The temporary reduction in reciprocal tariffs between Washington and Beijing on Monday, from over 100% to more than 50%, prompted U.S. companies to resume their orders from China.

Experts in the industry said that the suspension of the "de minimis duty-free" access for low value shipments from China or Hong Kong to the United States could have a long-term impact on demand.

Marco Bloemen is the managing director of Aevean, an air cargo consultancy. He said that since Monday, there has been a recovery in the capacity for air cargo. But on the ecommerce side, volume has been temporarily affected.

Airlines in Asia are facing a number of challenges, including a drop in air fares for passengers and a possible global recession.

Cathay Air and Korean Air generate around a quarter their total revenues from cargo. The cargo yields and revenues of a number Asian airlines grew much faster last year than the passenger segment.

Aevean's analysis revealed that in 2018, e-commerce low-value shipments made up just 5% of the goods flown from China to the United States.

The pandemic has boosted air freight demand in Asia, and major freight carriers like Cathay Pacific, Singapore Airlines, and Taiwan's China Airlines, have all ordered new large freighters to serve the busiest trade routes.

As "de minimis exemptions" are unlikely to be reinstated, companies like Shein and Temu will increasingly ship their products via sea to the U.S.A. or to other warehouse locations rather than sending individual shipments directly to consumers.

Reports on Thursday indicated that fast fashion retailer Shein had leased a large warehouse in Vietnam, a move which could help reduce the company's exposure to unpredictability of U.S. China trade tensions.

Cathay, the largest cargo airport in the world, said last month that it expected the demand for air cargo between mainland China, the U.S., and Canada to decline from this month as tariff increases take effect.

Cathay didn't immediately respond to an inquiry for comment.

SCRAMBLE

Data from Rotate, an air cargo consultancy, showed that operators flew 26% fewer freight capacities from China and Hong Kong into the United States from the "de minimis suspension" on May 2 to the detente on May 13, compared with the year before.

The capacity was 30% lower than the average for the four previous weeks.

South Korea, which is a hub for cargo and has been benefited by the growing volume of ecommerce coming out of China, experienced a 22% drop in capacity bound for the U.S. between May 2-13.

Korean Air stated in mid-April that it expects the volatility of air freight demand will increase as tariffs are imposed.

China's capacity was 15% higher in the 12 months prior to the fall than it had been the previous year, while South Korea's capacity was 14% higher.

Rotate data revealed that Atlas Air in the United States, which has the largest capacity on the Greater China-U.S. route from May 2-13, had a 28% drop in capacity compared to the same period last year.

Cathay Pacific's capacity dropped by 2%, while China Southern (owned by the Chinese government) saw its capacity fall 30%.

Cargo was the lifeline for airlines that had freighter aircraft during the pandemic, when almost all international passenger flights were grounded.

In financial reports for the period prior to the tariffs taking effect, several Asia-Pacific Airlines stated that they would move capacity onto other routes in order to cope with the fluctuating demand.

Dimerco, a freight forwarder specializing in Asia, announced this month that several freighter services on the China-U.S. route were cancelled. Some capacity was rerouted towards Mexico and Latin America.

Bloemen stated that about 70 freighters temporarily stopped flying on Transpacific routes. However, some of them were used in other markets.

Southeast Asia stands to benefit if manufacturers decide to ship goods from other countries to the United States instead of China, although many of these countries will also be subject to new tariffs.

Singapore Airlines, which is based in Southeast Asia said that changes in trade flows could open up new opportunities.

Singapore Airlines CEO Goh Choon Phong said to the media that tariff issues are unlikely to be as shocking as COVID-19. However, it is likely to be more uncertain. (Reporting and editing by Lisa Barrington, Miyoung Kim, and Kate Mayberry).

(source: Reuters)