The Impact of the Red Sea Crisis on Air Freight

By Amy Shen, Zach Gietzen, and Paige Evers

Since the beginning of the conflict between Hamas and Israel, tensions in the region continued to rise until on October 19th, 2023, Yemen's Houthi rebels initiated a series of attacks directed towards southern Israel and shipping vessels in the Red Sea. This has caused global concerns about trade stability in the region and viability of the Suez Canal as turmoil in the region continues. As shipping companies stop or severely reduce the number of vessels sailing through this region, many firms will switch to airfreight to deliver items that typically would be shipped through the Suez Canal to reach European and American markets.

Difficult Decisions

Under normal conditions, 30% of the global container volume travels through the Suez Canal. However, now due to the uncertain conditions in the region out of 540 ships assigned to Suez services, 136 are currently being diverted around the Cape of Good Hope and 42 have paused their journeys according to an article by FreightWaves. The Houthis have stated that that their goal is to target ships with ties to Israel to show their support for Hamas. While many industries reroute or pause their shipping in the Red Sea, oil tankers continue to sail their standard route to avoid schedule disruptions in the highly volatile oil market. However, it is also worth mentioning that, according to an article from Reuters, many of the oil tankers sailing this region were carrying Russian crude to India which doesn't affect the Houthis or their mission. Other companies, especially those that do business in the manufacturing Automobiles and electronics sector might turn to airfreight to deliver some of the more critical components, however the high cost means that this solution can only be temporary.

Intermodal transport

To maintain global supply chains, companies are adopting intermodal transport, combining sea and air routes (Maritime Logistics Professional). Hellmann Worldwide Logistics, a leading German freight forwarder, has reported increased demand for this approach, particularly for consumer goods like apparel, electronics, and tech items. The intermodal strategy involves shipping goods by sea to Dubai, followed by air freight, allowing companies to bypass the Red Sea danger zone and the lengthy circumnavigation of Africa. While some companies may opt for air freight for urgent items, the higher costs associated with this mode limit its widespread use as a blanket solution. The disruptions, compounded by issues in the Panama Canal and environmental concerns, are causing a significant economic impact on the global supply chain, notably affecting the consumer goods sector. The uncertainties surrounding a new U.S.-led naval coalition further add complexity to the challenges faced by shipping companies navigating this critical trade route.

Impact Created Economically  

The recent supply chain disruptions in the Red Sea have had a significant economic impact, especially on countries heavily reliant on maritime transportation like India. With the redirection of approximately $200 billion worth of cargo away from the Red Sea since early December, the strain on supply chains has been palpable (WSJ). In response to these disruptions, industries such as pharmaceuticals and apparel, which traditionally utilize both water and air freight, have seen a notable shift towards air transportation. With pharmaceuticals’ sum of air customs value exports to the USA currently at $5,186,769,717, the impact that this can create is quite large (NAIC). While air freight offers a quicker alternative to maritime transport, it comes at a higher cost, potentially leading to increased prices for consumers and putting pressure on businesses to absorb additional expenses. Consequently, the economic ramifications of these supply chain disruptions in the Red Sea are significant, affecting global trade dynamics and prompting adaptations in logistics strategies to mitigate further disruptions.

Air Customs Value vs Containerized Vessel Value ($US)

(Source: Census Bureau)

Global Impact of the Crisis  

While the impact on the economy can be expected to be significant, the impact globally will yet to be seen until April or May, , according to a Reuters article.. This delay may fall into the spring due to the Chinese Lunar New Year. Starting February 10, factories in China shut down for 2 weeks to a month, leading many companies to try to ship out as much product as they can before. However, with the lack of shipping vessels and rerouted trips, this is likely to add to the delays. This instance has also led shippers to relocate factories in hopes to close the gap between end consumers, which is called “near-shoring.” It aims to alleviate the impacts of a sole reliance on a country, like China. Unfortunately, as those are long-term solutions that cannot be made immediately, companies are dealing with a spike in shipping costs or switching to air freight According to an article by J.P. Morgan , the shipping rates between Shanghai and Genoa have risen by 350%. It is also important to note that according to the Federal Reserve Economic Data, inbound air freight prices from Asia also spiked in December, most likely due to the Red Sea crisis. It is interpreted that these prices have increased due to the rise in demand for air freight. These elevated prices are likely to stay as disruptions continue and fuel inflation is another factor companies may have to worry about.  

Recent Increase in Shipping Costs by Route (%)

(Source: J.P. Morgan)

Asia’s Inbound Air Freight Prices (Index 2000=100)

(Source: FRED)

Conclusion

Due to the conflict between Israel and Hamas, the Yemen Houthi rebels attacks of the Red Sea region, has caused many disruptions throughout the global supply chain. It has diverted 1/5 of shipping vessels assigned to the Suez Canal, impacting shipping times for up to 2 weeks and or leading companies to switch modes of transportation all together. A common shift companies have made is intermodal transport, this involves shipping goods to Dubai then relying on air freight to avoid the dangers of the Red Sea and as well as in hopes of keeping a timely arrival. However, shipping through sea is still the most common and many companies are dealing with increases in shipping cost, fuel and time leading to delays which consumers may not see until April or May. While these attacks continue in the Red Sea, disruptions will also continue due to the heavy reliance on shipping through the sea.