Dropping Oil Prices Keep Airfreight Rates Low

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The dramatic decline in oil prices is trickling down to airfreight customers. Airfreight rates have been drifting downward for much of 2014. However, they began falling more precipitously since the fourth quarter of last year, in line with plummeting oil prices. The recovery in freight prices is expected to begin in the third quarter of this year, but we will not see positive growth in year-on-year terms until 2016.

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The delay in higher price escalation is due to ample capacity in this industry, which has caused prices to be extremely flat for the past couple of years. Unlike passenger air travel, where suppliers still have market power, air cargo suppliers have little leverage to counteract the decline in oil prices.

Large increases will be difficult to push through given the lower cost environment, but we expect prices to begin to recover during the third quarter of this year. Still, in year-over-year terms, we will see 2015 prices that are 3%-4% lower on average than last year, and it will likely take until the end of 2016 for rates to reach 2014 levels. We expect overall price growth to be above 2% in 2016.


On the supply side, ample capacity will help keep prices low throughout 2015. We continue to observe low freight load factors, which mean only a small percentage of total capacity is filled with cargo. January freight load factors were 35% in North America and 42.8% on average across the world. These numbers do not represent a significant change from this time last year. However, freight load factors have been falling since 2010, when North America achieved highs of 47.5% and global averages were 57.1%.

Meanwhile, demand for airborne trade is finally picking up. After a prompt recovery from the dip in 2009, global airborne trade has stayed relatively flat. However, we saw a 4.6% gain in 2014, and 2015 should match that rate. These numbers look very promising in comparison with -1.7% and 1.6% in 2012 and 2013, respectively.

More recently, a brief surge in air cargo traffic followed the US West Coast port slowdowns that began at the end of 2014. Because of a labor dispute between the International Longshore and Warehouse Union and the Pacific Maritime Association, ports were unable to keep up with normal traffic and ships were forced to anchor before being unloaded. As delays mounted, manufacturers that were anxious to keep up production were forced to fly in parts, although transporting cargo by air is much more expensive. Now, having reached a tentative labor agreement, delays have eased and air traffic will return to normal. However, long-term trends do show air traffic increasing at a slightly quicker pace than seaborne traffic.

Bottom Line: We began to see oil prices pull down airfreight rates in the last quarter of 2014. Rates are expected to remain low throughout 2015 and begin to rise slowly as oil prices firm.

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