China-Europe air freight rate blip, but forward curve expects Q3 surge
Air freight rates on the China-Europe route surprisingly declined this week but are expected to ...
Exposure to price volatility in air freight could soon be mitigated by the launch of an air freight ‘forward price curve’.
The index could help forwarders manage the risk of rapid price changes in the $70bn market, according to the company behind it, Freight Investor Services (FIS).
FIS spent 12 months working with index provider TAC Index to develop a robust methodology for air freight.
The first weekly ‘forward curve’ covers a basket of routes from Asia to Europe, while next month the company will launch a second, on Asia to US tradelanes.
By using air cargo futures, freight forwarders will be able to manage their exposure – and obtain better pricing.
There are several unknowns in air freight pricing this year. Last year’s bumper, capacity-restricted second half saw rates soar. This year has been more tempered so far, with data providers such as IATA warning that the good times won’t be quite as good for airlines.
But capacity looks set to be constrained and e-commerce could send volumes sky high again. As a result, rates are particularly difficult to predict at the moment, making the ‘curve’ a useful tool.
“As we head into the second half of the year, there are three forces at play: cuts in airfreight capacity; the effect of rising seasonal demand on prices; and the impact of trade tariffs,” said FIS air cargo business development manager Nicola Hughes.
“We understand that the market will take time and education to develop, but faced with increased volatility for all users, there is real demand for an accurate and usable forward curve.”
While some in the industry have been wary of a futures market – one failed to get off the ground in container shipping – FIS remains confident.
“FIS has been working with a number of buyers and sellers in this market, and there is a strong feeling that an over-the-counter (OTC) futures market is workable in the short term,” said head of strategy Michael Gaylard.
“The counterparts in this market already have strong bilateral relationships, which means they are comfortable with OTC trading until full clearing is established.”
This is not the first move into futures markets for FIS. It started broking the $15.8bn commodities futures market some 12 years ago and has supported the development of the $114bn iron ore futures market.
FIS said it believed the air cargo market had reached the point where price volatility required some risk management.
It added that aircraft owners who lease aircraft to airlines could also manage their forward income stream by locking-in forward cover to reduce their exposure.