Sea-air routes gain as bypass option for Red Sea shipping delays

26.01.2024

The longer the Red Sea risk lasts, the more likely shippers are to divert a portion of their Asia orders from ocean to air carriers. Carriers’ need for vessels to move shipments a longer distance around the tip of Africa is soaking up some capacity and driving up ocean rates. Longer voyages mean vessel schedules for ports are out of sync, creating pockets of congestion in Northern Europe. Carriers may opt to skip some port calls to keep vessels on schedule. And repositioning empty containers back to Asia is taking longer, creating a container shortage at origin and slowing the ability of manufacturers to load the next outbound shipments.

Beyond those considerations, cargo owners need to evaluate the impact on their working capital if they have to increase inventory by several weeks to make up for slower delivery times. Although airfreight can be 13 to 15 times more expensive than ocean shipping, retailers and manufacturers may find it cheaper to move goods by air than to invest in extra inventory.

Tesla, Volvo Cars and Suzuki Motor Corp. have suspended some European vehicle production because of delivery delays associated with the Red Sea situation, while Stellantis said it has used limited airfreight to get around bottlenecks, according to multiple news outlets. France-based food producer Danone said it would turn to airfreight if the chaos in the Red Sea lasted for more than two or three months, the Financial Times reported.

“With every manufacturing company, there’s a tendency to reach immediately for the airfreight lever unless you’ve got an adult in the room who says, ‘When do you need this by? … Before you pull the airfreight lever, maybe you should ask yourself, Is there a rail option? Is there a sea-air option? Is there a deferred air option?’ said Bjorn Vang Jensen, executive director for international transport at engine manufacture Cummins on the latest Freight Buyers’ Club podcast. 

Analysis from Xeneta shows that a sea-air combination from China to Europe via Los Angeles could be a better option than traditional alternatives. It is only 2.6 times the pure ocean rate from China ($1.33 vs. 0.52/kilogram), with a transit time that is five days shorter than a traditional sea-air routing through Dubai. A Dubai sea-air transit currently costs $1.61/kg — just over three times the price of pure ocean freight — and is three weeks shorter than ocean only.

The potential increased demand in the sea-air mode could push Dubai-to-European air cargo spot rates above pre-pandemic levels, according to the market analytics firm. Demand on the route already increased 11% in the two weeks ending Jan. 7 compared to the prior two weeks. In normal years, that period usually experiences double-digit volume declines.

Rates have been slower to respond to the Red Sea situation than volumes. TAC Index, which tracks the cost of shipping goods by air, published data showing airfreight rates are now 29% lower than the same period a year ago after dipping since the start of the year and then leveling out the week up to Jan. 22. The delta had closed to 15% in mid-December as positive demand in the final months took the edge off a difficult 2023, before slightly softening. 

The Freightos Air Index registered a 6% weekly decline in rates, to $3.34/kg, from China to Northern Europe. Rates from China to North America are down 10% week over week to $4.84/kg.

But there are harbingers of firmer pricing in what is normally a slow period. While air cargo rates out of China have sagged since the start of the year, prices from South Asia to North America have increased 12% and rates from the Middle East — a key transshipment point for sea-air options — climbed 13% last week. 

Xeneta, another data provider, on Friday said air cargo volumes from Vietnam to Europe — a major trade route for apparel — soared 62% in the week ending Jan. 14. The demand grew 12% on a y/y basis and was 6% greater than in the peak week in October. Airfreight rates on the corridor moved up 10% from the prior week because of extra pressure on capacity.

Rates are also being boosted by the pull forward in shipments in anticipation of Chinese factories closing for the Lunar New Year holiday that begins Feb. 10, experts say. 

As the market moves back toward post-pandemic equilibrium, more businesses committed to longer fixed-rate contracts during the last quarter of 2023, Xeneta said. Contracts of six months or more signed with logistics providers or airlines accounted for 73% of total contracts. Shippers are less interested in one-month contracts that are subject to the upward trend in market rates for immediate transactions.

Source: https://www.freightwaves.com/news/sea-air-routes-gain-as-bypass-option-for-red-sea-shipping-delays

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