Vol. 11 No. 39                            #INTHEAIREVERYWHERE                            Tuesday April 30, 2013


air cargo news April 22, 2013

ince its inception in May of last year, Drewry’s Sea & Air Shipping Insight publication has offered the air cargo industry a bird’s eye view into an often obscure market by way of the company’s East-West Airfreight Price Index, which incorporates air freight rates across multiple key east-west trades.
     According to the Index, average East-West airfreight rates have continued to slump since the end of last year. The Index has fallen 13.9 points since December, equivalent to a fall of 13 percent. In March it fell 5.3 points, representing the fourth consecutive month of falls, bringing pricing down to levels seen midway through last year.
     Martin Dixon, Research Manager, Freight Rate Benchmarking at Drewry and one of the guiding hands behind the Index’s methodology, said the volatility in the Index (see above) last year, which featured a summer slump and peak surge at the turn of the year, could well be repeated in 2013.
     “Air freight rates fell last year due to weak demand and unchecked capacity growth—the latter influenced by passenger demand growth, as this drives belly hold capacity,” he said. “Rates actually fell to levels last seen at the height of the world recession in 2009.
     “Notwithstanding any seasonal variations, we expect rates to strengthen in the latter part of the year as demand picks up—we are already seeing early signs of tentative recovery.”
Further supply-side efforts by carriers will help the market move towards better balance, according to Dixon.      He said the grounding of Air Cargo Germany in late April would take some freighter capacity out of the global market place in the short-term and more cuts are expected. “Carriers have already made capacity adjustments to their freighter fleets and the growth in passenger belly hold capacity has slowed,” he said.      “But we expect further adjustments to come.”
     Dixon also took the time to explain to FlyingTypers exactly how Drewry's East-West Airfreight Price Index is compiled. Drewry has been publishing limited air freight data since 2008, but this was augmented “in response to widespread customer demand” last year to take in benchmark air freight rates on 21 East-West trade routes as well as the Index which is published in Drewry's Sea & Air Shipper Insight every month.
     “Most customers are shippers who use data to benchmark their air freight costs,” he said.
     The Index is a weighted average of all-in airfreight ‘buy rates’ paid by forwarders to airlines for standard deferred airport-to-airport airfreight services on 21 major East-West routes. So it basically covers two-way Asia-Europe, Asia-North America and Transatlantic air freight lanes and is expressed as an index starting at 100 in May 2012.
     Air freight rate benchmarks are based on a wide sample of forwarder buy rates and are collected following tried and trusted procedures also used by Drewry for its container shipping rates analysis.
     “Drewry's airfreight price benchmarks for multiple trade routes and airport pairs are based on averages of representative rates paid by freight forwarders to airfreight carriers for standard deferred airport-to-airport airfreight services,” said Dixon.
     “They are expressed in US$/kg and include 3 components: the base rate, the fuel surcharge, and the security surcharge. They exclude door delivery costs.
     “We use forwarder ‘buy rates’ rather than ‘sell rates’ as the former correlates more strongly with the charges levied by forwarders on medium/large shippers.”
SkyKing

 

 

