News / Good time for shippers to commit to longer-term air cargo contracts

© Jaromír Chalabala

Shippers should take advantage of lower rates in the first quarter to commit to longer-term airfreight contracts – while forwarders should move off the spot market, according to Xeneta.

Looking to 2024, Niall van we Wouw, chief airfreight officer at Xeneta, said: “Top of mind will be [shipper] ambition to agree longer-term contracts with their freight forwarders.

“This will allow them to catch their breath after a couple of intense years of revisiting their rates multiple times a year.

“This will also increase the need for a mechanism to adjust (when circumstances dictate) the contract rates within the contract period.”

He added: “Shippers and freight forwarders are looking for an efficient / neutral process to adjust their earlier agreed long-term rates, if markets move up or down beyond what is deemed fair for either party.”

Noting that the market had stabilised, or at least stopped falling so swiftly, Mr van de Wouw explained that this would give freight capacity buyers more certainty, especially as typical seasonal patterns are likely to return next year.

“We see more longer-term contracts being signed, and this only happens when people feel more comfortable about the foreseeable future,” he said.

“Longer contracts are becoming more popular again. As supply and demand rebalances, shippers and freight forwarders may find increased confidence in committing to longer-term air freight contracts. Twelve-month contracts may not be far from the horizon and be prominent in 2024, if market conditions continue on the current path.”

But he added that forwarders “will be required to do some soul-searching”.

He explained: “Their shippers require more longer-term deals while they are currently procuring close to 50% of their capacity needs on a short-term basis. This imposes a risk to both their financial and operational performance once markets suddenly increase.

“I would expect that we will see the share of short-term deals decline throughout the year, and get closer to the share we saw pre-Covid. This would mean airlines will also have to trade less on the short-term market. which, at least in theory, would create further stability in the marketplace.”

Mr van de Wouw added that one consequence of this could be less reliance on booking platforms in the long-run.

“The higher the share of weight being moved under longer-term rates, the smaller the share that could be sold on the booking platforms. There is however still ample room to grow by the booking platforms considering their current market penetration in the short-term market.”

According to Xeneta, forwarders are procuring more than 45% of volumes via the spot market, whereas pre-pandemic it was more like 35%.

“If sudden spot rate spikes were charged by airlines, forwarders would likely knock on shippers’ doors to renegotiate longer-term rates,” said Mr van de Wouw, who also pointed out that shippers were using fewer forwarders than previously, as a mark of the return to stability.

“Another indicator of a more stable market is the reduced number of logistics service providers shippers are partnering with when compared with the pandemic years. At its extreme, some shippers were managing a portfolio of 11 service providers at the same time due to the severe capacity squeeze. This number has nearly halved in Q4 this year.”

Xeneta’s airfreight analyst, Wenwen Zhang, added that if consumer spending increased next year, shippers should consider locking into longer-term contracts.

“Freight forwarders are facing fierce competition due to the impact of lower consumer spending (which means less demand for transport services), so they may also be eager to secure freight volumes through longer contracts. It will be a fierce battle to win business from shippers in a soft market, and we will likely see intense cost management by freight forwarders.

“Besides, with the nature of the air freight market, which is highly volatile, we will likely see interest in new tendering and financial mechanisms from shippers to save time from frequent rate negotiations. These could be mutually beneficial agreements for all parties, rather than creating a situation where if one party wins the other must lose.”

Xeneta also shows that air freight has been affected by lack of reliability in sea freight, which became clear during the pandemic. And with the end of CBER, plus unprofitable rates on many lanes and factors such as drought impacting the Panama Canal, this could lead to less-reliable ocean freight services.

“It’s important shippers remain agile and monitor what is going on – not only in their supply chain and market, but also developments and data in the ocean market, which can have a huge impact on air freight rates,” said Ms Zhang.