Earlier this year, Diio data suggested that airline passenger travel would recover to 20% below 2019 levels this summer. But schedules have only recovered to a 50% deficit.  And, two months after greenlighting vaccinated Americans for travel, the European Union is once again recommending that its member states restrict non-essential travel from the U.S. So, here we are, heading back to square one in terms of transatlantic capacity. Anyone that took the “under” on international travel - and thus international belly capacity - returning to normal sooner than 2023 is probably re-evaluating that wager, in our view. 

Although flights are resuming and operations are normalising, we believe the Chinese authorities have been signaling that they are prioritising the public health response and containment of the virus over the already-constrained movement of goods.

Things are not much better on Asia-based routes. Earlier in August, China moved aggressively to contain a COVID infection at Shanghai Pudong Airport (PVG), grinding cargo operations to a standstill. Although flights are resuming and operations are normalising, we believe the Chinese authorities have been signaling that they are prioritising the public health response and containment of the virus over the already-constrained movement of goods. From a policy standpoint, this may be the right decision, but that is probably of little solace to those struggling to restore supply chain normalcy.

In terms of the data, BAI Asia outbound to Europe routes were up 30% and 37% year-over-year last week from Shanghai and Hong Kong, respectively. And we have not even seen the incremental spike yet in sequential rates from the events discussed above. Our channel checks suggest that it is coming very soon. Frankfurt to North America has been tracking roughly in line with 2020’s elevated levels, but here, too, we expect an uptick. 

While we do not expect 4Q21 volumes to be as much of a surprise as 4Q20 volumes, we do expect core demand levels to be comparable or even higher, year-over-year. And thus, shippers should anticipate rates to be comparable or even higher, year-over-year.

The calendar is working against logisticians as well. The start of October brings China’s National Day Golden Week, which has shippers scrambling to move inventory in an already constricted capacity market. Meanwhile, the holiday peak looms in the distance.  While we do not expect 4Q21 volumes to be as much of a surprise as 4Q20 volumes, we do expect core demand levels to be comparable or even higher, year-over-year. And thus, shippers should anticipate rates to be comparable or even higher, year-over-year.

But more than rates, recent events bring uncertainty, in our view. The EU recommendation discussed above will be implemented differently by different members, creating imbalances in capacity that follow passenger demand, and not freight needs. And different policy restrictions, different terminal shutdowns, and sporadic infections are likely to make planning even more challenging. Last month, we spoke about “pfreighters”, and our belief that these were insufficient to Band-Aid capacity.  Indeed, as we see lumpy recovery of passenger travel demand, we expect this incremental supply to be fleeting.

Interestingly, non-conventional equipment conversions have spread to the ocean market as well.  We have observed carriers there converting bulk ships to haul containerized freight, welding stays to decks, and paying as much as 10x normal rates for voyage charters. These measures, in our view, speak to the desperation of shippers, and the sheer magnitude of rate increases on the water, which we believe also has implications for airfreight.  As much as airfreight has increased since last year, ocean rates have gone up by multiples, closing the gap on pricing, making air a viable alternative, and putting further pressure on capacity, in our view.

From a market-dynamics perspective, these are truly unprecedented times, and we see little on the horizon that could restore balance to the market. In 2020, we had surmised that a vaccine would be the answer and restore supply. But that eventuality seems unlikely at this point.  Another possibility is a substantial deterioration in demand, but that also seems unlikely based on current spending patterns and the state of business inventories, which remain at historic lows. 

 

About Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research, Stifel

Bruce Chan joined Stifel in 2010 and is based out of the Miami office.

Bruce Chan can be reached at chanb@stifel.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2021 by J. Bruce Chan.