Airfreight prices out of Asia are starting to rise, as capacity on all-cargo planes has become harder to find in the past two weeks, signaling the possible start of a late peak shipping season, according to logistics executives and analysts who keep close tabs on industry developments.
The market for spot rates out of China to North America and Europe is up by 15 percent to 25 percent since early this month, Ed Feitzinger, executive vice president of global operations for UTi, told American Shipper
UTi is a global freight management and contract logistics provider based in Long Beach, Calif., that moves cargo via ocean and air modes on behalf of customers. The company defines peak activity as an increase in incremental capacity costs of 15 percent that last longer than 10 days.
“Carriers are making a push to get peak rates to stick,” he said a few days ago during a private dinner for analysts and members of the press held in conjunction with the Council of Supply Chain Management Professionals’ annual conference in Denver.
The traditional peak shipping season that begins for ocean carriage in August and a bit later for air transport ahead of the holiday sales period has been largely absent since the recession because of weak economic conditions and better planning by businesses to flatten out shipment flows over several months and avoid order surges. But demand for airlift capacity could be greater in the fourth quarter because the late Thanksgiving holiday in the United States means retailers will have six fewer shopping days before Christmas and will need a faster transport option for replenishment of popular, high-value goods.
Apple this week announced the release of its latest iPad on Nov. 1 and the availability of new Mac computers in December. It is also several weeks into the delivery of its new iPhone 5. Meanwhile, Microsoft’s Surface 2 tablet hit the stores on Tuesday, and Sony will begin selling PlayStation 4 video game consoles on Nov. 15.
Electronics makers typically charter freighters well in advance of their releases to ensure distribution centers and stores are well stocked to meet the public’s appetite for the latest gadgets, which can make it difficult for other shippers to book space with air carriers.
“The market believes Microsoft will consume approximately 200 charters between now and Christmas for their new product launch,” Feitzinger said in a follow-up email.
“Some freighter operators are dropping their scheduled service to shift to moving charters. Other high-tech companies appear to be shifting some of their ocean movements to air,” he added.
Spot rates for ad hoc shipments on the Shanghai-to-Europe trade lane are now 40-percent higher than they were in August 2012, 25-percent higher than a month ago and 15-percent higher in the past week.
Hong Kong-to-Europe and Hong Kong-to-United States spot rates are up about 15 percent and 25 percent, respectively, in the last week. And rates from Shanghai to major U.S. airports have risen by 15 percent to 25 percent in the past nine days, depending on the airport and carrier, according to information provided by UTi.
Airfreight represented 31 percent of the company’s total gross revenue of $1.4 billion last year.
“If consumer confidence rises on the good unemployment numbers and no more [government] shutdown, and that drives more Christmas buying, we could see this [peak] last well into December,” Feitzinger said.
The Commerce Department announced this week that the unemployment rate for September dipped to 7.2 percent, the lowest result since November 2008. But job creation was flat and far below economists’ expectations, suggesting that many people have retired or have stopped looking for work out of frustration.
“The last time we saw this much charter activity was when Microsoft launched the Xbox 360 in 2005, which caused a very tight peak,” Feitzinger said. Other market participants and watchers similarly indicated a swift change in the supply-demand dynamic was underway.
“With seasonal volume increase, highly publicized new product releases, and some ocean to air conversions, Asia’s export market has been very dynamic recently,” Expeditors International said in a bulletin to customers. “These factors are now creating backlogs throughout key origin and transshipment gateways such as Taipei, Hong Kong, Shanghai, Singapore and South Korea.”
The Seattle-based forwarder attributed the heightened demand to improvements in the U.S. and European economies, which have led to increased manufacturing activity in China for exports. Expeditors, which moved 729,527 metric tons of air cargo last year and is ranked by Armstrong & Associates as the eighth largest global international forwarder based on a revenue and volume formula, recommended that shippers make advanced bookings when possible because of airlines’ stronger load factors from Asia to Europe and the Americas.
At a breakfast briefing for reporters on Monday, Cynthia Cochovity, executive vice president of business development for the Americas region at CEVA Logistics, only said there were pockets of volume increases out of Asia that had put mild pressure on rates during September, but when contacted Thursday she acknowledged that capacity had tightened further as the week progressed.
