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Volatile air freight rates a reality as fuel prices go sky high

Other factors such as ongoing Covid-19 restrictions place a huge question mark over freight recovery and fears of yet another ‘false dawn’ for Asia.
Volatile air freight rates a reality as fuel prices go sky high
31 May 2022 •

Surging jet fuel prices are the latest disruptor to global air cargo markets, with surcharges more than doubling overall freight costs. The situation is particularly gloomy for Asia, which was usually vibrant in terms of outlook.

According to the International Air Transport Association (IATA), global jet fuel prices in mid-May were up 126.8 percent year-on-year, inflating the collective global fuel bill for airlines this year to a forecast USD$120.1 billion.

Rising costs are dampening the return of passenger capacity, according to the May DHL Air Freight Market Update, which notes that “high prices” for the fuel are a factor in the “already slow belly capacity recovery” and are a factor “adding to the high rates”.

However, in Asia, it is Covid-19 travel restrictions in particular which continue to weigh most heavily on chances of a bounce-back in bellyhold options.

Willie Walsh, Director General of IATA, told delegates at the Changi Aviation Summit hosted in Singapore in May that while international travel in 2021 had shrunk to a quarter of that in 2019, the first quarter of this year had seen it climb to 48 percent, compared to the same quarter in 2019. But Asia is a different story.

“Indeed, in some parts of the world including Europe, North America, and Latin America, the recovery has reached around 60 percent,” Walsh said. “Regrettably, Asia continues to lag the recovery in 2021. International travel was only at seven percent of where we were in 2019. And although it's improved to 17 percent in the first quarter of this year, there is still a long way to go.

“And to put it into context, international travel within this region, one of the biggest and most important international markets in the world, is only at 6 percent of where it was in 2019.”

Walsh went on to call for a change in Covid-19 policies that stymied trade and travel, particularly in China. As the heavy demand for shipping increases, border re-opening is essential to increase the much needed capacity.

Lockdowns and travel restrictions related to Covid-19 were part of the reason why global air cargo capacity was 16 percent lower in May this year versus the same month in 2019, with bellyhold capacity still 21 percent below pre-Covid-19 levels, according to the latest DHL Update.

Month-on-month capacity levels are still fluctuating due to recent service disruptions, flight cancellations and re-routings, especially on many intra-Asia routes which were previously part-supported by seasonal or scheduled passenger flights.

Asia Pacific outbound flight cancellations are also still common, especially in China, while the closure of airspace due to war in Ukraine is adding to pressure on alternate trade lanes as cargo is re-routed.

“Essentially, capacity and demand are out of sync. Even though demand growth has softened and factory closures and/or truck bans are stopping lots of cargo reaching airports and ports, we are still in a capacity constrained environment,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

The upshot of this capacity crunch and rising fuel costs is that even as economic forecasts are downgraded and stock markets tumble on a cocktail of fiscal policy tightening, food insecurity, war in Europe and inflation, air cargo prices have remained at historically high levels on many key lanes.

“Easing demand pressure has allowed for some measure of debottlenecking and some anecdotal reports of air-to-ocean conversion,” said a report for the Baltic Exchange by Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research at Stifel.

“However, there have been few signs of respite in global air cargo prices, which remains elevated relative to 2021 on Asia-origin lanes.”

On Asia-to-Europe lanes, rates in April from Hong Kong and from Shanghai were still 30 percent and 70 percent higher, respectively, than the same period in 2021, according to Chan. This is relatively higher compared with rates to North America, which rose 13 percent and 27 percent year-on-year, respectively.

All eyes are currently on when and how China might lift lockdowns. In May, more than 40 Chinese cities and over 300 million people were subject to strict Covid-19 shutdowns, according to Nomura, and most economic indicators for China have tumbled.

Analysts have been comparing China’s re-opening to taking a cork out of a bottle of freight. “We are hearing more positive messages on Chinese policy and we are hopeful that we will see some of these backlogs starting to be cleared and a return to more normal operations out of Asia in June and July,” said Leung.

But it is a volatile market at the moment and hopes of a potential rush of cargo, both inbound to factories desperate for sub-components, and exports still sitting in storage, are in place.

