The $22 Billion USD Global Air Cargo China Headwind

In the Summer of 2024, our founder started spending more time in DC, trying to understand rule changes for US shipments of low value e-commerce goods, and one thing we found to be true... It wasn't if regulations would change, it was when.

To understand this issue, there are four things that we knew about the issue and were advising clients:

1) US lost manufacturing jobs to Asia for a 30-year period, and was on the brink of losing many more warehousing, fulfillment and transportation jobs over the next 10 years if a change was not undertaken.

2) Democrats and Republicans did not like the explosion of low value goods coming into the US. Very few things in America do these two parties align on, but the massive increases of Chinese direct to consumer was hurting main street America and costing US jobs.

3) These goods were to blame for the increase in Fentanyl and Opioids into the US, but also have significant problems with forced labor, counterfeit goods, product safety concerns, and other illegal trade practices.

4) Chinese industrial policy was propping up International E-commerce, and the playing field simply wasn't level for US Business.

There are really two industries that were going to be hit the hardest. First, the parcel delivery market in the US. And second, the International Air Cargo Industry. Cirrus Global works in both of these spaces, so we started modeling out what the impact would be to both.

While it's difficult to actually pin a number, our forecast relies on many inputs and assumptions, and with these, has sensitivity & ranges built in. Like any model that attempts to predict the future based on a set of assumptions, we self admit that erros are not only likely, but almost guaranteed. However, as we walked our clients through sensitivity of our assumptions, it was abundantly clear- there is more than enough data and evidence to ascertain a fairly sizable impact to the air cargo business.

Here are the inputs to the model.

1) De Minimis Closure

• What would the incremental Clearance Cost Per Parcel be? Can you clear 5,000 parcels under one formal clearance, with 12,000 different HTS codes on one clearance?

2) Customer Friction at Checkout

• Today, checking out on most China E-commerce sites is as easy as a domestic transaction. Name, Address, credit card number. Order is placed. But what happens if customers need to provide a drivers license number? Worst Case, Social Security Number. We knew these weren't likely, but if you import an ocean container of TVs from China, which require a formal clearance with CBP, you surely can't be the Importer of Record with a mis-spelled name and random address. What would a formal clearance of your e-commerce package look like?

3) Price Sensitivity to Clearance Cost Increase, Duty Application

• In the previous world, most clearances were assumed to be nothing more than an electronic transaction, and cost about $.10 per package. This is because most brokers needed almost zero human interaction. A formal clearance often costs $125 per transaction. Where would the practice land. Many assumed $3 per parcel. But could thousands of parcels come in on one $125 clearance? Scenarios to consider.

4) Tariffs

• While our original modeling surely didn't anticipate 145% tariffs (20% + 125%), we did make some planning on section 301 tariffs. We must admit, in the end, the tariffs had an outsized impact on driving the $22B.

5) Actual existing e-Commerce air cargo volumes

• It was difficult to ascertain the true amount of e-commerce coming into the US, but we have triangulated both # of parcels from CBP data, broken down by origin, as well as average weight. We know many e-commerce players also move 100Kgs of $750 worth of goods as a "Parcel", effectively also creating B2B in the de minimis channel.

6) Aircraft Retirements vs Redeployment, Adjusting Industry Utilization

• We applied research on the number of aircraft that would be cancelled on the Trans-Pacific trade, and put carrier reductions into three buckets. Aircraft Retirements, Aircraft redeployments, and Aircraft Utilization Reductions to estimate impacts to Yields. From our estimates, we then forced the aircraft into other global trade lanes.

7) Major Trade Lane Yield Impacts

• Forcing dozens of aircraft into trades that, one could argue today, don't need incremental aircraft, will always have negative impacts to market yields. Negative impacts were also assumed to hit Integrators revenue, as well.

8) Growth of E-commerce to New Markets

• While most of the modeling was focused on reductions, one thing we knew to be true. There are tens of thousands of companies that have built a significant portion (or all of their business) on Cross-Border E-commerce. These companies weren't going to just give up. They would build new markets in Latin America. New Zealand and Australia are target markets. This becomes a large variable in the modeling. Why? The European, UK, AU, NZ, CA, & southeast Asian consumers have as much buying power as the US consumers. If turning off the US meant growth to Canada or New Zealand, while this will not be overnight, it will long term, absorb much of the freighter capacity.

9) CBP Enforcement and airport slowdowns

• This still continues to be a wildcard. Think about this. In an effort to keep formal clearance costs down, hundreds of parcels may be grouped together. But these hundreds of parcels have hundreds of HTS codes. How much of a surgical knife would CBP take, vs the sledgehammer, when one code was incorrect. What if 5% of the parcels got stuck in customs for many days (or weeks). How would this impact consumer demand when the channel became unreliable. What would happen if airports became "backed up" in parcel processing. Was there enough bonded warehouse space for CBP to put hundreds or thousands of holds a day on parcels?

10) Mis-declaration Penalties

• While we will admit that we didn't put a lot of $ in this bucket, we know two things to be true. First, estimates range from 20% to 30% of parcel values are mis-declared for their applicable duties and tariffs. Based on two million parcels coming in from China daily, that is 400,000 to 600,000 "problem parcels" every day. Would CBP try to hold the marketplaces accountable? We expect Temu, Shein and others would attempt to distance themselves from any sellers declared values that were inaccurate. But we know of several marketplaces from China today that specialize in Fakes. If these websites are willing to do this today, would CBP start to crack down on the sites rather than individual sellers, and how would that impact total demand.