News / Volatile market sparks call for review of how air freight capacity is traded

© Bakhtiar Zein

 Volatility in the commoditised air freight market is at an all-time high, prompting calls for a re-think of how air freight capacity is bought and sold.

The most reliable, and up-to-date, data on capacity utilisation, published yesterday, shows a near-9% year-on-year fall in chargeable weight for February, as coronavirus impacted air cargo.

The fact that the data is weekly helped allow Clive Data Services to adjust the analysis to account for Chinese new year, and the leap year with its extra day.

February data shows air cargo volumes in Hong Kong 30% below their post-Chinese new year level, and 23% less than in the same week last year. But recent growth shows demand is on the rise.

“If ever there was a moment when we can highlight the limitations of basic month-on-month analyses from a methodology standpoint, this is it,” said Clive’s managing director, Niall van de Wouw.

“It is our opinion that the near -9% decline in February is the best ‘temperature reading’ of the state of the global air cargo industry. Without the normalisation of the data we have applied, the picture is skewed.”

Other recent data, from the weekly TAC Index, shows the immense pricing changes in the market, as Chinese production comes back on stream while capacity lags behind.

TAC Index

But perhaps the main lesson from the new weekly data is how volatile the market actually is at the moment, and whether anything could be gained from risk-mitigation practices, such as index-linked agreements (ILAs) and derivatives.

While ILAs offer a long-term contract at market price, air freight forward agreements (AFFAs) are risk-mitigators, providing the ability to lock-in forward margins over a long period of time, or hedge against spot price risk.

Noting high air freight rates on intra-Asian lanes, one forwarder told The Loadstar this week: “It’s peculiar, in that air freight acts as a commodity. I would use index-linked agreements, although it’s a bit late right now. I’d much prefer a stable market where we can provide our customers with consistency.”

It’s not just forwarders. Banks too will be keen to see less volatility in air cargo’s business model, as airlines increasingly struggle with finances. Lufthansa, Fraport and Dusseldorf airports this week approached banks for support. And it is thought that Volga-Dnepr Group is working on a deal with its main lender, Sberbank, to ensure continued operations.

But in order to offer financial support, banks will have their own restrictions.

“When banks are managing assets, they will want to manage the forward profit and risk – there is no room to act like a pirate,” said one finance source. “They will need more exposure on the hedging side.”

And, as one senior air cargo executive said: “In an industry of this magnitude, financiers will ask why indexes and derivatives have not landed.”

And in a crisis of this magnitude, that question is much amplified.