CSCMP's Supply Chain Quarterly
December 18, 2018
Forward Thinking

International air freight to have tradable futures market

Comment
TAC Holdings establishes platform to remedy pricing "inefficiencies."

The international airfreight industry is the next transportation mode that's about to have a tradable futures market.

A Hong Kong-based group called TAC Holdings said today that it will publicly disclose next Tuesday the existence of an international air freight futures market to correct the "historical" pricing inefficiencies in the $100 billion global air commerce industry. The platform actually became available about three to four months ago on Bloomberg and Reuters databases, according to Cameron Honarvar, CFO of TAC.

In a statement today, TAC said the lack of transparency of air freight services has resulted in chronic mispricing that imposes unnecessary costs on air freight users. It is unclear what financial exchange it will trade on.

Airfreight joins dry bulk and container shipping, and later this year, U.S. non-contract, or spot, truckload services, all of which have some type of futures market attached to them. With the truckload platform, initially called "TransRisk" but since re-branded as "Freightwaves," TAC hopes to establish a mechanism allowing participants to hedge the direction of spot rates and manage price risk. By doing so, they can protect their margins against sharp fluctuations in spot rates and the market's reaction to them, Honarvar said. Separately, the International Air Transport Association (IATA) said today that global freight demand in April rose 4.1 percent from the same period a year ago. This was up from the 1.8-percent growth rate in March, the weakest year-over-year growth in nearly two years. Freight demand is measured in freight ton-kilometers, defined as one ton of freight flown one mile.

Freight capacity, measured in available freight ton-kilometers (AFTKs), grew by 5.1 percent year on year in April 2018. This was the second time in 21 months that capacity growth outstripped demand growth. The last two years were notable in that demand generally outstripped capacity, reversing a trend that had been in place for years before that.

The weak demand figures in March gave credence to IATA projections that retail replenishment activity had slowed, and with it the surge in demand for airfreight that was behind last year's stellar numbers, the best in seven years. IATA pointed to the Institute for Supply Management's (ISM) monthly Purchasing Managers' Index (PMI) for manufacturing and export orders, which fell in April 2018 to its lowest level since 2016.

IATA Director-General Alexandre de Juniac said today that the airline trade group is cautiously optimistic that demand growth will be around 4 percent for the year. Risks to that forecast include higher oil prices, which may cut into consumers' discretionary spending, and rising protectionist rhetoric from various key governments.

The three major regions—Asia-Pacific, Europe, and North America—all reported volume growth of less than 4 percent, according to IATA data. Capacity exceeded demand in all 3 markets, the group reported.

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