For all the tumult of 2020, this year has been an equally challenging and befuddling one for many shippers, forwarders, and carriers. Discussing air freight rates in 2021 seems just as much about airline passenger demand forecasting, epidemiology and port terminal operations as anything else. None of those factors points toward structurally lower rates anytime soon, in our view. As we sit here at the midpoint of the year, it might be worthwhile to look at what’s transpired so far and look at how our outlook has changed.

But first, the data, as presented on three bases. First, on a sequential basis, air freight rates on major intercontinental lanes have cooled through the seasonally-softer June. West-bound TransAtlantic (BAI-FRA02) slid 8% versus May. Asia to Europe (BAI-HKG01 & BAI-PVG01) declined 8.3% and 9.3% from Hong Kong and Shanghai, respectively. And Asia to North America from Hong Kong and Shanghai (BAI-HKG02 & BAI-PVG02) both dropped 9.4% and 16.6% over last month.

Second, on a year-over-year basis, the picture is cloudier against Covid comps, but generally shows an increase on North American-bound lanes and a decrease on Europe-bound lanes. The discrepancy is likely a result of sharper demand recovery and more significant/earlier supply chain bottlenecks in North America. Frankfurt to North America (BAI-FRA02) is up 3.4% y/y. HKG to North America and PVG to North America are both up—40% and 34%, respectively. Meanwhile, Europe-bound lanes were up only 4.5% y/y ex-Hong Kong and down 13% ex-Shanghai. 

Frankfurt to North America rates are up 72% vs. 2018 and 2019. Hong Kong and Shanghai rates to Europe are up 62% and 64% vs. the same period, respectively.  And Hong Kong and Shanghai rates to North America are up 117% and 110% against the 2018 and 2019 blended average

And finally, when compared to pre-pandemic levels, global rates are significantly higher.  Frankfurt to North America rates are up 72% vs. 2018 and 2019. Hong Kong and Shanghai rates to Europe are up 62% and 64% vs. the same period, respectively.  And Hong Kong and Shanghai rates to North America are up 117% and 110% against the 2018 and 2019 blended average. Suffice to say, things remain universally expensive relative to a normal operating environment—neither brain science nor rocket surgery, but also a situation that we do not expect to correct until global supply normalizes.

In our February column, we disclosed our baseline assumption that global intercontinental belly capacity would not normalize until 2023. Five months later, we’re more inclined to take the “over” on that call than we are to take the “under”.  The appetite for long-haul business travel remains muted, in our view, especially with the resurgent Covid Delta variant. On its recent fiscal fourth quarter earnings call, FedEx Corp. management commented on air cargo capacity, saying “recovery will be slow, potentially episodic, and a full recovery is not anticipated until 2024.”

Does a protracted return of long-haul belly capacity mean that rates will stay high until next year?  We think yes.

Does that mean rates will stay this high until 2024? Unlikely, in our view. But there are structural factors that may keep rates higher than before, including the global rise of e-commerce and the fractalization of supply chains in search of labour, capacity, and production diversification. And several large freight forwarders have now declared air charter to be a permanent part of their service offering—not just peak capacity infill. 

Does a protracted return of long-haul belly capacity mean that rates will stay high until next year?  We think yes. And we think rates have another leg up as we move into back-to-school season. Recall that there was no back-to-school season in 2020; retailer inventories remain near historic lows, ocean capacity remains under pressure, and port terminal bottlenecks and trucking shortages are increasing hinterland lead times. 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.

 

About Bruce Chan, Vice President – Global Logistics, Stifel

Bruce Chan joined Stifel in 2010. Based out of the Miami office, Mr. Chan is a Vice President and Senior Research Analyst covering Global Logistics and Future Mobility. Bruce Chan can be reached at [email protected]. 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.