Air’s respite for congested ocean shippers

   The lengthy labor fight on the West Coast and the resulting congestion at major seaports has wreaked havoc on ocean transportation and the shipment of goods from Asia to the United States, but it is also leading to a surge of air cargo volumes, both domestically and internationally. 
   This shift to air freight as a necessity, however temporary it may be, is a benefit to the air cargo industry, which is looking to a strong 2015 after gains in tonnage and revenues in 2014. But with this increased activity, shippers may soon see rising air freight rates out of the Asia-Pacific region.
   “I think we’re starting to see pricing get a little stronger,” according to Kevin Sterling, BB&T Capital Markets’ managing director and a senior analyst in the company’s transportation group. Rates will rebound with increased strength, he said, on routes between the United States and Shanghai, for example. 
   Sterling said it’s difficult to pinpoint the exact reason for escalating air rates, but noted the congestion in the West Coast ports is combining with an overall increase in demand, record low oil prices and a need to replenish retail inventories to create the current air cargo situation. Shippers who have turned to air transport need to get goods to U.S. consumers in a timely manner, which has been difficult to accomplish for time-sensitive goods through ocean transport, he said. 
   Looking at the transportation preferences of Asian exporters, the exodus from the sea to the skies appears to be temporary. Sterling said the eventual shift back to ocean transport may not be as swift as the switch from ocean to air. Shippers will return to ocean, especially if oil prices increase significantly, he said, but there will be a bit of caution.
   “If you get burned, you’re not going to go back right away,” he said. “This threat of congestion, it’s been lingering. It could happen again, and from what I’m hearing it’s not going to be a quick fix.”
   And if shippers return to ocean transport, they may start by searching for other routes to stay clear of the West Coast ports, Sterling said. 
   Rich Zablocki, vice president of air products at third-party logistics services provider CEVA, said international shippers started switching modes in November, “as it became evident that ocean transits could not be trusted.”
   The majority of this modal shift has occurred with goods routing out of Hong Kong and Shanghai to the United States.  He added that some industry watchers believe the shift to air could stay around until the summer, but that “no one is really willing to make hard core predictions.”
   Capacity, he said, is not currently an issue; the only thing that may be a bit out of the ordinary is that charters will run a bit longer than usual. Everything Zablocki’s heard, though, points to sustained peak pricing. In early January, he predicted shippers would see peak costs through mid-February. The Lunar New Year celebrations should push pricing down, he predicted. 
   “Peak pricing is still in place, and the airlines are not willing to go into contract negotiations,” Zablocki said.  “It appears they want to ride this wave as long as it will last. 
   “We have some shippers bringing products into the West Coast now and asking for inland distribution by air rather than truck to make up time being lost at the port,” he added.
   International carriers are happy with the circumstances, but some overseas airports are seeing activity decline. At Amsterdam’s Schiphol Airport, Enno Osinga, senior vice president of Schiphol Cargo, pointed to a 1 percent decline in tonnage from Asia during the fourth quarter of last year. This decline, he explained, can be directly attributed to port problems in the United States. 
   “It is clear that the U.S. West Coast port problems have caused a shift of available freighter capacity from Asia-Europe to the Pacific to deal with ocean freight backlogs, resulting in December’s decline in growth from Asia. Given the continuing problems on the U.S. West Coast, it is realistic to also expect the start of 2015 to be slow,” he said.
   U.S. airlines’ cargo operations have also benefited from the West Coast port congestion, seeing improved results in the fourth quarter. American Airlines recently reported its tonnage for the fourth quarter rose 2.3 percent, when compared to the fourth quarter of 2013, while cargo operating revenues for the quarter increased 18.6 percent. In the same period, United improved its tonnage results by 12.5 percent; during the quarter, the airline’s cargo operating revenue rose 18.2 percent. Delta Air Lines reported its fourth quarter cargo operating revenue rose 2 percent during the quarter, helping offset a 3 percent decrease on the year; Southwest’s freight operating revenue rose 12.2 percent, year-over-year.
   While port congestion isn’t the only reason for these sunny results, it certainly doesn’t negatively impact them either. 
   Wally Devereaux, Southwest’s senior director of cargo and charters, said the carrier began noticing an increase in volumes during the third quarter of 2014. That domestic tonnage increase, he said, has been tied directly to the U.S. port issues. It’s hard to measure exactly what impact the congestion has had on air cargo tonnage, however, because he can’t divide congestion benefits from the bump air cargo has received from the general strengthening of the economy. 
   Devereaux said “select markets in select cities have certainly seen higher volumes,” but added there’s still ample cargo capacity on Southwest’s planes.   
   “I would suspect it will continue, to some degree, until the situation is resolved,” he said of the volume uptick, noting the shift isn’t likely a sustained trend. “I think it’s temporary, for the most part, but I do believe some shippers will actually wind up making a longer-term change.”
   Ross, a former American Shipper editor, writes about air transport and freight issues. He can be reached by email.

This column was published in the March 2015 issue of American Shipper.