Rates have finally begun to cool as we enter the seasonal first quarter airfreight trough, with 2021 seeing a much higher and more pronounced peak than in any of the three years prior.  As expected, peak season demand exacerbated supply constraints in an already congested market, leading to prices that averaged 2.5x to 4x those typically experienced at this time of year prior to the pandemic. 

In December, Hong Kong to North America (BAI32) and Shanghai Pudong to North America (BAI82) were both roughly 70% higher than last year’s already tight holiday season. And during the month, both lanes experienced their highest absolute levels since the inception of the BAI Index.

In December, Hong Kong to North America (BAI32) and Shanghai Pudong to North America (BAI82) were both roughly 70% higher than last year’s already tight holiday season. And during the month, both lanes experienced their highest absolute levels since the inception of the BAI Index. On the European front, Hong Kong to Europe (BAI31) climbed approximately 40% y/y and Shanghai to Europe (BAI81) rose 60% y/y, exhibiting much more pronounced peaks than they did even last year. 

Broad consumer demand levels this holiday season were more in line with forecasts and less of a surprise relative to the demand recovery in 2020, in our view. But the impact of nearly six quarters of supply chain constriction was on full display this year. Capacity constraints continue to widen and rates continue to breach new seasonal records, despite all manner of mitigation efforts and contingency planning. 

While air cargo pricing should cool sequentially in line with normal, seasonal patterns, we expect them to come at high double-digit premiums to even last year’s elevated rates on a year-over-year basis.

Unfortunately, we expect little change in the situation for the New Year. Ocean freight and port terminal congestion show few signs of amelioration and U.S. road and rail infrastructure are contending with their own issues. As a result, airfreight is still the only option to address supply chain delays and shortages that must be addressed. And while rates may be 2x-4x higher, on average, than pre-pandemic levels, ocean freight rates may be nearly 10x higher, depending on the lane. So, mathematically, the spread is narrower - and that doesn’t even consider the speed differential. While air cargo pricing should cool sequentially in line with normal, seasonal patterns, we expect them to come at high double-digit premiums to even last year’s elevated rates on a year-over-year basis.

The Omicron Variant certainly hasn’t helped, with effects across many different facets of the supply/demand curve. On the supply side, of course, Omicron has kept global business travel and belly capacity at bay. It has also reduced ramp and freighter capacity as well. In practice, there have been more infections and thus more handlers and flight crews calling out sick (increased virulence despite less reported severity for vaccinated individuals). Supply reductions have also come by way of policy. Cathay Pacific, for example, announced late last year that it was suspending long haul cargo flights. They have subsequently restricted all flights from other countries as well. On the demand side, Omicron is still stoking demand for PPE shipments, at-home test kits and continues to allay the goods-to-service rotation.

We are experiencing the longest and strongest airfreight bull run in recent memory. With little relief coming to broader supply chain congestion, with broad demand expected to remain strong (e.g., we believe Europe is further behind the U.S. on the inventory recovery curve and has more ground to recover).With capacity still under pressure, we don’t expect much relief any time soon. We think that shippers must continue to plan and budget aggressively, as our timeline for a moderating market continues to get pushed out.

 

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.