2022 is upon us, and the year of the Tiger looms. For the month of January, rates cooled substantially on Asia outbound lanes after a very pronounced peak season. As we outlined in our base case last month, rate progression was consistent with normal seasonality, albeit at a much higher increment on the pricing scale. The average U.S. dollar charged per kilo of airfreight is still closer to 2.5-3.0x higher than before the pandemic.

On the Asia-to-North America lane, rates cooled sequentially from December by 14% out of Hong Kong (BAI32) and 27% out of Shanghai Pudong (BAI82). But they were still 70% and 54% higher, respectively, than they were in an already-tight January 2021. On the Asia-to-Europe side, rates cooled 17% and 21% sequentially out of Hong Kong (BAI31) and out of Shanghai (BAI81), but were again up around 50% each on a year-over-year basis.  

With respect to demand: the U.S. consumer remains strong, inventories remain stretched, e-commerce volumes continue to gain share, and industrial demand continues to recover. On the supply side, capacity, congestion and labour availability continue to drive shortages across modes - including ocean freight, which is still pushing ocean-to-air conversion

From a broader supply chain perspective, we see many of the same fundamental issues ahead for 2022 that endured during 2021, and there are no obvious or concrete resolutions on the near horizon. With respect to demand: the U.S. consumer remains strong, inventories remain stretched, e-commerce volumes continue to gain share, and industrial demand continues to recover. On the supply side, capacity, congestion and labour availability continue to drive shortages across modes - including ocean freight, which is still pushing ocean-to-air conversion. The time-constrained holiday rush has passed, easing some of the pressure to move goods to the skies, but the spread between ocean and air rates is still historically narrow and critical process goods (including semiconductors and industrial parts) are still moving on a “need it now” basis.

Specific to airfreight, the Omicron variant continues to affect passenger demand and both passenger and cargo flight schedules, with illness and infection putting pressure on crew availability. As case rates in some major metropolitan areas have peaked, we are hopeful that operations will normalise and that we will finally see an uptick in belly capacity. But as we discussed in previous installments, we think it is likely that business travelers have developed muscle memory from slimmer T&E policies and grown accustomed to virtual meetings, which could mitigate or at least delay the return of international belly volume. 

We will be watching for disruptions to air cargo operations as a result of the rollout of 5G wireless service in the U.S.  Deployment is currently delayed, due to safety concerns regarding overlap of C-band frequencies and certain radio altimeters; the FAA, FCC, airlines, wireless providers and other stakeholders are working toward a solution

To summarise, cycles don’t last forever. But we think capacity relief is probably more likely to come from gradual demand cooling than from supply. And for those expecting major improvement this year -especially earlier in the year -we wonder how much is optimism versus reality. But not everything will look the same in 2022 as it did in 2021. There are a few new issues that we will be watching with great interest as they affect global air freight rates. We will be monitoring the impact of the Lunar New Year and the Beijing Olympics on Chinese factory output, as well as the extent to which any pauses or slowdowns allow equipment to be repositioned. We will be watching for disruptions to air cargo operations as a result of the rollout of 5G wireless service in the U.S.  Deployment is currently delayed, due to safety concerns regarding overlap of C-band frequencies and certain radio altimeters; the FAA, FCC, airlines, wireless providers and other stakeholders are working toward a solution. But according to the FAA, there are currently six airports that rank within the top 10 in terms of U.S. cargo tonnage handling that have low-visibility 5G approaches. These airports include LAX, CVG (Amazon’s Prime Air Hub), ORD, IND, DFW, and ONT.  We will be watching for disruptions in Europe as a result of potential armed conflict between Russia and Ukraine, as well as any cyberattacks that may happen in connection with, or independent from such conflict.Readers may recall the effect of the Petya and NotPetya attacks on the logistics industry, including hundreds of millions of dollars of losses for companies like Maersk, DHL, and FedEx. And of course, we will be watching for new developments on the COVID front.

 

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.