“Demand to North America is now quickly recovering due to several major project launches combined with inventory restocking prior to the retail season,” she said in an email. “The combination of constricted air capacity and rapid, significant demand is creating an uptick in costs to move cargo on the trans-pacific routes. We have been monitoring the situation very closely and managing through this volatility to bring the highest degree of capacity reliability and service excellence to our customers. It is, however, expected that there will be a peak-season surcharge implemented, especially in cases where un-forecasted volumes come into play.”
Earlier in the week, Cochovity said there were isolated cases in which CEVA Logistics, a top 10 global logistics provider by revenue, has had to implement a peak-season surcharge because of rate hikes, “but nothing of the sort we’ve been used to. It’s very targeted, and it takes some analysis to work through.”
The global 3PL has been able to get its customers’ cargo on flights through its existing block-space agreements, she said at the time. A block-space agreement is essentially a continuous reservation for space on a specific route for consolidators with regular volume.
Shippers affected by shrinking capacity due to recent product releases primarily are ones that didn’t accurately predict how much product they would have to order from suppliers in China.
“So if their forecasting was way out of whack in terms of how we procured the capacity, we worked through those things,” Cochovity said. “But there’s nothing at this point to push out an across-the-board, peak-season surcharge.”
CEVA served as an intermediary for the movement of 550,000 metric tons of airfreight in 2012, according to data compiled by Armstrong & Associates. The company schedules one charter plane on behalf of a customer somewhere in the world every day, CEO Marvin Schlanger said.
A rise in trade between Asia and North America helped raise air cargo rates on east-west trade trade lanes in September for the second straight month, according to Drewry’s latest East-West Air Freight Price Index
. The average rate for a kilogram of cargo ended the month at $3.24, 10 cents more than in August. The price was $3.06 in June and July.
Some experts gathered in Denver this week for the CSCMP conference said cargo volumes remain relatively flat, with minor exceptions. But that was before reports from freight forwarders on the front lines of international trade began trickling in.
“Peak season” is a relative term in 2013, but if there was one, it occurred in August, with freight volumes remaining stable in September and into October, Ben Hartford,
a senior research analyst at investment bank Robert W. Baird & Co. in Milwaukee, opined during a panel session at the CSCMP event.
Any potential peak is likely to be tied to specific product launches or commodity types as opposed to wider economic forces, he said.
“Capacity utilization is rising slightly, but there are no shortages,” he said.
There is a perception among some transportation intermediaries that carriers such as Evergreen Airlines have temporarily parked some aircraft to create a feeling of scarcity and improve spot-market rates, but an Evergreen official said his company simply phased out older aircraft that are expensive to operate, something airlines have been doing since 2009.
Evergreen retired the last of its fuel-guzzling Boeing 747-200 freighters in the early summer, Calvin Harmon, vice president of sales and marketing for the Americas, said in a phone interview. During the past 16 months, it deactivated 10 of the older freighters because of the soft market, and their high fuel and maintenance expenses. Its fleet currently consists of three 747-400s. The cutbacks leave less available capacity when businesses decide to ship more products.
Evergreen Airlines, which doesn’t participate in the spot market, has only seen signs of a peak in the sense that customers took longer than usual to assess their options before signing an annual contract, Harmon said.
The financial benefit to airlines of a peak, however small, is muted by Chinese freighter operators that increased the number of frequencies from Shanghai to Los Angeles and Chicago during the summer and lowered rates to a point that they don’t cover the round-trip fuel costs in an effort to gain market share even though there is not enough demand to justify the extra service, he complained. The weak global economy has also prompted carriers such as Cargolux, which previously focused on the Europe-Asia market, to operate around-the-world services in an effort to pick up business on the trans-pacific trade lane to the United States, he added.
Evergreen is making revenue projections for 2014 to see if it should augment its fleet by acquiring some more modern aircraft, which can be obtained at attractive terms given market conditions, Harmon said. If the company, which runs scheduled freighter service as well as charters, wins a big contract, it could obtain an aircraft and get it approved under the company's operating certificate within 30 days, he claimed.