Episode Transcript
[00:00:00] Speaker A: When you're under constant threat of missile or drone attack, don't tell me the Dubai airport can operate normally with more
[00:00:07] Speaker B: than four and a half thousand flights a day that we have, that affects us everywhere.
[00:00:11] Speaker A: Forwarders are right now scrambling to figure out how can they get creative to reroute cargo, particularly for their most valuable shipper customers.
[00:00:20] Speaker C: If you think you're in the Trans Pacific trade and you're going to avoid the implications of this, think back to the ever given.
[00:00:26] Speaker D: So you better move quickly if you need capacity in this market.
[00:00:29] Speaker B: But if it drags on for four months, yeah, that will be very, very tough.
[00:00:34] Speaker A: When oil goes to 120, there are just a lot of decisions about how many times we fly from Chicago to New York. Right.
[00:00:49] Speaker C: Hello and welcome to Air Cargo Unpack the Freight Buyers Club production. This content is brought to you by Ontegos Cloud, the freight forwarder profitability specialist. And as ever, I'm delighted to say I'm joined today by Neil Jones Shaw. Hello, Neil. We're in Lima.
[00:01:04] Speaker A: Hello, Mike. We are in Lima at the World Cargo Symposium.
And you know, this year's show has really been dominated by the war in the Middle east. And I'm looking forward to unpacking everything that that means for, for supply chains around the world.
[00:01:19] Speaker C: Yeah, the implications are huge. We've also got, joining us later, we got Jan Krems, the President, United Cargo, and we've got Peyton Burnett breaking down rates from TAC Index. But Neil, I've got to say I, I have to get something off my chest because I came here from tpm, the big shipper conference in Long beach. And as you do, as this war was breaking around us, you get chatting to people and of course everyone's on trade and they're looking at it from their own point of view. Shippers are worried about costs going up. Carriers maybe looking at slightly different. There's profits to be had.
But there was a general sense of why is there a war? Is this in the U.S. national interest? No one, particularly from people, Republicans from Democrats. I'm not being political. There was a general consternation about why the world was at war. I know you went in the States at the time, you were over in Asia. What was the view from Asia?
[00:02:12] Speaker A: Yeah, you know, Mike, they do call it a war of choice for a reason. And so we don't talk about politics on this show. But I'll tell you, I was in Asia as this conflict was breaking out and actually, you know, I was at Air Cargo India. And as that conference ended this war began and so didn't get any feedback from that conference. But as I transitioned to transition to Hong Kong, there was a surprising ambivalence to the conflict. I think people it hadn't yet sunk in sort of what was going on and the global implications. The only thing I heard from people is wow, I hope my gasoline prices don't go up. We which is a common concern for most everybody around the world, particularly in developed economies. As the week wore on and as I transitioned into China, I think there started to be greater concern around what's going to be the impact on capacity, how long is this going to last, what's the impact to my supply chain and oh, what's going to happen to yields?
And so there was growing concern over the severity and the length, the potential length of the crisis and how it was going to impact their pocketbook.
[00:03:22] Speaker C: Yeah. Anyone who wants to get a real in depth insight into capacity can check out an interview I did with Rotate where we've got some great graphics on that.
As a point of reference, the Middle east represents something like 20% of global air cargo capacity. Now in recent days we've seen the Asia Europe trade line has been massively affected. At one point had lost something like 40% of capacity. This is all going on with airspace closures over the Middle East. But also let's not forget for Russia, for a lot of carriers as well, there's big limitations on operations.
How the forwarders, how do carriers and how should shippers be approaching and planning for what comes next?
[00:04:05] Speaker A: Well, you know, the good news is, is that as an industry, we've gotten pretty good at, at handling crisis. Right, Crises because we've been thrown a lot of them over the years. But I think specifically with this crisis right now, because it is unique in the sense that it is impacting a specific part of the world. But the global ripple effect of this is quite phenomenal.
And so from a carrier perspective right now, carriers are evaluating the cost of flying.
