4th
Quarter outlook & Expectations
Due to PPE export rush in April to July in China, and the
capacity restrictions/challenges we faced , all forwarders and large branded
shippers demanded for capacity guarantees in Q4. All shippers and forwarders
expected the PPE demand to continue until it was public news that the US Gov
came after the quality of PPE production in China and started restricting Chinese
PPE exports.
Traditionally, September 2nd week is a time that
demand picks up on Air freight due to Chinese Golden Week holidays. Most
forwarders, Airlines and master loaders prepared for this season as early as
June and July to block off capacity. Everyone expected the demand for space to
be so high that it will reach USD9-11 per KG. The reasons behind this
expectation was the fact that the world’s largest export market, which is China,
has less air capacity to export goods. If 2019 mid-September was a traditional peak season,
then 2020 could have been a worse situation with less capacity and airlines
operating at each airport.
Accenture has published that global capacity has reduced by
26% in September compared to August. Few contributing factors are, the demand
for PPE from Indian Sub and South East Asia declining faster than expected and
Pax-to-freight(P2F) flights are on demand basis. The other reason is some freighters
are going in for maintenance in order to
be ready for peak season and perform on signed contracts.
All players in the market is expecting the market to pick up
soon after the 15th October due to ecommerce events like 10/10 and
in November 11/11. Most exporters think that inventory levels are low in USA
and EU due to buyers not ordering products because of the lock downs and
financial difficulties. However, demands will pick up and products need to move
to destination markets.
We expect the market to be at peak levels from October 15th
onwards. If a vaccine is found in coming months, we cannot imagine what could
happen to air freight rates and capacity as all commercial demand will be
surpassed by national interest for moving vaccines by governments and national
carriers.
Demand forecast
General behaviour of demand:
We believe the general demand for goods to be sold in brick
and mortar stores, will be somewhat volatile mainly due to waves of Covid
infections and unpredictability of Governments shutting down outdoor commercial
activities. Demand for such businesses will most likely be driven by spot
decisions to order goods by Air freight. At the moment, most logistics decision
makers in the US and EU are looking at cutting costs and are finding the cheapest
options of moving goods. Unfortunately, not many options are currently
available.
Ocean demand has outstripped the capacity by +100% in the
market and not many ships will be added anytime soon. One of the major airlines
(among many other examples) have parked a three figure number of aircrafts in
Australia. This means at least for 6 months, that capacity is decommissioned. Some
Middle Eastern Carriers are running full capacity of Freighters and adding more
and more P2F flights to the network.
We believe the online sales will drive the air freight
demand, more than the B2B demand at the end of this year. Shopify reported that
they have on boarded 80,000 new online retails in July or August. Most
retailers have started to look for options to go online and sell goods, and
since there is not enough time to build up e-foot fall for their sites, they
tend to go to market places to get better sales.
Let’s look at region by region.
China & HK
We expect the demand to pick up from South China mainly for
the small sellers involved in ecommerce. However, all this demand will not
translate to air freight numbers in HK. A greater percentage of demand will
flow (non-electronics and battery) to east and north China airports for
exports. That is mainly due to the number for freighters that are operating
from these 2nd and 3rd tier cities in China. A new trend
that’s developing in China related to Air freight is, b2b shippers making an
effort to follow ICAO and local regulations to export goods with batteries from
Chinese airports due to lower rates and subsidies.
The demand will also be subdued by the actions that large
forwarders have taken. To protect their key accounts such as HP, Apple, Dell
and SONY, these forwarders signed up charters for the 4th QTR. Since
the capacity is locked in and rates are locked in, these key accounts and
forwarders will not be going to the open market for capacity which takes away
to wild-fire-style rate increases.
Conclusion is, Chinese export numbers to US/EU are way down
if you remove the PPE effect. This is mainly driven by loss of retail demand in
western countries. Chinese export data is way up to ASEAN region mainly due to
raw materials and production moving to ASEAN.
Another disturbing news is the rumour of US CBP
investigating the Section321 tariff and de Minimis. Although its expected to
take some time to implement of they decided to, or if the US elections change
the direction, this could impact the air freight demand in long run. Some
effects are already starting to surface as US CBP has increases the detection
of counterfeit goods from China and increased the inspection of Chinese
Ecommerce parcels. Many ecommerce sellers and consolidators that we work with
have less confidence to forecast a super peak in 2020 Q4.
