Transpacific market: from the doldrums to new highs

Source: Cathay Pacific

After a difficult 12 months, carriers and forwarders expect business on the transpacific to take off in the latter half of the year.

Cathay Cargo, the recently rebranded freight arm of Cathay Pacific, is leading the push for a new intermodal service to facilitate flows from the Dongguan area in the heart of Shenzhen’s manufacturing cluster to international markets.

In February, the Hong Kong-based airline and its handling arm were the first players to handle screened and palletised airfreight shipments moved by boat from Dongguan to Hong Kong International Airport (HKIA).

Shipments are screened and unitised at the HKIA Logistics Park in Dongguan and sent by ship to Hong Kong, where they are unloaded in a secure area at the airport and towed straight to waiting aircraft. At the moment this is a pilot scheme that should move to a permanent facility in 2025.

The programme, which is open to regulated Hong Kong forwarders, promises cost savings, improved efficiency and better cut-off times.

It is a reflection of the efforts of the Airport Authority of Hong Kong (AAHK) and operators to revive the fortunes of the territory’s airfreight business after a painful hiatus brought about by the strict zero-Covid policy and, more recently, economic headwinds.

Cathay carried 13.4% less cargo last year than in 2021, while its capacity was down 19% and revenue freight ton km (RFTK) contracted 29.8%.

The new year began for the airline with a 28.1% jump over January 2022 traffic, but this figure is distorted by a seven-day suspension of the airline’s long-haul schedule in January 2021.

Compared to pre-Covid levels, the airline’s tally for this past January was down 42.9%.

Cathay resumed its full freighter schedule last summer, which currently includes 33 weekly flights to the Americas.

It has ramped up its passenger flying since the lifting of the Covid restrictions, with a strong focus on restoring flights to mainland China, aiming to run over 110 flights to 15 cities by end of March.

Cathay is also planning to increase passenger flights across the Pacific this year. In light of current market conditions, the desire of airlines to boost transpacific belly capacity is not particularly strong, though.

Transpacific doldrums

Carriers and forwarders are unanimous that the market is in the doldrums.

“The bottom has fallen out of the spot market, particularly in the transpacific,” says Neel Shah, global head of airfreight at Flexport. “The Pacific has felt it the worst.”

Rates have fallen drastically. According to Freightos, in the third week of February transpacific pricing was down 70% year on year.

Matthieu Casey, managing director commercial of Air Canada Cargo, has seen some recovery in Asian markets after a muted Lunar New Year season. “From a volume perspective and load factors we’re seeing things strengthening – yields are holding and looking a little bit better,” he says.

The airline has beefed up its transpacific schedule from less than 40 flights a week last year to close to 70 and aims to get close to 80 by the autumn, but it is still way down from pre-Covid days, he says.

According to Shah, the transpacific market has been weak more or less across the board, with Hong Kong and China faring the worst. A few markets like Australia have been holding up better.

“Those are niche markets, and there’s not that much capacity,” he adds.

Import volumes through Rickenbacker International airport in Ohio dropped by about a third last year, reports Bryan Schreiber, manager of business development, air cargo.

Most large retailers and fashion chains supply their distribution centres in the Ohio valley with airfreight imports (mostly from Asia) through Rickenbacker, but last year that traffic shrank as companies had ordered inventory early to avoid a repeat of the congestion of 2021, he says.

Despite this sharp drop, the value of goods flowing through the airport was up, reflecting a rising stream of medical devices and equipment and electronics touching down there.

Finding the positives

While categories like fashion saw a decline in traffic, some other sectors held up better.

“Demand for industrials is okay,” says Shawn McWhorter, president for the Americas of Nippon Cargo Airlines. “Demand for automotive continued strong.”

“E-commerce overall demand is steady as we see consistent output despite all the challenges,” notes Tom Owen, director of Cathay Cargo, adding that this sector will remain a key area in the market this year.

By most predictions, there will be a strong turnaround in the market in the second half of the year.

Says Owen: “Market conditions remain challenging in the first half of 2023 as cargo demand comes under pressure from increased supply and a build-up of inventory worldwide. This, coupled with a depressed seafreight sector and macroeconomic concerns, means the transpacific market is facing pressures.