Right. Because jet fuel is the second biggest cost for most airlines. And with it spiking, you know, just in the past 24 hours, we've seen jet fuel, you know, spike to 118, come back down now to 84 today. That's a phenomenal move. That's a $32 move in jet fuel over the course of, you know, 36 hours. We haven't seen anything like this in modern history. But carriers are evaluating if this war continues, where do they continue to fly, at what frequency do they canc or suspend routes altogether. So that's an analysis that's going on in C suites at carriers. Forwarders are right now scrambling to figure out how can they get creative to reroute cargo, particularly for their most valuable shipper customers, ones that they have very strict SLA with that they have to protect their supply chains. And so forwarders, just like during COVID are starting to get creative, trying to figure out how do I route in different directions, how do I use different carriers, different hubs, how do I combine sea and air together in order to come up with a solution? And so all those discussions are happening. There's no obvious answers to any of this, but all of these conversations are happening and I suspect it's going to be a major topic of conversation this week here in Lima. And I think you're going to see a lot of deals get done over this new challenge.
[00:06:04] Speaker C: Fantastic, Neil. We'll come back to some of those innovations because as you say, there's opportunity there, but there's going to be a lot of scrambling as well.
I let's see what's going on with those markets and rates. I caught up with Peyton Burnett, who's the founder of TAC Index, which powers the Baltic air freight indices, a little earlier, and I started by asking him where rates are going and what key markets buyers should be looking at right now.
[00:06:32] Speaker D: Yeah, well, let's jump straight into it. Exciting times all around.
If we have a look at our new BAI Spot India market, what you'll see is being severely impacted with price surges both from India to Europe and India US east coast and India US West Coast.
The main signal indicator you can see from our charts is the gradient of the curve and you can see they're shooting up. So there's problems on that market if you move a little bit further afield where you see a few more nuances.
If you look at the new BAI Hong Kong spot market, again to US East Coast, west coast and to Europe, you'll see Europe again severely impacted.
And for the first time it's actually priced higher than the Transpac market there. So that's a point to note. You can see a little bit that the gradient for the pricing to the east coast is higher than the west coast, but all those pricings are up.
Moving on to outbound Korea, again moving further away from the epicenter of the war.
What you'll see is the Europe market again severely impacted.
East coast, or in this particular case is Midwest into Chicago is impacted, but less significantly, but more interestingly is the west coast market is flat.
So what that sort of gives you an idea that these prices are being driven by demand rather than fuel.
[00:08:06] Speaker C: Because the fuel point is really quite intriguing at the moment. We've had these crude oil prices have been absolutely flying through the roof. They're going up as we talk, they're going up. And obviously that crude oil price dictates where jet fuel prices go. And that's a key component of any sort of freight rate, including air cargo rates.
So what will this mean if so far the movements have been about demand? Are we going to see these prices come filtering through in the weeks to come?
[00:08:32] Speaker D: Yeah, I mean historically there's always been a bit of a lag with a jet fuel surcharge.
So in all our indices that we publish, essentially an all in rate, which is the air cargo rate, a fuel surcharge and a security surcharge. I was talking with the Baltic exchange and the Singapore exchange earlier this morning.
A couple of weeks ago the market was thinking it's going to be short war. So the price for oil is at $80 a barrel. I think today is up over $120 and going up further. So a longer war is expected.
You know, how does this impact air cargo? There's also longer routing with the flights in some cases.
The other thing to start looking out for in my old days as a charter broker when the oil prices went over $90 a barrel, you know, you would start to consider two engine aircraft rather than four engine aircraft. And so we do have some of these older freighters on the market, like a bit more older747,400 factory builds which start to get more expensive.
So maybe that impacts the market.
[00:09:41] Speaker C: Peyton, what happens if this disruption continues? Where do you think prices might go?
[00:09:46] Speaker D: Well, I've been talking to a number of the actual charter brokers on the market in Hong Kong when this first kicked off. Again, there's just limited supply on the market anyway.
You may recall that we had a number of MD11s coming off the market last year and haven't recovered there.
There's limited sort of new build and conversions coming on the market. So it was just very little slack in the market anyway.
