Is air cargo really a bargain right now?

Date: Tuesday, March 16, 2021
Source: Freightwaves

Retailers are stuck between playing the ocean waiting game and ponying up for air cargo. The number of container ships in San Pedro Bay has hovered around 30 since the start of the year and levels remain stubbornly high. As of Wednesday, there were 31 at anchor. The CMA CGM Marco Polo — with a capacity of 16,022 twenty-foot equivalent units (TEUs) — has been stuck at anchor the longest, since Feb. 27. The median time a container ship spent anchored outside the port last week was just over 7.5 days before it could head to berth.

The Ports of Los Angeles and Long Beach have received the lion’s share of media attention given their scale and importance to the U.S. consumer, but it is a common story playing out around the country (and the world).

Up the coast of California, ship-positioning data from MarineTraffic showed 13 ships at anchor off Oakland as of Wednesday. Even further to the north, MarineTraffic data showed 11 ships at anchor off Vancouver in British Columbia, as Asian exports to the U.S. are flowing heavily through Canada as well. Over on the East Coast, Savannah, Georgia, had 14 container ships at its anchorages as of Wednesday. (Fortunately, the situation on the East Coast is abating. Read Greg Miller’s analysis here.)

I called Peloton (NASDAQ: PTON) “The Poster Child for Containergeddon” in mid-January, but it’s far from alone in its struggles to get product stateside. One of its biggest rivals, Nautilus (NYSE: NLS) Inc., which makes fitness machines like Bowflex, said on its fourth-quarter earnings call that logistics disruptions delayed the launch of some of its new connected treadmills.

Shoemaker Wolverine World Wide (NYSE: WWW) Inc. said $20 million in sales would shift from the first to the second quarter because of the backlogs. Steven Madden Ltd. (NASDAQ: SHOO) said supply chain disruptions cut the footwear company’s first-quarter sales expectation by $30 million.

Crocs Inc. (NASDAQ: CROX) , which has had a remarkable turnaround story worth the gaze of documentarians, is struggling to meet elevated consumer demand. “I don’t think we’re meeting everybody’s expectations today — and frankly, we’re unlikely to. I doubt if anybody else is either importing products from Asia,” Crocs Inc. CEO Andrew Rees said on the company’s fourth-quarter earnings call. “Getting it through Long Beach and other ports, getting shipped to customers is really challenging right now. And that’s not an issue with production capacity; that’s just logistics.”

The pileup at ports around the country has added costs to maritime shipping that make airfreight, which is normally significantly more costly, look like a relative bargain, especially when factoring in the time saved.

Prior to the pandemic, shipping by ocean from China to the West Coast took 21 to 28 days, but bottlenecks at every level — from containers to ships to drayage capacity to warehouse space and longshoremen — have pushed that transit time to 60 to 75 days.

Although air cargo capacity remains ~20% below pre-pandemic levels, the industry has added significant space since the depths of the COVID crisis, according to IATA’s monthly market report. While demand has remained strong with North America leading all major air markets with 8.5% growth in international demand in January, prices on air shipping have dropped dramatically from holiday highs. Prices remain elevated on a historical basis, but are enticing to retailers when factoring in transit time savings.

The price of a 250-kilogram air shipment traveling from China to the U.S. has dropped from about 60% of the cost of a full container to around 36%, Capt. Adil Ashiq, executive of MarineTraffic’s U.S. western region, said.

Given the delays at nearly every U.S. port, the time savings when shipping by air are disproportionately enormous. Seko Logistics Chief Growth Officer Brian Bourke told CNBC, “If you want to ship a hot tub via ocean from Shanghai to New York, that will cost you around $1,000 for the transportation for a lighter hot tub, but it will take a minimum of 35 to 45 days,” and that doesn’t include the 14 days needed for advance booking. Bourke said the hot tub costs around $2,000 to $3,000 to ship by air, depending on the weight.

“But it will only take you three to four days to get your hot tub,” Bourke said. “So, paying two to three times will save you four to seven weeks right now. Ultimately the math makes sense for certain shippers right now.”

