Listen: Airfreight rate volatility likely to linger

Kuehne+Nagel Q4 earnings this week saw soaring airfreight rates support revenues for some freight forwarders in 2020 while other transport modes struggled, but volatility in rates, particularly in the spot market ex-Asia, could threaten gross profits in the months ahead. In this episode of On Air with Air Cargo World , Charles Kauffman and Caryn Livingston discuss how new strategies developed by airlines and freight forwarders in 2020 are affecting the airfreight market so far in 2021. With insights from the latest Baltic Air Freight Index report, their discussion covers capacity and rate volatility in the weeks ahead and following the Lunar New Year holiday, as well as the outlook for when relief may finally arrive for the capacity crunch. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Caryn Livingston Hello and welcome to this episode of On Air with air cargo world. I'm your host Caryn Livingston, editor of air cargo world. I'm joined today by Charles Kauffman, Senior Editor of Air Cargo World and our sister publication cargo facts. Welcome, Charles. Charles Kauffman Hi, Caryn. Glad to be here. Caryn Livingston Thanks for joining today, with 2020 results now coming in from the world's largest freight forwarders like DSV and Kuehne+Nagel. And now January and February traffic and read analysis also available as of this week, we're starting to get a greater sense of the market fundamentals as carriers and borders have mostly justed to eliminate capacity marking. Charles this week, you covered an anomalous fourth quarter results where the performance of their air freight division was impressive. Can you walk us through that? Charles Kauffman Yeah, Caryn. Sure, I would be happy to know. So Switzerland-based Kuehne+Nagel is one of the top three forwarders by air freight tonnage transported each year. And as you mentioned, their quarter for earnings came out last week. And really what was remarkable, not that this has never happened before, but air freight really carried the company for the quarter. So if we look at gross profit for Kuehne+Nagel's air freight unit, compared to 2019, gross profit rose nearly 17% delivering earnings before interest in tax of about $168 million for the unit, which was an increase of 135%. And this I will note is on air freight volumes that were actually 7.5% lower compared to 2020. And if we compare this side by side with Kuehne+Nagel other units, you know, earnings were really down for the company's other units, with EBIT down 7.2% for the sea logistics division, down 20.5% for road logistics and down 60% for contract logistics, you know, so But before we close the year, with air freight tonnage of about 1.4 million tonnes, this is this would put it right behind DSV, which is the number two and they reported tonnage of about 1.7 million tonnes in 2020. Now, of course, as you've written about in the past few weeks, Kuehne+Nagel did just acquire Apex, which last year was the number 11 forwarder, with about 520,000 tons. So, you know, combining the two companies will really put canonical ahead of DSV and closer to DHL global forwarding. Caryn Livingston Right, yeah, good point. That's a that's really going to move them up the rankings and in a couple of years. So looking back at the the gross profit on the air freight side, what was driving that during the most recent quarter? Charles Kauffman Yeah, definitely quite a confluence of factors. I would say. As we've reported about extensively, there still is a major lack of belly hold capacity. You know, Kuehne+Nagel said that, you know, by their measure, airfreight our belly hold capacity was was still about 90% lower compared to 2019 levels with intra Asia capacity really being the only bright spot the you know, the only trade lane that has as recovered and of course, much of the air freight that is moved is by forwarders, I should say is, is long, some of those long haul routes, you know, either on Trans-Pacific or Asia to Europe lanes. But belly hold capacity is a major factor here. And then, according to Detlef Trefzger, the CEO of Kuehne+Nagel it really was was partially the result of, of instability on the ocean side. So very high high rates, constrained ports, and low capacity or just uncertainty on on that front really drove modal shift to air for for some of those time sensitive shipments that needed to make it to market ahead of the December peak, you know, ahead of Christmas. You know, another factor is really the mix of cargo that moved last year. And there were, you know, larger, larger volumes of, of medical supplies, high-value time-critical medical supplies, and then also industrial commodities that, you know, we're being transported to alleviate supply chain shortages and whatnot. So, you know, this pushed out some of the traditional mix of commodities that we see moving by air. So Kuehne+Nagel mentioned that the perishables portion of the total volume they moved by air in the final quarter of 2020 was reduced relative to the rest. Caryn Livingston Right, yeah, it is important to keep in mind even though we're focused on the air freight side that, uh, that ocean logistics are also really capacity-constrained right now. And so, we are hearing anecdotally that the perishables you know, maybe struggling on some routes for capacity against other commodity types right now. And in the most recent Baltic airfreight index analysis. They've noted significant backlogs exist across the entire airfreight supply chain right now. And that is, of course, what's driving this demand for some of the solutions we're seeing entering the market, such as new charter routes and in additional passenger freighter operations. So, back to them to Kuehne+Nagel. They also touched on their first quarter so far during the recent earnings. So how does that compare with Baltics analysis? Charles Kauffman Yeah, good question. So it wasn't necessarily a comprehensive report at this point. But, you know, kind of just generally speaking, volumes are still looking healthy in quarter one, especially compared to 2019. I think we're going to see that many companies are going to avoid doing year-over-year comparisons with 2020 simply because of you know, the disruptive the COVID related disruptions that we saw last year. And so, demand is up in general over 2019. And then they're Kuehne+Nagel, in and of itself says that they've won some new business contracts are they were awarded additional contracts in the second and third quarters of 2020. And so that, that is continuing to drive growth into 2021. Yeah, as the capacity crunch, you know, continues and, you know, with the healthy demand dynamic, what is the rate situation and spot market looking like these days? Caryn Livingston Right, well, of course, January and February, as as you know, are typically kind of unusual months, as the Lunar New Year holiday approaches, and this year that began on February 12. And that, that normally coincides with a peak season for the first quarter for airframe. So kind of looking back at the Baltic analysis. And some conversations we had with forwarders. Last month going into the holidays. This, this