Air cargo shippers brace for continued high-flying rates

Air cargo shippers brace for continued high-flying rates

Booking early and avoiding urgent shipments is the best way for shippers to avoid delays and sky-high air freight rates this year. Photo credit: Air France-KLM.

Finding air freight space is likely to be an area of continuing frustration for shippers in 2018, with strong volume placing available capacity under pressure, creating lengthy delays and pushing air cargo rates up to unprecedented levels.

Shippers had a taste of what to expect in the current high demand environment in the December peak shipping period when delays of 15 to 20 days were reported out of China airports as fast growing e-commerce combined with general cargo to generate high levels of traffic. Air freight rates on the busy China-North America routes shot up to $12 per kilogram.

With Chinese New Year approaching, air freight capacity is starting to tighten up, and leaving shipments to the last minute could be a costly mistake. “The longer the lead time you can allow between pick up and delivery to customers, the more able you will be to find available space and contain your costs,” said Bogen Chi, C.H. Robinson director for global air freight.

Manel Galindo, CEO of Freightos WebCargo, said most China-US pricing was currently in the $6 to $7 per kilogram band, but with the high demand for air cargo continuing to place available capacity under pressure, this would increase before Lunar New Year, which begins on Feb. 16.

“At this point, I’d predict prices to jump to $10 to $12/kilogram as we get closer to Chinese New Year, with urgent shipments facing prices in the $10 to $17 bracket,” Galindo said.

Chi said capacity this year would become harder to find as airlines try to engage with large shippers in a variety of industries and negotiate directly for their air freight needs. As an example, he said a large retailer in 2017 bought the capacity of a whole aircraft for a critical product launch, paying well above market rates, and other airlines could follow that approach and work directly with larger shippers to gain a healthier return on their assets.

“There is only so much air cargo space available. If large shippers absorb a larger slice of the available capacity, small- and medium-sized shippers will probably find it a lot more difficult to secure air space for their freight,” he warned.

Smaller freight forwarders may still be able to provide quotes for space, but Chi said the largest forwarders with many air carrier relationships would most likely be able to provide available space when it was needed.

When volume rises and capacity dries up, forwarders turn to chartered capacity, and digital forwarder Flexport will begin regular 747F charter flights from Hong Kong to the US West Coast in the first quarter to ensure capacity on one of the most space-constrained routes.

Sanne Manders, Flexport COO, said space constraints have made the spot market much more profitable than block space, and he expected airlines to hold the line on capacity growth and block space allocation, especially on the trans-Pacific, in order to maintain yields into 2018.

The International Air Transport Association reports that the freight load factor was maintaining levels last seen in late-2014 and the ongoing pick-up in global trade was driving up yields and supporting growing airline profitability.

The 2017 air freight figures for Asia’s leading air cargo carrier Cathay Pacific reveal the imbalance between supply and demand that was heavily stacked in the airline’s favor throughout the year. Cargo tonnage rose by 10.9 percent against a 3.6 percent increase in capacity.

“Cargo’s strong momentum continued well into December, with volumes growing ahead of capacity,” said Cathay Pacific director, commercial and cargo, Ronald Lam. “We were able to sustain a high load factor and high yield during the month. As a result, revenue efficiency gains were observed in all route groups.”

Angus Hind, air, sea, and logistics director at London-based Europa Worldwide, said the forwarder’s air freight growth had been “massive” over the last year with strong volume during the peak season.

“We haven’t seen a peak like this for many years. The rates are sky high, especially rates from South China” he told JOC.com. “Rates out of Shanghai are coming down a bit but will rise again up to Chinese New Year.”

Chi had some advice for air cargo shippers this year. “The key to sanity in 2018 will lie in understanding the trends and your options,” he said. “Start by analyzing your current transit times and delivery dates, and evaluating how they impact your ability to execute an effective air freight strategy. Many companies that perform this exercise discover that lengthening transit times alone can often save between 15 percent and 20 percent, before other process changes are even considered.”

One of those transit time-lengthening strategies involves shifting China-Europe cargo from the air to the train, which is what a global white goods manufacturer did to take rising air freight costs out of the supply chain. The shipper had three air freight flights per week between China and Eastern Europe and switched it all to rail.

The supply chain head of a major German retailer said China-Europe rail was a “super alternative” to air freight that would otherwise have to be used to ship 150 to 200 TEU of cargo every year. “It is very helpful to be at [the] final destination in Europe in less than three weeks, so we will continue to use this option, but it will remain an option used for things that are too late,” he said.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.