News / Double whammy for forwarders as shippers demand cheaper rates and airlines want more

© Titipong Jaiharn

Forwarders are being squeezed from two sides as shippers and airlines try to find the best way forward in the current pricing slump.

The former are slow to sign contracts, holding out for further air cargo rate declines, while the latter are unwilling to make commitments, hoping that prices will climb again.

In expectation that rates will continue their downward trajectory, shippers have been dragging their feet.

“Some started contract negotiations in October, but are still calling for further revisions,” reported Rich Zablocki, vice president, global product development at CEVA Logistics.

In some cases, rate negotiations have continued, even though shippers and forwarders already reached agreement over service and rates levels some time ago, but the shippers continue to hold out for further rate drops, citing falling spot rates.

“We find deals we thought were done are now being renegotiated,” said Bob Imbriani, executive vice president international at forwarder Team Worldwide.

He finds it hard to predict how long shippers will continue the stance that “I may have tentatively agreed, but if I see rates go down, I’m not going to sign up”.

“In the past few months, we have seen airfreight rates on a downward trend, largely due to the decline in oil prices and excess capacity in the market. Competition for logistics services is also continuing to intensify as we see an increase in M&A deals,” said Li Wenjun, senior vice president of airfreight, Asia Pacific, at DHL Global Forwarding.

In Mr Imbriani’s analysis, the downward pressure on rates from sluggish volumes out of Asia, notably China, has been aggravated by ongoing attempts by shippers to shift more of their traffic from air to ocean. As a result, they are not looking to shore up capacity arrangements, as they do not feel that rates have bottomed out yet.

It has not helped forwarders that some airlines have tried to tighten capacity on some sectors in an effort to shore up yields. Rather than scrap services, they have cancelled individual flights.

“Normally they don’t have to do that in March,” commented Mr Zablocki.

So far such efforts have failed to stem the drop in pricing, but airlines are hoping that the air cargo rate decline will soon reverse itself.

One source of encouragement for them has been the exit of players, such as Kalitta, from the transpacific market. They had joined the fray when lower fuel prices improved the operating economics in the transpacific arena.

Mr Imbriani described the agents’ predicament as “almost like a Mexican stand-off”.

“Logistics players are facing several challenges, including balancing seasonal volumes, building up local capacity and capabilities in areas such as warehousing and customs brokerage, and optimising their capacity and service levels at reasonable costs,” said Mr Li.

For their part, airlines see little benefit in signing longer-term agreements at this point, as they hope for prices to turn around and start climbing again, Mr Imbriani noted.

“There are so many unknown factors coming together, so no one knows what’s coming and no one is willing to make a commitment.”

For mid-sized forwarders, this means that much activity remains in flux.

“This has really put the forwarder in the middle,” commented Mr Imbriani. “How do we commit to customers when we don’t get solid commitment from the carriers?

“We do not generally enter into iron-clad rate agreements with customers,” he said, adding that many bids have clauses that open the door to renegotiation if rates drop below a certain level.

For the moment he sees no relief for forwarders, but eventually shippers will have to commit, he reckons.

“We think it could end, as we head towards a peak season – although peak seasons are not what they used to be – when shippers may get a bit more anxious about space,” he said. “This is going to end if rates go up or the reduction of capacity makes an impact.”