Besides the sustained high level of demand for airfreight, one of the defining characteristics of 2017, has been an ongoing capacity crunch, potentially exacerbated by a driver/pilot shortage that could get worse this year and in the years ahead. These factors have helped push up freight rates to record highs, and in some cases, caused delays for shippers unwilling to pay the premiums generated by the demand/supply imbalance.
It’s easy to lose sight of the market fundamentals in such turbulent times, but C.H. Robinson’s Matt Castle, vice president of global forwarding – products and services, reminded Air Cargo World during a recent interview that, ultimately, its still, “a simple supply-and-demand equation that we’re trying to sift through.”
While conventional wisdom says that the current capacity crunch should make it increasingly hard for smaller forwarders to access space in aircraft, Castle said the effects of tight capacity depends heavily on whether the cargo is shipped on a contractual or a transactional basis. As is so often the case in airfreight, he said, the answer is more nuanced than it would appear on the surface.
Q: What is happening in terms of cargo capacity as we move into 2018?
Matt Castle: Capacity has remained relatively stable. A lot of older aircraft are being replaced with newer aircraft, which has perhaps created a bit more consistency in capacity. As a byproduct of that, we’ve seen capacity increasing at a pretty good pace, from 2014 to the beginning of last year. Starting in 2016, we saw a peak that played out in September/October 2016, and it really never let up. For the majority of the last year, we saw what we would normally consider to be peak-season levels, and then when September 2017 rolled around, we saw a peak on top of that. Now we’re starting to see capacity settle in at maybe a more measured pace, with market demand remaining relatively strong.
Q: How does a contractual vs. a transactional structure affect how forwarders are impacted by capacity changes?
Castle: Those who took contractual positions last year in the market are at an advantage. Forwarders with strong contractual positions had more flexibility in terms of what they were able to do in supporting their customers, versus those that were playing in a transactional phase. What is generally going to be the differentiator is what you are going to have to pay for that space. If you’re in a contractual agreement, typically most of those deals are constructed as follows: a forwarder agrees to pay for a minimum amount of space at an agreed rate, so there’s a certain amount of stability in that contractual pricing. Whereas transactional deals are going to be more reflective of what’s happening in the open market. That said, contractual position can sometimes work against you, because you are committing to a rate, and a certain amount of capacity. If market demand falls off, you could find yourself on the wrong side of that agreement. Given the fact that market demand never really decreased, those with a larger contractual position fared better than those that chose to play the market.
Q: How can forwarders and shippers better anticipate when to use contractual vs. transactional structures?
Castle: There’s so much of our industry that comes down to consumer demand, and that plays a big role in how we choose to make decisions. It’s also the variable that’s hardest to predict. Regarding the North American market, we’re coming off a strong 2017. There were several different factors that played into market demand. Consumers were operating with a high level of confidence. We had the hurricanes that blew through in the latter part of the year. And, we’re all continuing to watch the whole evolution of e-commerce and its maturing process. When we look at the tax legislation that’s taken place, at both an organization and person level, it will continue to perpetuate consumer confidence for the next few quarters.
Q: How is this playing out at C.H. Robinson?
Castle: C.H. Robinson has been pretty well positioned. We’ve taken a more conservative approach in the airfreight market space, but it’s been appropriate for our mix of customers. As a freight forwarder, gravitating towards the trans-Pacific market, where we are a sizable non-vessel operating common carrier [NVOCC], we end up having a fair amount of conversion freight – that’s ocean freight that gets delayed, and is unpredictable. We try and collaborate with out clients to understand what they see on the horizon, and we try and communicate what we are seeing in the marketplace. But, many of them choose to take a transactional position, where they know that when they bring us an opportunity, its typically a situation where the freight has to move. It could be to offset production delays, or maybe getting something to a retailer from a consumer standpoint. So their costs, from a logistics perspective, are part of a series of factors that they are taking into consideration. That gives us leeway in how we establish our position in the airfreight space.
Q: What is C.H. Robinson’s outlook for the rest of the year?
Castle: There’s a general sense where we’re feeling as if market demand will stay strong, so regarding our approach to the year ahead, we’re looking to increase our contractual position in the marketplace. I think that’s a judgement based on many of the variables that we covered in this conversation. From our standpoint, having a stronger contractual position will ensure that we have capacity where our customers need it.
Those interested in learning more about how emerging technologies will impact the airfreight industry are invited to join us at Cargo Facts Asia 2018 in Shanghai 23-25 April at the Mandarin Oriental Pudong, where a round table panel will be dedicated to the topic. For more information, or to register, visit www.cargofactsasia.com3 - Readers Like This Post