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Shippers face high air cargo rates for some time yet

Analyst indicates there is likely to be a continued capacity shortage for 12 to 18 months, keeping prices high

Shippers are unlikely to find much relief from the current elevated levels of air cargo rates in the foreseeable future due to a continued shortage of capacity and bullish market conditions, according to analysis from a leading global management consultancy and industry insiders.

Moreover, shifting shipments to lower-priced ocean freight is set to remain a non-starter because of the ongoing difficulties in the segment, ranging from a dearth of empty containers and port congestion to blank sailings and a squeeze on space.

Ludwig Hausmann, who leads the air cargo service line within the global transport and logistics practice of McKinsey & Company told Lloyd’s Loading List in an interview that he saw little prospect of change in an air cargo market environment characterised by strong demand on most major trade lanes – driven by a mix of COVID-related shipments, sharp growth in e-commerce volumes and buoyant flows of ‘staple’ airborne commodities such as high-tech and pharma goods – and where high prices have become the norm, much to the dismay of shippers.

“We work with some of the biggest shippers on their supply chains and are fully aware of the dilemma they find themselves in presently. The central, recurring questions we are hearing from them are simply: ‘What should we do? Should we now contract at these escalating (air freight) rates for the coming years and lock ourselves into such levels, or should we bet on spot rates going down again?’

Continued capacity shortage

“What we would say in terms of the general outlook is that in the next 12 to 18 months, there is likely to be a continued supply/capacity shortage on the air freight side, keeping rates high. This rather leaves shippers in a situation where they just have to ‘grin and bear it’, but unfortunately that’s the reality.”

Hausmann played down suggestions that the Suez Canal blockage at the end of March had exacerbated the capacity squeeze in air cargo and driven up rates further – at least to a significant degree. He argues that “most of what is transported by ocean container is not of a value density that will ever find its way into air freight even if the Suez blockage had lasted a month or two.

“However, for shipments which had not yet departed in containers (before the blockage occurred) and those where the commodity to be shipped via ocean was in the high value or super-urgent category – and where it is often a case of a toss-up between using air freight and ocean freight anyway – then, yes, perhaps there has been some latitude for a short-term pivot towards air.”

Forwarder feedback

Various freight forwarders have told Lloyd’s Loading List that conversion from ocean freight has been a significant part of the demand for air freight this year, as importers struggle with congestion and delays at various points within the ocean freight supply chain. And with the aftermath of the late March blockage of the Suez Canal continuing this month, this was continuing to contribute to high air freight prices.

Hausmann’s colleague, Tobias Wölfel, who leads Air Cargo Research at McKinsey’s German office, observed that given the current elevated level of air cargo prices, under normal circumstances shippers would have been looking at the possibilities of a potential shift from air to the lower-priced ocean mode despite the disadvantage of the latter in terms of transit times.

Air to ocean conversion unavailable

“But the difficulties on the ocean side – port congestion, container shortage and one-offs like the Suez blockage – have meant air cargo remaining a strong proposition for high-value and high-urgency shipments. With the emergence of express services for ocean container loads and/or a combination of ocean and air modes, there would have been scope to take a little bit of the pressure off the under-capacity in air cargo; but that obviously only works if a very reliable ocean service can be counted on, which clearly is not the case at the moment.”

Hausmann added: “The shift (from air to ocean) would have been a natural thing in a situation where air freight rates have skyrocketed like they have today. But the window of opportunity to ‘downgrade’ from air to ocean has become extremely narrow because of the decreasing reliability and service quality of ocean shipping itself. Shippers will have to bite the bullet on high air cargo rates for some time yet.”

Several air freight sources have told Lloyd’s Loading List that although there is expected to be some return of passenger belly capacity in the second half of this year, there will continue to be a significant deficit for some time. Furthermore, much of the capacity that is returned is likely to be on intra-regional routes rather than widebody capacity on the intercontinental routes where most air cargo is carried.

Freighter pressure

Reto Hunziker, group cargo director at air charter broker Chapman Freeborn, this week told Lloyd’s Loading List: “We think the market will remain the same for at least this year. PPE requests might go down towards the end of the year, however other verticals like eCommerce, pharma, high-tech, automotive and general cargo will have a stronger demand.

“We expect a strong peak season with high demand during Q3 and Q4. It has then to be seen what happens when PAX demand comes back to an increased level. The ramp up will take a while and will be based on the travel demand. Considering this, we expect that the access to freighter capacity will remain challenging.”

Latest monthly analysis

The latest monthly analysis by industry analysts CLIVE Data Services and TAC Index highlights that global air cargo demand bounced back into growth in April after a slight dip in March, “with high load factors keeping the international air freight system under significant strain as the traditional surge in summer capacity has so far failed to materialise for a second consecutive year”.

CLIVE’s air cargo market data shows volumes in April up 1% over April 2019 and +78% compared to the same month of 2020, continuing the positive trend seen in the opening two months of this year, highlighting that the second half of April 2021 showed particularly strong year-over-year growth, up 6%.

To provide a meaningful perspective of the air cargo industry’s performance, CLIVE Data Services is continuing to focus on comparing the current state of the market to pre-Covid 2019 volume, cargo capacity and load factor data until at least Q3 of this year, produced alongside the 2020 comparison.

