News / Price risk-management could mitigate the volatility of China's air cargo market

The moveable feast that is Chinese new year always makes it difficult to interpret the first statistics, in January and February,.

This year it is harder than ever, with the new year holiday extended, factories shut or under-staffed and capacity to China in a downward spiral.

The latest air freight information from Clive Data Services, for the four weeks up to 2 February, shows a year-on-year decline of 4%, with the dynamic load factor down two percentage points to 65%.

As Clive noted, the change largely reflects the earlier Chinese new year.

Managing director Niall van de Wouw said: “At face value, the 4% drop in global air cargo in the weeks between 6 January and 2 February appear to be quite a setback, relative to the growth numbers seen in the last three months of 2019.

“But looking at the data in more detail tells a more nuanced picture. The Chinese New Year holiday started this year on 25 January, one week earlier than in 2019. By our estimates, the fact that this holiday is celebrated in such major air cargo origins as China, Hong Kong, South Korea and Singapore, pushed the overall growth number down by around 3% for the start of the year. This implies that the ‘normalised’ global market saw a decline of 1%.”

For a regional holiday to have such an impact on global volumes, the drop must be quite dramatic, noted Clive.

“In the last week of January, volumes from China to Europe, relative to the same week in 2019, dropped by 66%. Subsequently, the dynamic load factor of westbound flights from China dropped from close to 90% to 74%. The reason for the load factor not dropping further is due to airlines cutting capacity by 44% relative to the same week last year. Most of this fall in capacity was caused by a reduction of freighter services in anticipation of the weaker demand.

“While the industry traditionally anticipates lower demand during Chinese New Year, the big unknown now is the impact of the coronavirus at the start of a year where there was previously slight optimism for a modest recovery in air cargo volumes.

“We have already seen airlines suspending passenger services in response to the virus, and now it’s a case of wait and see. The impact of the coronavirus on cargo volumes out of China will become clearer in the weeks to come when the factories reopen and their supply chains are brought up to speed again. How quickly that will happen – and what knock-on effects it has for global air cargo industry – will be a strong indicator for the year ahead.”

Freight Investor Services said, in a research note yesterday, it expected significant price volatility.

“Chinese New Year will typically reflect a short freight price peak followed by consistent negative price movement as a result of the seasonal low point for Chinese freight output. The coronavirus has coincided with, and compounded, this, sparking unnaturally sharp price volatility.

“The reduction of airline capacity meets this slack demand in the short term; however, the outlook post-quarantine is concerning. Core freight volume is being restrained across all modes, and the freight market has been warned of a rush of volume whenever quarantine measures have been reduced.”

It urged the industry to consider price risk-management tools to mitigate this volatility.

“Reduced capacity collides with an unknown timeframe for reimplementation of flight schedules, creating an unknown deficit between potential freight volumes and freight capacity.

“At present, shippers, forwarders and airlines will be forced to react as events occur, creating a highly unpredictable scenario when disregarding the use of price risk management tools.”