You won't hear this often in the transportation business, so pay attention: Airfreight rates were of little importance in 2005. You read that right. But while basic rates showed little change, the surcharges that cargo carriers imposed to keep up with surging fuel prices pushed up the cost of airfreight.
Between May 2004 and October 2005, fuel surcharges soared from 20 cents per kilo for international shipments to 60 cents per kilo.
On many trans-Atlantic routes, surcharges were as high as the base rate for freight, which meant that shippers were asked to pay twice the normal price. Elsewhere, surcharges practically were the transportation price. Forwarders say that on some routes to Asia, several European airlines were levying just the surcharges for fuel and security, plus a nominal fee of 1 euro cent per kilo for administrative purposes.
So what does it mean for 2006? While surcharges have retreated from their peak in late October, hitting the 45 cents-per-kilo mark in late November, some shippers and forwarders wonder if the airlines may respond by trying to up their base rates. "We're seeing the possibility that as fuel surcharges come down - and they will remain volatile - airlines may now go back to raising their base rates. I have not seen that yet, but I do see that as a possibility," said Bob Imbriani, vice president of international development at Winnsboro, Texas-based logistics provider Team Worldwide.
As the pricing from Europe to Asia reflects, carriers have largely held the surcharges but have shown flexibility on base rates, a response to pressure from forwarders and shippers who found their costs had risen drastically. "If the fuel surcharges were taken out, the airlines would have seen yield erosion across-the-board," said Ole Ringheim, senior vice president of global airfreight at Exel Global Logistics.
As a result, forwarders now think that the carriers may be inclined to raise the rates as the surcharges fall. "I suspect base rates will firm if the economy remains stable," said Chris Coppersmith, president and chief executive of Compton, Calif.-based Target Logistics Services.
Shawn McWhorter, vice president of network management at Northwest Airlines Cargo, said the picture would vary by area. Because demand out of Asia exceeded capacity in the past year, airlines saw no need to lower their rates, while overcapacity in the opposite direction forced them to be more lenient, he said.
Even without a carrier need to restore previous pricing levels, rates out of Asia are expected to maintain their upward momentum in 2006. "People need to be prepared for rates to continue to go up in Asia - not dramatically, but some," Ringheim said.
McWhorter said Northwest has been able to secure increases of 3 to 5 percent out of Asia for 2006 contract rates. In some markets, the increases are as high as 8 percent, he said.
The rising cost for airborne imports from Asia is the result of tight capacity that is expected to characterize the market beyond the coming year. Production slots for large, new freighters are fully booked, as are conversion slots to reconfigure passenger aircraft into cargo planes. Those orders in the pipeline are not going to hit the market in significant numbers before 2007, said Edward Hernandez, vice president of sales and marketing of freighter airline Polar Air Cargo.
Much of the new capacity that does become available over the coming 12 months will be deployed on trans-Pacific routes, with most going to China. While this is not expected to match the growth in demand, it will likely mean further overcapacity in the opposite direction.
In addition, U.S. passenger airlines are as eager as their cargo counterparts in flocking to China. "This may just add to the overcapacity to Asia," Imbriani said.
He pointed to another major trend among U.S. passenger airlines: the shift of widebody aircraft from domestic to international routes. "If that continues, it puts more lift in certain trade lanes and may lead to reduced rates, or at least keep them stable," Imbriani said.
While the belly-hold capacity of new international passenger flights is unlikely to have a dramatic impact on rate development, air-cargo pricing could again be determined chiefly by developments outside the industry. Having been dominated by rising oil prices for the past two years, the market could be heavily affected next year by a change in the U.S. involvement in the Middle East, which has generated a plethora of contract charter flying for U.S. cargo airlines. Hernandez regards this as the wild card that could have serious repercussions. "Carriers like Evergreen have a significant amount of capacity tied up in military flying. If that were to end, they'd have to place those aircraft elsewhere," he said. "Then you'd see a flood of capacity in markets that have so far been less served."
The obvious choices for those freighters would be markets with strong export volumes to North America, chiefly Asia-Pacific countries and growing economies such as India. Carriers would be less likely to deploy freighters in Latin America, a market that has seen capacity reductions this year resulting from weaker northbound traffic.
Hernandez said north- and southbound flows are now close to equilibrium, which leads him to anticipate a fairly stable rate picture on a round-trip basis. Southbound, he said he expects to see modest increases, with a corresponding softening in the opposite direction.
Some commodities from Latin America, such as Chilean salmon, cannot absorb further upward momentum in transportation costs. Importers in Asia would simply switch to salmon from other areas, such as the Pacific Northwest or Alaska, Hernandez said.
His observation matches reports by forwarders that Chilean salmon farmers have increasingly put frozen fish on ocean vessels to Asia and Europe. This makes it difficult for airlines to raise northbound rates and suggests they will look to U.S. exporters to Latin America to pay more for their traffic.