News #64 - Disruptions churning out resilient air cargo in Asia

“Trade finds the path of least resistance”, “cargo will always find its way”, “crazy”, “overwhelming”, are the terms used to describe the state of airfreight in Asia. However, beyond all the Red Sea, e-commerce, and trade war disruptions, the air cargo industry in the region is preparing for the future.

“Air cargo capacity is up but the Red Sea disruption, together with the e-commerce demand means that so are rates. Exports from Asia via Japan have been surging and we see that impact in all the transit hubs in Asia – HKG (Hong Kong), TPE (Taipei), SIN (Singapore), NRT (Narita). March saw a 10 percent year-on-year volume increase, and rates are expected to rise even more during the peak season.”

These are the words of Joyce Tai, executive vice president of worldwide partnerships, Freightos, that sum up what is happening in the air cargo market of Asia.

“All indications are we are heading into a tight peak season,” says John Peyton Burnett, managing director, TAC Index. “And,” he added, “if you haven’t locked in your capacity you are probably too late.”

The global supply chain connections to and from Asia are heavily disturbed by the armed attacks on cargo vessels moving through the Red Sea causing longer transit times, reduced reliability, port congestions, increased freight rates and shift to air. Meanwhile, increased cross-border e-commerce movements to the West together with trade war between the United States and China is also spicing up the market. The results are congestion in both origin and transit airports in Asia and elevated freight rates on major trade lanes. The uncertainties are also churning out market complexities that are difficult for air cargo professionals to handle or reasonably predict.

Ripple effect of Red Sea

Tai used the word “crazy” to describe the impact of the Red Sea attacks and the diversions of cargo.

“Nobody was prepared for this. So many different types of cargo moved from ocean to air. It was overwhelming for a lot of airports and airlines,” she said.  

She was talking about South Asian countries Pakistan, India and Bangladesh and Southeast Asian countries Singapore, Thailand and Vietnam. She explained further by saying that there are two different types of congestion: witnessed in origin airports as well as transit hubs.

As she said, “The surge in cargo and the congestion is happening on both sides at origin airports like Mumbai, Delhi, Chennai and Bangalore as well as in transit hubs, particularly in the Middle East.”

However, at the source of these demand and diversions lie the retailers in the importing countries.

“You're dealing with larger retailers and e-tailers in the West shifting their cargo from ocean to air because they cannot afford to have empty shelves in Europe, North America,” she added.

Amid all the demand growth and congestion at airports, Tai observed that carriers in South Asia without digital distribution are still struggling when compared to their digital counterparts, leading to frequent booking cancellations.

“Meanwhile, those with digital capabilities see bookings soar by 50 percent," she said. “For airlines that are not fully digitised to every single touch point, the data could be easily lost through layers.”

Disruptions like the Russia-Ukraine war also have an impact on the capacity offered in the market and ultimately the freight rates. Niall van de Wouw, chief airfreight officer, Xeneta noted that it's costing much more time to get from Asia to Europe.

“This means more aircraft to operate the frequency and it puts pressure on capacity and cost,” he said. “If a freighter takes 14 hours instead of 12 or 11, then that has a cost implication.”

He also pointed out that different parts of Asia experienced the Red Sea disruption differently and some regions saw bigger impacts, particularly the countries in the Indian Subcontinent.

“The delay in shipping out of Asia could be seven to eight days, going through around Cape of Good Hope. But from India and Bangladesh, it is 10 to 14 days. Because if you're coming from Asia, you can anticipate that you're going all the way down south, but if you're coming from the Indian subcontinent, there's no shortcut. There's also a lot of apparel companies trying to get their goods to the European shelves, which got concerned, so it pushed off to airfreight,” he said.

According to the April 2024 traffic figures by the Association of Asia Pacific Airlines (AAPA), for the region’s carriers, international air cargo demand recorded a 13.7 percent year-on-year growth.  

On the same line, the International Air Transport Association (IATA) data highlighted Asia Pacific as the strongest of all regions with demand growth.

Concerns over geopolitics and trade war

While these numbers explain the rate of growth of cargo volumes in recent months, logistics companies are already looking to the future. For instance, in its May-June 2024 Asia Pacific Freight Report, Kathy Liu, vice president of Dimerco Express Group, noted that the continuously rising ocean freight rates on the Trans-Pacific Eastbound (TPEB) route, driven by strong demand, are expected to impact the airfreight market.

