Date: Friday, November 5, 2021
Increased use of airfreight by shippers trying to avoid clogged ports is adding pressure to overtaxed air capacity and sharply pushing up rates, especially out of Asia, but new data showing demand plateaued in October reinforces evidence that the traditional busy shipping season started earlier than normal.
In a panic over slower factory production due to power rationing in China and shortages of semiconductors, as well as ocean shipping backlogs that have quadrupled delivery times, more retailers and manufacturers have rushed to make emergency air shipments since July. Flights with exports from Asia were full in October, hiking the price of shipping to Europe by 20% from September and rates to North America into double-digit territory.
A systemic lack of capacity from reduced passenger flights due to the pandemic has made space difficult to find, freight experts say.
The International Air Transport Association on Wednesday said the passenger airline sector saw a 2.7-point month-over-month improvement in traffic during September, primarily due to lifting of travel curbs in China, with total demand 53.4% below the 2019 benchmark. But international passenger demand, which dictates how many widebody jets with lots of cargo capacity are flying on the key trade lanes, actually worsened by half a point to 69.2% of pre-pandemic levels.
COVID restrictions at certain airports have reduced labor available to load and unload planes, further constraining air capacity.
On Monday, Hong Kong Air Cargo Terminals Ltd. said it returned to full staffing and normal operations after authorities forced many workers into quarantine for contact with a single ramp worker who tested positive Oct. 7. The manpower shortage, plus two typhoons, affected about 20% of flights. HACTL was able to minimize the impact through increased overtime, rescheduling of some flights, redeployment of other ramp staff and subcontracting of some functions to other operators.
The China International Import Expo held in Shanghai from this Friday through next Wednesday has caused another pinch point, with some airlines canceling scheduled freighter and passenger freighter service during the event. Spot rates have increased sharply in recent days, and shippers can expect transit delays of three to five days due to the limited capacity, freight management company Flexport said in a market update to customers.
The benchmark rate from China to the U.S. West Coast reached $12.71 per kilogram at the end of October, about four times the normal level, according to the Freightos Air Index. The index is powered by automated transactions on the company’s freight booking platform. Many freight forwarders say the true spot rate, which includes premiums to guarantee a booking, is closer to $18 to $20 per kilo.
Supply, demand dynamics
Clive Data Services, which tracks the airfreight market by collecting data on widebody passenger and freighter flights from many airlines, said Wednesday that physical volume moved globally grew 3% in October from 2019 and was up 14% from a year ago, but the measure of how full planes are dipped 3 points from October 2020.
The average reading of 68% is relatively high. Before the pandemic, peak season load factors hovered around 67%, but because they reached 68% in late September some analysts expected increased capacity utilization per flight. Still, the figure reflects the fact that the market is efficiently matching supply and demand, according to Clive Data.
Although the data suggests the peak season surge in demand has not been as dramatic as expected so far, freight forwarders paint a picture of extreme scarcity on the major trade routes.
Clive Data said load factors out of the Asia-Pacific region to North America and Europe were about 90%, with certain airports like Shanghai well above that.
Overall, air cargo rates were up 10% month-over-month, Clive said in its report. Compared to peak season 2019, prices are 155% higher and they are 37% above where they were a year ago. Some midtier markets, such as Vietnam and Malaysia, had higher spot rates to Europe — between $9 and $10 per kilo — than Hong Kong does, demonstrating that like politics, all cargo is local.
Large shippers are heavily leaning on freight forwarders to charter entire aircraft, either for their exclusive use or sharing with other customers, but most aircraft are already committed. Competition for freighters is so high that the one-way cost from China to the U.S. Midwest is about $2 million, according to air logistics specialists.
“We have chartered flights for things that you would never think would go by air, such as deck screws and nails,” Joe Saggio, chief operating officer of Steam Logistics, said on the Oct. 20 edition of the FreightWaves podcast “Rising Tides.”
Westbound and eastbound rates out of Hong Kong and Guanzghou have surged on a per-kilo basis this week, with some airlines in Guangzhou rejecting large shipments or providing longer transit times of up to three weeks, Flexport reported.
The Taiwan market continues to be very tight and rates are at a record high, the San Francisco-based logistics provider said. Expect at least seven days of dwell time at origin for standard service and at least three days of dwell time for express service. Airlines announced rate increases of 15% to 25% starting Nov. 3.
Available cargo capacity in October was 13% below pre-pandemic levels, according to Clive Data, although that was notably better than a year ago when international passenger flights were only a trickle.
Conditions for strong air cargo usage are expected to remain favorable.
The September global Purchasing Managers’ Index (PMI) for supplier delivery times was at 36, reflecting ongoing sea freight backlogs that analysts say are likely to continue through mid-2022, or longer. The metric reached an all-time low in the U.S. in October of 15.45. Values below 50 indicate it takes more time for businesses to receive inputs from suppliers and are favorable for air cargo.
Manufacturing exports dipped from earlier highs but continue to grow. And retail inventories remain extremely low leading up to big sales events such as China’s Single’s Day, Black Friday and Cyber Monday this month.
The decision to convert ocean freight to air is also easier for shippers because air transport is much more cost competitive than it has ever been. Pre-pandemic, the average price to move air cargo was about 13 to 15 times higher than ocean, but now it is only three to five times more expensive, according to IATA and industry experts.
International air cargo demand grew 9.4% in September compared to 2019, up 1.9 points from August, with a 12% deficit in capacity, according to IATA. Seasonally adjusted, volumes only ticked up 0.2% from the prior month. International capacity was significantly constrained in the Asia-Pacific region, down 18.2%. North America continues to be the hottest market, with a 19.3% increase in September cargo volume.
The trade association’s report is a lagging indicator because results are based on monthly data submitted by airlines and differs from other research because it is based on cargo ton kilometers, a metric that multiplies weight times distance and double-counts shipments with an intermediate stopover. Overall, cargo volume grew 9.1%, with negative cargo capacity of 8.9%.
IATA’s report showed load factors were 9.1 points ahead of 2019 at 62.6%, helping to double cargo yields and boosting the bottom line for airlines. Air Canada, for example, this week reported record third-quarter cargo revenue of $291 million.
Belly cargo capacity is expected to gradually increase next year following the new U.S. policy change to reopen travel Nov. 8 to 33 countries, including members of the European Union, for fully vaccinated travelers, along with the lowering of border restrictions in markets such as Australia, Argentina, Thailand and Singapore. Airlines reported bookings rose sharply after the U.S. announcement in mid-October. On Thursday, Delta Air Lines (NYSE: DAL) said that it has experienced a 450% increase in international bookings in the six weeks since the U.S. announcement versus the prior six weeks.
A potential headwind for air cargo is inflation, which tends to lower manufacturing output and the volume of goods shipped. Supply issues, from raw materials to production and freight transportation bottlenecks, are driving up the cost of goods, and companies are passing on higher prices to consumers. The G7 producer price index rose 10.8% year-over-year in August, according to Refinitive Elkon. That’s the largest increase since the series started in 1983. Consumer price inflation for all items was 4.3% in September, the highest increase since 2008.
The inflationary impact is already visible in the PMI data, which is still growing sequentially each month, but at a slower pace. In China, both new export orders and manufacturing output were below 50 in August and September.