“However, we have found more than one false dawn during these extraordinary times, so any optimism is tempered by the possibility that more Covid-19 outbreaks could lead to a further tightening of policy,” cautioned Leung.

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Surging jet fuel prices are the latest disruptor to global air cargo markets, with surcharges more than doubling overall freight costs. The situation is particularly gloomy for Asia, which was usually vibrant in terms of outlook.

According to the International Air Transport Association (IATA), global jet fuel prices in mid-May were up 126.8 percent year-on-year, inflating the collective global fuel bill for airlines this year to a forecast USD$120.1 billion.

Rising costs are dampening the return of passenger capacity, according to the May DHL Air Freight Market Update, which notes that “high prices” for the fuel are a factor in the “already slow belly capacity recovery” and are a factor “adding to the high rates”.

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However, in Asia, it is Covid-19 travel restrictions in particular which continue to weigh most heavily on chances of a bounce-back in bellyhold options.

Willie Walsh, Director General of IATA, told delegates at the Changi Aviation Summit hosted in Singapore in May that while international travel in 2021 had shrunk to a quarter of that in 2019, the first quarter of this year had seen it climb to 48 percent, compared to the same quarter in 2019. But Asia is a different story.

“Indeed, in some parts of the world including Europe, North America, and Latin America, the recovery has reached around 60 percent,” Walsh said. “Regrettably, Asia continues to lag the recovery in 2021. International travel was only at seven percent of where we were in 2019. And although it’s improved to 17 percent in the first quarter of this year, there is still a long way to go.

“And to put it into context, international travel within this region, one of the biggest and most important international markets in the world, is only at 6 percent of where it was in 2019.”

Walsh went on to call for a change in Covid-19 policies that stymied trade and travel, particularly in China. As the heavy demand for shipping increases, border re-opening is essential to increase the much needed capacity.

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The supply chain challenge lies in whether it is ready to cope with the likely upswing.

The fast-evolving nature of China’s Covid-19 lockdowns is still preventing significant volumes of cargo reaching ports. And while backlogs will need to be cleared when logistics networks in China re-open, there are signs that demand from key import markets in North America and Europe is faltering.

Unlike the closure of the port of Yantian in 2021, which caused substantial disruption of ocean supply chains, lockdowns in China this year are mostly affecting hinterland operations rather than terminals which have remained open.

Beijing has issued strict orders that provincial-levels government should keep highways, harbors and other transport arteries open and must not erect roadblocks or put healthy truck drivers into quarantine. Even so, logistics networks and manufacturers continue to be affected by a chronic lack of labor, while trucking capacity shortages are stymying central efforts to get freight moving.

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Cargo backlogs will need to be cleared

With cargo backlogs building in warehouses and factories, any relaxation of China’s zero-Covid-19 policy is expected to result in a brief uptick in trade as production resumes and logistics networks move into top gear.

“This is not like Yantian in 2021 and other shutdowns when terminals were closed to prevent the spread of Covid-19. While ports in China are open, strict Covid-19 measures are preventing truck drivers from delivering freight to terminals,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Warehouses and factories are also facing labor shortages, which in turn leads to delays for exports. Manufacturers in China are finding it harder to receive materials and components sourced elsewhere in Asia, and vice versa. This has led to a slowdown in intra-Asia trade.

”With a backlog of cargo building up, demand is expected to return later in the year, or just as soon as freight flows resume,” added Leung. “But at what level is not yet clear.”

The availability of cargo in key ports in China including Shanghai continues to dampen spot shipping rates, particularly on the Asia-Europe trade lanes. Forward export bookings are reported to be 40 percent or more below expectations prompting carriers to consolidate loads and blank more sailings.

China lockdown contributing to macro-economic fallout

The macroeconomic fallout from lockdowns is also proving significant. The Caixin manufacturing PMI, which surveys SMEs located in eastern coastal regions, dipped further into contractionary territory in April, falling to 46.0 from 48.1 in March, due to coastal logistics disruptions including at Shanghai, Jiangsu and Fujian. This “significantly weighed on manufacturing activity and exports in those regions,” according to analyst firm Nomura.

