An Air Atlas cargo plane 5Y4304 jet returned to Hong Kong International Airport almost immediately after take-off on the morning of June 17th to make an emergency landing. The Boeing 747-400 landed hard, bursting a tire and damaging the hydraulics, which shut down one of the airport’s three runways for eight hours and delayed over 180 flights. No one was injured, and the incident was a minor operational blip for the world’s business air cargo hub. Air Atlas’ misfortune, however, may be a harbinger of the future of Hong Kong’s international air freight business, enabled by U.S. Customs Entry Title 86: headed towards a hard landing.
The consensus view from tarmac is that U.S. policymakers will soon change T86 exemptions, most likely in a targeted effort to blunt China’s ecommerce competitiveness. When, however, is another matter. Passing such legislation could effectively double the price of a Shein T-shirt by forcing the fast fashion giant to absorb punitive duties (and build an onshore fulfilment infrastructure from scratch when air freight becomes unfeasible).
Hong Kong Cargo Ascent
Hong Kong’s air cargo freight volumes have been one of the few bright spots in the territory’s wobbly economic recovery. Hong Kong shipped 4.3 million tonnes of cargo by air in 2023, up 3.3 percent in a year where cargo volumes in most of the world’s other top air cargo hubs fell (volumes in Memphis, the world’s second-largest hub, fell 4 percent.) While Hong Kong’s volumes are still well below their pre-Covid levels, Hong Kong has seen the most rapid growth in air freight in the world after Shanghai.
Hong Kong owes most of this to a relatively new phenomenon – the rapidly increased use of air to ship individual consumers’ packages by online retailers, primarily from China, like fast fashion firms like Shein or shopping sites like Temu. “Two-thirds or more of our cargo volume is ecommerce orders from China,” observes a Hong Kong-based senior executive in the cargo operations of a global commercial airline, “within the last two years it has become what airlines have come to depend on for their cargo business out of Asia.”
Direct-to-consumer ecommerce air freight has allowed the entrepot to regain some part of its historical prowess as the world’s most important trading gateway to China. It has also helped Hong Kong partially paper over holes elsewhere in its balance sheet: Hong Kong’s census department reported that retail sales in May this year fell 11.5 percent compared with 2023 levels and that retail sales volume for the first five months of 2024 was over 6 percent lower than last year. Hong Kong’s retail doldrums have, as recently reported, many causes, but one reason is its long overdue transition to online shopping: ecommerce sales grew nearly 22 percent in May 2024 over the previous May, and most of the physical retail categories showing the biggest losses—including clothing, accessories and furniture—are likely the most heavily cannibalized by cheaper online alternatives.
Shipping Cargo Tax-Free
At first glance, shipping T-shirts from Shenzhen to individual shoppers overseas makes little economic sense. While China’s online shopping sites incur relatively expensive air freight costs (which currently average $6 to $7 a kilogram) for low-volume items, that cost is an offset benefit from a U.S. customs regulation set in 2019. Known as Entry Type 86, it allows overseas consignments below $800 to be delivered to U.S. consumers without paying any tax or duties. Prior to 2019, the exemption cap was $200, roughly in line with most other Western economies. Type 86 radically redefined the economics of online shopping for China’s emerging e-tail giants, and with it, the structure of global ecommerce supply chains.
Air cargo specialists and freight forwarders spoken to for this article note that not only has 2024 been a booming year so far, but cargo volumes have also been uncharacteristically unseasonal. “Normally we see that after CNY” (Chinese New Year, typically in late January or February) “the air freight market is slow until September,” says the managing director of a Hong Kong air freight forwarder, ” yet this year it has been quite busy all year long.”
eCommerce Shipping Frenzy
The constancy of ecommerce parcels is seen as the primary driver for this boom. Cathay Pacific, Hong Kong’s flagship carrier, reported that while April cargo volume, at 117,428 tonnes, was 13% lower than March, it was up 7.4 percent on the year before, and total tonnage in the first four months of 2024 was up over 10 percent over 2023, which the carrier largely chalked up to online demand for Chinese goods.
Many global carriers are increasing their regional capacity to capitalize on this trend. Dubai-based Emirates airline’s cargo unit has plans to increase its flights to Hong Kong by more than a quarter, an Emirates executive told Hong Kong’s South China Morning Post in March that it saw a 30 percent growth in cargo volumes in the first part of 2024, prompting them to earmark $2.7 billion to add 15 more aircraft to its freighter fleet, a third of that which will be delivered this year.
