Businesses requiring air transport to move goods are putting on their big boy pants as they accept the harsh reality of the air cargo market in 2021: If you want to play, you have to pay.
Volatility and uncertainty are the watchwords for the air cargo sector, but analysts and logistics professionals say extremely tight capacity and elevated freight rates are here to stay for the rest of the year, with none of the usual doldrums until the fall holiday rush. And finding aircraft with cargo slots is a big challenge all over the world, not just on the major trade lanes connecting China, North America and Europe.
High retail and industrial demand for shipping is putting pressure on the international airfreight sector, which is still about 20% below normal capacity because passenger jet traffic is heavily restricted.
Air cargo carriers are prioritizing customers willing to pay a premium for faster service. At the head of the line are e-commerce shippers, automakers that need components to keep assembly lines running, pharmaceutical manufacturers and retailers like Peloton (NASDAQ: PTON) with disgruntled customers waiting weeks for high-value products on backorder.
Reserving cargo slots with an airline resembles trying to buy tickets to a Beyonce concert before it sells out or trying to buy a home in a hot seller’s market. To beat the competition, you have to move fast and pay top dollar.
“There are not that many lane-pairs these days that are easy to get freight on because the capacity is just not there,” said Benno Forster, head of airfreight operations and procurement Americas for logistics giant DB Schenker. “If you get an offer for a freighter and don’t grab it now, in two hours it’s gone. That happens sometimes in peak seasons, but now it’s kind of daily business.”
Chinese factory production slowed coming out of the Lunar New Year holiday, but the price dip and slight capacity influx appear to be temporary. Logistics providers say rates are starting to climb again out of Shanghai and Shenzhen and likely will trend up the rest of the month. Short-term market softness belies the fact that rates are still two to three times higher than historical standards and transport supply is very low.
In the past two weeks, global airfreight volume increased 14% and capacity eroded about 3.5%, according to World ACD, which compiles market data from airlines. On a global basis, year-over-year, rates are 84% higher than a year ago, it said.
It’s easy to focus on export trade from the world’s manufacturing epicenter, China, to North America and Europe, but industry experts say the shortage of airlift combined with soaring rates is being felt in nearly all trade lanes.
In Asia, demand and rates are especially strong from Taiwan, Singapore, Vietnam, Korea, Japan and Thailand. San Francisco-based freight forwarder Flexport said in a customer update that the yield difference between those markets and China is approaching $4 to $5 per kilogram.
Logistics service providers increasingly are taking more risk to secure space for customers by chartering full planeloads but are confident they will be filled. Flexport, for example, said it has inaugurated a twice-weekly dedicated freighter service from Taipei, Taiwan, to Los Angeles and six weekly controlled freighter flights from Seoul, South Korea, to Los Angeles.
“There has been a huge spike in demand and air rates from both Japan and Korea, and I assume much of that is automotive-related,” said Brady Borycki, executive vice president for global business development at Wen-Parker Logistics.
The highest rates in air cargo at the moment are for shipments originating in South Korea, with demand for COVID-19 diagnostic kits and sea/air transfers contributing factors, World ACD said. Some companies report the rate from Tokyo to John F. Kennedy Airport in New York is as much as $8 per kilogram on some airlines.
Forster added that the capacity squeeze is also significant for Australia and South Africa.
Qantas is operating freighters, but most of its passenger fleet is grounded. Many all-cargo operators are reluctant to offer charters to Australia now because of limited backhaul cargo, the need for multiple crews and tight COVID restrictions, he noted. The Australian government has tried to alleviate the situation for domestic exporters by subsidizing airfreight service with several carriers and logistics companies.
Passenger service to Johannesburg is mostly shut down and the few freighters that fly there are completely full.
Logistics providers and carriers report supply challenges for air transport from the U.S. to Asia, Europe and Latin America, with very high load factors and bookings being made five to seven days ahead of desired transit to secure slots. Flexport said that shipments face rolling backlogs to destinations such as Chile, Brazil and Argentina, and constrained airlift to Central America.
Forster said shipment volumes from the U.S. to Asia — a trade lane that typically has a 70% imbalance that favors inbound freight — has jumped in the past couple months. He attributed the big change to the need for automotive supplies in China.
Air export rates from Europe to Asia, and North and South America, are double what they were in recent months with limited capacity. Carriers report high load factors from major hubs in Europe, mainly due to shipments of automotive, industrial and pharmaceutical products, logistics providers say. The time from booking to uplift is up to 10 days, unless shippers upgrade to express service. Demand out of Europe has increased by more than 30% since the start of the year, with searches for bookings at their highest level since April 2020, according to digital market WebCargo.
Record retail sales and unusually high cross-border trade since last summer have been fueled by several pandemic trends: a shift in consumer spending to goods people need, or can enjoy, at home as they shun services and experiences, such as going to the movies; companies still trying to replenish depleted inventories resulting from closed factories and urban lockdowns at the start of the COVID outbreak; and difficulty maintaining stock levels to feed the e-commerce beast, which grew more than 40% in the U.S. last year.
Hot products include sports equipment, digital devices, hot tubs, outdoor firepits, patio equipment, digital devices and office chairs — anything that can be used at home or outdoors for work and leisure.
And demand drivers seem to be gaining momentum.
The U.S. government has begun disbursing $1,400 checks (more for families) as part of its COVID emergency aid plan, which puts money in people’s pockets that can go to more e-commerce orders. Pharmaceutical companies are producing more doses of COVID-19 vaccines, many of which will be shipped by air.
Ocean shipping capacity is so tight that it is taking shippers weeks to reserve a container to move their goods, and many ports are so crowded that vessels have to wait at anchor a week or more for a berth. Container shipping rates are setting records and are up more than 200% from a year ago from China to the U.S. West Coast. Some shippers report paying $6,000, or more, for a forty-foot box, while rates to Europe are in the $10,000 range. Last week, the National Retail Federation raised its forecast for U.S. container imports to 23.3% year-over-year for the first half of 2021.
Expensive and unreliable ocean shipping is forcing many companies to switch to air where possible, especially for goods that have a short shelf life or will decrease in value over time. Logistics providers, such as Kuehne + Nagel, say there is renewed interest in sea-air services, which involve an ocean voyage to a transshipment hub like Dubai, deconsolidation and transfer to the airport for onward transit by air.
Market intelligence firm International Data Corp. is forecasting smartphone shipments will grow 13.9% year-over-year in the first quarter and 5.5% for the full year, pushed by pent-up demand and interest in 5G devices. It also estimates that strong demand for PCs is expected to carry forward into 2021, with shipments growing 18.2% to 357.4 million units and a stronger-than-normal compound annual growth rate of 2.5% for the 2020-2025 period. Manufacturers tend to ship a huge share of both products by air.
The Logistics Managers’ Index shows the cost of freight transportation, warehousing and inventory are all projected to keep growing, even if some incremental ocean and air capacity enters the market.
Meanwhile, Goldman Sachs recently upgraded its estimate for U.S. GDP growth to 7% for 2021, and the Organization for Economic Development doubled its global growth forecast to 6.5%.
“Looking out over the next few months, we see a scenario where capacity could get even tighter and spot pricing could continue to accelerate,” Bruce Chan, vice president of global logistics at investment bank Stifel, said in the March 5 Baltic Air Freight Index newsletter. “Assuming that consumer, and especially e-commerce driven activity persists, and that the industrial recovery continues, more brick and mortar activity and more produce and seafood demand could further tighten capacity as vaccination efforts march forward and life gets back to normal.”