Airfreight rates likely to remain elevated and volatile in 2021

WITH the outlook of airfreight demand remaining uncertain and belly capacity slowly being re-introduced in the market, airfreight rates are expected to remain elevated this year.

Bruce Chan, vice president - global logistics at investment bank Stifel, said in a Baltic Exchange market update that airfreight rates are likely to remain elevated and volatile for some time, and those looking for reprieve in 2021 may have to be patient.

He said that a lack of bellyhold capacity would drive the high rates as passenger airlines will only slowly re-introduce international widebody services.

"By the second half of 2021, we do anticipate passenger flights to resume, especially as vaccinations pick up," Mr Chan said. "But we caution against over-exuberance, as the first flights to come back are likely to be short-haul, domestic, and leisure, which align less favourably with cargo.

"Core long-haul international travel and the belly capacity that comes along with it will be slower to return, in our view, so capacity relief for cargo should lag the recovery in airline passenger activity."

Mr Chan said that extra freighter and PAX-freighter flights would help alleviate some of the capacity pressure, but there were limits.

He explained that in the short term rates may not always be high enough to justify PAX-freighter flights, while in the long term companies may be cautious about investing in freighter conversions because of concerns about what will happen when belly capacity is eventually ramped up.

On the demand front, Mr Chan said that a faster than expected rise in e-commerce demand, Covid-19 vaccine supply chains and PPE demand would all drive the airfreight market over the coming year, reports London's Air Cargo News.

However, he added: "The full impact of vaccine distribution on air freight capacity may not be as severe as some anticipate, due to the disbursed nature of production and, quite simply, the form factor of the doses - we believe the bottlenecks are more likely to come from container availability, storage, handling, and road distribution."

With an uncertain rate outlook, shippers are looking to index-linked contracts and ad hoc agreements, according to Peter Stallion of air cargo derivatives broker Freight Investor Services.

"Much of the calendar 2021 pricing (full calendar year contracts) has reverted to a toss-up between the old normal for annual pricing and block-space agreements, to the new normal of high market-based price heavily focused on ad-hoc agreements.

"Unsurprisingly, a renewed focus has been placed on both index-linking of contracts in 2021, and dynamic pricing fed through and driven by airlines and forwarders to try to operate more efficiently to the elapsing market. Both of these factors have been driving [derivatives] interest."

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