Airlines bring Asia-to-U.S. cargo capacity in line with dwindling shipper demand.
By Jon Ross
Two years ago, Asia seemed to be the shining star in the air cargo world.
According to the International Air Transport Association, Asian carriers moved a similar amount of cargo in November 2010 than during cargo’s pre-recession peak in 2008. In 2010, Asia-Pacific carriers had a 45 percent share of the market, and though their growth rate fell behind those of Latin American and Middle Eastern carriers, they were still one of the dominant players in the air cargo sector.
In the ensuing years, a never-ending series of high-tech upgrades coming out of factories in China were routed to the United States, giving the Asia-Pacific market some insulation against a decline in worldwide cargo activity.
While new product launches still generate occasional air freight demand out of Asia to the United States, the routings have shifted to countries far from China even as the shipments have slowed. Consumers hurt by the global recession have decreased demand, bringing a decline in Asian manufacturing. This has coincided with a large increase in jet fuel prices, driving goods from the air to the ocean.
Seeing the writing on the wall and not wanting to flood the market with more capacity, carriers have been parking planes or canceling orders. In May 2012, Cathay Pacific parked three Boeing 747-400BC freighters due to a lack of demand and replaced an order for eight Boeing 777-200 freighters with a request for three 747-8Fs. The carrier also removed passenger planes from its fleet, saying it would consider taking more capacity out of commission if demand continues to dwindle. In December, Singapore Airlines Cargo removed one of its 13 freighters from the skies, pledging to keep it grounded until May 2014.
Transpacific air cargo has remained volatile. Activity to the United States from Asia stagnated during the last few months of 2012, getting a small boost in January during preparations for the Chinese New Year, according to Richard Zablocki, CEVA’s vice president of air products in the Americas.
For the most part, the tale of Asia-Pacific air cargo this year will be a continuation of 2012, Zablocki said. Seeing the trade in a different light, IATA has pegged Asia-Pacific growth for the year at more than 5 percent.
Even with carriers parking planes, capacity is still somewhat loose on the transpacific lane, and rates are currently flat on both the import and export side. As 2013 progresses, Asian carriers have hinted that cost is likely to rise. Third-party predictions on the transpacific lane are somewhat mixed, but most freight forwarders see a tightening of capacity and an increase in rates in the near term.
Zablocki said shippers should plan ahead for the entire year, gauging how much capacity they really need on the Asian trade lane and working with their forwarders to lock in rates to protect themselves from sudden swings in air cargo availability. He noted, however, that once the anticipated price increases start, they likely won’t stick for very long.
“The biggest concern that shippers should have is to either see an unexpected increase in demand exceeding available capacity and quickly driving up air rates, or on a slower scale, see a continued sluggish recovery that forces more capacity to be pulled from the air and the possibility for a carrier bankruptcy or complete shutdown,” he explained.
Asian exports to North America will remain flat with a possibility of minor growth, according to Zablocki. Exports out of Shanghai are weak, he said, but shippers in Hong Kong are seeing a little more activity. Imports into Asia, which have been quiet so far this quarter, will grow in most markets.
Matt Castle, director of global air services at C.H. Robinson, said changes in the economy, leading to more conservative retailers and consumers, are causing shippers to see air cargo as “a mode of last resort.” Mode conservation and a slower transportation speed has taken the place of fast shipping from Asia. That doesn’t mean shippers should completely take goods out of the air, he said, and he agreed with Zablocki that planning is paramount.
“To help protect them from too much exposure, shippers should focus on aggregate supply chain spend and not on what is their cost per kilo on air,” Castle said.
At least one carrier is seeing a steady Asia-U.S. trade lane. Kenji Hashimoto, head of American Airlines Cargo, said his cargo team likes the performance of its scheduled Asian routings. The Asia-Pacific and Latin American regions remain strong performers for the Dallas-Fort Worth, Texas-based airline, which will add even more international routings if a pending merger with US Airways is approved.
“Relative to how things have been a few years ago, maybe things aren’t as robust or strong,” he said, “but for us, we still fly those routes on a standalone basis. They are performing great.”
DHL Global Forwarding has experienced a small uptick in China-origin exports since the Chinese New Year, but this hasn’t caused a significant change in the firm’s outlook toward Asia. The traditional thinking is that any air cargo bump associated with the New Year will slowly evaporate, with activity returning to the status quo. Optimistic Asian cargo numbers reported recently have corresponded, for the most part, to the build up of this national holiday and can be seen as temporary gains.
Some carriers, like China Cargo, have already pulled capacity, while others are taking a day-to-day approach to demand, said Gary Schultheis, DHL’s senior vice president of air freight for the Americas.
“It’s going to be very interesting to see how this moves going forward,” he said. “If the Chinese recovery isn’t there, we will see capacity be reduced, and ultimately, we will see pricing increase.”
To some extent, Schultheis saw this coming, or at least made the right moves to insulate DHL against tightened capacity. By creating a strategic capacity management group, DHL has taken the initiative to look for alternative routings to make sure there are no capacity shortfalls.
As labor rates in China increase, Schultheis sees manufacturers looking for other options. Manufacturers in the automotive industry, he said, are looking at moving to Mexico or Argentina to lower their transportation costs.
