American shippers ride higher on lower export rates, capacity bumps in key markets.
While the current export market for U.S. air freight is stable and prices have even increased, albeit narrowly, in September and October, shippers are liable to see rates decline for the rest of the year and into the spring of 2014.
According to London-based shipping analyst Drewry, these changes in rates are simply following demand patterns that ebb and flow with the seasons. However, other factors — including the price-raising change in how carriers arrive at surcharge fees — are expected to help keep a lid on the cost to transport air cargo and benefit shippers overall.
Looking back on 2013, air export rates were impacted by the sluggish economy. On the transpacific lane, Drewry measured the nadir in rates during June and July, when average prices on the lane fell to $3.06 per kilo from a high of $3.60 per kilo at the end of 2012.
Pricing has turned around since the summer — Drewry measured a per-kilo cost of $3.24 in September — but costs for shippers are expected to fall in December.
“If you compare overall air freight levels on a more longer term historical basis, they’ve generally been down at the same level as they were back in the recession of 2009, which just shows you how poor the air freight market has been,” Drewry’s Martin Dixon said.
Rates on the transpacific are likely to fall in the near future. Once the demand generated by new product releases abates, market overcapacity will force shippers to drop pricing to their customers, Dixon said.
One of the reason rates are currently trending up on the transpacific is due to a peak that materialized at the end of October — much later than many analysts thought it would. Carriers who had been constraining capacity by taking lift out of the market helped create the market for this peak, analysts say.
After this peak, freight rates will fall again until March, Dixon said, when another wave of product releases is due. The March date also matches up with the end of the fiscal year for many companies, so Dixon expects a bunching of orders by firms to possibly prop up rates.
While U.S. exporters may be content in the current market, carriers are hurting.
“It’s been a big problem for the carriers principally because of the very poor level of demand,” Dixon said. “The other challenge the sector has is that it is difficult to control cargo capacity in the same way as it is in other transport commodities because capacity is driven by external factors such as the demand for air passenger transport.”
Joe Kronenberger, OHL International’s senior vice president of commercial air product, has measured a decrease in export rates on the vast majority of lanes, but sees a small uptick on a few routes that are under capacity constraints. He pointed to the route between Newark, N.J., and Singapore as an example because Singapore Airlines is backing out of that trade as of this month. He added that he hasn’t seen signs of a peak season, per se, in his field — more of a tightening of capacity on certain days of the week.
In the lanes where capacity is still loose, Kronenberger said shippers are not only seeing low pricing, but are receiving better terms like block-space agreements that are less stringent.
Bob Imbriani at Texas-based Team Worldwide has seen mixed signals on the air export side of the business. Exports, he said are steady, with only a small shift toward other modes of transport. (The shift from air to ocean, he said, is much more pronounced on the import side.) He predicted a steady increase in pricing over the first part of next year, but as of the end of October, hadn’t seen any peak season concerns, adding it would likely occur in November.
Richard Zablocki, vice president of air products for CEVA, said airlines are trying to increase rates, but haven’t had much luck due to the amount of capacity in the market and the threat of price undercutting by other cargo carriers. He said the rates carriers are assessing now could be sustainable through the second quarter of 2014, but the low prices they’re offering to exporters may drive some all-cargo airlines, which can’t rely on revenue from passengers to keep their businesses afloat, “to make some hard decisions about operating their fleet of freighters.”
Rate Calculations. Emirates, Lufthansa, Air France-KLM and SAS Cargo announced this summer a change in the way surcharges are calculated, effectively implementing a rate hike by using a new calculation that looks at chargeable weight for fuel and security surcharges. Delta jumped on board, with a caveat: There would be no changes to U.S. export surcharges.
Zablocki thinks that it’s just a matter of time before Delta includes U.S. exports in this new pricing scheme. He also said the new surcharge calculation is likely to spread to more carriers, though American Airlines may be cautious about getting entangled with anything the U.S.
Justice Department could view in a negative light with the pending merger with US Airways.
Some analysts have said expansion of this surcharge-calculation method could follow airline alliances as well, because carriers that have grouped together appear to be echoing each other with this new calculation, analysts say.
Zablocki warned costs will start to increase for shippers across the board, but added carriers have started to absorb their own cost increases to pick up business.
“Many of the airlines have begun providing what they call all-in rates. The rates were inclusive of the surcharges, and while you did pay based on chargeable weight, they had adjusted the rates to somehow make it attractive enough that in fact you didn’t find a price increase at all,” he said. “While we’re seeing a near-term increase in costs, what we’re hoping is that will be mitigated by a profusion of these all-in type rates.”
If the new surcharges stick, DHL Global Forwarding’s Gary Schulthesis said carriers may try to stretch these surcharges into their base rates.
Freighter Effect. According to reports, the Defense Department makes up about 20 percent of the U.S. export market, and with the drawdown in Iraq and Afghanistan, it will no longer be supporting exports at those levels. By having the same amount of capacity in the skies with a big exporter out of the game, export prices will fall.
CEVA’s Zablocki said Evergreen International Airlines, which shut down its air cargo business in November, watched freight volumes shrink as the military started its drawdown in the Middle East. He added Evergreen’s withdraw from the market, along with the overall reduction in U.S. military air freight, hasn’t affected export pricing levels much.
“For the most part, while there is a reduction in capacity on the North Atlantic, there still is a fair amount of excess and readily available capacity (for American shippers), so that it has not caused any kind of noticeable price differences on the North Atlantic,” Zablocki said.
Capacity pressures are, however, affecting U.S. exporters as Russian carriers, which have entered markets like Chicago with freighters, increase capacity and potentially drive down rates, according to Zablocki. Middle Eastern carriers may also reduce air export costs if they raise their presence on key U.S. trade lanes. Zablocki thinks most of the Middle Eastern business will come via the transatlantic.
Schulthesis sees the same impact from Russian carriers as Zablocki, but warned about the instability caused by undercutting rates. One of the Russian carriers attempting to enter the U.S. market, Air Cargo Germany, is already out of business.
For Schulthesis, there’s plenty of capacity on the transatlantic lane, and moving northbound and southbound. Like other forwarders, he’s seen the late start of a peak season affecting rates in the transpacific and noted air freight capacity between Europe and Asia is constrained. But that doesn’t mean even lower rates for shippers. Schulthesis views the surcharges that the carriers are implementing as having a bigger impact on shippers than some might think.
“If we look at the latest fuel surcharge methodology, it’s tantamount to a price increase,” he said, noting DHL Global Forwarding had anticipated this issue and is working with its customers to create new solutions to work around the increased costs. Savings, which come from maximizing loads, are achieved by using more pallets and consolidating through gateways, he added.
“The market pricing can only go down so far. As airlines get new equipment, and new and bigger aircraft, the shipper should not be too concerned about cost but concerned about getting capacity,” Schulthesis said.