Freight shipping peak season: like death and taxes, it’s one of life’s few certainties– and is fraught with almost as many questions. What is peak season? Why does it cause prices to rise? And is there any way to avoid it?
We sat down with Tal Kohn, Freight Market Pricing Analyst at Freightos, to understand how the shipping process works, how it relates to pricing, and why that leads to seasonal price spikes. We’ve written up everything you need to know right here, and included the video for your convenience.
So let’s dive into air and ocean peak season.
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- What really happens with your cargo as it gets shipped
- What goes into your freight quote
- How and why ocean and air freight prices go up during peak season
- When is peak season?
- FAQ for ocean and air freight peak season 2019
- Planning Air and Ocean Shipments During Peak Season: The Full Webinar
What really happens with your cargo as it gets shipped
To understand peak season, first we need to understand the step-by-step process of getting freight from an overseas factory to your warehouse. This process varies by shipping mode.
How an FCL shipment works
In FCL shipping, the first step is having your factory produce goods and load those goods into a container. Then a truck picks up the goods and brings them to the seaport, where the container waits to be loaded onto a vessel by crane. After loading, the goods set sail across the ocean. This part of the journey is what we refer to as ocean freight.
Once the vessel reaches its destination port, a kind of reverse process happens: the container is removed from the vessel by crane, waits at the seaport for a few days while customs is cleared and pickup is arranged, and then a truck transports the container to its final destination warehouse.
FCL has the simplest operational flow: the container is closed from the time that it leaves the factory and isn’t opened again until it reaches that final destination warehouse. There’s no extra handling or consolidation along the way.
How an LCL Shipment Works
LCL shipments have more steps than FCL because instead of sending a fully loaded container from the factory, you’re sending pallets or boxes. These smaller packages are picked up by a truck, but instead of going straight to the port, they need to first stop at a consolidation warehouse to be placed into a container along with other LCL shipments.
Placing goods into containers is more complicated than it sounds: forklifts needs to be used to move goods around, loose boxes need to be palletized, Amazon shipments may need labeling or other handling. In short, a lot of human touch as well as a variety of equipment go into preparing LCL shipments for a safe and secure journey.
At the destination seaport, the reverse happens once again: after cargo is removed by crane, it’s trucked to a deconsolidation warehouse, where the container is opened up and your goods are separated from everybody else’s so they can be picked up and delivered to your warehouse.
All of these steps are necessary for air freight as well, except that goods are loaded onto a plane instead of a ship. And as we’ll see, in both LCL and air freight, all this extra handling affects pricing.
What goes into your ocean or air freight quote
Here is a sample FCL quote (click to get a closer look):
This quote is broken down into the five sections of the shipment, corresponding to the parts of the shipment process we discussed:
- Pickup is just as it sounds, covering pickup charges from your warehouse or factory
- Origin Terminal Handling includes crane operation and storage at the origin port
- Ocean Freight covers the main leg of the journey
- Destination Terminal Handling refers to the costs of crane operation and storage at the destination port. In shipments to the United States or Canada, such as this one, these charges are included in the Ocean Freight amount
- Delivery encompasses costs of trucking to your destination warehouse
Here’s a sample LCL quote (click to get a closer look):
In an LCL quote, there are more line items in the origin and destination charges, corresponding to the additional handling that’s done at the consolidation and deconsolidation warehouses.
Another thing to note: in an FCL price quote, the ocean freight portion makes up a large part of the overall quote, whereas for LCL, the ocean freight is a much smaller part of the quote– in this case, it’s even lower than the origin and destination charges.
Air freight quotes look more similar to FCL in that the main freight– that is, the portion of the journey where your goods are actually airborne– accounts for the largest part of the quote.
The following chart illustrates this point:
For FCL, ocean freight accounts for 50% of costs. Similarly, for air freight, the air portion of the quote makes up 52% of the price.
Now we can start to see where peak season spikes have the greatest impact: Since for FCL and air, the ocean or sea portion of the journey is so significant, peak season rate increases can raise overall rates significantly.
On the other hand, for LCL, where combined origin and destination charges make up 40% of the quote and the actual freight costs are less than 10%, a peak season increase will have very little effect. In that way, LCL is largely immune to the volatility of peak season.
How and why ocean and air freight prices go up during peak season
Let’s take a step back to explain what peak season is and why it happens.
Peak season is all about the holiday shopping season. Starting with Thanksgiving and Black Friday going all the way through Christmas, people buy a lot more goods than usual. That means sellers need to produce and stock a lot more goods than usual.
Since so many businesses source their goods in China, China exports are the primary shipments that are affected.
When is peak season?
Even though shopping season starts at the end of November, peak season begins much earlier because shipping must be done in advance.
Ocean freight requires three to six weeks of lead time, which means good need to ship sometime in October. But if seasonal products ship from October to early November, what about normal, non-seasonal items? Those need to be produced and shipped even further in advance, causing additional shipping starting as early as August.
Air Freight is different since transit time is much shorter. Air freight peak season starts in November and goes until the first-second week of December.
