COVID-19: How the Global Vaccine Distribution Could Impact Cargo Supply Chains

COVID-19: How the Global Vaccine Distribution Could Impact Cargo Supply Chains

Introduction

As pharmaceutical companies around the world race to develop COVID-19 vaccines that could receive emergency regulatory approvals by as early as December 2020, logistics providers are preparing to build the supply chain needed to deliver these drugs to billions of people as rapidly as possible. 

Once a vaccine is approved, manufactured at scale, and ready for distribution, the high-stakes supply chain will require additional logistics capacity and specialized equipment, as well as cold-storage facilities and processing capabilities by ground handlers. The timing of the start of the distribution efforts is particularly critical as shipment capacity – notably for air freight, which is likely to serve as the main mode of transportation for the vaccines – remains 20-25 percent lower than in the same period of 2019 due to unavailable belly cargo on passenger flights. As of November 2020, air cargo rates remained up to 60 percent higher year-on-year on some major trade lanes, with the year-end holiday season likely to push up rates even further in the coming weeks.

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. Particular concerns revolve around the impact the global distribution efforts could have on air cargo capacity and rate levels on the three major air cargo trade lanes between Asia, Europe, and North America as well as on secondary trade lanes. 

In addition, as only few airports around the world have the equipment and handling capabilities in place to process complex vaccine shipments, a large part of the distribution efforts is likely to be routed through airports that either have received international certification for handling pharmaceutical cargo or have long specialized in handling such cargo by building dedicated infrastructure. This could increase the likeliness of disruption to general cargo at these airports in the form of congestion and delays as non-vaccine shipments are likely to be handled with a lower priority than vaccine shipments. 

This report examines the specific risks that organizations from a variety of sectors relying on air cargo operations are likely to face in light of the upcoming global distribution of vaccines and also lists recommendations on what organizations can do to anticipate some of these challenges in order to improve their supply chain resilience.

What will be the potential impact on logistics capacity?

With the International Air Transport Association (IATA) estimating that the transportation of COVID-19 vaccines could require more than 8,000 Boeing 747 jumbo cargo planes, it is difficult to underestimate the potential impact that the distribution efforts would have on the overall logistics market, particularly on air cargo. However, a recent survey conducted by The International Air Cargo Association (TIACA) revealed that only 28 percent of stakeholders in the air cargo industry expressed being well prepared to distribute a COVID-19 vaccine once it becomes available. 

Besides the complex preparatory work currently underway by air cargo logistics providers, there are three main factors that are likely to determine the extent of the impact on overall capacity and rate levels: when and how many doses would be available for international distribution; where the vaccines would be manufactured; and how quickly and on which routes airlines would inject additional capacity into the market.

First, the timing of the initial distribution efforts will be significant. Worldwide air freight capacity remains at levels that are about 20-25 percent lower compared to the same period in 2019, and air freight rates are still considerably higher on the major trade lanes to what they were before the COVID-19 pandemic. According to the TAC Index, which tracks weekly price changes for air cargo, spot rates between Hong Kong and North America were 62 percent higher in October 2020 year-on-year while rates from Hong Kong to European destinations remained 33 percent higher. On the transatlantic route, air cargo rates between Europe and destinations in North America were also up 60 percent year-on-year in October 2020. 

Figure 01: Monthly change in air cargo spot rates on major trade lanes. Source: TAC Index

Besides the lack of belly capacity on passenger flights, the continuously elevated rate levels are likely fueled by high demand for retail and e-commerce shipments for the year-end peak season and product launches in the technology industry, as well as preparatory efforts for the upcoming vaccine distribution. 

The distribution of a first approved vaccine during the air cargo peak season that runs until the week prior to Chinese New Year in February 2021 – when cargo space is at a premium – would likely reduce capacity and raise spot rates even further. In addition, high demand for vaccines from governments willing to pay higher prices for transportation could result in a similar scenario to the personal protective equipment (PPE) shipments earlier this year. Between March and June 2020, air cargo spot rates were being driven up to unprecedented levels out of China as governments raced to secure enough protective equipment in their fight against the COVID-19 outbreak. Companies unable or unwilling to pay the significantly higher air cargo rates would be forced to divert cargo to alternative modes of transportation, which would likely have impacts on transit times and could cause supply shortages and/or lost sales. 

Key locations in COVID-19 vaccine supply chain of Pfizer and BioNTech. Source: The Wall Street Journal

Second, a crucial factor will be the manufacturing location of the initial vaccines as well as how the doses will be made available for international distribution. Governments may regulate that vaccines produced inside the country or within a trading block cannot be exported, similar to export controls set up by many countries for masks and other protective equipment earlier this year. In this scenario, the initial vaccine distribution would take place mostly on a regional level with limited effect on the global air freight market. For instance, the cooperation between pharmaceutical companies Pfizer and BioNTech, which is currently seeking approval for its COVID-19 vaccine, has revealed that some of its key sites in the vaccine supply chain will be located in the U.S. and Europe, with the U.S. government and the European Commission already having signed contract agreements over hundreds of millions of doses. It remains, however, unclear when and if the vaccines produced in Europe or the U.S. would also be distributed outside of these markets in order to have a significant impact on international air cargo rates or capacity.

