We conduct a regular survey of dozens of airports around the globe to produce our proprietary Broughton Capital Airfreight Indices. Data from our indices first began signaling that the European economy in general and the semi-conductor industry in particular were stronger than widely understood beginning late 2016. Since we know that the volume of high-value low-density goods grows faster than the other parts of the goods spectrum, we continue to be long-term bullish about global airfreight and U.S. airfreight in particular, however we would also point out that in the short-term the APAC (Asia Pacific) and Eurozone airfreight volumes are now offering some cautionary signals.
Historically, APAC airfreight has had a relatively tight correlation with semi-conductor billings. This is not because everything shipped in this region is a semi-conductor, but because approximately 70% of the goods airfreighted in this region have one or more semiconductors in them. We are transport-centric in our view, and don’t pretend to have any special insight into the companies which produce micro-processors, however, the current APAC data suggests that if those who do model the earnings of the semis aren’t modeling for a drop-off in billings in the coming months, then those equities (and their investors) could be in for some unpleasant surprises.
Just as we candidly admitted about semi-conductors, we admit that we aren’t currency valuation experts. However, there is a strong historical relationship between the Eurozone airfreight volumes and both the Eurozone PMI and strength of the Euro against other major currencies, particularly the U.S. Dollar. With the current decline (the last three months have been negative), we suggest that if historical patterns hold, the Eurozone PMI is poised to decline in coming months and the value of the Euro is poised to continue declining against the U.S. Dollar. Stay tuned…
Contextual – Why Should You Pay Attention to Airfreight?
Most shippers, carriers, and students of the freight market spend most of their time focused on a particular mode. It makes intuitive sense that you would focus on the mode that you spend the most time in which you are buying services or providing services. Net result, there are plenty of experts in rail, truck, and intermodal/container freight, and with the ongoing prodigious growth of e-commerce, there is a growing number of experts in parcel freight. That said, we continue to be surprised how little attention overall is given to airfreight. We understand that only 1% of the weight of the U.S. and global economy is delivered via air, and we understand that this is often only in the last leg of the commercial supply chain. We also understand that over 16% of the value of the tangible goods flow is carried by air.
We should remind everyone that the decision to pay a premium for air transit confirms two very important facts about the goods being transported and the economy:
1. They are valuable – Air freight has a very high value to density ratio. Coal isn’t transported via air. Smartphones and microprocessors are transported via air. In the cost of goods delivered, the cost of delivery is minor. The shipper just wants it where they want it, when they want it, without it being lost, stolen, or damaged.
2. They are in high demand. There is a sense of urgency. At the most extreme end of this example, human organs that are to be transplanted, they are worthless if not delivered in an expedient manner. No one pays for air transport unless, as FedEx made famous years ago, “It absolutely, positively has to be there overnight.”
As an economist, we also know that airfreight tends to be very predictive of certain products (such as semiconductors), but fairly lagging as an overall economic indicator. Why? Because as an economy comes out of a slowdown, most firms are still focused on cost control, and neither the buyer or the seller wants to pay the higher shipping expense. As an economic cycle becomes more mature, firms will pay a premium to drive incremental sales. “What if I could get it to you tomorrow?” becomes a sale closing question. It doesn’t predict that the cycle is ending, since this behavior can endure for many months or even years, especially in high value/low density goods, but it will continue right up to the very end of an economic cycle. Put another way, it has been our observation that inflections in airfreight volume tend to happen after the inflections in truck freight and rail freight, both on the way up and on the way down.
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