Strong demand and 'very tight capacity' predicted for air cargo market
While it is chaos on the high seas, air freight out of China has seen ...
Forwarders are finding themselves between a rock and a hard place: as demand continues to outstrip capacity growth, they are moving to secure lift in anticipation of tighter supply and rising air freight rates down the road – but neither airlines nor shippers are in a supportive mood.
As long as overcapacity kept yields down and forced airlines to market empty space at bargain prices, forwarders increasingly shifted their capacity procurement to the spot market. In this they were egged on by shippers, who kept looking for lower prices.
According to one carrier executive, one large multinational logistics player is currently covering about half of its capacity needs on the spot market.
Faced with a recovery that outstrips the rise in capacity, however, cargo agents are shifting gear and trying to put more of their procurement on a longer-term basis.
For example, in anticipation of tightening capacity and rising prices, Team Worldwide is looking to recalibrate its mix of long-term and ad hoc procurement and to sign more agreements for space and rates, reports Bob Imbriani, executive vice-president, international.
“What moves as air freight today has to go by air, so reliability has to be there,” he said. “In the past, airlines gave you a spot rate when they had space. Now they give you a rate and you may see the freight get bumped.”
Team is looking to sign contracts as close as possible to one year, but some may have a three- or six-month trial period, he said.
He is aware that airlines have less incentive to lock in capacity and pricing at a time when rates are poised to go up. Hence, the agreements Team is trying to firm up vary, depending on carrier and routes involved, and seek to bring benefits to the carriers beyond planning security.
“We try to promote and develop their service with our branch offices,” he said, adding that progress is monitored on a weekly and monthly basis.
It requires incentives to prompt airlines to boost their block space deals at this stage.
“Airlines don’t sell as much of their space on a BSA format as they did, they hold more for spot pricing,” noted Rich Zablocki, vice-president, global route development at CEVA Logistics. “They try to push everybody out to buy at spot rates, which is probably a smart move from their perspective.”
This stance puts forwarders in a conundrum, as shippers show little inclination to make firm commitments that would allow their agents to secure lift in advance.
Mr Zablocki said shippers were very reluctant to offer forecasts and the projections they share are not far enough out to enable CEVA to plan sufficiently in advance.
Shippers for the most part demand that their cargo moves at the lowest possible rate, and they regard it as the forwarder’s job to accomplish this, Mr Imbriani said.
Jeff Cullen, CEO of forwarder Rodair International, can relate to competitors’ misgivings about signing contracts without strong commitment from their customers. Last year some agency partners of Rodair made binding agreements for capacity from Asia to Canada, only to find that the volumes that their clients had anticipated did not materialise, which left them with commitment for space they could not fill and the associated penalties.
Such experiences make agents reluctant to lock in this year, he said.
Mr Zablocki said: “The issue comes back to forecasting and either making the binding agreement or ending up having to pay high prices that shippers do not want to pay.”
Another senior air freight forwarder said shippers only had themselves to blame if they failed to secure capacity. And one factor could seriously aggravate the situation, Mr Imbriani noted.
“The elephant in the room is that we are in a honeymoon period with fuel prices. No one is sure how long this will last,” he said.
Even without higher fuel costs added into the mix, forwarders are going to find it harder to secure lift if global demand continues on its current trajectory, and nobody has identified signs to the contrary.