Third, it also remains to be seen how quickly airlines and other carriers would inject additional air cargo capacity into the market, for instance by deploying grounded passenger planes, many of which were re-configured to cargo-only aircrafts that carried PPE shipments during the March-June period of 2020. 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. 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. 

One additional factor that could determine the available air cargo capacity in the coming months is the restriction on how much dry ice can be transported on aircrafts to maintain the extremely low temperatures required for some vaccines. In the case of the Pfizer-BioNTech vaccine, temperatures will have to be kept at -70°C by using dry ice, which is classified as dangerous goods. The U.S. Federal Aviation Administration (FAA) usually allows up to 3,000 pounds of dry ice per flight. In such case, airlines would have to add more capacity to the market to be able to transport larger volumes of the vaccine while creating extra space for general cargo to fill the planes. However, the FAA recently granted permission to carry up to 15,000 pounds on a flight operated by United Airlines, a decision that – if made permanent and adopted by other aviation regulators – would allow carriers to fill aircrafts with much higher volumes of vaccines than expected.

How would cargo handling at airports be impacted?

Vaccines must be handled and transported in line with international regulatory requirements, at controlled temperatures and without delay, to ensure the quality of the product, which is different from the shipment of personal protective equipment. High volumes of vaccine shipments arriving within a short period of time and handled on a priority basis could therefore lead to higher congestion levels and possible bottlenecks at airport facilities due to a potential lack of cold storage capacity, specialized equipment such as refrigerated containers, or trained personnel to adequately store, handle, and process these shipments. 

In addition, enhanced security and customs checks could further cause delays as was the case at many airport facilities throughout China in the first half of the year. In particular, during the peak of the PPE exports, long delays and missed flights for all types of shipments were reported at the country’s main air cargo gateways after authorities introduced new customs checks to filter out low-quality masks and equipment in April 2020.

Everstream Analytics conducted an analysis of air cargo export shipment volumes at Chinese gateways from mid-April to mid-May 2020 that caused significant shipment delays for all industries relying on outbound air cargo shipments from China. Although PPE shipments are significantly less complicated to handle than vaccine shipments, the data still provides insights into how a sudden large number of shipments, labor shortages, and new customs regulations have the potential to quickly overwhelm even the largest and most efficient air cargo handling facilities in the world. Setting aside the current shortages in global air freight capacity, the challenge that a large number of incoming and outgoing vaccine shipments could pose to airport facilities is likely to be exponentially higher than that of PPE shipments.

Daily increase of air cargo export backlog volume at Chinese gateways compared to normal volume, in %. Source: Everstream Analytics
Source: Everstream Analytics

Air cargo export shipment data analyzed by Everstream Analytics reveals that during the peak of PPE shipments from mid-April to mid-May 2020, airport facilities across China were faced with considerable amounts of outgoing air cargo shipments that led to a 200 percent increase in the export volume compared to the normal daily average. At its highest, air cargo terminals faced a 211 percent increase in the backlog volume of air cargo export shipments in late April, shortly before the long Labor Day weekend in China. This led to significant increases in terminal congestion levels, causing long waiting times for trucks outside terminals, missed flights for scheduled air cargo shipments, and a scramble for alternative modes of transportation to export cargo. For instance, trucks at air cargo facilities at the Shanghai Pudong International Airport waited for more than 48 hours on average in late April, corresponding with the peak of shipment volumes processed at Chinese air cargo gateways. The waiting times fell significantly in mid-May to about 5-6 hours after the backlog volume of air cargo export shipments significantly decreased as well. During the height of the congestion, shippers sent cargo five days in advance of flights to allow for enough time to clear customs. The speed advantage of air cargo rapidly decreases in light of such delays, which adds costly transit time to the industry average of 6.5 days for a door-to-door air cargo shipment, based on the latest calculation by IATA.

Which airports are most likely to experience congestion?

With pharmaceutical companies and shippers expecting the bulk of vaccine shipments to be transported by air, uncertainty remains regarding the preparedness of international gateways to handle the potential influx efficiently and without delay. Airports with a robust infrastructure and certified stakeholders in place will likely play a crucial role in the distribution efforts and may experience a significant increase in vaccine shipments that could have an impact on the overall operations of the airport. 

Globally, there are two recognized certifications that guarantee specific and clear standards for the handling of air freight shipments of pharmaceutical goods: the Good Distribution Practices (GDP), set by the European Union and the World Health Organization, and IATA’s Center of Excellence for Independent Validators (CEIV). The latter has been described as providing more stringent regulations than the GDP. 

