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Congestion forced shippers into air freight at height of the market, Drewry says

Greg Knowler, Senior Asia Editor | Dec 01, 2014 6:22AM EST

HONG KONG — The U.S. West Coast port congestion drove shippers to air freight at the worst possible time with rates for air cargo at the seasonal highpoint of what is turning out to be the most robust peak season in years.

After four months of stable pricing, air freight rates surged in Oct. on the back of strong demand and the conversion from ocean shipping, according to Drewry’s container insight. This has temporarily reversed the long-term modal shift from air to ocean as shippers took to the skies to make sure their goods hit the stores in time for the U.S. holiday season.

Ocean carriers and terminals have been battling congestion in Los Angeles and Long Beach all year, but conditions have worsened in the peak-season months, severely disrupting container handling at the U.S. gateway.

As delays began to roll down the supply chain, some shippers pre-empted the disruption in the container sector by moving cargo earlier and via the longer all-water route to the U.S. East Coast. However, as the countdown to “Black Friday” and the start of the holiday season neared, more costly air freight solutions were required.

According to Drewry, high average rates on the Asia-U.S. route was responsible for most of the overall hike in east-west trans-Pacific air freight rates in Oct. By contrast, container freight rates on the route were in decline.

So what did it actually cost shippers to send their products via air freight instead of by container ship? While ocean rates fell 7 percent from $3,106 per 40-foot container in Sept. to $2,881 in Oct., according to the Drewry Trans-Pacific Eastbound Freight Rate Index, air freight rates were soaring from $4.19 per kg to $4.90, an increase of 17 percent in just one month.

When the Nov. numbers come in, Drewry expects air freight rates will have continued rising as the shopping season picked up, while tighter capacity would have supported stronger pricing on certain trades. The backlog at U.S. west coast ports has the potential to soften the traditional drop in Asia-U.S. rates in Dec. and depending on how long the issue remains unresolved, could prop up air rates until Chinese New Year in February.

“Congestion on the U.S. West Coast ports is a costly reminder to shippers of the need for risk planning, particularly in peak seasons. The issue will help to inflate air rates and demand temporarily, but it will not reverse the longer-term trend towards ocean,” Dreary’s weekly report noted.

World air cargo growth has for a number of years lagged behind container shipping growth due to a combination of factors, including higher demand for commodities that are typically shipped by ocean freight, faster growth at the low-value end of commodities such as T-shirts that reduces air cargo’s overall share, and the sea conversion of “mature” products, such as electrical machinery.

A study published earlier this year by Seabury, commissioned by the International Air Transport Association (IATA), revealed that air cargo volumes fell by as much as 15 million tonnes since the start of the century, with modal shift accounting for approximately one-third of that sum.

“The shift towards the much cheaper ocean freight mode has gathered momentum in recent years as shippers have developed more sophisticated IT systems and leaner inventory strategies,” Dreary said in its report. 

“A greater faith in container service reliability is often cited as another contributing factor, but this is possibly overplayed and almost certainly misplaced as the container industry has long struggled to deliver its promises. Drewry’s research shows that barely 60 percent of container ships arrived at port on the advertised day within a threshold of 24 hours in the third quarter.”

Drewry said the long-term trend from air to ocean transport was not expected to be reversed, but supply issues in the container sector, including poor reliability, rolled cargo, missed voyages in peak cargo months and port congestion could be starting to slow the modal shift. Recent numbers show that international air freight growth is starting to keep up with container traffic growth and even overtake it in certain months, Dreary noted.

Courtesy of www.joc.com 

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