was an unusual holiday, just a bit because typically, you know, factory production shuts down, there's, you know, almost a complete drop off in capacity during the holidays. And the the expectation this year was that at least some production would continue. And that does seem to be the case, but it wasn't, you know, the same level that it was typical early in the month. So rates did moderate. In a in baltics analysis of week seven through nine for the quarter with production slowing down. So looking at Hong Kong to North America spot rates, for example. They, they dropped by about 25% to an average of about $4 and 9030 cents per kilogram us, which of course is still significantly above the levels for 2020 about 53% above and then looking At the most significant drop in rates from the Lunar New Year peak to the end of the month, that was the Shanghai to US trade lane, which was down 38%. And then Hong Kong to us, for that time, dropped initially by 22%. But then rates recovered late in February. So they were only down by about 14% overall. So, still, of course, very, very high rates year over year. And more airlines and freight forwarders are starting to, to make projections around the recovery, which I believe Kuehne+Nagel did in their earnings. That right. Charles Kauffman Yeah, definitely. And it's I think it really echoes what you've, you've, you've seen in the Baltic index reports, you know, there's, there's, there's, you know, relative relief, but not necessarily compared to historical precedents. And, you know, again, a lot of this depends on the recovery trajectory of passenger aviation, because forwarders traditionally have relied heavily on the belly hold to, move around 50% of their, their shipments that are moving by air. And so with, with passenger with international passenger aviation, you know, not really expected to recover before 2024 2025 at the earliest. You know, it's some ways off before we see, you know, a major change in this situation. Kuehne+Nagel isn't really expecting much in terms of rate relief for or a change in the high yield dynamic, until 2022. And, and even then, you know, it's, there is an expectation that it's going to be a dramatic reduction. Pleased to be, Caryn Livingston right, it does seem to be a bit of a slow return to normal belly freight capacity. Although some promising conversations I've had with the combination carriers recently have noted that they are able to use the support from the higher air freight rates to kind of subsidize, expanding their passenger capacity on some routes. So looking back at the Baltic analysis, and kind of what it tells us about rates now and in the months ahead, one of the most interesting parts of that analysis to me was kind of the volatility within the month, as we saw with, you know, the higher rates that then dropped during the holiday and recovered for the end of February. So, given the much higher pricing levels, combined with this volatility, this, this really stands to have a major impact on freight forwarders, who may be looking for, for spot rates in the market. And it seems like the spread of spot rates is likely to to remain quite high, which kind of makes up to date pricing information. Very important for those who are who are in the spot market right now. Even there's so much variance even between origins in the same region, as we saw with Shanghai and Hong Kong, as well as week over week, and I believe that uh, that the Baltic analysis mentioned that rate negotiations between shippers, forwarders and carriers have been just extremely short term so far this quarter, on a weekly or even a per shipment basis. So, one, one element that that kind of stood out to me. And the analysis is, is the note that kind of the lack of available capacity is driving increased interest for more freighters. And the February analysis, noted that the passenger to freighter conversion market is picking up and that's something that you cover course very closely on cargo facts. And as the Baltic analysis noted, there are only so many conversion slots available. So can you maybe give us a bit of insight on what the outlook is for more capacity into the market from converting Traders in the near term. Charles Kauffman Oh, I can't say that I was expecting a freighter question, but I will I'll definitely take it. Yeah, so if we look at the, you know, the number of parked aircraft, you know, why don't we just convert them and, you know, alleviate the, the lack of freighter capacity and address that immediate? Well, it's not that easy you as you mentioned there's certainly a lag between you know that that initial decision to convert an aircraft and actually adding capacity to the market. And it you know, if we, if we go back to pre-COVID even, there was there's quite a lot of pent up demand for conversions particularly on the narrowbody side, because we had all of these new programs can we write about these extensively in cargo packs, the 737 NGS and the A321 family conversions and many of the aircraft that you know, are now in today's market decent candidates for conversion, they were tied up in passenger service because of the 737 max grounding. And so, there was kind of a shortage there. You know, without getting into it too much. I would say that, you know, right now, most conversion houses and OEMs that manage conversions, they are almost universally either very tied up working on new programs or are in the process of or have recently set up additional conversion capacity for their their existing programs. You know, Boeing has added capacity for its 767 AEI which converts the 737 classics and other narrowbody aircraft has set up new lines in Canada and in China. You know, pretty much every every major program has has added new lines and even without additional capacity, good luck getting a slot. I mean, he I would say at this point even in 2022 is is quite difficult. Most of those conversion slots are are accounted for by Amazon is a major customer but also the carriers that fly on on behalf of the major Express carriers. A major fleet modernization is underway and that was the case before COVID and it continues to be the case and you're not only are we facing the capacity crunch, but also we're seeing booming demand for e commerce and now that that creates a healthy dynamic for time sensitive Express deliveries that brings the narrowbody freighter fleet into into service. Caryn Livingston But unfortunately, it sounds like no new flood of capacity into the market from converted freighters. Charles Kauffman No there's no switch I mean they do have there are a number of temporary solutions you know so we've seen that the passenger freighters which is essentially using a passenger aircraft on its own and some airlines have been successful in removing seats and operating their fleet as a package trader but it's it's not quite the same as a freighter so no yes. Caryn Livingston Okay, well that wraps up our conversation for today but thanks again Charles for joining me for this episode of On Air with air cargo world. Charles Kauffman Yeah, sure, anytime Caryn,

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