As a growing number of airports has sought to attract more pharmaceutical shipments over the past decade, freight forwarders, airline carriers, and ground handlers have invested in the CEIV certification, with some airports having been recognized as “CEIV Pharma Gateway” after a minimum amount of logistics stakeholders operating within their premises achieved CEIV certification via the so-called community approach. 


Globally, there are currently 8 CEIV-certified pharma gateways. In the Americas, the first airport to have gained such status was Miami International Airport (MIA); while in Europe and Asia, these were Brussels Airport (BRU) and Singapore Changi Airport (SIN), respectively. In addition, seven airports have 7 or more CEIV-certified stakeholders operating within their premises. Among these are some of the largest air cargo gateways, including Paris (CDG), Frankfurt (FRA), Shanghai (PVG), Seoul (ICN), and Osaka (KIX). 

Depending on where the final vaccine products will be manufactured, some of these airports may serve as hubs for the vaccine shipments to be exported or imported where they would be stored in refrigerated warehouses. While there will certainly be other airports serving as export and import hubs for COVID-19 vaccines, these airports may play a key role in the early stages of the distribution due to the higher likelihood that pharmaceutical companies or other stakeholders such as governments involved in the distribution of vaccines will choose certified gateways over non-certified ones. 

Source: WorldCity, Inc.

Among other possible airports that could play a significant role in the distribution efforts are those specialized in handling vaccine shipments on a regular basis. In the United States, almost 80 percent of total imports and exports of vaccine doses between January and August 2020 have arrived at or departed from seven key gateways that specialize in handling such cargo. Among the top three import hubs for vaccines are Chicago O’Hare International Airport (ORD), Washington Dulles Airport (IAD), and Indianapolis Airport (IND), while the main export hubs were Chicago O’Hare International Airport (ORD), Miami International Airport (MIA), and John F. Kennedy Airport (JFK).

Source: International Air Transport Association

Within the European Union, trade data is not available on an airport level. However, an analysis of EU trade data for imports and exports of vaccines in 2019, which are in the majority of cases transported via air cargo, revealed that seven countries account for more than 80 percent of vaccine shipments to or from the European Union. These include Germany, Spain, France, the Netherlands, Belgium, Austria, and the UK. If only taking into account these countries’ main airports for cargo movements, the following list highlights the airports most at risk of congestion and disruption once COVID-19 vaccines are internationally distributed at scale.

Source: European Commission, Directorate-General for Trade

What can organizations do to prepare for the upcoming vaccine distribution?

Despite the uncertainty around the timing and the extent of the impact of the COVID-19 vaccine(s) on global logistics markets, organizations with global supply chains should start to anticipate some of the most significant risks that could disrupt their operations. Below are a few recommendations for companies looking to improve their supply chain resilience ahead of the upcoming COVID-19 vaccine distribution efforts:

  • Keep abreast of the latest developments regarding vaccine approvals around the world. By regularly assessing where potential vaccines will be manufactured and which airports could therefore serve as import and export hubs, companies can anticipate logistical bottlenecks by activating contingency plans with their logistics providers, i.e., by routing shipments through other nearby airports. Using supply chain intelligence & monitoring solutions to track developments can aide in this process.
  • Secure air cargo capacity on the most critical routes in case organizations need guaranteed space for large volumes. Companies able to provide very accurate forecasting for the coming months can lock protected rates for longer terms from logistics providers amid the current market volatility where weekly or monthly contract rates have become common in the industry. However, in case of large fluctuations in volumes, customers could also lose the blocked space and lower contract rates despite the agreement.
  • Use freight forwarders instead of operating own charter flights to increase shipping flexibility. Companies traditionally used to chartering their own flights for large volumes have increasingly turned to freight forwarders to operate dedicated charters for them. This gives organizations greater flexibility should the actual volumes to be shipped turn out to be lower than expected, as freight forwarders can offer the blocked space on the spot market. Organizations can thus minimize their financial risk, i.e., by paying for half-full charters in case of delayed uplifts due to congestion or other factors in light of the uncertainty of the COVID-19 pandemic. 
  • Explore alternative or combined modes of transportation for specific routes. As shipments out of China took several days or even weeks before being uplifted between March and June, organizations increasingly diverted air cargo shipments to expedited ocean freight services to North America or rail/trucking services to Europe to avoid congestion. Most recently, expedited ocean freight services have also been offered on the transatlantic route. Additionally, multimodal offerings such as sea-air into Latin America or Australia have also been used to a greater extent in recent months due to high air cargo costs out of Asia. 
  • Strengthen relationships with key logistics service providers, which can prove valuable in times of global market disruption. Logistics partners can not only be a source of information to provide on-the-ground intelligence, giving companies a head start to prepare for impact, but can also support in securing critical capacity or offering alternative routes as part of a trusted, long-term partnership.

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