Stranger Things: Air Cargo Becomes Value Play Over Ocean Freight

Supply chains in 2021 are living in an alternate dimension. Up is down and down is up. That's what happens when container shipping rates exceed $20,000 per box and air cargo, normally used for high-value goods and perishable products for which speed to market is critical, doesn't seem budget-scary anymore. 

The price for shipping goods by air is nearly double what it was before the COVID pandemic, but ocean freight has become so expensive – and even slower –  in recent months that air cargo actually seems like a relative bargain to many companies. Mode conversion for international freight is one factor in the air cargo market's 14 consecutive months of growth, according to new data released Wednesday.

Rates are moving up again after a 10% drop in June from the year-to-date high in May, according to the TAC Index. Overall air cargo rates are 90% above where they were midway through 2019, and cargo revenues are up 70%, the International Air Transport Association said.

Despite that increase, air cargo has become much more cost-competitive relative to ocean shipping. When global trade waned in 2019 and there was an abundance of vessels, trans-Pacific container rates to the U.S. West Coast and East Coast were about $1,500 and $2,500, respectively. Shipping by air at the time was 12 times more expensive than by ocean. 

Today, ocean supply chains are stretched by the high shipping demand and buffeted by a variety of supply chain disruptions. The logjam of freight waiting to move by container vessel is equivalent to an estimated 8.6% loss of capacity from the available fleet in April, according to analysis by Sea-Intelligence.

With so much competition for limited space, carriers are fetching at least $7,000 per forty-foot equivalent unit to the West Coast and more than $10,000 per FEU to the U.S. East Coast — and that doesn't include thousands of dollars in extra surcharges and premiums that need to be paid to ensure loading. 

The spread between air and ocean freight costs has been cut in half in recent weeks, with per-kilogram airfreight costs only six times greater than those of ocean freight, according to IATA. Some airfreight users say the gap is even less now, with some ocean shipments quoted at $20,000 or more and a drop in certain air rates, such as Shanghai to Europe down more than 50% since May to $4.08 per kilogram as of July 6. Given the lack of ocean capacity and extensive port congestion that is adding weeks of delay to shipping schedules, companies are shifting some loads to air to meet retail and manufacturing needs.

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Competitive advantage of air cargo: speed and price.

Many commodities that typically move by ocean went by air during the pandemic because heavy ordering  wiped out depleted inventories and kept going. People stuck at home for social distancing reasons bought hot tubs, exercise bikes, leaf blowers, fire pits and other items they could use for recreation or home improvements.

About 90% of goods involved in global trade move by ocean and 1% by air, according to the Organization for Economic Cooperation and Development and IATA.

Brian Bourke, chief growth officer at Chicago-based SEKO Logistics, says the pivot to airfreight is driven by both e-commerce and traditional retail sales.

"A lot of our clients have really made it their position to not run out of inventory and if that means a couple of weeks they have to spend a lot more for airfreight, they'll do it. They want to be the company that has a stock-keeping unit ready to ship domestically," he said during a media briefing two weeks ago.

Meanwhile, many manufacturers have deals with retailers that include shelf space, and if they're not able to fulfill purchase orders they could lose that prime real estate. 

"So, it's really about investing in future sales to make sure your inventory is flowing in the traditional retail side," he added. 

With airfreight, shippers can get their goods within days compared to several months of lead time for ocean freight, logistics professionals say.

Robust Airfreight Demand

Other factors behind the strong airfreight demand include growth in global goods trade (up 5.2% in April) and rapid growth of manufacturing for exports. There are some signs demand is tapering, but airfreight intermediaries don't expect that to last long.

IATA reported that global demand for air cargo increased 9.4% in May compared to 2019. Although the growth rate slowed from 11.3% in April it represented the 13th consecutive month of improvement since the market reached the pandemic bottom and the fifth consecutive month that airfreight growth exceeded growth in cross-border merchandise trade.

Capacity improved slightly for the fourth consecutive month to 9.7% below pre-pandemic levels, primarily due to the reduced number of passenger flights that offer space for cargo in the lower hold. IATA said overall passenger demand in May was 62.7% below the 2019 benchmark, a 2.5-point improvement from the prior month, but the all-important international travel segment was still down by 85%. That left international cargo capacity at an 11.1% deficit. 

