Air freight rates soar as carriers abandon contracted rates
Air freight prices are continuing on an upward trajectory, although recent injections of capacity from passenger airlines have alleviated the impact on forward prices, according to the latest update from Freight Investor Services (FIS).
FIS reports that average rates from China to Europe have gained a further 75 cents per kilo over the past week, rising 24.75% to $3.78 per kilo, while its benchmark China to US trades have seen gains of 87 cents, up 20.67% to $5.08 per kilo, “closing the distance to the 2018 Q4 market high of $5.28”.
Peter Stallion, aviation and freight derivatives specialist at market specialist FIS, noted: “Shanghai continues its dominance on surging pricing, gaining 90/95 cents on Shanghai to Europe and US respectively, however Hong Kong exports gain greater price support, up 61/80 cents.”
FIS noted that London to US “surged a massive 128% in one week, reflecting price increases on severely limited capacity transatlantic. Frankfurt to US is up 109%.”
Stallionobserved that the current turbulent market had caused many airlines to abandon their long-term pricing or blocked-space agreements (BSAs) with customers, partly because they have been forced to cancel the passenger services – and hence bellyhold cargo capacity – on which the pricing arrangements had been based.
Stallion commented: “Prices continue to surge. The inevitable has happened: airlines, either through surging open market price, more likely due to schedule and operation strain, have broken BSA agreements. This has spilled over to inter-line agreements between airlines which have also broken, severely limited third-airline capacity.”
He said that problem will in turn “be passed on to the shipper, knocking the prospective long term contract market out of sync as shippers will look to recover costs from forwarders, and forwarders from airlines”.
Stallion added: “This isn’t the first time these contracts have been broken, breached or amended; the same was seen with the cargo demand glut in 2017. The fundamentals for these actions are understandable: aircraft aren’t flying, and if they are, they are being operated off-of-the-back of achievable air freight rates that can (hopefully) cover operating costs for charters.”
Explaining the advantages of his company’s derivatives and forward-pricing models to help manage the pricing risks of this kind of volatility, he highlighted that Index Linked Agreements (ILAs) are able to “correct the price basis for these problems. By pricing BSAs at a floating rate, correlating above, below, or at the index, a fair price is paid regardless of volatility. The stimulus to break a contract due to severe price movements is removed, and minimum margins can be locked-in using AFFA derivatives on both sides of a physical contract.”
Stallion noted: “Our daily forward curves have softened the sudden shifts in prices; however, release of open market information has spurred a widening of spreads across most trading periods. Trading against the monthly average, offers for China to USA have lifted to $5.00, subsequently lifting the value another 32 cents on the front month and quarter. China to Europe has seen less of a change; however, spreads still remain wide as offer volume is weak.”
He added: “But beyond our hopes for the future of our market, there is one very significant positive for all of us amidst the chaos of COVID-19: Air freight has been pushed into the spotlight, and many will be looking to air freight to see what how we will adapt and change as an industry in the coming months.”