And so the charter prices that were quoted, you know, typically maybe from India to Europe and the US price might be around 3 to $500,000. It was already being quoted when the war kicked off, $1.2 million plus. I mean a lot of people bulked at that. But there's not much options in the market. So if you've got to move it and your factory's Shutting down then, then you've got no choice. So you, you better move quickly if you need capacity in this market.
[00:10:44] Speaker C: We've had these conversations going back over the years, Peyton, when crises have hit, I suspect I know what your answer might be. Should shippers have been hedging for this?
[00:10:54] Speaker D: Yes. Well, these are the new tools that we're looking to introduce into the market.
This is why we built these new buy spot indices so you can use it as a settlement price for these types of instruments is really for the buyers of freight where would help most. So it's a bit like having insurance. You could pay a small premium to ensure that your prices don't go above a certain amount. You either exercise that option or you don't. But it's really for the shippers to push this, for the forwarders and airlines to adopt these new risk management tools. So it's up to you, the market, to try and get this into action.
[00:11:33] Speaker C: Neil, as we heard there from Peyton, we got spot rates and charter rates surging almost by the day. Some of this is still feeding through and we'll look at fuel in a moment. But what are you hearing in terms of pricing at the moment?
[00:11:46] Speaker A: I think very similar to what Peyton presented to us is that at the start of any crisis, right, you see carriers reacting very quickly. And if you're trying to procure capacity during the early days of a crisis, it can get very expensive.
And so we have seen prices spike, not in every lane segment, but certainly for capacity that is solving sort of an immediate need to get cargo out of a trade lane affected by, you know, the closure of these Middle east airports. So I would concur with Peyton 100% that you know, we're seeing a surge in not only spot prices, but charter pricing as well.
[00:12:24] Speaker C: And how will people expect to see the fuel price increases come through on their bills as it passes through the air cargo supply chain? There's always a lag as fuel, as fuel prices go up, of course.
[00:12:35] Speaker A: So you know, there are two components, right, to all of these price increases. One is a carrier's ability just to make incremental profit. And let's be honest, you know, that, that, that is carriers are going to take advantage of that opportunity to, to drive profitability where they can now. Increased jet fuel prices certainly doesn't drive profitability and those do get passed along to shippers and typically it just happens with a fuel surcharge.
It is a practice that's very common in this industry now for 20 plus years, shippers and forwarders are all used to it. It's a mechanism that typically gets reset every couple of weeks. It's not even implemented in most trade lanes where there's all in pricing. But some trade lanes do have FSCs and now I suspect every trade lane will have FCs and these might get updated on a daily basis, if not a weekly basis. So let's see how that happens. But there is a mechanism and to pass these through, it typically is a week to two weeks in arrears. But carriers do get usually fully compensated for the additional fuel cost.
[00:13:39] Speaker C: There's a big thing here with the air cargo, Martin. We can't really ignore what's going on in shipping lanes. It's not just the Strait of Hormuz is closed that's obviously affecting the fuel prices on the container shipping side.
There's not really going to be any escape from this disruption which I'll just. I'll just lay out a few things that are going on there. We, we've got the Suez Canal. A lot of carriers are looking to go back through that. That's not happening. That means they're all going to have to go around Southern Africa.
That takes out a lot of capacity and it has upward pressure on prices. But let's not forget there's a whole load of cargo that has been stranded. This is end of voyage, they call it on the bill of lading. If your cargo was going anywhere near the Middle east, you might find it's going to be dropped off somewhere in India or Sri Lanka. We're also getting insurance costs surging in the eastern Med, right across the Middle East. There's going to be surcharges for fuel coming in. If you're trying to get equipment. If you think you're in the trans Pacific trade and you're going to avoid the implications of this, think back to the ever given because what happened then is that the Suez Canal was closed for a week. The implications of that dominoed out right across global container trades. And the same is going to happen again. What you're going to find is you're competing for equipment because that's going to get in shortages loading out of Asia. So if you're bringing stuff into the US you're going to be in that same market with everybody else. Now, from an air cargo perspective, it's an opportunity perhaps.