Vietnam
Vietnam has come under increased scrutiny by US Trade
agencies as they suspect Chinese goods are transiting VN by just changing the
label. VN customs have implemented strict rules for exporters to prove 30%
value additions of VN exports if the raw material of SKD goods are exported ex
VN. However, if the demand picks up in VN and all factories start to produce,
VN has no export capacity by Air fright to serve all exporters. Even YTD
capacity additions are mainly from Charters despite most Japanese and Korean
air freight carriers continuing to feed capacity to VN market.
It’s an Air Freight time bomb waiting to explode in VN if
production (mostly B2B) is on full swing
Indian Sub
Although much of China’s displaced apparel production has
moved to the sub-continent and the factories have no capacity to take new
orders, the production has been somewhat slow and low due to retail demand in
US and EU. Most of the current movements are from retailers who have moved to
Omni channel logistics for their brands rather than staying with only brick and
mortar. Most Indian Sub manufacturers of apparel do not have their own brand of
there are not many local platforms, market places (like Shein, flatworld in
China) who could mobilize the manufactures to find their own destination
markets via online sales. This is a huge opportunity for Indian Sub apparel
manufactures.
When you talk about the capacity, Indian Sub has always been
a pax-aircraft dominated market due to migrant labour forces in the Middle East
countries. Due to lockdowns, Pax capacity is severely restricted and rates have
remained higher. This is affecting the export demand for goods to US and EU.
Rest of Asia
When we talk about rest of Asia, Japan and Korea cannot for
forgotten. Japan PMI indexes are down for exports and therefore we do not
expect the export demand ex Japan will be much stronger than expected. While
that’s a negative effect, the positive effect for the other Asian origins will
be the fact that Japanese, Korean carriers will have enough throughput capacity
to carry exports to US, EU , AU.
Thailand, Malaysia, Philippine markets are mostly supported by passenger flights as markets
are not large enough for profitable freighter operations. Some of the national
carriers like TG have been facing dire financial struggles. Its unlikely that
these markets will see infusion of dedicated freighter capacity. Most if not
all will be P2F flights carrying the load.
Looking at the largest Air Export market which is China, the
single largest positive news I have for you is, Chinese local governments
continuing to fund the charter operators. This gives confidence to operators
and less financial impact even if the flights went half empty in AUG and first
two weeks of SEPT. Capacity keeps getting added in 2nd and 3rd
tier cities by local government subsidies. Freighters coming in TAO, additional
freighters from Herfei, Nanchang are examples.
If you need a charter for OCT and willing to book now, major
charter operators are asking for USD800-900K for OCT. This will further
increase in NOV to USD1-1.3Million as the availability of flights are far less
than April-May-June PPE season. However, there will be a limit to the charter
rate increases as the demand is now for commercial goods, not for PPE paid by
governments who did not care how much they were spending.
The number of freighters available for free sale is limited
due to large master loaders , forwarders blocking off freighters for Q4. This
is even evident by looking at the behaviour of some airlines in Africa who
operate freighters. One such airline offered to operate charters and got paid
even before knowing if they could get landing rights. Without accepting their
fault, they demand the forwarder to pay 30% more to reroute. Some other middle
eastern carriers have let go their service levels they used to maintain and they
are overbooking flights by 200%. Airlines should make money but should follow
ethics too. Another Asian airline who came up with a split charter program is
facing a backlash due to their stubbornness and holding forwarders against the
agreements they signed.
Most other origins like Myanmar, Cambodia, Manila, Malaysia
are served by P2F or regional freighters. They do not have enough direct
freighter capacity to the country as a regular freighter loads cannot be
supported.
Conclusion
Demand will come in
OCT and NOV and they will be very high spikes of demand and drive rates very
high for a short period of time. If Covid 19 vaccines start to move, it will
destroy the commercial goods demand by air freight as commercial goods will not
have any air capacity left if the vaccines start moving. Having blocked space
with airlines will drive the longevity of customer relationships. I wish
ecommerce consolidators had long term confidence/courage to block off space to
let their sellers, manufacturers continue to sell in US/EU instead of buying
week to week space. When the market picks up, line haul rates will be so high
that sellers will not be able to sell their products and miss out the peak
season of ecommerce this year. If retailers in the US are not shipping
inventory replenishments by now by Ocean freight, then OCT and NOV will be a
season that retailers will be struggling between serving customers vs doing
business with less or no margins. I wish I had a better crystal ball to read
the market.