Chart of the Week: Transportation Air Cargo Index (price per kg in USD) – Hong Kong to North America, Frankfurt to North America, Hong Kong to Europe, Shanghai to Europe SONAR: AIRUSD.HKGNOA, AIRUSD.FRANOA, AIRUSD.HKGEUR, AIRUSD.PVGEUR
It seems the unlikeliest of things: airline rates spiking as travel bans expand across the globe. We are of course not talking about passenger rates, but cargo rates. The average spot rate for shipping cargo through the air from Hong Kong to North America reported by the Transportation Air Cargo Index has jumped almost 27% over the last two weeks. The rate from Shanghai to Europe has jumped over 50% in the same time frame as capacity tightens and the demand for medical goods expands in the wake of the COVID-19 pandemic.
The current rate spike cannot be explained by normal seasonal patterns. Looking at the Hong Kong to North America rate, there is clearly a peak season in Q4 leading up to the holidays as electronics are shipped en masse, but nothing of significance in March.
According to a recent article by FreightWaves air cargo market editor Eric Kulisch, over 50% of the world’s air freight capacity is derived from passenger flights with the other half flown on true cargo jets. This is called “belly” freight in the industry due to the position of the cargo hold in the jet.
With most major airlines canceling trips in response to limited demand, much of the capacity for shipping through the air went with it. Most air freight is traditionally high value freight that can bear the expense of air travel such as electronics and pharmaceuticals. Electronics production largely went offline in February as the pandemic hit China, where most of it is manufactured. Medical supplies and other items used to treat the illness have taken its place.
In addition to surging demand for these items, production was shut down or consumed by China in recent months to handle their own situation, leaving much of the rest of the world’s supplies at risk. Production remains limited, but demand is stronger than ever in places like New York City. With cases expanding exponentially in the U.S., the need for medical supplies is at an all-time high and consequently no cost is too high to get them where they need to be in a timely manner.
A similar situation has been observed in the United States domestic trucking sector with spot rates increasing throughout March. Demand for consumer products and foodstuffs jumped in the wake of people panic-purchasing. The big difference between domestic trucking and international air freight is the fact domestic trucking has seen no noticeable reduction in capacity to this point.
Lagging production has yet to be fully realized in the U.S. outside of medical supplies and pharmaceuticals. Once the virus peaks in the U.S. there will be increased demand for other products creating bottlenecks throughout the various supply chains as the world’s factories slowly turn back on, but at an uneven pace.
America may recover faster than some of the less developed countries where many of its goods are sourced. Much like the trade war in 2019, companies will have to adapt their supply chains in a more uncertain environment than the one seen last year.
Transportation networks will see ebbs and flows much like the ones seen after natural disasters. Rates will rise and fall as infrastructures are rebuilt and the proverbial dust settles. Airfreight will be crucial over this period of recovery, but they have their own set of challenges ahead of them.
Even with the rates spiking, the airlines are not expected to turn a profit this year, with overall volumes forecast to drop in cargo and passenger travel.
About the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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