Sea-to-air conversions drive up airfreight rates on Transpacific

Dive Brief:

  • Airfreight rates from China/Hong Kong to the U.S. ticked up steadily throughout April and have risen nearly 75% since the most recent trough in mid-March to reach £8.90 per kilogram as of Monday, according to figures from the TAC Index. Rates did dip on a week-over-week basis, falling by almost 4% since May 3.
  • The surging rates were driven largely by a wave of demand from sea-to-air conversations as a result of delays on ocean lanes that followed the blockage of the Suez Canal, according to a recent note by Peter Stallion, head of air and containers at Freight Investor Services.
  • Constraints in airfreight capacity also contributed to rising rates. Stallion noted strict quarantine measures put in place by Cathay Pacific.

    And low passenger demand for air travel is exacerbating capacity constraints and high rates, Clive Data Managing Director Niall van de Wouw said in a statement.

Dive Insight:

Air cargo demand continued to show growth in April with volume increasing 78% YoY and up 1% compared to the same month in 2019, according to the most recent figures from Clive. While demand is growing, capacity has not returned to pre-pandemic levels. Clive’s numbers show overall capacity in April was down 18% compared to 2019 as a result of the belly capacity that is still missing from the market.

The loss of belly capacity means that dedicated freighters continue to see heightened interest in their services. Atlas Air’s demand is “well above typical seasonal levels,” President and CEO John Dietrich said on the company’s earnings call last week. Levi Strauss CFO Harmit Singh noted last month that the company was dealing with a number of delays and bottlenecks in the company’s supply chain and it was leaning more on airfreight to help to navigate the current market.

“In terms of cost, as I mentioned in the last quarter, we negotiated capacity and that … is allowing us to offset some of the increases that we can see,” Singh said. “We have had to increase our airfreight.” Dietrich did note there has been some return in demand for passenger travel, but it has largely been domestic. “Although, there’s been a lot of attention about recent levels of improved US passenger air traffic, it’s important to note that these recent increases have largely been driven by pent-up demand for domestic and regional leisure travel with smaller gauge aircraft, which is less impactful to international airfreight,” Dietrich said.

The volatility in airfreight led more shippers to seek longer-term commitments with their carriers, Dietrich said, later adding that cargo owners may have realized they were overly dependent on belly space before the pandemic. UPS said it added capacity as exports grew by double digits in all regions. “To support outbound Asia demand, we added 25% more flights and even more in terms of capacity because of our 747-8 capabilities,” UPS CFO Brian Newman said on the company’s earnings call last month. “Asia export volume was up 43%, Europe exports were up 27.7%, and overall total exports grew 26.2% on a year-over-year basis.”

The increase in air cargo demand comes as ocean freight services experience near-record high delays and near-record low schedule reliability.

While both figures improved in March — the latest figures available — schedule reliability was at 40% for the month, and the average delay for late vessels was just over six days, according to Sea-Intelligence.

“Given this is typically the start of slack season for airfreight, this is almost certainly an upset (on top of the many upsets in 2020) for company balance sheets, especially those still relying heavily on air cargo,” Stallion wrote, referring to the high airfreight rates. “The scale of delays on container freight has maintained the viability of airfreight, despite enormous price increases.”