North American carriers contributed nearly half the 9.4% growth rate IATA reported in May. Air cargo demand grew in every region except Latin America, led by 25.5% growth in North America. 

Meanwhile, research from London-based CLIVE Data Services showed air cargo throughput increased 1% in June following what it said was a 4% decline in May. And there was a 22% shortfall in capacity, down a tick from negative 21% the prior month, according to CLIVE Data. 

IATA and CLIVE Data differ in their measurements because of their methodologies. CLIVE reports on cargo tons sold, whereas IATA reports on cargo tons flown. The former approach counts each ton once; the latter does so each time the shipment is transshipped through an intermediate airport and reloaded on another airplane. IATA also calculates volume with a distance component — cargo ton kilometers — so if the share of the long-distance route increases the IATA numbers increase even if the same tonnage is moved. 

CLIVE Data gets its capacity data directly from airlines. The difference in capacity calculations comes from CLIVE counting the number of metric tons available to cargo per flight and IATA using available cargo ton kilometers, a metric that combines weight and distance components.

Although IATA and CLIVE Data differ in timing and measurements, their reports are directionally aligned: Volumes are growing, and load factors and rates remain high, but there has been some softening since early in the year. IATA said month-over-month growth in May was 0.4%.

International load factors hit a record high for the month of May at 65%, according to IATA. Load factors have dipped from 72% in March to 69% in June, said CLIVE Data, which uses a volumetric measure for the amount of space occupied, but that's 9 points higher than in 2019. 

Freight forwarders, who are booking shipments for importers and exporters, say they haven't experienced much letup in airfreight business. Airfreight lift in key trade lanes is difficult to secure from airlines and all-cargo carriers without pre-commitments, and with the traditional peak season approaching there is little expectation of any substantial rate declines for the remainder of the year.

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May air cargo demand. IATA

Despite air rates dropping in the first part of June on major intercontinental lanes – spot rates for Hong Kong to the U.S. fell 8.25% to $5.22/kg from May – analysts predict another peak this summer before the big fall peak as economies reopen and inventories remain tight. It's a highly unusual circumstance because summer is usually a slow period for the airfreight market. 

Neel Jones Shah, global head of airfreight at Flexport, attributed some of the lull in May and June to COVID outbreaks in Southeast Asian nations. As those protocols are lifted, he said, volumes are likely to shoot back up.

"We see a lot of robustness on the demand side. There's nothing that leads us to believe that 2021 won't be an incredibly strong year right to the finish line," the Flexport executive vice president told FreightWaves last month.

In a Monday podcast with STAT Media, Jones Shah added that rates are likely to stay at current levels or even go up a little more.

"We know the consumer is very strong. The consumer in Europe and the U.S. is spending a lot of money, they've been stuck at home for a year for a year-and-a-half, they saved trillions of dollars above what they would have normally. That's a lot of buying power. 

"Now, they are going to spend a lot of that money on experiences. They are going to travel, they are going to go out to eat, doing all the things they missed out on. But they are also going to buy stuff. So you'll see pretty strong demand for the next year."

That behavior is already reflected by the fact that rates are rising again outbound from Frankfurt, Shanghai and Singapore, according to the Baltic Air Index, powered by TAC. And rates have room to adjust up more as the back-to-school season kicks in and families make up for no school shopping last year amid record-low inventory rates, tight ocean capacity, port bottlenecks and trucking shortages, wrote Bruce Chan, senior analyst for global logistics at Stifel, in the BAI's June newsletter.

"These factors will be slow to unwind, in our view, and leave precious few alternatives to airfreight for shippers in need, especially if we see a Q4 peak. So, as little relief as the current lull offers to purchasers of airfreight capacity, we do expect things to get worse before they get better," he said.

As European nations begin to reopen borders to vaccinated travelers – potentially followed by the U.S. later this summer – more long-haul passenger flights will be gradually added to the mix, triggering some supply and pricing oscillations, Gareth Sinclair, an analyst at TAC Index, said in a research note. Initially, capacity will increase, but as passenger operations start to pick up capacity could suffer with more baggage occupying the lower deck and some temporary cargo-only aircraft returned to passenger service. 

Austrian Airlines, for example, recently said it was discontinuing use of two Boeing 777 aircraft and several 767s as auxiliary freighters. Seats that were removed on the 777s to increase cargo capacity by 35% are being reinstalled.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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