Last month, we forecasted the rates would creep higher into the end of the year. The reason was that supply-chain bottlenecks would drive shippers to rely on the fastest (and most expensive) solution for fulfilment with the holiday deadline looming large. Indeed, those trunk routes serving peak season consumer pull continue to grind higher, finding new peaks on several major Asia outbound lanes.

Hong Kong to North America (BAI32) and Shanghai Pudong to North America (BAI82) increased 57% and 71% year-over-year, respectively, and finding their highest absolute levels in the four year history of the index—including the 2Q20 PPE spike. For anyone keeping score, that’s 2.5x and 3x the average monthly pre-pandemic rate for each respective lane. Hong Kong to Europe (BAI31) behaved similarly, rising 47% y/y to an all-time high of $8.43 per kilo this week—again, nearly 2.5x pre-pandemic levels, on average. Shanghai to Europe (BAI81) also grew substantially at 36% versus November 2020, with 9% sequential growth from last month, but was shy of the 2Q20 peak.  

With one month left in the year, it is difficult to say exactly which way rates will trend, but we think it’s safe to expect that absolute rates will remain high.  

we think it’s safe to expect that absolute rates will remain high.  Normal seasonal patterns tend to dictate a softening into the very end of the year as the holiday rush cools. Our base case assumes that trend holds true this year. Supporting that thesis, preliminary data suggests Cyber Monday sales declined for the first time in history, albeit very modestly. In our view, there are two likely explanations: 1) we are seeing a true softening in demand this peak season against what was an exceptionally strong 2020 peak, or 2) many consumers (like businesses) are taking notice of supply chain backlogs, and ordering earlier to mitigate the risk that goods don’t arrive on time.

That said, capacity seems to be getting tighter, rather than looser.  Labour remains a major constraint, and while we’ve all read about the congestion in the ports, we understand that similar congestion is happening on airport cargo ramps as well. Which brings us to the elephant in the room, as far as air cargo capacity is concerned: COVID.  The new omicron variant sent the stock market into a tizzy over fears that this novel strain is exceptionally transmissible and more resistant to existing vaccines.

Whatever the epidemiological impact, the rise of this new variant, in our view, will keep capacity tighter for longer, and thus keep rates higher for longer.

Whatever the epidemiological impact, the rise of this new variant, in our view, will keep capacity tighter for longer, and thus keep rates higher for longer. First, this and potential future variants will likely continue to restrict network throughput due to safety protocols, episodic infections, and variations in national and municipal responses.  Second, this and other new variants are likely going to delay a return to pre-pandemic international business travel (or international travel in general), which means that the complete return of belly capacity on those core lanes will also get pushed out. And there’s at least some risk that belly capacity may never fully recover if we see more permanent cultural adaptation to a hybrid in-person/virtual business environment. Finally, with renewed lockdowns in some countries and geographies, and with continued and not unreasonable public concern about viral spread, we believe the eventual transition of discretionary dollar spend away from goods and back to services may be elongated as well. These factors should support persistently elevated air freight rates, in our view, and any shippers that were looking for relief in the seasonal first quarter freight lull may not find it - at least to the extent that they expect. 

 

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.