Find out more about when peak shipping season 2020 is here!
How much can ocean and air rates change during peak season?
To get a sense of how much rates increase during peak season, let’s analyze the data from 2018 and 2019.
As we said, peak season for ocean freight runs roughly August– October. In 2018, a few other factors affected pricing fluctuations: the China-US trade wars, and additionally, prior to peak season, the ocean freight market had been somewhat depressed.
The following image shows 40-foot container pricing trends for East Asia to West Coast USA in 2018-2019. Let’s break it down:
How peak season affects FCL prices
The first spike, on the left, shows a big price jump at the beginning of July, 2018.
This has to do with the fact that the market in early 2018 was depressed relative to 2017, and in July it started to catch up, bringing the market back to its regular levels.
The second spike, in August, shows rates jumping from about $1,550 to over $2,000 at beginning of peak season.
Then there was another additional jump in September to bring the rate levels to about where they stayed through October.
2018 was unusual in terms of the magnitude of the jumps because peak season coincided with President Trump threatening and then implementing new tariffs, which left shippers scrambling not only to ship their regular and seasonal holiday goods, but also to try to import before tariffs kicked in. With all that demand, prices soared even more than usual, from $1,550 to a high point of $2,350 in September, which is a 50% increase.
This shows the dramatic impact peak season can have on shipping prices.
One final note about 2018: usually after the middle of October rates start to go down for FCL, but in 2018 they stayed very high. Once again, the China-US trade issue was the culprit.
Things have been a lot different in 2019. Most notably, there’s been no peak season spike– in fact, where we usually see rates go way up, we’re seeing them go down.
So what happened to peak season?
For one thing, this year, the China-US trade war has actually lowered FCL prices by lowering demand. It’s done this in two ways:
First, concerned about new tariffs, many businesses shipped in advance while rates were still low. That left much less volume for August.
Second, because so many Chinese imports are subject to tariffs, some people have started moving their production to India, Central America, and other areas. That also lowers the amount of shipping that’s being done from China and the Far East to the United States.
How peak season will affect air freight prices
In a typical year, air freight increases during air freight peak season can be quite dramatic: from one week to the next, rates per kilogram can increase by a dollar or more. We’ve even seen rates increase by the day or even by the hour.
In 2019, things might play out differently. We don’t yet know what will happen, but we do know that so far this year, demand for air freight is significantly down internationally.
So rates, while still having fluctuated over the course of the year, have stayed more stable and low than they have in the past.
Given that rates are already down and volumes are low, it’s possible that airlines will not raise rates as much as usual during air freight peak season. They’ll need to consider the risk of losing business due to higher rates when they’ve already been hit by the general market.
Additionally, here too, the rise of production outside of China might mean air freight rates won’t jump as much as they have in the past.
However, none of this is certain. Since ordinarily, air freight peak season is a very volatile time of year, even if rates don’t get as high this year as they have in the past, you probably want to try to avoid getting into a situation where you have to rush air airfreight.
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FAQ for ocean and air freight peak season 2019
What should I expect for the remainder of peak season 2019?
Peak has been pretty quiet so far and we have reason to believe that it will continue to be less intense than usual. Shipping FCL seems stable at the moment, LCL is immune to wild fluctuations in any case, and for air, do what you can to get shipments moving now, since we can’t yet know how prices will behave this year.
What is the best way to prepare for peak season?
The best strategy for peak season is to make sure that you have a good handle on your supply chain. Know your budget, production, and freight costs. Analyze the cost of shipping early and storing inventory versus running into peak season prices. Understand how much tolerance you have for increases in FCL, and do everything that you can to avoid air freight peak season.
Peak season is a reality in this market. And while shippers have been very lucky this year to avoid it so far, try to produce as quickly as possible to continue to avoid it.
Should we expect any dramatic ocean price increases in the near future?
The way that rates are set is that carriers have to report a month in advance if they’re going to be increasing rates, and if so by how much.
Often, carriers will announce an increase, let’s say by $1,000, but it ends up being an empty threat and they don’t increase by that much. What’s been happening over this peak season is that the initial announcement is not anywhere near $1,000, with carriers instead announcing increases more in the $500 range. Given that the threats are already not as high as usual, and that rates have been decreasing instead of increasing, there is reason to believe that we’re not going to see drastic increases over the next couple of months.
That being said, carriers are also noticing that rates aren’t going up, so they’ll be doing whatever they can do make sure they do. For example, one strategy is called blanking sailings, which means canceling sailings. In this way, they reduce the supply, which means they can increase rates. Carriers used this technique earlier this year, and they may wind up using it again to try to generate the extra revenue they usually see during peak season.
Will President Trump’s decision to not implement new tariffs after saying he would wind up contributing to lower peak season pricing?
Maybe. The trade environment has been so uncertain for so long that many people, as we mentioned, have done their advance shipping already, which helps keep prices lower by avoiding the rush. It’s likely that since Trump has formally announced that he will not be increasing the tariffs until after the holiday season, it will keep the rates low, but probably not lower than they are right now.