Air cargo set for index-linked BSAs and derivatives
25 / 04 / 2018
The air cargo industry could have its first index-linked block space agreements (BSA) completed within six months while a derivatives market is also being launched.
Shipping derivatives broker Freight Investor Services (FIS) and rate index TAC Index have teamed up to develop and launch a paper derivatives product, known as forward freight agreements (FFAs).
Meanwhile, Reuters reports that the Baltic Exchange is also considering launching an airfreight index. This could also potentially be used for index-linked BSAs and paper markets.
It today announced the start of a container shipping index in partnership with Freightos.
FIS head of strategy Michael Gaylard told Air Cargo News (in an interview in the upcoming May edition) that FFA markets can take a while to develop and before this happens index-linked BSAs – where carriers and forwarders peg BSA prices against a rate index that fluctuates along with the market – will take off as a first step.
He expected the first index-linked BSA in airfreight to be signed within the next three to six months.
Index-linked contracts offer the advantage of taking the hassle out of constant price negotiations – when navigating the spot market – as the amount paid will automatically fluctuate.
Parties will also always pay the going market rate rather than risk losing out if the market goes the opposite way to their fixed-price BSAs. That said, they also stand to lose out if the market swings in their favour.
FFAs will come later and will allow forwarders and carriers to use a paper market to hedge against the BSAs they have signed, in the same way airlines do with fuel.
However, a paper market in container shipping failed to take off because shipping lines didn’t buy into the concept, meaning there was a lack of counter parties to strike deals on the paper market.
Gaylard does not anticipate this being a problem in air cargo because there is a drive from end users for pricing stability, visibility and clarity, particularly from the growing e-commerce market.
"The air cargo freight market is undergoing a transformation; growing rapidly, with volumes expected to more than double in the next 20 years, it also faces threats from new entrants challenging established business models and promising new levels of transparency using tools that threaten long-standing relationships," FIS said.
Using TAC Index, FIS will publish a forward price curve, helping market participants with forward planning and budgeting, allowing them to better forecast expenditure and manage budgets effectively while also gaining more flexibility.
Buyers and sellers of cargo space will be able to improve price discovery on physical fixed rate contracts, strike index-linked floating BSAs and use air cargo FFAs to lock in prices.
In order to generate the maximum liquidity in this emerging market, FIS has developed a series of geographically-focussed baskets to represent the most popular routes.
Currently available baskets include the six biggest routes on Asia-Europe and Asia-US, generated on a volume-weighted basis set on an historical basis and priced against weekly index publication.
“This is a market that is ready for take-off: strong growth, high volatility and an annual value of $70bn with $20bn worth of goods shipped daily,” added air cargo business development manager Nicola Hughes.
“The size of the air cargo market – 35% of global trade by value, but only 1% of trade by volume – puts huge amounts of value at risk every day that needs to be managed.”
See the May edition of Air Cargo News for a full interview with FIS