[00:15:03] Speaker A: You know, air cargo executives are one of the most creative bunch of people I've certainly ever worked with. And so I think that there's going to be a lot of opportunity that comes out of this crisis. Right. For those that can react quickly, that those have the ability to repos assets, for those that may have sort of traffic rights, that they're not leveraging fully, there will be opportunity to come out ahead, you know, during this crisis. But overall, I don't think we should underestimate just the, the loss of capacity with just these big Middle Eastern carriers being not fully online is, is something that we may not be able to sort of make up in the world. And that's something that we have to watch very carefully. And, you know, one thing is that I know that all of these carriers have restarted flights in the Middle east, but when you're under constant threat of missile or drone attack, don't tell me the Dubai airport can operate normally when these sirens are going off multiple times a day. It's just not possible.
And the traveling public is also quite nervous as well. And so, you know, there are going to be much broader implications than just sort of air cargo here. So look, I think there's going to be a ton of creative solutions that come out over the coming days. I think that we'll execute on a lot of those. But I think if this crisis continues to drag on, the loss of capacity is going to be felt far and wide.
[00:16:36] Speaker C: We'll just take a short break and we'll be back for more analysis from me and Neil. And we'll be joined by United Cargo's Jan Krems.
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[00:17:17] Speaker C: and now I'm delighted to say that as promised, we are joined by Jan Krems, who's the president of United Cargo. Welcome to Air Cargo Unpacked, Jan.
[00:17:28] Speaker B: Thanks, Mike.
[00:17:29] Speaker D: Good to see you.
[00:17:30] Speaker C: Good to see you too. Let's just get straight into this. How has United been affected by war, by chaos in the Middle East?
[00:17:38] Speaker B: Yeah, we are affected like any other airline is affected.
And yeah, we have to see how we deal with it. I found out yesterday that 21% of the capacity goes or is linked to the Middle East. We are not that much affected as that 21%. But we have to see how we deal with that. I mean, for example, as the cargo organization, we don't fly to Tel Aviv or as the passenger organization in general, we don't fly to Tel Aviv. But we found a freighter partner that helps us now for our customers to fly the freighter from New York to Tel Aviv. So we look at other alternatives and opportunities to see how we tackle that. Now, for example, the kerosene, the fuel, the prices went up dramatically. I think it's even 60, 70% higher than, than, than, than, than it was before. I mean, with the more than four and a half thousand flights a day that we have, that affects us everywhere. So that really has a big impact on the company itself.
Although most of the flights are domestic and that maybe has less of an impact than, than the international network, but still also it impacts the fuel there as well because it's not only the flights there, but every flight is affected. But we look at alternatives, we talk to our customers to see how we can help. There's a lot of backlog in a lot of places. How do we tackle that? How do we deal with it? Do we find alternative routes? I mean, I always tell you I'll not own, I don't want to own freighters, but I like to have access to freighter capacity. And that's why we try to find, see if that works and if it's also affordable because also now for those rates also they go sky high. So it still has to be, yeah, it has to be positive to deal with it. But we talk to each other with the team every day to see where are we and with our customers, where can we help each other and how do we, how do we continue with doing this?
[00:19:24] Speaker C: Me and Neil were talking earlier about the sea cargo that's getting abandoned in different parts of the world, particularly around the Indian Ocean, India, in Sri Lanka. Presumably you'll be having conversations with your customer to see how you can help them out on the air freight side.
[00:19:38] Speaker B: Yeah, so we do that anyway. I mean, I'll not prioritize certain products. I mean, for me it's just how can we help our customers and then our friendly customers who we always work with in good and bad times to see how we can, how we can make sure we, we get their cargo transported as soon as possible. And, and we see also some flows because of the sea freight that comes to us or that comes to, to, to air transportation. And we have to tackle that if we have space also to deal with that, but again, at the moment, I mean, there's so much backlog around the world that we have to deal with.
And again with the customers we deal with in the day to day business, we have to help them first.
