Middle East conflict: Flexport shipping air freight ‘express ocean’

The severe disruption to air freight traffic on the Asia-Europe trade lane as a result of the military conflict in the Middle East has led U.S. forwarder Flexport to take the “creative” step of offering its customers an ‘express ocean’ service.

In an interview with CNBC earlier this week, CEO Ryan Petersen highlighted just how vital a role the Persian Gulf region plays in the global market for airborne freight, which explained why the Iran war was having such a significant impact on the sector.

“The region is the home of at least three major airlines — Emirates, Etihad, and Qatar Airways — who, between them, represent around 15% of the world's air cargo capacity between Emirates, Etihad, and Qatar Airways.

“And that's just the air cargo capacity, to say nothing of the importance of the region’s airports. Dubai is the world's largest cargo airport, a huge hub for Asia to Europe airborne trade.”

‘Very Unorthodox New Route’

To the backdrop of the military conflict, air cargo prices between Asia to Europe have doubled over the last two weeks and continue to go up, Petersen claimed. “And that's even before what we're going to be feeling very soon from these heavily-escalated jet fuel prices.”

Shifting to the ocean for air cargo shipments under current operating conditions would mean sailing all the way around the tip of Africa – plans to resume vessel itineraries through the Red Sea having been aborted for fear of renewed attacks from Houthi militia in Yemen – thus adding considerably to transit times, he explained.

“Air freight is time-sensitive. That's why it’s used so much. What we’re going to see is increasing amounts of creativity to get air freight to market. What we’ve done at Flexport is create a very unorthodox, new route. We're shipping ‘express ocean’.”

It entails crossing the Pacific Ocean on a container vessel - “a fast ship that doesn't make any stops, trans-loading at Los Angeles and LAX airport, and then flying it to Europe. It ends up being about half the cost of air freight and twice as fast as ocean freight in getting from Asia to Europe. Getting creative as an industry, that's kind of what our customers pay us to do - finding solutions even in times like this where things are very uncertain.”

‘Much, Much Slower but Cheaper’

Quizzed on the cost to customers of this ‘express ocean’ service, Petersen replied: “Well, it certainly amounts to a saving relative to air freight. The problem is that shipments take about 15 days to cross the Pacific Ocean and then another one to two days to reach an airport and be flown to Europe,” he noted.

“It's much, much slower but cheaper than going 'pure' air freight. However, with the 100% increase in air freight rates, it’s a nice 'middle ground' between air and ocean. That’s the way to think about it.”

Still on the topic of escalating air freight rates driven by the Iran war, the Hong Kong Association of Freight Forwarding and Logistics (HAFFA), which has more than 300 corporate members, has expressed “deep dissatisfaction” at the announcement by “many local airlines” of “sharp increases” in cargo fuel surcharges.

It stated that “the magnitude of these increases by certain airlines far exceeds reasonable limits, is unfair, and will inevitably inflict heavy damage on Hong Kong’s economy and the livelihood of its people.”

According to HAFFA, their monitoring showed that one major airline has raised fuel surcharges on long-haul routes by more than fourfold, while short-haul routes have seen nearly quadruple increases. Compared with the concurrent rise in international crude oil prices of around 30% to 40%, such almost immediate and multiple-fold adjustments were clearly disconnected from actual operating cost increases.

'Unbearable Burden' on Forwarders

HAFFA chairman Gary Lau stressed that airlines must provide clear and transparent explanations of how surcharges are calculated and justified, and establish a public mechanism that links adjustments to actual operating costs.

“Freight forwarders have the right to understand the principle of these charges so they can reasonably account to their customers. If airlines fail to provide sound justification, such almost immediate and multiple-fold increases will be regarded as profiteering from market volatility rather than a genuine reflection of costs.”

He said that this “reckless escalation” was nothing more than forcing an unbearable burden onto freight forwarders and driving overall logistics costs out of control.”

Lau went on to warn that the “massive extra expense” will be passed directly to ultimate consumers, potentially destabilizing supply chains and disrupting cargo flows.

Shippers not Happy

The head of the Global Shippers Forum (GSF), James Hookham, has also denounced the surcharge announcements from both ocean carriers and airlines to the backdrop of the Middle East conflict, which he argues will drive up shippers’ operating costs significantly.

“As an example of the impact, one Australian exporter has told us that these (surcharges) would cost him an additional $250K for his Middle East exports. When MSC’s outrageous ‘End of Voyage’ announcement and arbitrary $800 surcharge were announced, this estimate rose to $600K,” he said.

“This is the sort of behavior that makes shippers despair. It is also the worst way to build the essential sense of trust between customers and full logistics service providers that many of the shipping lines aspire to become.”

Hookham explained that GSF has often emphasized that surcharges are real cash transfers, levied and payable almost in real time.

“In total, the surcharges will have more than doubled the agreed or contracted freight costs for these shipments, but the scope for recovery of them from customers, consumers, or suppliers will take a much longer time to negotiate, so the ‘hit’ stays on the shipper’s accounts as a budget overspend and an increase in working capital requirements in the meantime. For SME shippers particularly, these will be scary times.”

Hookham also noted that while the focus has been on energy exports from the Gulf region, a growing concern of Middle East importers is the non-arrival of essential consumer goods.

“Extraordinary efforts are being made by forwarders and, indeed, some ocean shipping lines to find overland routes to bring in fresh food, live animals, pharmaceuticals, and commodity foodstuffs. There are a few easy options, but this is the proactive, solution-seeking approach that shippers look for from logistics partners, rather than the ‘not my problem’ attitude experienced from some,” he added.