The supplier’s delivery time sub-index of the official manufacturing PMI dropped to 37.2 in April from 46.5 in March, meaning it took much more time to deliver goods. Meanwhile, the new orders index dropped to 42.6 in April from 48.8 in March, and its new export orders sub-index fell to 41.6 in April from 47.2 in March.

Nomura’s leading index of Asia ex-Japan’s aggregate exports also plunged by 3.8 points in April, the largest drop since June 2020 at the height of the Covid-19 pandemic. The index is made up of eight forward-looking components and has a three-month lead time. Nomura said prolonged lockdown measures in China, related weaker import demand, and the ongoing Russia-Ukraine war risk were exacerbating global supply chain disruptions.

The analyst also said a decline in orders for North American semiconductor equipment could herald a downturn in the global tech cycle, while the April drop in the index “could also be a harbinger of cooling global aggregate demand, as a result of tightening monetary and fiscal policies and the cost-of-living crisis”.

DHL’s May Ocean Freight Market Update also noted that with inflation pressures building, Western Europe’s real GDP growth will likely slow from 5.6 percent in 2021 to 2.6 percent in 2022 and 1.7% in 2023.

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Taking stock of the volatile situation

While global ocean reliability schedule has seen a marginal month-on-month improvement, standing at 35.9 percent,  levels still remain low for most carriers. This is -4.4 percent from the numbers in 2021. The lowest reliability was recorded on the Europe-Oceania trade, at 13.2 percent in March 2022 versus March 2021.

Vessel congestion in Los Angeles/Long Beach has subsided in recent months, although container dwell times still range between five and seven days due to rail infrastructure shortcomings, notes the Update.

However, as pressure has subsided on the West Coast, congestion on the East coast has been building as carriers shift capacity across. Indeed, Asia-US East Coast capacity is up 28.1 percent over the last year, compared to 20.5 percent on the Asia-US West Coast trade lane.

“Berth utilization remains high at all [East Coast] ports and congestion is expected to worsen again as soon as China suspends the Covid-19 restrictions,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

The Update also notes that truck and especially chassis availability remain a concern, adding to the congestion of the intermodal system. Port omissions continue as carriers are aiming to compensate vessel delays caused by the congestion.

“Overall, with the lockdowns in Shanghai and situation in Ukraine, the months ahead are expected to be volatile and require careful monitoring,” added von Orelli.

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Lockdowns and travel restrictions related to Covid-19 were part of the reason why global air cargo capacity was 16 percent lower in May this year versus the same month in 2019, with bellyhold capacity still 21 percent below pre-Covid-19 levels, according to the latest DHL Update.

Month-on-month capacity levels are still fluctuating due to recent service disruptions, flight cancellations and re-routings, especially on many intra-Asia routes which were previously part-supported by seasonal or scheduled passenger flights.

Asia Pacific outbound flight cancellations are also still common, especially in China, while the closure of airspace due to war in Ukraine is adding to pressure on alternate trade lanes as cargo is re-routed.

“Essentially, capacity and demand are out of sync. Even though demand growth has softened and factory closures and/or truck bans are stopping lots of cargo reaching airports and ports, we are still in a capacity constrained environment,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

The upshot of this capacity crunch and rising fuel costs is that even as economic forecasts are downgraded and stock markets tumble on a cocktail of fiscal policy tightening, food insecurity, war in Europe and inflation, air cargo prices have remained at historically high levels on many key lanes.

“Easing demand pressure has allowed for some measure of debottlenecking and some anecdotal reports of air-to-ocean conversion,” said a report for the Baltic Exchange by Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research at Stifel.

“However, there have been few signs of respite in global air cargo prices, which remains elevated relative to 2021 on Asia-origin lanes.”

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Global factors, including further Covid-19 restrictions in China, will continue to put a damper on the supply chain.

In northern Europe, container traffic to and from Russian ports has fallen dramatically due to sanctions imposed on Russia.

Meanwhile, Ukraine’s Black Sea ports are closed, prompting cargo to be diverted to ports in Romania, Turkey, Greece and Italy.  The result is port congestion in the region, further complicated as operators and carriers seek to confirm how they should handle Russian shipments under the sanctions regime.

With Russian imports and exports left stranded on quays and in storage, or stuck on vessels, ocean carriers have been forced to re-organize schedules and restrict services to avoid vessel delays in the region.

