Supply Chain Managers Favor Air Cargo in Recent Weeks

The dramatic decline to ocean freight spot market rates has served to widen the pricing differential to air rates to record levels, say Drewry Supply Chain Advisors.

Analysts at the London-based think tank reported last week that spot market ocean freight rates are in a rapid tailspin. Highlighting the extent of the decline, average container rates for October on the backhaul Europe to Asia trade – where ships are barely two-thirds full – were more expensive than they were for the far bigger headhaul Asia to Europe leg.

This was the first time this had occurred since Drewry started benchmarking the aggregate trade rate indices in 2011. Despite similarly sluggish demand trends, air freight spot rates have held up much better than ocean rates.

Chuck Clowdis, managing director of transportation advisory services for IHS Global Insight, agrees with this observation, but with one caveat.

“Air cargo will see last moderate rise this week and maybe early next week,” he says. “But it may not be sustainable, as there was no real peak season this year.”

Still, with ocean and air taking moving in opposite directions the pricing differential between the two modes has reached a record high.

The longer the multiplier remains above the historical average the greater the chance there will be acceleration to the ongoing modal shift of certain transferrable commodities from air to ocean.

The shift towards the much cheaper ocean freight mode has gathered momentum in recent years as shippers have developed more sophisticated IT systems, leaner inventory strategies, and greater faith in container service reliability.

Drewry expects air freight pricing to have strengthened, though, as end-of-year holiday sales boosts short term demand.

But pricing is not expected to match the “dizzy heights” of last year as stagnant growth combined with rising bellyhold capacity from a fast expanding passenger aircraft fleet keeps pressure on pricing. Thereafter, rates are expected to soften as peak season recedes, say Drewry Analysts:

“Further weakness to ocean spot rates should serve to keep the pricing multiplier at or around the current levels.”

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