Airfreight rates expected to shoot up by September

Eric Kulisch, Air Cargo Editor Sunday, July 26, 2020

Stability in the airfreight market may be short-lived, with outbound China rates rising this month and big high-tech product launches poised to soak up cargo aircraft in several weeks. That could pinch some shippers that currently view air transport as a refuge from unreliable and expensive ocean shipping, freight transportation specialists say.

The price of shipping by air has dropped about 70% since the spring, when capacity shortages were rampant because of surging medical-supply orders, but have been slowly moving back up, according to market watchers and freight transportation companies.

Rates from China to Europe and the U.S. gained 6.2% and 4.9%, respectively, in the prior week, according to the The Airfreight Index Co.’s latest tracking data. Rates also increased out of Hong Kong, with rates to the U.S. up 11% to $4.90 per kilogram.

As previously reported, there are several reasons for the upturn in shipping rates. Capacity has tightened in Hong Kong, with North American carriers suspending most activity there because of differences over COVID screenings for aircraft crews. China capacity is also down because some airlines have pulled down freighters for scheduled maintenance as well as some passenger freighters that aren’t affordable to operate anymore.

The reduction in transport supply comes while demand stays solid, led by a resurgence in shipments of typical commodities as global economic activity increases, a tight ocean market, and continued need for personal protective equipment.

One factor that could temporarily dent the upward price momentum from China is extensive flooding around Wuhan that has caused many manufacturers of hospital gear and other supplies to temporarily suspend operations. That could mean fewer exports in the next couple of weeks. 

Holiday orders are contributing to higher-than-expected ocean demand the past month, which combined with supply discipline exhibited by ocean carriers has led to a mini-peak season with red-hot spot rates that is blending into the peak shipping season that typically starts now.

(Source: FreightWaves SONAR)

Brian Bourke, chief growth officer at SEKO Logistics, said reservation backlogs, more than ocean rates, are making businesses consider airfreight again. “You have to book like two weeks in advance, so the lead times are getting longer and the transit times are getting longer. That probably is causing some people, with the right commodity, to convert to airfreight because you can’t wait that long,” he said.

Logistics service providers say they expect rates to increase slowly through August and then accelerate in September as Sony (LSE: SMSN), Apple (NASDAQ: AAPL) and Samsung (NYSE: SNE) book a substantial chunk of the available freighter capacity to move new product releases.

In Europe, the limited number of passenger flights remains a constraint for goods movement. Most European countries reopened borders to travel this month, but in some cases they are reimposing landing bans on aircraft from certain countries where COVID is not contained. Austrian Airlines, for example, said it recently was forced to cancel flights between Vienna and several cities, including Cairo, London and Stockholm.

Still, there is much less pressure on supply in Europe than two months ago, which has helped stabilize rates for the moment.

The market uncertainty makes it difficult for companies to hedge their exposure to rate volatility by purchasing airfreight futures contracts, with forward pricing bouncing up and down, according to London-based Freight Investor Services.

Freight futures set quantity, time and location of a shipment but leave the price to be discovered through an auction process. The contracts are settled in cash and don’t involve the physical exchange of commodities.