Capacity down 18% versus 2019

Despite the similar volumes as in April 2019, the pressure on available airline cargo capacity is much higher, CLIVE highlighted, with overall capacity down 18% versus 2019 “as the increase in belly capacity seen then and in previous years, as airlines increased from winter to summer schedules, remained grounded due to continuing Covid restrictions on international passenger movements”. Consequently, CLIVE’s ‘dynamic loadfactor’ for April of 71% – based on the volume and weight perspectives of cargo flown and capacity available – was 10 percentage points (% pts) higher than in 2019 and 4 pts above the level of a year ago.

Niall van de Wouw, Managing Director of CLIVE Data Services, commented: “This lack of bandwidth capacity-wise is being exacerbated by the fact there is no summer schedule based on passenger demand, which is contributing to the high rates being reported in the market.”

China to Europe ‘completely full’

China to Europe volumes were 18% higher in April 2021 than in 2019, with load factors ex China at 95% or “completely full”, he said. Despite a 10% drop in volumes from Europe to North America compared to 2019, CLIVE’s latest data also shows the fall in capacity of around 40% on this lane, resulting in a dynamic load factor at 87% – 21% pts higher than in 2019.

The decline in North America to Europe volumes is less pronounced at -4% versus 2019, producing a load factor of 69% or 19% points higher than in 2019.

TAC Index data for April “shows the impact of the volume vs. capacity conundrum on air freight rates”, the air freight pricing specialist said. Gareth Sinclair of TAC Index commented: “There has been a big bounce back from the slowdown we saw in March with prices strengthening, driven by demand outstripping capacity in several markets, with some lanes recording higher pricing levels versus the highs seen in 2020.

“The BAI (Baltic Air Freight Indices) increased by almost 17% in April over March largely driven by China (HKG & PVG) with growth around 30% but London Heathrow also saw an improvement on 3 out of 4 indices although at more modest levels (~3%) building on similar growth levels in March. Frankfurt, Chicago and Singapore origins all saw declines over March levels.

“There continues to be a dynamic market environment with operational crewing and permits continuing to impact some carrier operations.”

Market variations

TAC Index says the differences by market can be seen in the performance of the China and Hong Kong markets, which continued to lead the way in terms of price strength, whilst the US and Europe saw a more volatile and mixed picture in April.

For China/Hong Kong to the US (CN/HK-US), April ended on the highest rate this year of US$8.56 or +60% vs. March, with continuous week-on-week increases since 22 February, TAC noted. Prices are up 8% versus last year and 153% higher versus 2019.

HKG-US is exceptionally strong with the highest rate of the year at US$8.65 compared to US$4.91 on 1 March “and is approaching the highest level seen last year of $8.81 in May as market capacity tightens”. The April price is up 29% on the same period last year and +153% over 2019. And data for this week indicate that spot prices have risen beyond that high last May.

“In summary, the air freight market continues to be strong, particularly CN/HK to US, and may continue, at least in the short term, with demand strengthening as countries relax lockdowns and subdued passenger travel continues to impact capacity,” Sinclair said. “With the easing of Hong Kong quarantine rules for crew, Cathay Pacific, for example, are looking to restore their full market presence as soon as possible, which may dampen pricing.”

Forward Freight Agreements

In a further examination this month of air freight pricing expectations, including using Forward Freight Agreements (FFAs) tracked by and available via the Baltic Exchange, Peter Stallion from Freight Investor Services commented: “Riding a wave of cargo on the back of the delays in the Suez, air freight saw a lift ex-Asia with substantial gains across the core Asia-Europe and Asia-US front haul. Much of this was driven by sea-air conversions and a boost on the transpacific lane as a result of the collapse of capacity provided mostly by Cathay Pacific ex-Hong Kong. Cathay had engaged in extremely strict crew quarantine procedures, cutting capacity on routes which have since returned at the tail end of April.

“In terms of forward sentiment, the outlook for the Asia market remains uncertain. However, support from record March and April cargo demand has fed back into price support all the way through into June and July. Given this is typically the start of slack season for air freight, this is almost certainly an upset – on top of the many upsets in 2020 – for company balance sheets, especially those still relying heavily on air cargo. The scale of delays on container freight has maintained the viability of air freight, despite enormous price increases.”

He noted that on transatlantic routes, vaccine cargo and a persistent lack of passenger volume were continuing to support prices, adding: “At the risk of wearing out the record, this has been the consistent factor on transatlantic and indexed backhaul routes. In terms of a cross-market analysis, we have been seeing large volume on the tanker FFA routes, reflecting a large import of clean fuels – most likely jet kerosene – into Europe, driving speculation that passenger schedules will return in force from the end of May onwards. This removes the support for high container prices, if and when passenger volumes return.”

Wrong kind of capacity

But he also indicated that the impact of any returned passenger air capacity may not be so significant as much of it was likely to be on non-core cargo routes, noting: “There is particular focus on the intra-Europe and transatlantic routes, in line with positive progress regarding vaccines. As European governments have provided official guidance regarding holiday travel, this is a positive sign for passenger volumes. There is still doubt as to whether this will impact the long-haul routes, particularly those into East and South East Asia – Singapore is on the road to another lockdown after another bump in COVID cases.”

Source: Lloyds Loading List

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