Air freight demand in Q4/2020- Expectations

 

4^th 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 2^nd 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 15^th 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 15^th 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 2^nd and 3^rd 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 4^th 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.

If you look at the PMI data in China, it has slightly increased and mainly driven by medical goods and local demand. Chinese customs data shows that YTD exports YoY is up by 0.8% and imports are down by 2.3%. When you deep dive the exports and remove the PPE, it’s a net decrease of general trade for Chinese exports. Chinese exports will remain stronger in the coming months and years even if the production moves to SE, Asia or Indian Sub. In the first half of 2020 as per Chinese Customs data, trade with ASEAN has increased of 5.6%, accounting for 14.7% of China’s total foreign trade volume. Trade with EU was down by 1.8%. Trade with US was down by 6.6%. These stats for the first half had a major negative influenced by the Covid related issues.

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.

 

Capacity update

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 2^nd and 3^rd 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.