What should retailers do? Retailers are stuck between playing the waiting game and risking delays that wreck quarterly results or ponying up and taking to the skies. The goods will arrive quickly, but at what cost? We need not look any further than Peloton to see the impact of trading ocean containers for air cargo slots.

As I’ve said about Peloton, air cargo is not a long-term solution. In fact, it’s not a long-term solution for the vast majority of retailers that have shifted transportation to the air. And it’s not a solution at all for most retailers.

But for the pandemic favorites — items in which benefits of ownership decline substantially in a post-COVID world — like home exercise equipment, patio furniture and recreational equipment, retailers are choosing revenue (and taking market share) over profit.

“Barbecue equipment and associated goods such as lawn/patio furniture, inflatable pools, filter equipment and everything that could be used to improve the shelter-at-home experience in lieu of family vacations are now moving by air,” Shawn Richard, Seko’s vice president of global airfreight, told CNBC.

The air cargo unit economics simply don’t make sense for most retailers. Prior to the pandemic-induced sh*tshow at U.S. ports, air cargo was primarily utilized for high-value, low-volume goods like pharmaceuticals and high-end electronics like enterprise servers and semiconductors. But now, Richard says Seko is regularly flying 65-inch televisions from China to the U.S. So it remains high-value product but the typical sizes of items shipped by air has expanded greatly to include large stuff like pingpong tables and treadmills as Americans continue to seek at-home entertainment.

And retailers know their window of opportunity to lock in customers is quickly closing. Nearly 3 million Americans received vaccinations last Saturday and now 1-in-4 adult Americans have received at least one shot. It’s remarkable news for the country, but for exercise equipment companies, it signals the beginning of the end to the stellar demand for their products.

When will the congestion let up? Retailers expect the problems to spill into the next quarter, though some say they think the worst is behind them.

Nautilus CFO Aina Konold said the company no longer needs to send purchase orders two or three quarters into the future. “We have gone back to issuing them closer to normal lead times of several weeks,” she told Bloomberg.

Lowe’s (NYSE: LOW) CEO Marvin Ellison said in an interview that there are still some challenges, with appliances in particular, but “we’ll have corrected it” over the next couple of months.

From the ocean shipping community, there are signs that the container-shipping capacity crunch may be easing, at least temporarily.

The Container Availability Index produced by Container xChange shows a marked improvement in container-equipment availability in Shanghai. An industry source confirmed to American Shipper that box availability has improved.

Meanwhile, ocean spot rates have stopped climbing, and in some cases, pulled back. According to the Freightos Baltic Daily Index, the Asia-West Coast spot rate (SONAR: FBXD.CNAW) was $4,709 per forty-foot equivalent unit (FEU) on Friday. That’s still astronomically high, but down 4% from $4,922 per FEU in late February.

There are also reports that carriers are not hitting shippers with as many premium charges above the base rate. During a webinar in late January, Nerijus Poskus, a vice president at Flexport, predicted that the first visible improvement would be “you won’t need to pay thousands of dollars in premiums,” after which the base spot rate would start to pull back.

For the first time in months, Flexport reported last week that “space and equipment is opening up at FAK [base rate] levels” on sailings from China to Los Angeles/Long Beach.

Additionally, congestion is expected to ease as more longshore workers get vaccinated against the coronavirus. Port of Los Angeles Executive Director Gene Seroka said the port is lobbying “all levels of government” for more vaccines to help ease congestion. Just 5% of longshore workers reportedly have received vaccinations so far.

But these positive developments do not necessarily equate to falling cargo demand and lower port congestion.

President Biden signed the newest stimulus bill this week and $1,400 payments will be hitting millions of Americans’ bank accounts as early as next week. Consumer demand continues to impress and the stimmy checks will only add fuel.

So while there may be some capacity relief ahead, there is no abatement in demand visible anytime soon. For most retailers, playing the waiting game is the only move. It’s an unfortunate reality of the current situation. But for others, like Peloton, Nautilus and retailers that know their goods won’t have the same ownership benefits post-COVID, air cargo is the only answer to meeting customer expectations. So expect to see even more executives mentioning freight and logistics costs in their Q1 earnings calls.


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