Several industry executives estimated that individual de minimus parcels now collectively take up between 60 to 70 percent of all air cargo transiting through Hong Kong. This is surprising on several dimensions. The high cost of air freight–currently roughly $6 per kilo from Hong Kong to the U.S. — has traditionally made it only viable for small, high-value items like computers, smartphones or handbags.
Global Fast Track Co-Dependence
There are geopolitical factors putting upward pressure on Asia’s trans-Pacific air freight sectors. These include Russia’s war with Ukraine (turning all Russian air space into a no-fly zone) and supply chain bottlenecks through the Red Sea, exacerbated by container vessel attacks by Yemen’s chaos agents, who joined the fray after Hamas’ October 7th attack on Israel.
The shift to air freight is also a function of how much faster fast fashion product development cycles have become. “The rhythm of collections has speeded up incredibly in the last few years,” says Hardy Haenisch, president of Los Angeles-headquartered ARC Global Logistics. In decades past, a fashion brand shipped a new season’s collection every two to three months through several links of the supply chain: warehouses, fulfilment centers, and last-mile delivery agents, which freight forwarders operating between many of the links. “Now, a collection can be created, marketed and shipped to customers every few weeks,” observes Haenisch, who notes that the added urgency has made air freight more viable “and it also allows those brands to bypass most of the traditional import service players.”
There is also a faster feedback cycle, as customers unbox, review and show off outfits of the day over social media, sending real-time customer experience data back to Asia’s digitally native fast fashion brands who can fold it back into the next production run.
Turf Wars
The resulting disintermediation has been a sore subject for the host of air freight forwarders and supply chain specialists that have been a constant feature of Asia’s cargo economy. Forwarders blame ecommerce for creating a tremendous space shortage on trans-Pacific air cargo routes, this year, and for driving up prices. “Forwarders now may feel they are being cut out of the market by the Temus and Sheins who now deal with cargo brokers directly through their D2C models,” says Devon Bovenlander, Managing Director of Hong Kong-based logistics specialist Critical Solutions. “Traditional B2B models for all but the biggest companies would have the forwarders in the middle making their buck.”
Deminimizing
US legislators have for years sought to reduce de minimis exemption thresholds or remove the Type 86 loophole entirely, particularly as China’s ecommerce sector becomes one more target in the ongoing game of U.S.-China bilateral trade whack-a-mole. The proposed Americas Act, sponsored by Representative Maria Salazar, seeks to reroute American trade relationships away from Asia and towards partners in North and South America. It seeks to fund the bill by reducing de minimis thresholds, by equalizing them to those of the shipper’s country of origin or, in the case of China and other more adversarial countries, placing them on a blacklist.
The consensus view from tarmac is that U.S. policymakers will soon change T86 exemptions, most likely in a targeted effort to blunt China’s ecommerce competitiveness. When, however, is another matter. Passing such legislation could effectively double the price of a Shein T-shirt by forcing the fast fashion giant to absorb punitive duties (and build an onshore fulfilment infrastructure from scratch when air freight becomes unfeasible). This would be a bold move in a US election year where high prices are perhaps voters’ chief concern.
On Deadline
Knowing that the window is destined to close, Greater China’s supply chain is rushing to squeeze as much as possible through it. Air cargo carriers are milking de minimus parcels for as long as they can, hoping to bank as much revenue as they can before freight volumes collapse and they must pick up the pieces. Similarly, China’s ecommerce retailers foresee a change in their good fortune and want to make the most of it — particularly if, like Shein, they are hoping to preserve their impressive quarterly earnings track record in the run-up to their IPO.
The air freight ecosystem is not likely to implode once sundresses and sneakers are removed from the cargo mix. There will be a protracted period of supply chain chaos, and that will benefit specialist freight forwarders who thrive in such periods, working to plug inventory gaps and creatively reconfigure sourcing routes. The laptop and semiconductor air freight’s pre-Temu traditional customer base will benefit from lowered costs; industry participants forecast that charges could drop to between $3 and $4 a kilogram once Chinese e-tailers are 86’ed.
There will even be a sustainability dividend for the fast fashion industry, as shipping will shed carbon-intensive air miles in the transition back to sea freight—although this has (surprisingly) not been a large part of the conversation to date. The net losers will benefit American fast fashion consumers, who will see prices rise significantly as this anomalous low-cost corner of the retail supply chain landscape comes to pass.
