Air cargo looks to index-linked deals in response to a volatile market

Freight forwarders and shippers are increasing the use of index-linked deals due to current industry volatility.

Speaking on a webinar from data provider Xeneta and Tiaca, the two organisations said that supply chains were facing unpredictability and elongated transit times in ocean shipping due to the Red Sea crisis.

Meanwhile, e-commerce volumes had boomed since last summer with the rise of platforms such as Temu and Shein. 

These two factors had resulted in rising volumes and rates on key trades out of Asia and the Middle East and contributed to industry volatility. 

And e-commerce volumes are expected to continue to surge.

Tiaca director general Glyn Hughes said that e-commerce now represented around 20% of total air cargo volumes, with the figure reaching as much as 60-70% out of South China and Hong Kong.

“We are still only at the starting point,” said Hughes. “The demand from the e-commerce platforms for capacity now for the rest of the year, they are already foreseeing that they are going to increase their need for capacity from where they are today.”

Meanwhile, he added that it didn’t seem that there would be a major improvement in ocean shipping reliability as vessels continue to take the longer route around Africa to avoid potential missile attacks in the Red Sea.

Xeneta chief airfreight officer Niall van de Wouw said that its research showed that as a result of the situation freight forwarders and shippers were turning to index-linked deals, where the rate paid periodically increases or decreases depending on the movement of pre-agreed price indices.

This reduces the need to renegotiate contracts as rates surge or fall.

“We see both shippers and forwarders alike coming up with index-linked type deals,” he said.

“They are looking for a mechanism to still have a longer term deal but share the risk of volatility in a fairer manner.

“We see the push from many shippers in different sectors and major freight forwarders in order to help minimise the workload and have competitive rates through the duration of the contracts.

“Freight forwarders have the stability of predictable volumes and shippers do not need to go to tender each time the market is overturned by some external event.”

It is not just forwarders and shippers that have been turning to index-linked deals. 

In April, Qatar Airways chief cargo officer Mark Drusch told Air Cargo News the carrier was driving the use of index-linked long-term contracts for general cargo to help manage pricing volatility and reduce the amount of time spent renegotiating deals when market rates change.

Meanwhile, Xeneta also noted an increase in the use of spot deals – with rates valid for less than a month – by shippers in the first quarter.

Its figures show that first-quarter spot deals were up three percentage points to 29% of the overall market compared with last year.

Van de Wouw said this was likely driven by shippers wanting to delay signing long-term deals for the peak due to the unpredictable market conditions.

Conversely, freight forwarders and airlines were opting for longer term deals.

The number of spot market deals between forwarders and airlines is down four percentage points on last year to 41% of the overall market, he said.

He said this was partly because forwarders last year were selling long-term deals to shippers but buying short-term deals with airlines. They were then caught out when the market unexpectedly turned and spot rates increased in the peak season due to the Red Sea crisis and surge in e-commerce volumes.

This year they are looking to take a less risky position and more align the deals they buy and sell.

“Also, although we just entered the summer, a lot of forwarders are already thinking about the fourth quarter which will be here in a heartbeat,” he added.

“So we see also more and more plans between freight forwarders and the airlines discussing more longer term deals for that period as well.”

The volatility of the market to outside geo-political events was highlighted yesterday when the US announced a new round of tariff increases on imports from China.

This could result in a surge in volumes in the short term as shippers rush to move goods before the tariffs increase but in the longer term is likely to drive up prices and reduce consumer spending.

Supply chains brace for new US-China tariff war

Qatar Cargo aims for efficiencies with data, index-linked deals and by tackling no-shows