Russia Sanctions Cut Both Ways For Air Cargo

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The fallout from tit-for-tat aviation sanctions over Russia's invasion of Ukraine is starting to have an impact on the air cargo and airline sectors, with Russian airspace now off-limits to most Western carriers.

Finnair said Thursday it is considering additional furloughs of up to 90 days after having to reduce flight activity because its aircraft can no longer land in, or overfly, Russia. From 90 to 200 pilots and 150 to 450 cabin crew employees could be impacted, starting in April. Final determinations depend on how the situation unfolds and what substitute measures can be implemented.

Employees working at Finnair stations in other nations could also face temporary layoffs.

"I think this persists. Vladimir Putin can't start this and not finish it. You're going to see a sustained period of higher fuel prices and lower economic growth around the world because of that. So we're expecting some pretty rough headwinds for airlines everywhere because the consumer is going to get hit in the pocketbook and they'll have less money to spend on discretionary flying," said George Ferguson, senior airline and aerospace analyst at Bloomberg Intelligence, in an interview.

Russia barred Finnish aircraft from its airspace until May 28 after the country, along with other Nordic and Baltic countries, Canada, the European Union, the United Kingdom and the United States, blocked Russian aircraft from their airports or airspace.

Finnair has canceled all flights to Russia and flights to China and South Korea until Sunday.

"With Russian airspace closed, there will be fewer flights by Finnair and unfortunately less work available for our employees," said Chief Operations Officer Jaakko Schildt in a statement. "A large share of our staff has been on long furloughs during the pandemic, so the need for further furloughs feels especially harsh, and we are sorry for this."

After initially canceling flights to Tokyo on Tuesday, Finnair said it will resume operations four times per week from Helsinki as of next Wednesday because Japan is one of its most important markets.

"Japan is also an important cargo market, and air connections are needed to keep cargo moving," said Chief Commercial Officer Ole Orvér.

Passenger and cargo traffic between Asia and Europe plays an important role in Finnair's network. Before the pandemic, more than half of Finnair's revenue came from this market. Many Asian countries have restricted travel since the COVID outbreak, but Finnair has operated many of its Asian routes supported by the strong cargo demand. The company even removed seats from an Airbus A350 to create space for light cargo in the cabin.

Detouring around Russia can add 30 minutes to an hour for all-cargo carriers connecting Asia and Europe, but the location of Finland and Sweden adds considerably more time for Finnair than with direct routes over Russia.

For Finnair, more circuitous routes can add several hours to the flight time and higher prices for jet fuel combined with the longer routing makes it difficult to break even.

The Russia-Ukraine war has pushed the price of jet fuel past $111 per barrel, up 4% from a month ago and 57% from a year ago, according to the latest data Friday from the International Air Transport Association.

Finnair continues to fly to Bangkok and Phuket, Thailand, Delhi and Singapore with a longer routing that avoids Russian airspace. Thailand is also served from Stockholm.

Officials say they are evaluating an alternative network plan for China and South Korea in case the Russian airspace closure is prolonged.

United Airlines (NASDAQ:UAL) is temporarily suspending routes to Delhi and Mumbai, India, from Newark, New Jersey, and other U.S. hubs until it can devise viable alternative routes, according to The Points Guy website.

American Airlines (NASDAQ:AAL) also competes on the New York-Delhi route but has never crossed Russian airspace. Instead, its planes refuel in Bangor, Maine. Whether United is considering a similar option is not known.

The closure of the Russian and Ukrainian passenger markets represents less than 2% of Lufthansa's (DXE: LHA) summer capacity and only a small portion of passenger flights to China, Korea and Japan will have to detour, CEO Carsten Spohr told analysts on an earnings call Thursday.

Drag on cargo

The aviation sanctions are negatively impacting air cargo capacity, which is still struggling to catch up from pandemic-related cutbacks by passenger airlines that provide ride-along space for goods, in several ways.

The use of less direct flights means aircraft may have to carry more fuel, which reduces the available payload weight for cargo. Spohr, however, said it makes more sense for a cargo aircraft to make an intermediate stop for fuel than to leave cargo behind.

The cancellation of passenger flights eliminates belly space for freight. And Volga-Dnepr, a major Russian cargo airline operator, is no longer available for hire by Western companies.

Freight rates from Frankfurt to China are rising, according to the Freightos Index on SONAR.

Volga-Dnepr operates a fleet of super-size freighters with ramps that can accommodate unusual types of cargo, such as subway cars, as well as large shipments of general cargo. Its AirBridgeCargo subsidiary has 17 Boeing 747 jumbo jet freighters and a 777 that now can't fly to three dozen countries. New European Union and U.S. export controls for dual-use technology will prevent the company from getting parts and maintenance support needed to keep the planes airworthy.

Plus, sanctions cutting Russian banks from the SWIFT international messaging system will make it difficult for customers around the world to make payments for charter flights or partial loads, effectively removing the airline group from the market.

AIT Worldwide, a Chicago-based third-party logistics provider, "deactivated" Russian-based carriers in its system on Friday, days before the U.S. airspace ban, Greg Weigel, chief business officer at AIT Worldwide, told FreightWaves in an email.

Ukraine-based Antonov Airlines is operating a few of its giant AN-124 freighters, the same type in Volga-Dnepr Airlines's fleet, outside the war zone. Other aircraft in its fleet are trapped in Kyiv.

Air cargo trucking services might also be affected. Ukrainians formed a large part of the trucking force in Europe and many have decided to go back to their home country, said Niall van de Wouw, managing director of Clive Data Services, an air cargo benchmarking and analytics firm.

Experts say the sanctions will eventually grind down Russia's commercial air fleet, which is heavily weighted toward Boeing and Airbus. Boeing said it is suspending parts, maintenance and technical support for Russian airlines and stopped operations at its Moscow Training Center in response to the invasion of Ukraine. And Airbus followed suit Wednesday, saying it would stop support to companies such as Aeroflot, SkyNews in London reported.

Lufthansa will not only feel the impact of lost revenue from flight cancellations and higher fuel prices, but also the loss of maintenance services performed by Lufthansa Technik for Russian airlines, Spohr said. Some of the extra cost to reroute around Russia will be offset by not having to pay overflight fees to cross Siberia.

A Russian airspace retaliation against the U.S. would force airlines such as Atlas Air (NASDAQ:AAWW), FedEx (NYSE:FDX) and UPS (NYSE:UPS) to take a more southerly route for trans-Pacific destinations, adding 30 to 45 minutes per flight, Neel Jones Shah, global head of airfreight at Flexport, a logistics company, said.

Although airfreight demand and rates out of Asia have softened because COVID crackdowns in China have temporarily slowed factory production, freight forwarders say rates are quickly climbing again because of flight cancellations and fears they could last. With jet fuel prices at their highest level since 2015, many airlines were already adding fuel surcharges to their cargo invoices before the outbreak of hostilities.

The Freightos Air Index shows China-Europe rates climbed more than 80% last week to $11.36 per kilogram.

Meanwhile, a few carriers are starting to introduce a war surcharge, according to European 3PL DSV and other sources. Some airlines are considering whether to implement a war surcharge on freight shipments, Weigel said. Most logistics specialists contacted by FreightWaves said they have yet to see the fees and Bloomberg's Ferguson said cargo airlines are more likely to just roll it into the rate because they have pricing power.

Biden bans Russian aircraft from US airspace

Ukraine crisis creates logistics headaches for air cargo, airlines

Sanctions squeeze Russian carrier Volga-Dnepr, air cargo capacity

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