October 28, 2013

Rates taking off in eastbound trans-Pacific market as tight capacity meets rising demand

Double-digit price hikes hit shippers, forwarders as lift is reduced ahead of holidays.

By Mark B. Solomon

Air freight capacity on the trans-Pacific eastbound trades has tightened quickly and dramatically, sending spot market rates out of Asia soaring and putting pressure on shippers and consignees to procure ample, reliable, and affordable air lift heading into the pre-holiday shipping season.

Several factors have coalesced to create the current state of affairs. U.S. and European economies have improved since August, albeit haltingly. Manufacturing out of China has accelerated also since that time. Seasonal demand for space has been rising, amplified by the fact that the late Thanksgiving Day holiday this year means six fewer shopping days between Thanksgiving and Christmas than a year ago, the shortest shopping period in 11 years. This fact forces shippers who had not planned sufficiently ahead to move goods by sea to shift deliveries to air in order to make their delivery commitments. IT behemoth Microsoft Corp. is expected to consume 200 charters to support its own holiday product deliveries, and the even more gargantuan Apple Inc. has bought up an unspecified number of charters as well.

In addition, carriers looking to boost profits have taken capacity out of the market in general over the past several years, reducing both scheduled and charter space. While that approach by itself would be unlikely to greatly affect the market, it would have an impact when combined with the other trends.

Rates on the spot market have taken off, according to Ed Feitzinger, executive vice president, global operations for Long Beach, Calif.-based UTi Worldwide Inc., a global freight forwarding and contract logistics company. In an e-mail sent Friday, Feitzinger said spot rates from Shanghai to major U.S. airports have risen between 15 percent and 25 percent in the prior week alone; the specific increases depend on the airport and carrier, he added. Rates from Hong Kong to the United States are up 25 percent in that period, according to Feitzinger. Rates from Shanghai to Europe have increased 40 percent since August 2012, he said.

According to Feitzinger, the market is currently experiencing a supply-demand imbalance, which he defines as when rates increase 15 percent or more and then hold at those levels for 10 consecutive days or more. "We crossed that threshold about two weeks ago," he said in a separate e-mail today. UTi first alerted its customers to this scenario in its September newsletter.

Expeditors, the big forwarding and logistics company whose core strength is handling U.S. import traffic, said in an online bulletin Friday that "demand levels have far exceeded available capacity" out of the critical Hong Kong Air Cargo Terminals (HACTL). "The market has seen an influx of cargo from south China and Southeast Asia as shippers convert shipments from ocean to air, fulfill orders for highly publicized new product releases, and [accelerate] shipments to meet holiday demand," Seattle-based Expeditors said.

In a bulletin earlier in the week, Expeditors said shipment backlogs have been reported in Taipei, Hong Kong, Shanghai, Singapore, and South Korea. Expeditors advised customers to make advance bookings through their local representatives and, if necessary, book passage for urgent shipments via the company's express or "premium capacity" services to avoid any supply chain disruptions.

The trans-Pacific air cargo market can be a dynamic, fast-moving beast, especially at this time of year. That dynamism was illustrated by contrasting comments made in a one-week span by Marv Schlanger, CEO of Dutch transport and logistics giant CEVA Logistics. At a media breakfast last Monday at the Council of Supply Chain Management Professionals' Annual Global Conference in Denver, Schlanger said that although the company has experienced some rate pressure, "it's not my sense that capacity has tightened."

Schlanger had an altogether different view today, telling DC Velocity in an e-mail that "we have seen a significant upturn in demand and carriers are keeping capacity very tight" for both scheduled and charter services.

More articles by Mark B. Solomon

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