By Tim Hepher, Lisa Baertlein, Allison Lampert and Valerie Insinna

Air cargo enjoyed record demand when COVID-19 closed borders and snarled supply chains. Now, it is reeling from overcapacity and tumbling freight rates as the freight boom makes a hard landing.

Consumers who had the means to spend the lockdown shopping online for goods needing to be delivered, diverting budgets from restaurants and leisure, are travelling in ever-rising numbers.

The result? Passenger jets grounded during the health crisis are flying again and bringing their lower-deck cargo space, which competes with dedicated air freighters, back into play.

The switch in demand from goods back to services and the abrupt expansion in belly capacity on passenger planes have sliced about a third off cargo rates in the last year.

Some pilots are leaving to fill passenger airline vacancies.

And shipping is flowing again after congestion sent goods as mundane as jeans and bathtubs into the air during the pandemic.

It's a perfect storm for the roughly $200 billion air cargo industry, which handles a third of global trade by value, industry executives and analysts say.

Looking forward, shippers whose freight bills climbed in 2021, will have more bargaining power in upcoming winter price negotiations, Norwegian cargo analytics firm Xeneta said.

That should ease inflationary pressure on high-value lightweight items from electronics to luxury goods that traditionally go by air. But it is bad news for cargo operators.

"(They) are in for a rough ride. Shippers are spoiled with capacity, but they're not really utilising it because demand is not really there," Xeneta Chief Analyst Peter Sand told Reuters.

The scale of the industry's problems is laid out in filings by Western Global Airlines, which asked a Delaware court for Chapter 11 protection last week.

The Florida-based carrier cited "the unyielding and rapidly mounting macro-economic headwinds that plagued the entire air cargo transportation sector starting in late 2022".

Western Global's fortunes are emblematic of the risks and rewards in the volatile global freight business.

The airline expanded as contract customers including Japan Airlines, once a dominant power in air cargo, stopped operating freighters following its own bankruptcy in 2010 - though it has since announced a limited return to cargo.

Now Western Global has itself fallen victim to the market's swings, despite relying on outsourced U.S. military work.

According to data supplied by Xeneta, it cost around $2.30 to air-freight one kilogram in early August, based on global average spot prices. That is down 35% since the same period of last year and down by more than half from a late-2021 peak nearer $5.

True, rates remain 36% above pre-pandemic levels. But costs of fuel and scarce labour are also up sharply.

FREIGHTER STORAGE

There are some positive signals.

In June, air cargo experienced the slowest contraction since February 2022, the International Air Transport Association said.

Cargo rates from China or southeast Asia to the United States have risen 5%-7% since mid-July, according to Xeneta. Yet that may in part be due to China's difficulties in rebooting its internal economy, which tipped into deflation in July.

"If you look at it from a global perspective, we're definitely still seeing a tendency of rates falling for this year, as well as next year," Sand said.

The downturn comes at a tricky time for planemakers who have invested in developing new freighter versions of widebody jets.

Demand for the windowless aircraft rose during COVID-19 lockdowns as airlines rushed to expand or modernise fleets.

Since May 2019 the active freighter fleet has grown by 22%, said Eddy Pieniazek, head of advisory at consultants Ishka. But the proportion of stored or idle freighters is rising again.

After months of falling yields, "it's not a good time to buy freighters," an airline expective said, asking not to be named. Yields measure average revenue per tonne adjusted for distance.

Cathay Pacific, the fifth-largest cargo carrier, has postponed final decisions on a potential $2 billion order, industry sources said.

Cathay said in an email it would continue to evaluate what freighters it may need and remained "open to all possibilities".

Boeing and Airbus said separate 20-year demand forecasts for well over 2,000 new or converted planes remained intact.

But the number of investors willing to convert old passenger planes to freighters is also dwindling, Pieniazek said.

That restores calm to a speculative corner of the jet market specialising in regenerating planes after carrying passengers.

"We see people slowing down orders, people deferring, planes not going to customers as soon as they are converted," Robert Convey, senior vice-president at Miami-based Aeronautical Engineers, told Reuters.

(Reporting by Tim Hepher, Lisa Bartlein, Allison Lampert, Valerie Insinna; editing by Barbara Lewis)