Manufacturing won’t leave these Asian strongholds altogether, though. Schultheis noted China is still performing at a good pace, but has simply seen muted growth relative to the activity of a few years ago. The Go West phenomenon continues to accelerate as well, with manufacturing moving from Shanghai to interior cities like Chengdu or Zhengzhou. DHL, Schultheis added, was one of the first to move into China’s interior, signing block space agreements with carriers in order to get capacity into the region. Currently, though, capacity is being reduced in these interior cities even as it is evaporating from emerging air cargo destinations outside of China, he said.
DHL’s analysis doesn’t find that air cargo has abandoned cities like Shanghai and Hong Kong completely, but they’re certainly not gaining ground either. Asian carriers will watch this market closely in 2013, removing capacity as their profits start to erode.
“If the Asian carriers aren’t going to make money, because obviously all their money is made on traffic coming into the U.S., they’re going to reduce capacity so the pricing will go up,” he said.
Near-sourcing, as a trend, is just emerging, and manufacturers haven’t yet abandoned China, so the full impact of manufacturing wage increases on the Asia-U.S. trade lane won’t be realized for some time. As the economy improves, however, manufacturers will start looking around the region for cheaper labor.
“The labor rates, despite wage pressure in China, are still low,” said Brandon Fried, executive director of the Airforwarders Association. “I don’t think that’s going to have the real measurable impact that some are forecasting in the near future.”
Fried doesn’t see that the U.S-Asia lane will ever completely fall out of favor; he just thinks a new rival routing will emerge for air cargo. Additional modal pressures will also force carriers to adapt. The opening of the Panama Canal will allow for a robust ocean freight trade between Asia and the U.S. East Coast, reducing the need for air cargo; the relocation of companies to Mexico will likely lead to an increase in trucking.
In its latest multimodal transportation analysis, the Airforwarders Association reported that rates from Asia to the United States stayed flat in January both month-to-month and when compared to the same period in 2012. Demand on the lane, the organization found, is shrinking, and this is leading to a drop in U.S. export rates, though the cost of shipping out of the United States to Asia has shown a year-over-year increase due to the positioning of 2012’s Chinese New Year.
Forwarders who responded to the organization’s monthly survey see rates that can go no lower. One forwarder said rates are hovering around $2.50 per kilogram and that the traditional price jump before the Chinese New Year, which has been between 50 cents and $1 per kilogram, didn’t occur.
“Our air freight rates are flat year over year,” said one forwarder quoted in the survey. “We tested the waters on a small bid ahead of (the Chinese New Year) during January and did not see any upward rate pressure. It is hard to imagine rates going much lower, though. I think we are seeing the bottom. However, I do not think we will see enough demand to move rates upward dramatically.”
Data points to air freight rates that rose out of Asia by 0.3 percent, year over year, in December, while U.S. exports grew by nearly 2 percent. Demand, however, is highly volatile, and surplus capacity has kept rates down. Hong Kong imports grew by 4.6 percent in the same period, and exports from Hong Kong rose by nearly 6 percent. Shipments to Shanghai fell by more than 10 percent.
Whatever happens on the lane, whether manufacturing shifts or capacity gets reduced, in the near term, all that’s certain is that rates are currently stagnated.
“There was no spike in air freight rates. Cathay continues to tell us they are pulling capacity while they are still taking delivery of new, more fuel-efficient planes,” one forwarder said. “There is some playing of the press to try to drive up rates, but I do not see rates moving significantly.”
Within Asia, there is a tradeoff to switching production locations from China to cheaper parts of the region, or shifting trade routings in favor of savings, said Charlie Ogle, trade lane director for Asia-Pacific at Lynden International. When shippers look to other countries as new manufacturing bases, they may be confronted with a poor infrastructure, something that adds increased cost, he said.
From Lynden’s perspective, shippers operating out of Asia in traditional trade lanes should see “very little if any” rate increases in 2013 due to an overabundance of capacity and the continued slow U.S. economy, Ogle said.
“Rates and capacity have been and will continue to be inextricably connected,” he said. “Carriers have not reduced capacity appreciably as they attempt to hold on to market share.”
While imports to the United States aren’t expected to grow any time soon, exporters should experience a healthy 2013. These shippers, Ogle said, will benefit from excess of cargo capacity.
With capacity on both passenger and freighter aircraft easy to come by, all-cargo airlines have been forced to get creative to attract customers. These carriers, for example, have begun offering Asia-to-U.S. routings that continue on to Europe or the Middle East. These routings help carriers fill their planes with goods from farther East for the return trip instead of flying directly back to Asia without full loads.
Overtures from Middle East carriers, who are adding capacity and new routings, are also having a downward impact on rates, Ogle said.
Overall, Ogle sees flat to modest growth for the transpacific trade lane, noting this will only change if a more robust recovery hits the United States. Politics is currently adding to the turbulence in the transpacific lane. The impact of Congress’ sequestration bill is causing worry among air cargo shippers trying to get their goods quickly into the United States via a resource-constrained Customs ranks at the nation’s airports.
“The U.S. economy continues to be the main driver for the trade,” Ogle said. “Until it recovers, demand for air freight will continue to be flat.”
- While capacity on the transpacific lane remains abundant, shippers should analyze their Asian air cargo needs for the entire year, so they don’t get left without lift if capacity suddenly tightens up.
- Working on a long-term agreement will isolate shippers from impending price increases that some forwarders predict will come toward the end of the year.
- Shippers may want to plan for extra transit time as the impact of the sequestration is felt by U.S. Customs and Border Protection at the airports.