Red Sea Risks Point Shippers to Air Freight

Glenn Taylor
·4 min read

Air cargo demand saw its strongest year-over-year growth in almost two years in November, rising 8.3 percent to 22.4 billion cargo to-kilometers (CTK) over the year prior, according to data from the International Air Transport Association (IATA).

This represents the fourth consecutive month of rising air cargo demand, and is the biggest since an 8.4 percent uptick in December 2021. But with the conflict-ridden Red Sea off limits for major container shipping companies like Maersk and Mediterranean Shipping Company (MSC) and ocean transit times increasing, shippers could look for shipping solutions in the skies.

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Brian Bourke, chief commercial officer of Seko Logistics, has seen an increase in quote requests and inquiries about air trade lanes, especially in the Asia-to-Europe route most impacted by the disruption.

“Air freight is going to be an option that you’re going to pull on when you need to,” Bourke said. “We’re seeing more of that in Asia to Europe. We will absolutely start to see the same in Asia to the U.S., because when ocean rates go up, then the difference between ocean and air starts to shrink. The higher the value your goods, the more likely you are to convert to air freight.”

According to the IATA, flights out of Asia Pacific and the Middle East saw the biggest jumps in demand, at 13.8 percent and 13.5 percent increases in CTK. North America saw the lowest increase at 1.8 percent.

Although demand is expected to rise, air freight rates are still working in shippers’ favor. As of Wednesday, the China-to-Northern Europe weekly price fell 25 percent to $2.98/kg, according to the Freightos Air Index. China-to-North America prices stayed level at $5.85/kg, while Northern Europe-to-North America weekly prices fell 13 percent to $1.82/kg.

Compare this to the massive week-over-week leap in per-container ocean spot freight rates, with Drewry’s World Container (WCI) showing the Shanghai-to-Rotterdam lane up 115 percent to $3,577, and the Shanghai-to-Genoa route up 114 percent to $4,178. Across all lanes, spot rates jumped 61 percent to $2,670 per container.

Air freight demand is still down compared to November 2019 pre-Covid levels, seeing declines of 2.5 percent CTK on a four-year basis. That may change as importers load up on inventory ahead of February’s Lunar New Year, when Chinese factories close for two weeks.

“Supply chain managers that work for companies that import and export goods are risk averse,” said Bourke. “They do not like risk, so they will avoid it. That’s why the companies pulled away from the West Coast, it’s too risky. Now, companies are going to start to de-risk their supply chains, which means they’re all going to start to look at the safer options.”

Air cargo capacity reached 47.9 billion available cargo ton-kilometers (ACTKs) in November, surpassing the 2022 and 2019 levels by 13.7 percent and 4.1 percent, respectively, IATA said.

“There’s as much capacity as there was before the pandemic. That’s not an issue anymore,” Bourke told Sourcing Journal. “A lot of cargo moves in the belly of a passenger aircraft, which were severely constricted during [the] beginning of the pandemic. We’re even expecting more passenger flights between China and the U.S. this year, so we are going to see more…supply, but demand is definitely going to go up, so air freight rates will be highly volatile. They typically are more volatile than ocean, but you’re going to see rate levels higher on both modes for the foreseeable future.”

Bourke expects to see shippers fly goods that typically don’t go through air cargo, particularly orders that would normally be classified as “just-in-case” inventory.

“Now we’re in a situation if you’ve got just-in-case inventory, you have to start to look at flying some of that in order to keep sales orders happening and meet delivery promises,” Bourke said.

DHL Group has advised customers to take a closer look at how they manage inventories as vessels switch away from the Red Sea.

“We generally advise our customers to carefully examine their inventory strategy and, if necessary, adjust it,” DHL Group said in comments to Reuters, adding it could provide alternative air freight and rail options for impacted customers.

As more cargo is expected to be shifted toward air freight, container shipping liner Hapag-Lloyd will keep diverting vessels away from the Suez Canal and around the Cape of Good Hope for security reasons, a spokesperson said on Tuesday.

“We deem the situation still dangerous,” the spokesperson said. “We have daily re-assessments and will have next decisions taken Monday, Jan. 15.”