A Tale of Two Cities: Does the data foretell more supply chain imbalance?

We have spoken at length about month-to-month volatility in global air capacity pricing; mostly as a function of a smaller supply shock absorber to short term changes in the demand picture. In the month of April, we saw that observation bear out with several interesting trends in BAI's air cargo capacity pricing data.

First, we mentioned in our previous installment (insert link) that we were seeing some sequential price stability through March. But we also said it was likely fleeting. Indeed, April experienced much greater standard deviation in pricing on most core routes.

Second, although we've seen signs of recovery in supply, demand continues to outstrip available capacity. The result is persistently-high air freight rates, in our view. Hong Kong to North America, for example, broke the US$9/kg threshold in week 16. That reading was higher than at any point in 2020, even at the height of the initial COVID lockdowns and PPE surge.

Some of the reasons for the recent price spike tie into the third potential trend: we are seeing increasing signs of geographical lane imbalance in market demand and capacity availability.

Some of the reasons for the recent price spike tie into the third potential trend: we are seeing increasing signs of geographical lane imbalance in market demand and capacity availability. That imbalance is manifesting via pricing and has significant implications for global supply chains as the market continues to recover from the Pandemic. Shippers, 3PLs, and other stakeholders may struggle to right-size their transportation networks in the wake, in our view.

For the purposes of this monthly column, we will choose to focus on trend number three.

Comparing two large baskets: PVG/HKG to Europe and PVG/HKG to North America, we see that the Europe-bound lanes grew average prices by approximately 7% and 14% from March to April, respectively. That increase is nothing to sneeze at and directionally consistent with normal seasonal trends, in our view. But compare that to North America-bound lanes, with PVG and HKG origins rising 39% and 32% in April 2021 over March 2021, respectively. That sequential ramp is far larger than the low-to-mid-single-digit increases seen in 2019, the increases seen in 2018, and within earshot of last year's 62% and 41% monthly sequential increases from Shanghai and Hong Kong, respectively. Recall that those numbers came during an unprecedented globally coordinated lockdown and as worldwide capacity halved almost overnight.

The growth in personal income levels have been fueling significant demand for retail goods-on top of already historically-low inventory levels-particularly among air freight-heavy categories like e-commerce fulfillment, luxury goods, and high tech, in our view.

First, let us explore some of the potential drivers of this bifurcation in results. We believe they all have a foundation in end-market demand. By the close of Mach, US personal income was up around 30% y/y. Government transfer payments accounted for more than the entirety of the gain, thanks to a significant third round of stimulus, as well as unemployment benefits (to a much smaller but still-material extent). The growth in personal income levels have been fueling significant demand for retail goods-on top of already historically-low inventory levels-particularly among air freight-heavy categories like e-commerce fulfillment, luxury goods, and high tech, in our view. Moreover, differences in vaccination rates and the pace of economic reopening has caused a perceptible divide in brick-and-mortar activity, as well as services and experiential spending, in our view. From a product category standpoint, we believe the implications are for perishables, fresh produce, flowers, and live animals, among others.

But for supply chain planners, what are the knock on effects of the demand dichotomy? If they persist, and if we see a sustained rift in Europe-bound versus North-America-bound pricing, we might expect capacity providers to naturally allocate more lift to the North American demand market. Follow the money, as they say. We might expect already-challenging asset balance and lane balance issues to be exacerbated. And we might expect an uptick in cargo-only flying of passenger aircraft as average prices spike. In conclusion, among the other challenges posed by severe supply chain disruption and scarce air cargo supply, geographic variance in the pace and magnitude of recovery and reopening may create additional layers of complexity and cost for shippers and other purchasers of lift. We continue to look toward the BAI data to see whether last month's results develop into a bona fide pattern, or whether they represent a shorter term blip.

About Bruce Chan, Vice President - Global Logistics, Stifel

Bruce Chan joined Stifel in 2010. Based out of the Miami office, Mr. Chan is a Vice President and Senior Research Analyst covering Global Logistics and Future Mobility. Bruce Chan can be reached at [email protected]. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2021 by J. Bruce Chan.