“It is anticipated that more less-than-container-load (LCL) shipments will switch to airfreight starting in June, especially on the TPEB route, resembling the situation in 2021, she wrote.

“Furthermore,” she also wrote, “with the new tariff set to be implemented in August, it is expected that a surge in products related to this tariff will occupy both air and ocean capacity to meet the expected arrival dates before the tariff takes effect.”

In fact, in May 2024, US President Joe Biden announced new increases in trade tariffs on Chinese imports worth $18 billion, covering electric vehicles (EVs), solar panels, and semiconductors industries.

Meanwhile, in a statement issued by US Customs & Border Protection acting commissioner Troy Miller on May 31, 2024, the law enforcement organisation confirmed that it is coming down hard on the exploitation of the small package, or de minimis, environment and has suspended multiple customs brokers from participating in the Entry Type 86 Test.

The Entry Type 86 Test is a voluntary US Customs programme allowing participants to electronically import small shipments valued up to $800 without paying duties and taxes.

His statement reads, “We are enhancing our enforcement efforts to ensure that all participants are held accountable when they are not.”

“To date, CBP has suspended multiple customs brokers from participating in the Entry Type 86 Test after determining that their entries posed an unacceptable compliance risk,” he added.

Tai of Freightos also raised her concern about the new legislation in the US and trade group opposition that may reduce the flow of e-commerce.

She said, “Temu and Shein are still filling up cargo holds fast but potential legislation and trade group opposition may lead to Temu pulling back from the US, which could free up some space.”

The trade wars and crackdowns could derail the trade and air cargo volumes. However, van de Wouw doesn't think there is a trade war going on between China and the United States.

“The governments and politicians are imposing tariffs but despite all of that there is tremendous trade still taking place between these countries. The impact that we see is the diversions. Goods still originate or partially originate from China and go to Vietnam and then to the US or Mexico and then to the US,” he added.

On the same line, Burnett of TAC Index noted that the decoupling of supply chains is a slow process but they are seeing some structural shifts. 
“We hear both FedEx and UPS for instance are bolstering their operations at Clark Airport in the Philippines, and moving activity away from China. We are told this is probably more due to the fact that US citizens are reluctant to be positioned in China due to current tensions,” he said.

In fact, in March 2024, UPS announced its new Asia Pacific hub at Clark Airport (CRK) in the Philippines. Construction of the new Clark hub is set to begin in February 2025, and it is expected to be operational in late 2026.

Burnett also added, “Some countries are starting to either align with China or the West. Having said that, countries that have more adversarial positions like China and India also have to work together. We hear, for instance, that components for the Apple plant in India are being supplied by Chinese/Indian JVs based in China.”

Both export growth as well as Red Sea disruptions are driving air cargo volumes and rates from India. For instance, Apple's iPhone exports from India almost doubled to $12.1 billion in 2023-24 from $6.27 billion in the previous financial year, according to the trade intelligence platform The Trade Vision.

Beyond the geopolitical disruptions and trade wars, there is a strong demand increase due to the e-commerce growth in this region. According to the December 2023 data of parcel-shipping consultant ShipMatrix, the two Chinese e-commerce platforms Temu and Shein are each shipping one million packages to the US in a day.

Leveraging the rise of e-commerce

Dimerco, in its May-June 2024 Asia Pacific Freight Report, pointed out that, unlike traditional trends in the air freight market, e-commerce and e-cigarettes have been key products driving demand. It also reads, “Additionally, the production shift from China to countries like Thailand and Vietnam has contributed to increased volume within the Intra-Asia market.”

Wilson Kwong, chief executive, Hong Kong Air Cargo Terminals (Hactl), termed Asia as a hotspot for e-commerce. He said, “Both because of the presence of big producer countries led by China and increasing industrialisation in Asia is creating wealth and resultant demand for luxury foreign goods.”

“E-commerce boomed during Covid-19 when many countries were in lockdown, and much buying went online. It subsequently cooled, but has recently returned to strong growth. The reasons for this are not clear except, perhaps, due to the recovery of some economies and a resultant rise in demand for the big ticket items often shipped by air,” he added.  

