Cargo delays will continue, but air freight option has to be balanced against skyrocketing prices, UPS officials say.
Cargo delays at the ports of Los Angeles and Long Beach could get worse before they get better, but shippers looking for a faster transportation alternative should be aware that air freight from Asia is fraught with capacity and pricing challenges, UPS officials said Tuesday.
The logistics integrator has direct exposure to all sides of the supply chain equation related to West Coast ports, which were subject to work slowdowns and manpower shortages as collective bargaining between the International Longshore and Warehouse Union and the Pacific Maritime Association deteriorated into acrimony. In recent months, cargo that once was processed in several days has taken four to five weeks to leave the docks once discharged from a vessel. The two labor parties reached a tentative contract settlement on Friday, but their respective memberships must still ratify the deal in the coming weeks.
As one of the world’s largest ocean NVOCCs and a major customs broker, UPS is managing the movement and clearance of cargo through West Coast ports for shippers. It’s contract logistics and domestic transportation management arm provides specialized warehousing and distribution services. UPS is also a huge air freight forwarder and operates the world’s second largest cargo airline, allowing customers with time-sensitive or high-value goods to quickly get goods to market.
In a webinar designed to promote the company’s range of capabilities, UPS officials said that as Southern California longshoremen become more productive, container flow through terminal yards will still be constrained by pre-existing, systemic problems such as poor chassis availability, reduced truck capacity associated with difficulty retaining drivers, and long lines at the gate.
Los Angeles and Long Beach could take three months to clear the existing backlog, Los Angeles Port Director Gene Seroka said Monday, while other port authorities along the coast have tried to set expectations of about two months for a return to normal conditions.
But UPS officials cautioned that there is an avalanche of cargo backed up at sea that will soon hit the ports and make the recovery that much more difficult.
In addition to the 30 vessels sitting offshore in San Pedro Bay waiting for a berth, there are 61 ships, accounting for 340,000 TEUs, that have been added into the Asia-U.S. trade lane during the West Coast port crisis, including 14 vessels routed to the East Coast, according to research firm Alphaliner. Carriers added the capacity and sailed slower to maintain regular schedule integrity because vessels were stuck at West Coast ports and unable to return to their port of origin in time to pick up new loads.
“So it’s going to take some time for the carriers to rotate those extra ships out of the trade, back into their normal usage,” David Harlow, director of ocean trade lane management at UPS, said. “This not going to be a quick recovery.”
As a frame of reference, when local clerks in Los Angeles and Long Beach went on strike for one week in 2012 and ILWU longshoremen honored the picket line, it took six to eight weeks to clear the backlog, Eric Souza, director of marketing for UPS global forwarding, said.
“This is a much more severe situation,” added Souza. “There are more vessels, carriers have been extra slow steaming, so the situation is much worse. It will take longer to recover.”
Meanwhile, air freight capacity from Asia continues to tighten on transpacific routes as many shippers shift ocean cargo to the air mode in order to avoid the port bottlenecks.
The global airfreight market experienced a second-half resurgence last year, with Asian carriers benefiting from a 5.4 percent overall increase in freight ton kilometers, according to the International Air Transport Association.
Expeditors International on Tuesday reported fourth quarter earnings per share of 51 cents, ahead of Wall Street estimates, due mainly to better air freight volume growth caused by the West Coast port disruption. The forwarder’s airfreight growth rate surged from 10 percent in November to 19 percent in December, while its ocean freight growth fell from 10 percent to 6 percent during the same period. Fourth quarter operating income for the company increased 18 percent to $157.9 million on a 9 percent gain in net revenue to $518.9 million. Net air freight revenue increased $16.8 million from the fourth quarter of 2013.
All-cargo carriers such as Atlas Air also stand to gain from the ocean-to-air conversion of freight. In the third quarter it had eight Boeing jumbo jets in commercial charter and generated $143 million in revenue from that division, according to a recent client note from BB&T Capital Markets analyst Kevin Sterling.
There will likely be an additional spike in demand toward the end of the first quarter as shippers try to pull in needed inventory following factory shutdowns during the current Chinese New Year celebration, which fell 2.5 weeks later than in 2014, Stuart Lund, vice president of air capacity and procurement at UPS, said.
