Shifting From The Ocean To The Sky: Air Carriers Seek To Lure Away Sea-Freight

Aviation freight is experiencing a supply-demand imbalance. Soaring ocean costs because of IMO 2020 could make air freight look less expensive. And these factors are creating supply chain and risk management opportunities for agile shippers and freight forwarders, says air freight specialist C.H. Robinson.

"Some people say they only or mainly do ocean. But the reality is you need to be agile and look at different opportunities. The [air] market is soft now," air freight expert Andrew Coldrey, vice president Oceania at C.H. Robinson, told FreightWaves.

Benefits to shippers

The benefits to shippers of a modal shift to air freight include the ability to run decreased inventory; a decreased risk of redundant stock and increased speed to market.

"In lots of industries, if you don't have the product then you miss out on the sale. If a mechanic phones up and asks for a specific part then he won't wait for you if you don't have the stock. He'll go somewhere else. Availability and cost to serve needs to be balanced," Coldrey explains.

Another point he raises is that the airfreight industry is not a one-product service. It offers various service levels and price points. These include next-flight premium services, fixed day consolidation services (equivalent of less-than-containerload, or LCL, in ocean freight), and deferred services where a lower price can be offered for standby against available space.

"So the thinking about supply chain is becoming more sophisticated and many factors can be taken into account when determining the best method of transport," Coldrey explains.

Ocean and air: interconnected freight markets

He also adds that the ocean and air freight markets are much more interconnected that the general person realises.

For instance, shippers and forwarders can take advantage of softness in different air and ocean trade lanes air-freighting cargo to Asia and then sailing elsewhere. "It's half the time and less cost," he explains.

Coldrey also points to IMO 2020, the global regulation that will mandate a drop in the maximum limit of sulfur in marine fuel used by ocean-going ships from 3.5 percent down to 0.5 percent sulfur. It's widely expected that the use of low-sulfur fuel will be more expensive than the current, higher-sulfur content fuel. There's a massive price difference between high-sulfur and low-sulfur fuel.

For instance, at the time of writing, Intermediate Fuel Oil 180 (98 percent heavy fuel oil and 2 percent distillate oil) was priced in Singapore at US$454 per metric tonne. A metric tonne is equivalent to 2,204.6 U.S. pounds. In New York it was US$424.50 per metric tonne and US$449.00 per metric tonne in Santos, Brazil. However, Marine Gas Oil, a pure distillate oil with a world average of about 0.38 percent sulfur, was priced at $590.50 per metric tonne in Singapore and $606.50 per metric tonne in New York. It is a massive US$731.00 per metric tonne in Santos.

"Fuel is the most significant cost when running a ship but only about 20 percent of the cost of operating an airplane. IMO 2020 could make ocean freight more expensive and that makes air freight more attractive," Coldrey explained.

Scrubbers or low-sulfur fuel

The big unknown right now is whether ship operators will opt for scrubbers, which, as the name suggests, scrubs sulfur out of the emissions from a ship's smokestack, or whether they will opt for low sulfur fuel.

"Feedback from container operators is that it will be about 10 percent of the world ocean shipping fleet will be on scrubbers. You might see another 10 percent become non-compliant – there will be a level of non-compliance – and so, initially, 10 percent to 20 percent at max will initially not be using low-sulfur fuel," Coldrey explains.

So IMO 2020 could increase the attractiveness of air freight by making ocean freight more expensive. So that's the market price issue.

Supply and demand issues

On the air freight supply-side, Coldrey reckons that supply has slipped into over-capacity by about 2.7 percent. On the air freight demand-side, demand has fallen by about 4.7 percent.

Air freight on the China to the U.S. trade lane is soft as is China to Australia. But the air freight market in Southeast Asia, especially Vietnam and Thailand, is tight and has been firming. Europe to Asia is tight too.

"That's probably a response to the trade war," he says of the trade tensions between Beijing and Washington.

"It's a big risk factor. The trade war is having an impact. There was a huge increase in inventory holdings in the first half and North America now has warehouses full of inventory. Warehouse capacity in North America is really tight. But air freight has been soft. So the trade war impact has been to shift product timings," he says.

Inventory uncertainties

Because of the uncertainties caused by the trade war, shippers have been pushing stock from Asia to North America sooner than they otherwise would have. That stock can't be sold immediately and so much of it has to sit in a warehouse until it is called for to replenish stock on shelves. 

Coldrey explains that some goods are "almost exclusively" sourced out of China and these include basic consumer goods, basic electronics and fashion.

"Shippers might start to decrease inventory and run a tighter supply chain. Air freight is expensive but warehousing inventory is expensive too, especially if you are stuck with redundant consumer stock like fashion that you can't sell," Coldrey explains.

"The next round of tariffs is more likely to have an effect on the back-end of the year," he says.

There are other reasons for the softening of the air freight markets. For a while now, there hasn't been the shipping of any truly giant-volume consumer products, such as the newest iphone. 

Contestable cargoes

Meanwhile, some cargoes have been slipping from air freight to ocean freight (there's that air-ocean interconnection again) because of a glut of ship capacity. And a glut, of course, means lower freight rates.

"Dairy exports are fairly stable. Also we have seen a conversion from air to ocean of ultra heat-treated milk," Coldrey explains.

Air/ocean contestable cargoes include consumer goods, fashion – as that is "really susceptible" to stock redundancy – and foodstuffs such as Australian produce into Asia, especially given all the food scares in China. Other contestable cargoes include high value/low volume cargoes such as medical devices.

Buggin' out

Looking forward, another driver of air cargo volumes that will likely help firm up airfreight in an otherwise soft market will be the return of the brown marmorated stink bug (BMSB). As previously reported, this bug has spread around the world, typically via ocean cargoes, and is now a serious invasive pest. It is very destructive, particularly of farm and orchard crops. Efforts to control it have led to biosecurity and logistics chaos.

Because of the problems of clearing ocean cargo through the Australian border, some shippers and forwarders began using air freight to get the cargo into the country.

Coldrey expects that the forthcoming BMSB season, which, in Australia, potentially runs from September to April, will lead to a pick-up in air freight volumes.

"Well, it certainly did during the last season. You can't fumigate when the weather is less than 10 degrees Celsius [50 Fahrenheit] because the bugs go dormant and fumigants don't kill the bugs. So, in January and February in the northern hemisphere, you can't fumigate. So fumigation has to be done somewhere warm. We think it will have an impact on what is normally a softer time for air freight," Coldrey says.

Turning to the impact on the trucking market, Coldrey thinks that, largely, modal shift won't affect trucking because seaport- and airport-focused truckers tend to be different companies. But he said that more air cargo is likely to lead to growth in less-than-truckload volumes and more deliveries.

Image sourced from Pixabay