Shipping companies are currently forced to opt for longer sea routes around the Cape of Good Hope in Africa, leading to a significant increase in maritime freight rates. The extended sea routes are causing schedule disruptions at ports, escalating the risk of congestion in Northern European regions. Presently, the top priority for shipping companies is to catch up with schedules, resulting in prolonged return trips of empty containers to Asia. This has created a shortage of container supply at the source, reducing the ability to load additional goods from manufacturing units.
In addition to these factors, shippers need to assess the impact on their capital if they have to increase inventory for several weeks to compensate for extended shipping. Although air freight rates may be higher by 13-15 times compared to sea freight, retailers and manufacturers may find air transportation cheaper than adding extra storage for inventory.
Some companies, such as Tesla, Volvo Cars, and Suzuki Motor Corp, have temporarily halted their car production lines in Europe due to shipping delays related to the situation in the Red Sea. Certain retail units of Stellantis – the 6th largest global car manufacturer – have mentioned that Stellantis is opting for limited-capacity air transport to avoid congestion. French food producer Danone stated that they would switch to air transport if conflicts in the Red Sea persist for more than 2-3 months.
"For every manufacturing company, there is a tendency to immediately leverage air transport unless there are other impediments... Before choosing air transport, are there other transportation methods such as rail, sea-air, or alternatives?" said Bjorn Vang Jensen, Chief of International Transportation at engine manufacturer Cummins.
Xeneta's analysis suggests that the combination of sea and air transport from China to Europe via Los Angeles could be a better option than traditional alternatives. It is only 2.6 times the pure sea freight rate from China ($1.33 vs. $0.52/kg), with a shorter transshipment time by 5 days compared to the traditional air route via Dubai. An air-sea shipment from Dubai currently costs $1.61 USD/kg – three times higher than the pure sea freight rate – and is only a few weeks shorter than the sea route.
According to market analysis companies, the potential increase in demand for sea-air transport could drive spot rates from Dubai to Europe higher than pre-pandemic levels. Demand on the route increased by 11% in the two weeks ending January 7 compared to the previous two weeks, a period that usually sees a two-digit decline in normal years.
Freight rates in the Red Sea change more slowly than the supply. TAC Index data shows that air freight rates are now 29% lower than the same period last year after declining since the beginning of the year and stabilizing by January 22. The index experienced a 15% increase in mid-December due to strong demand in the last months of 2023.
The Freightos Air index shows a 6% weekly decrease, reaching $3.34 USD/kg from China to Northern Europe. Freight rates from China to North America decreased by 10% compared to the previous week, reaching $4.84 USD/kg.
But there are warning signs of a more resilient pricing in the low season. While air freight rates from China have decreased since the beginning of the year, rates from South Asia to North America have increased by 12%, and rates from the Middle East – a crucial transshipment point for sea-air options – have risen by 13% in the past week.
Xeneta, another data provider, announced on Friday that the volume of air cargo from Vietnam to Europe - a major trade route for textiles - increased by 62% in the week ending January 14. Demand rose by 12% compared to the same period, higher than 6% during the peak week in October. Freight rates on this route increased by 10% compared to the previous week due to additional capacity pressures.
Experts suggest that prices are also being driven by a reduction in export volume as Chinese factories are anticipated to close for the Lunar New Year starting on February 10.
Xeneta states that as the market returns to a balanced state after the pandemic, many businesses will commit to signing longer-term fixed-rate contracts in the last quarter of 2023. Contracts of 6 months or longer signed with logistics service providers or airlines account for 73% of the total contracts. Shippers are less interested in one-month contracts, as the market tends to increase prices for immediate transactions.
