We pointed out last month that volatility seems to be the new normal as freight demand chases materially less supply amid significant bottlenecks and network disruption. February was no exception, in our view. Average global airfreight rates on Asia export lanes accelerated into the mid-month start of the Lunar New Year when factories traditionally shut down for several weeks and workers return home to celebrate with their families. 

This year was a little bit different as governments staggered breaks to dampen the COVID effect and some factories remained open to keep up with significant demand. Still, in weeks seven through nine, rates moderated as at least some production halted during the holiday. HKG to North America spot rates, for example, cooled 25% sequentially to an average of US$4.93/kg—“only” 53% above 2020 levels. 

Significant backlogs remain throughout the entire freight supply chain. That is pushing more demand for low-latency air capacity, especially as we head into the Q2 peak season, in our view.

But shippers shouldn’t let down their guards just yet, in our view. Significant backlogs remain throughout the entire freight supply chain. That is pushing more demand for low-latency air capacity, especially as we head into the Q2 peak season. Shanghai outbound rates to Europe and North America have already begun to tick back up and we expect other lanes should follow.

As we lap the tremendous PPE and China-production recovery spike from 2Q20, we think it worthwhile to examine some of the factors that might influence capacity spot pricing this year. Our base case assumption is not for the same magnitude of acceleration as last year’s second quarter. But that’s not to say absolute rates won’t stay consistently high. E-commerce continues to drive significant consumer airfreight demand, especially for high-value small-batch inventory. Shippers in that segment with high-margin goods have a lower demand elasticity threshold for air freight and may price others out of the market. And while the industrial recovery has lagged the consumer economy, resurgence in that sector will tighten up airfreight demand too, especially for shippers with critical process inventory. For example, current semiconductor and chip shortages have been slowing or even halting automotive production as suppliers were caught off guard by the recovery. If as and when chip manufacturers ramp production to meet renewed auto demand, the threshold prices that purchasers are willing to pay could be very high. And lest we forget fuel, Gulf Coast kerosene-Type Jet has recovered to its highest level since before the start of the pandemic. Cost per gallon has been on a steady ascent and is now approaching US$1.70—270% higher than the April 2020 cyclical trough.

The appetite for new freighters is growing and operators continue to eye passenger-to-freighter (P2F) conversion. Conversion slots, however, are a major bottleneck.

Meanwhile, supply continues to be a constraint and meaningful international belly capacity likely won’t return for another year or more. The appetite for new freighters is growing and operators continue to eye passenger-to-freighter (P2F) conversion. Conversion slots, however, are a major bottleneck. With only a handful of companies equipped for widebody conversion, build slots were limited even before the pandemic - soaked up by ACMI operators looking to ramp business for Amazon and other consumer and e-commerce-driven networks.

Looking out over the next few months, we see a scenario where capacity could get even tighter and spot pricing could continue to accelerate. Assuming that consumer and especially e-commerce driven activity persists, that the industrial recovery continues, more brick and mortar activity and more produce and seafood demand could further tighten capacity as vaccination efforts march forward and life gets back to normal. 

And with no proximate signs of capacity loosening in other modes of transport, we believe that airfreight will remain a critical goods pressure relief valve in shipper supply chains for months to come. 

As we embark on a new Lunar Year, we anticipate average airfreight rates will remain elevated. Shippers will need to find new and creative ways to offset these costs, which may include a surgical analysis of modal planning and selection, greater use of buffer stock, tactical procurement and sourcing, reliance on new, bigger, or more nimble logistics providers to supply capacity, and better use of technology for supply chain planning and execution. We don’t see many signs of immediate rate relief on the horizon, so strap in and try not to get gored. Gong Xi Fa Cai.

 

About Bruce Chan, Vice President – Global Logistics, Stifel

Bruce Chan joined Stifel in 2010. Based out of the Miami office, Mr. Chan is a Vice President and Senior Research Analyst covering Global Logistics and Future Mobility.

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.