Air freight rates remain perched at elevated levels, well beyond those seen in 2020, and seem set to increase even higher as supply chain congestion drives further ocean-to-air conversion for essential peak inventory, analysis indicates.
Already exceptionally high air freight prices are likely to climb further as supply chain congestion drives further ocean-to-air conversion for essential peak inventory, analysis indicates, analysis indicates.
Based on the latest air freight pricing figures from the Baltic Exchange’s Baltic air Index, logistics investment analyst Stifel highlighted that air freight rates in October remained “perched at elevated levels, well beyond those seen in 2020”. Hong Kong to North America and Shanghai Pudong to North America average prices increased 76% and 89%, year-over-year, respectively, with the former increasing 2% during the month while the latter fell 4%, sequentially.
Into Europe, average prices for air freight traffic from Hong Kong and Shanghai climbed 78% and 63% year-over-year, respectively – and 20% and 7%, sequentially from September.
“We posited last month that the inflection on core lanes was due to early preparations for peak season. As we push deeper into the year, we think it is likely that rates creep higher before they get lower,” said Bruce Chan, Director and Senior Analyst of Global Logistics & Future Mobility Equity Research at Stifel.
“From a retail perspective, it is becoming clear that supply chain backlogs on the inbound side – particularly in the US – show little sign of abatement. In fact, delays may be mounting,” he highlighted, in a reference to ocean freight supply issues.
Driver supply issues
“And the solution to the backlogs and bottlenecks is not as simple as increasing port throughput or extending port operating hours. Terminals and container yards are full. Drayage capacity is tight due to structural driver supply issues, as well as compounding disincentives to pick up from ports as a result of the delays.”
Referencing anecdotal reports among US and other truck drivers about the unattractiveness of the container trucking market currently to drivers, he noted: “After all, what driver wants to wait in line at the port for hours with no bathroom facilities and minimal compensation for the extra time? Meanwhile, inland warehouse and storage facilities are also full, due to a lack of labour to unload, and scarce capacity to move freight to intermediate stocking locations.”
Chan continued: “The proverbial pig is stuck in the python, and governmental efforts to relieve supply chain pressure will only push it deeper, in our view – at least here in the US. As such, we believe there is a contingent of inventory that will not arrive in time for the seasonal rush via ocean and that freight may be converted to air.”
Air capacity challenges persist
“So, demand pressures are acute, but what of supply? Much has been made recently of relaxation of travel restrictions between Europe and the US and the positive incremental benefit from belly capacity on that lane. Unfortunately, transatlantic supply has little impact on the China outbound routes that comprise the bulk of holiday peak volumes.”
In China, he noted that “stringent Covid regulations continue to bottleneck capacity, limiting labour productivity, increasing the frequency and likelihood of episodic shutdowns due to infection, and even restricting capacity types. For example, temporary ‘pfreighters’ might be disallowed, because they take longer to load and don’t comport with regulatory time limits that are designed to minimise exposure windows.”
Recent and forward pricing trends
Looking at recent and forward pricing trends, Peter Stallion, Head of Air and Containers at Freight Investor Services, noted that air freight prices “diverged across several routes through October, with Asia-China routes actually coming off through from mid-October, ex. Shanghai dropped from $11.31/KG to $10.04/KG – in a stark reversal of market sentiment that prices into the US are actually going up. This was driven by congestion into US ports forcing more cargo into an extremely tight air freight market.”
Stallion said that “tightness – and the power held by airlines – was shown by Cathay Pacific implementing a General Rate Increase on BSA (block-space agreement contract) capacity ‘until further notice’.
“As we push through into what would have been a traditional demand peak in Q4, markets already start off very high on all Asia-outbound routes,” Stallion continued. “The market out of China continues to be driven more by owned or chartered capacity rather than traditional mid-term contracts. This has continued to spark up spot market volatility with the market on a shift towards dynamic pricing.”
On transatlantic routes, he noted: “As we’ve said before, sentiment is driven by the availability of capacity rather than any substantial fluctuation in demand. This capacity is driven by the resurgence of passenger traffic in what is usually a belly-freight dominated route.
“The US government announced it would lift travel restrictions from 8 November, potentially putting the dampers on rates which have been held up relatively flat ever since the travel corridor was closed in Q2 2020. Again, the index price is not following this sentiment yet, with many keeping an eye on price action once passenger traffic returns. This is despite forward bookings for passenger tickets, which will have pre-loaded transatlantic schedules giving airlines more of a better reading on available capacity.”
Longer-term expectations
Longer-term, Chan highlighted that there has been “discussion about an increase in the appetite for passenger to freighter conversions and the impact of that capacity on the market. For example, Amazon, and most recently Maersk – in connection with its acquisition of Senator International – announced intentions to deploy more long-haul widebody aircraft. And with passenger airlines retiring long-haul equipment, there is theoretically more feedstock available for conversion.”
But Chan said “conversion capacity is still limited and major providers are booked for at least the next few years. If and when they do enter the market, it is interesting to consider the structural implication for air cargo rates.
“A significant mix shift away from belly space and toward main deck freighters means that air cargo that previously enjoyed marginal contribution pricing to passenger demand might no longer be getting a ‘free ride’. So, air cargo (prices) might be permanently and structurally higher in the distant future. And it is likely higher in the near future, too.”
Source: Lloyd’s