[00:20:16] Speaker A: Jan, it's really, really great to hear about the creativity and I think, you know, I commend you and your team because I think that you guys have shown a lot of creativity over the years. I remember when Covid started, you know, you were one of the first carriers to launch passenger freighters and actually you and I did one of the first big deals for passenger freighters out of Asia to the US So. So that's great. And I think creativity is going to be really, really important as we navigate this crisis. But one question for you is that as this crisis drags on and actually, you know, your CEO Scott Kirby has been very vocal to say that this is going to have a material impact on the company's, you know, financial performance.
Not only given the fact that jet fuel has, has obviously spiked, but also the loss of several routes, you know, the Dubai, the Tel Aviv, etc. That you're no longer able to fly. So just give us a little bit of a flavor for just the velocity of the conversations that are happening at United right now. Is it, is this a daily conversation where the networks are being, you know, revisited? Is it, are you meeting once a week like give us a little insight as to what's going on at corporate headquarters?
[00:21:28] Speaker B: I think at corporate headquarters is an hourly conversation because I think that's really necessary with what is happening. What I said before, so 21% of the world capacity maybe goes or is touched by the Middle East. It's less for us, but again, I mean we don't fly to these destinations. Is there a possibility that you use these planes to other network that you can, but is that short term possible to deal with?
You have to see, of course the fuel increase. What you said is amazing and has really an impact on your bottom line.
A company very healthy. So we will sing this out, but it is just not good. And that's what is wise to do.
What are opportunities and how also because I think there's a lot of customers who are scared to fly, have nothing to do with the Middle East. But I think the whole perception of flying is different.
And so we have to tackle how do you deal also with your customers and how can you make sure that that trust will come back or will stay and that's. It's tough.
And again, I mean, what will happen in the next 30 days. We hope it's finished by then. At least it finished even earlier. But if it drags on for four months. Yeah, that will be very, very tough.
[00:22:39] Speaker C: Well, to both of you, I mean, let's just to finish up here, what is the worst case scenario here? What happens if it does drag on for months?
[00:22:47] Speaker A: I'll give you my $0.02. I think that as Jan mentioned, 21% of the capacity flows through the Middle east and that's material because the carriers that are there are incredibly impactful to this business. When you think about Qatar Emirates number one and two cargo airlines, Etihad not far behind. Right. Just in terms of the depth and breadth of their networks and schedule, very, very critical to the movement of air cargo around the world. But I think. So that's obviously going to have an impact. Less capacity, it's going to mean higher yields worldwide because these guys are connecting freight in every which market. But I think the bigger concern for me is that, you know, you think about the Strait of Hormuz, you think about how much oil is flowing through. There are 20 million barrels a day. Right. Storage capacity is now completely full in the Middle East. They're going to have to throttle back production, you know, quite significantly. How quickly that can restart is anyone's guess. But that to me could end up being a bigger choke point because, you know, we've seen the oil markets fluctuate wildly over the past 48 hours. But if this strait actually does get closed and we feel it's closed for a longer period, that's going to have just a material impact on people's ability to continue flying. Even in markets that aren't impacted. When oil goes to 120, there's just a lot of decisions about how many times we fly from Chicago to New York because oil is a global market and it impacts all of these sort of things. So that's what we just have to keep a really, really close eye on.
[00:24:20] Speaker B: Yeah, And I think really what Neil is saying, it's that impact of the fuel. I mean, if we really, and I read it, I saw it on television this morning also, if that really is not sorted out and if that straight will really be closed or whatever, the impact will go not even 120 like it touched yesterday, it will even go to 150 or higher than that. And it's also the production at a certain stage is down and before you get it even up, it will take weeks again. So those price will stay very high. And at a certain stage there will be a moment that it's not affordable to fly anymore for people. It's not affordable to operate a plane. And then, yeah, I mean, it will really have an enormous effect.
[00:25:00] Speaker C: Thank you very much for joining us today, Jan.
That's it for this episode of Air Cargo Unpacked. This was produced with the support of On Teagles Cloud, the freight forwarder profitability specialist. We've got a lot more content coming to you from IATA here, but for now, I'm Mike King.
[00:25:19] Speaker A: I'm Neil Jones. Shaw. We look forward to seeing you in.