“For our part, DHL no longer accepts cargo to and from Ukraine, Russia and Belarus. Meanwhile, many major ocean carriers have suspended their services to Russian ports,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

Despite port congestions looming on the horizon, the ocean freight situation is less severe than its air counterpart, which has seen significantly longer transit times due to airspace closures.

“Contrary to the situation in airfreight, the impact on the ocean freight market due to the ongoing situation in Ukraine is largely limited to the European region,” added von Orelli.

The war in Ukraine, however, is only part of an evolving global situation. The ongoing Covid-19 pandemic is still very much disrupting the global supply chain, which is facing further restrictions outside of Europe.

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China affected by further Covid-19 restrictions

Port congestion is blighting container ship scheduling beyond northern Europe, with delays globally soaking up shipping capacity. In China, strict lockdowns and Covid-related absences from work continue to disrupt exports, factory output, warehouse and distribution centre operations, and trucking service availability.

“Even with ports formally open, the lack of terminal handling staff and the expected trucking delays could force carriers to skip numerous Pearl-River Delta calls or keep vessels waiting, thus causing major delays,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

The lockdown of Shanghai is also disrupting cargo flows and it is not clear at this stage how long the city’s terminals and transport network will try to operate under these conditions.

Port congestion and vessel delays persist

According to supply chain analyst firm Sea-Intelligence, some 13.7 percent of the global container fleet was “not available” in January due to port congestion and vessel delays. This figure is expected to improve between 11.7 percent to 11.8 percent in February when final datasets are available.

Sea Intelligence’s terminal congestion index saw a gradual improvement in February and March in the U.S. but the index remained at an elevated level. The analyst firm also notes that there has been no improvement in the past three months in terminal congestion in Europe, with no sign of improvement any time soon.

On the intermodal side, the level of congestion in North America is not as high as compared to Europe, suggesting that the problems for the latter are more heavily focused specifically on terminals rather than capacity.

Economic impact from further Covid-19 restrictions in China

The above events continue to impact the world’s economy significantly, especially for China and its exports. The latest DHL Ocean Freight Market Update notes that China’s economic growth is likely to fall short of the country’s 5.5 percent target for 2022. The forecast is revised to 5.1 percent, reflecting the impact of higher energy prices and slower growth in European export markets. Furthermore, new outbreaks of Covid-19 variants could dampen industrial activity and consumer spending this spring.

Analyst firm Nomura’s leading index of Asia ex-Japan’s (AEJ) aggregate exports, made up of eight forward-looking components with a three-month lead time, is now predicting a modest slowdown in total export growth from AEJ, although export growth of around 15 percent year-on-year is still expected between March to April 2022.

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Expecting a major rebound in demand

With the ongoing Covid-19 restrictions in China, and developing situation in Europe, demand for Asia Pacific to Europe is likely to soften for the next few weeks. This, however, will most likely see a major rebound.

As space in various regions remains tight, the prudent approach is to place a higher emphasis on advanced booking to secure space. “Customers are advised to stay ahead of the situation, and consider booking up to four weeks in advance in anticipation of a revival in demand,” added Leung.

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On Asia-to-Europe lanes, rates in April from Hong Kong and from Shanghai were still 30 percent and 70 percent higher, respectively, than the same period in 2021, according to Chan. This is relatively higher compared with rates to North America, which rose 13 percent and 27 percent year-on-year, respectively.

All eyes are currently on when and how China might lift lockdowns. In May, more than 40 Chinese cities and over 300 million people were subject to strict Covid-19 shutdowns, according to Nomura, and most economic indicators for China have tumbled.

Analysts have been comparing China’s re-opening to taking a cork out of a bottle of freight. “We are hearing more positive messages on Chinese policy and we are hopeful that we will see some of these backlogs starting to be cleared and a return to more normal operations out of Asia in June and July,” said Leung.

But it is a volatile market at the moment and hopes of a potential rush of cargo, both inbound to factories desperate for sub-components, and exports still sitting in storage, are in place.

“However, we have found more than one false dawn during these extraordinary times, so any optimism is tempered by the possibility that more Covid-19 outbreaks could lead to a further tightening of policy,” cautioned Leung.

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