“However, we believe that towards the second half of the year – as supply stabilises, inventories run down and macroeconomic traits improve – will show improvements in market conditions.”

Shah reports that most customers anticipate significant growth in the latter half of this year. “Airlines are firm that business will be coming back at a decent strength in Q3,” he adds.

Until then operators are facing a challenging six months to navigate. “We may test even lower lows,” says Shah.

Shippers have been looking to lock down current rates, but airlines are not committing, as they anticipate demand and rates to climb.

Dedicated lift

Flexport is conducting more business on the spot market this year and next, but it will also retain its dedicated freighter capacity, which comes courtesy of three B747 freighters leased from Atlas Air.

Shah is philosophical about the dedicated lift. “There will be times when the cost of that is higher than the market. We have to smooth it out over time and stay committed to our game plan,” he says.

At the height of the pandemic forwarder EFL had daily dedicated freighter flights into Rickenbacker, plus charters and space on other freighters.

Photo: Atlas Air Worldwide

Now this is down to a single weekly frequency provided by Emirates. EFL feeds traffic from southeast and west Asia to Dubai, handing full pallets to the airline.

This means no split shipments or lost cargo at either end, says Evan Rosen, president for the Americas region.

“We have customers that use only that service,” he reports.

He views Rickenbacker as a strategic advantage vis-a-vis congested hubs like Chicago O’Hare. At this point the congestion there is gone, but he doubts it will remain this way for long.

The use of dedicated freighters is lifting the fortunes of second-tier airports like Rickenbacker or Rockford.

Kuehne + Nagel, which is leasing two B747-8Fs from Atlas Air that it deploys primarily across the Pacific and on intra-Asian sectors, recently signed an agreement to establish a gateway at Birmingham-Shuttlesworth airport in Alabama.

Some forwarders, such as DB Schenker, have reduced their dedicated freighter services. Capacity has also shrunk with the end of cargo flights with passenger planes.

Bellyhold update

The China-North America sector has seen a huge reduction in belly capacity, and recovery there is hampered by flight restrictions between the US and China that were implemented during Covid and have not been rescinded.

As a result, United Airlines reportedly delayed planned increases in China flights that were to start in March by at least six months.

In February there were 48 passenger flights from the US to China, compared to 1,255 in February 2019. United was running four weekly flights to China late last year.

The airline stepped up its presence in Japan in January with a new Newark-Tokyo service and the resumption of the San Francisco-Osaka route.

Jan Krems, president of cargo, is looking to leverage United’s capacity from Japan through interline deals with Asian carriers.

First and foremost, he regards this as a way to tap into the growing exports from countries like Vietnam or Cambodia.

“We do a lot of beyond traffic. Typically 60-70% is to Japan, 30-40% is beyond,” says McWhorter. Yields in Singapore and Bangkok are high, but capacity is limited, he adds.

Air Canada, which is about nine months away from taking delivery of its first B777 freighter that will enable it to mount transpacific all-cargo flights, has had enquiries from Canadian customers about reaching markets like Vietnam, says Casey.

Matthieu Casey, Air Canada. Source: Air Canada

He sees some opportunities for interline arrangements, noting that these don’t necessarily have to involve a transpacific leg.

The airline has enjoyed strong flows between Asia and Latin America, which is also a major target for Cathay. Last year the Asian carrier added freighter flights to Mexico City and Guadalajara, where Owen sees promising demand owing to the US–Mexico–Canada Agreement covering trade.

“Traffic to and from Latin America continues to be encouraging,” he observes, adding that Cathay’s capacity for this traffic is on the rise with the resurgence of passenger flights.

“We work closely with our interline partners to feed cargo into Latin America through various gateways.”

While e-commerce has been a strong driver of flows to Latin America, perishables dominate the return legs to Asia.

The westbound transpacific market has held up better than the eastbound sector over the past year, but there is still ample capacity to accommodate traffic from South America.

However, inflation is a concern, as most perishables cannot absorb large price increases.

NCA carries a lot of perishables to Japan when the yen is at a rate of 130 to the dollar, but when it drops to 140, this prices many perishables out of the market, McWhorter says.

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