n recent months, container shipping lines have tried every play in the book in a bid to boost freight rates, and not without good reason. After many struggled to break even last year, the need could not be more pressing to play a better hand in negotiations during this year’s annual contracting season, which takes place in the coming weeks.
     2013 has already seen a rash of new general rate increases introduced on Asia-Europe trades by lines, most notably in March, but with more scheduled for April.
     On the Pacific trades, the Transpacific Stabilization Agreement (TSA), which represents most leading carriers, declared recently that market indicators and bookings indicated a “gradual upturn” in the market, which was helping support a new round of GRIs introduced on April 1.
     TSA executive administrator Brian M. Conrad said the current trend of modest but steady growth was expected to continue in 2013, with improved vessel utilizations already apparent throughout April, following the traditional post-Lunar New Year lull. “Coming off a period of close to zero cargo growth in 2012, the outlook is definitely more positive at this point,” he said.
     But as lines have attempted to talk up the market to justify new GRIs, the facts have been telling a rather different story, with rates declining despite the best efforts of box shipping companies.
     The GRI announcements by carriers have to be put into context, and that context is the need to soften up counter-parties in the current negotiations, especially on the Transpacific where some 90 percent of cargo is shipped under the 12-month contracts now being ironed out.
     Despite the upbeat pronouncements of leading liner executives, rates from Asia to both NW Europe and the Med are now at a 14-month low, having wiped out all the March 15 rate increases. Most analysts predict a similar fate for April GRIs.
     “To make things worse, some carriers have deferred their April 15 rate increase until May 1, which will see rates continuing to slide south over the coming two weeks,” said analysts ACM/GFI late last week.
     “The weakness on both the U.S. routes [via Suez and the Pacific] does not bode well for the upcoming annual Transpacific contractual negotiations either.
     “One wonders whether this could finally spell the end of the rut that the industry has been in for the last 12 months, whereby carriers have pushed through regular rate increases to stave off the weekly declines seen in between.”
     Lines are in effect using GRIs, slow steaming strategies, cancelled sailings, and laying up tonnage as a means to maintain a semblance of rate stability in a market that remains dominated by excess capacity.
     Although container ship demolitions in the first part of 2013 are running at record highs—some 450,000 TEU in the first 11 weeks of 2013, according to shipping organization Bimco—fleet growth continues, up almost 1 percent in the first quarter with more ships due later in the year.
     A decline in bunker prices could have a further adverse impact on carriers’ efforts to report profits this year by encouraging lines to break ranks on capacity management.
     “Slow steaming is closely linked not only to the poor demand side, but also to the super-high bunker prices,” said Bimco’s Peter Sand. “Should bunker prices come down significantly in future, the extent of applied slow steaming on the trading networks may be reduced.”
     Sand does see one positive—higher demand from Asia for imports, aided by domestic consumption and strong currencies, not least the RMB, are providing some respite on key trade arteries in the shape of better backhaul volumes. “This has meant that the front-haul/back-haul ratio has come down from 2.60 in 2008 to 2.07 in 2012,” he said. “This results in more balanced trades with higher earnings possibilities on the total round voyage. This should improve profitability in the industry.”
     But, he admits, higher volume on the back-haul leg has no effect on the over-capacity situation as it sucks up no extra tonnage. “Only higher volumes on the front-haul leg can do that,” he adds.
     Drewry estimates that capacity on key head-haul routes will increase by 10.2 percent on Asia-North Europe and 5.5 percent on the transpacific in the second quarter. “With over 40 ships of at least 10,000 TEU due for delivery in 2013, carriers will find it increasingly difficult to manage capacity without upsetting the fragile supply-demand balance,” said the company. “Carriers are asking themselves where they can put these vessels without flooding the market.”
     As the TSA’s Conrad admits, lines are desperate to shore up rates because fleet expansion is outweighing cargo growth, a basic economic fact that explains why Drewry described the recent decisions by some carriers to put more capacity into Asia-U.S. lanes as beggaring belief.
     “As we head into the bulk of the negotiations in April,” explained Conrad, “it is critical for shippers to understand that rates which reflect little or no increase in rates over 2012 levels are simply not sustainable in the long run. The financial repercussions are serious, and carriers are looking to ensure that new contracts include rates that reflect a meaningful increase above 2012 levels, and closer to the post-April 1 market trends.”
     Could this be construed as a plea to shippers? Certainly, that’s the view of ACM/GFI.
     “With the 2013/14 TP annual contract negotiations about to be finalized, the contagion that has plagued Asia-Europe for so long is now much more real on the Transpacific,” said the analyst firm. “There are talks that one of the major BCOs (Beneficial Cargo Owner) have agreed to rates unchanged from last year, which does not bode well for the carriers this year.
     “Despite their assurances that they have control of the capacity situation, the latest decreases in freight rates demonstrate that carriers are still willing to drop rates to unprofitable levels in order to fill their vessels. If that is indeed the case, then without a significant growth in demand, the next six months could get very uncomfortable for a few of those lines who are already on the ropes.”
SkyKing


 

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     “And along comes pretty little May,” are lines that Oscar Hammerstein II wrote for the musical play Carousel.
     Those words echo in my mind when this time of year rolls around.
     I have taken this picture of our youngest daughter, Emily, every year since she was ten years old.
     Now, with all the kids out of the house, we are always happy when one of them comes around again, as Emily did this past Sunday.
     Today “all growed up,” Emily is the high-powered retail manager of an upscale boutique store for the company Paige Denim in New York City.
     So along comes pretty, twofold: the old crab-apple tree in our backyard blooms once more behind an equally blossoming Emily, as May approaches our doorstep this week.
Geoffrey

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