December 22, 2009

Air-cargo capacity crunch to last into spring

Demand for international air-freight service expected to remain high right through traditional first-quarter slump.

By Mark B. Solomon and Toby Gooley

After a disastrous first half of 2009, the outlook for international air freight became increasingly brighter as the year wore on. But for many participants —especially the users of air-freight service —the sweetness of improving demand trends is being tempered by the bitter realities of tightening capacity and rapidly escalating rates.

As the global economic downturn hit with ferocity through June, carriers were parking aircraft and slashing rates in a desperate effort to cut costs and fill what space was still left. Now, with the supply chain experiencing tight inventory levels and a better economic outlook in view, the worm has turned.

DHL Global Forwarding, the world's biggest air-freight forwarder, said in mid-December it was working to secure additional capacity from commercial carriers to avoid capacity constraints on the North Asia-Europe trade lanes in the first quarter of 2010. DHL confirmed what most observers and players already knew: that a demand spike in November and December resulted in a significant backlog of goods, thus driving spot-market rates steeply higher.

And lest anyone thinks this is a holiday season phenomenon, DHL said current conditions are likely to persist at least into the early spring. DHL said continued robust demand, combined with carriers' reluctance to bear the high cost of reactivating grounded aircraft, would keep rates high.

"While the demand for air-freight space traditionally decreases after the year-end holiday, causing freight rates to drop significantly, the current capacity outlook and latest customer forecasts for the first quarter of 2010 indicate a continuation of air-freight capacity constraints on the North Asia-to-Europe trade lanes," DHL said in a statement.

Air-freight demand is running high out of China, Hong Kong, Korea, and Taiwan, with the next peak expected to occur before the Lunar New Year in February as market players anticipate factory closings in China before the holidays, DHL said.

Shippers scramble for space
The current situation is a far cry from a year ago, when desperate carriers would go so far as to rebate base freight charges and keep only the fuel and other surcharges —a tactic that Jack Lampinski, managing director-Americas for Swiss World Cargo, called "totally nuts." Lampinski spoke in early November at the 8th Annual Northeast Cargo Symposium of the Coalition of New England Companies for Trade (CONECT).

When rates reached unsustainably low levels in early 2009, some carriers cut back flights and took aircraft out of service. In retrospect, however, carriers on the trans-Pacific and Asia-to-Europe routes appeared to have acted overzealously.

One attendee at the CONECT conference, a regional manager for a U.S.-based freight forwarder, said at the time that his company's Hong Kong office had reported that a 4,000-ton backlog of outbound freight had developed at Hong Kong Air Cargo Terminals, and that electronics shippers like LG were paying spot-market prices of $6 per kilo (roughly 2.2 pounds) from Hong Kong to London, up from $3 just four weeks earlier.

To guarantee capacity and keep a lid on pricing, big shippers have been scrambling to grab charter space. Daniel Wolf, director of logistics and purchasing for Boston Apparel Group, said at the conference that big air-freight users like Apple Computer and Sony Corp. had chartered space on about 60 flights from Asia through mid-November to ensure capacity for holiday shipping.

Why were shippers that normally book under long-term contracts suffering the caprices of the spot market? When rates were in free fall, many forwarders and their shipper customers were reluctant to lock in pricing with carriers, said a vice president of a large European freight forwarder interviewed at CONECT but who asked not to be named. That was a smart move —for a while, he told DC Velocity. "They didn't want to commit to rates and then see them go even lower. They made a big miscalculation."

About the Authors

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon
Toby Gooley
Contributing Editor
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Senior Editor at DC VELOCITY and Editor of DCV's sister publication, CSCMP's Supply Chain Quarterly. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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