“For Hactl,” as he also said, “We have been investing in serving this sector, recognizing its long-term potential for our customers.”

Kwong pointed out that new markets are coming up for Chinese cross-border sellers even though the mature markets of Europe and America continue to be the primary targets.

“With the implementation of free trade agreements and the Regional Comprehensive Economic Partnership (RCEP) policy, emerging markets such as Southeast Asia, Latin America and the Middle East are gradually becoming new "gold mines" for cross-border sellers,” he said.

Like Hactl, logistics companies in the region are preparing to leverage this potential and opportunity. For instance, Pete Chareonwongsak, chief executive officer, Teleport, the logistics venture of Malaysia-based Capital A (formerly AirAsia), in a recent media interaction spoke about their vision to offer affordable yet fast same-day and next-day delivery services in Asia.

Along with Air Asia's belly space integrated into its network, Teleport also operates three narrow-body Airbus A321 freighters. The company is planning to add seven more freighters to its fleet and deliver two million parcels daily, both by 2025.

Talking about the growth of e-commerce in Asia and Southeast Asia, he pointed out that the export value of parcels from China to Southeast Asia is $523 billion. “Which means China currently exports more to Southeast Asia than to the United States,” he said.

“During Covid-19, e-commerce became a $130 billion industry, meaning that e-commerce became the way we engage. Now that we are out of the pandemic, we expect e-commerce to be maturing and growing 20 to 25 percent a year. More importantly, consumers' expectations are maturing. Cheap or good delivery isn't enough. They want cheap, good and fast delivery,” he added.

Lim Ching Kiat, executive vice president, air hub & cargo development, Changi Airport Group, informed that they remain cautiously optimistic for the remainder of the year while enduring headwinds such as ongoing geopolitical unrests and supply chain shifts arising from escalating trade tensions. 
‘In light of the emergence of fast fashion giants Shein and Temu, industry observers maintain optimism for e-commerce-driven growth out of Asia for the remainder of the year, especially on Asia-Europe and Asia-North America routes,” he said.

He pointed out the one area in which the advantages of Asia Pacific has borne fruit is the semiconductor sector,

“This is where ASEAN has in recent years seen increased foreign investments,” he said. “Asia-Pacific will undoubtedly continue to play a significant role in air cargo in the long run. In particular, ASEAN is poised to augment its role as a major manufacturing centre, given the region’s advantages of rich resources, competitive cost and skilled labour. With expected advances in urbanisation and industrialisation, the region is primed for growth not only in manufacturing, but also in trade, and logistics,” he added.

Rise of Index Linked Agreements

Even though the future is bright for the region, the current uncertain and volatile nature of the market is visible in the agreement trends between forwarders and shippers.

In a recent Xeneta TIACA State of the Air webinar, van de Wouw noted that shippers and forwarders are now less comfortable entering into long-term agreements.  

“Coming out of the Covid-19 pandemic environment, when there was a lot of uncertainty and hardly any long-term deals, the market calmed down a bit. And there was more common ground for shippers and freight forwarders to enter into longer-term agreements,” he said.

But then, we had the Red Sea situation and a tremendous surge in e-commerce volumes.

“This made shippers and forwarders a bit less comfortable in entering long-term agreements. Because the more long-term agreements you will have, the more uncertainty and hence risk there if you are agreeing on a fixed rate. And there will always be the question on both sides of the negotiation table: Did I enter the deal at the right time at the right level?” he added.

On the same line, Burnett pointed out that the market needs new risk management tools which TAC Index and the Baltic Exchange are developing.

“One example of these is Index Linked Agreements (ILAs with physical delivery) which ensures the shipper is paying at the best price at that point in time,” he said.

“If wholly reliant on spot capacity, the best price may not be available at the time of booking. Fixing a price in the future is also an option but this is a more risky strategy given the volatility of prices. Procurement teams need to change their mindsets from working to a fixed budget to accessing the best price,” he added.

Be it the volumes increased due to Red Sea diversions or the e-commerce demand, air cargo leaders are sceptical about how long they will continue to surge and be there for the long term. And beyond all the geopolitics and trade wars, cargo will always find its way.

Source: https://www.stattimes.com/air-cargo/disruptions-churning-out-resilient-air-cargo-in-asia-1352293?infinitescroll=1

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