Grim picture for shippers with no relief from elevated air freight rates in sight

08 Dec Grim picture for shippers with no relief from elevated air freight rates in sight

Shippers hoping for relief in air freight rates early next year can expect to be disappointed, according to consultants and analysts.

A host of factors, including the Omicrom variant and its likely impact on belly capacity and lockdowns, spurring spending on goods rather than services, as well as a shortage of labour, could see pricing remain high.

“These factors should support persistently elevated air freight rates in our view, and any shippers looking for relief in the seasonal first quarter freight lull may not find it – at least to the extent they expect,” noted Bruce Chan, director, global logistics, at Stifel.

Peter Stallion, head of air and containers for Freight Investor Services, agreed and added: “With the prevalence and development of the new Omicron variant of Covid, the potential rapid spread of this variant has shut down open travel corridors… All of this paints a convoluted picture for the 2022 market, with oil prices slipping, capacity potentially dropping back again and a lot riding on the development of the new Covid variant.”

But Mr Chan added there was a softening in demand: “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.”

He said preliminary data showed that sales on Cyber Monday were (slightly) lower than in any previous year, indicating a “softening in demand this peak season” against last year’s “exceptionally strong” peak, or that consumers had ordered earlier, aware of supply chain backlogs.

But while demand may have thinned, so has supply.

“Capacity seems to be getting tighter, rather than looser,” said Mr Chan. “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.”

As a result, capacity is likely to be tighter for longer, he argued, with air travel down, keeping rates high. It could also restrict networks due to lockdowns, illness and variations in national responses.

“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 … we believe the eventual transition of discretionary dollar spend, away from goods and back to services, may be elongated as well.”

Meanwhile, the TAC index for November saw rates increase 15% from October, with ex-China and Hong Kong seeing a 19% month-on-month increase. While both markets hit records to North America, beating even the Q220 PPE surge, China mainland only saw a 6% rise to Europe, while Hong Kong was up 22%.

Mr Stallion noted some individual airline moves triggering some rises: Southwest Airlines ditched standard cargo bookings in favour of next-flight guaranteed shipments, while Cathay Pacific began using general rate increases on BSA capacity, “borrowing an often unpopular market mechanism from the container freight sector”.

TAC Index board adviser Gareth Sinclair added: “In summary, air freight prices continue to move upwards in response to demand and capacity constraints driven by unprecedented levels in disruption across all supply chains.

“There is currently little evidence that rates will fall significantly in the new year, as backlogs are cleared and inventories restocked.”