This capacity crunch exists even though air carriers have deployed extra aircraft to take advantage of the booming market. The reduction in fuel prices during the past six months has even led some charter operators to reutilize older aircraft, such as MD-11s and 747-400s, that were idled or retired, Lund said. Higher rates and low fuel prices means the inefficient planes are now economically viable to operate and the lease costs are less than a newer 777 or 747-8.
Jet fuel prices have fallen 40 percent in the past year, with most of the drop occurring since October. It can take months, however, for airlines to see the benefit on their bottom line because of hedging programs that may have locked in prices before they fell and vendor procurement arrangements, he said.
Carriers that typically reduce capacity immediately after the Chinese New Year likely will hold off longer on implementing their summer schedules because of the extra business caused by the port situation, which will give shippers more ability to find space for their cargo, Lund said.
There has been a steep jump in charter rates in recent weeks from key markets such as Japan, South Korea and Hong Kong, where most of the demand exists, he added.
The strong demand for charters from Asia to the United States gives exporters a silver lining because air charter operators, which are looking to quickly reposition aircraft to Asia, are willing to provide relatively economic backhauls.
“We have been able to identify those backhaul opportunities at very competitive market rates,” said Lund.
But no one should be deceived into thinking that the robust air market will quickly untie the Gordian knot at the West Coast ports, executives said.
Most of the volume surge connected to the West Coast port congestion is being served by scheduled freighters or charters, which carry 15 times more cargo than a passenger belly hold.
The average charter aircraft can hold about 100 tons, compared to one 40-foot container (FEU) that can carry 18 tons of goods. It would take between 360 and 700 wide-body aircraft just to accommodate the tonnage on one 4,000-6,000 FEU ship.
“Where it makes sense, I think air freight and air charters are a great solution…You need to be strategic about what you decide to upgrade,” Lund recommended.
As a freight forwarder, UPS is able to flex up capacity through additional block space allocations with air carriers, chartering aircraft and using UPS Airlines, which leased extra aircraft in February and March to meet package and heavy freight demand from automotive and other customers.
Companies such as Lululemon Athletica, Nissan, Honda, Subaru, Ann Taylor and Chico’s have reported using air transport to avoid supply chain disruptions.
UPS is also offering U.S. customers for the first time a sea/air product through Dubai, by which cargo is transported via ocean to the Middle East freight hub and then transferred to an aircraft for the second leg of the journey. The company has previously offered the sea/air option for shipments to Europe and Latin America.
“What’s new is using Dubai as the relay to come to the U.S.. Generally speaking, that is not a cost-effective routing,” Harlow said. “But given the West Coast congestion issues, and the premiums placed on the ocean freight pricing, we see it as a viable alternative for the time being as a contingency plan.”
The sea/air option is offered from 27 Asia origins, including all the major Chinese ports and ports in Japan, Southeast Asia and the Indian subcontinent. Dubai has an efficient customs process that enables the transshipment, according to UPS.
Sea/air is seven to 10 times more expensive than ocean freight, but it provides a 40 percent gain in transit times and comes in well below traditional air freight pricing. Under normal market conditions, air freight can be eight to 10 times more expensive, on average, than ocean, but today pricing is 30 percent to 50 percent higher than usual depending on the origin/destination pair and customers’ transit-time requirements, UPS officials said.
Average full-capacity 747 charter rates from China and Japan to Los Angeles and Chicago have risen more than 50 percent since Feb. 10, according to UPS data.
The company recommends that shippers identify their most critical orders and weigh the cost of air freight against the downside of not having product on hand, late delivery penalties or canceled orders from customers, cash flow, and just-in-time manufacturing requirements.
Shippers are also experiencing sharp rate increases for diverting cargo from the West Coast by ocean. The Shanghai Container Index for booking cargo on the spot market is at an all-time high, with rates to reach the East Coast by all-water routes about 2.5 times more than via the West Coast.
Harlow said the actual price paid is even greater because shippers, including logistics companies like UPS, have to pay premiums to ocean carriers to guarantee their shipments will get on a vessel in a timely manner.
“We expect East Coast and Gulf all-water services [to Houston] to remain very full for several more months,” he said.
Air freight market heats up as West coast port congestion worsens
