Retailers pay more to fly everything from bikes to hot tubs from China as backup at U.S. ports delays deliveries

  • Peloton said its profit margins during the last three months of the year were squeezed by $100 million in extra shipping costs.
  • Recreation vehicles and parts that used to ship by ocean have shifted to air freight.
  • Seko Logistics expects U.S. importers to ship by air more in the coming months to avoid the maritime delays.

A ship with 197 containers of Peloton bikes and merchandise circled at anchor just outside the Port of Los Angeles right before Christmas, entering a holding pattern on Dec. 22 until it was allowed to dock Jan. 2, according to global shipping data company MarineTraffic.

"The ship, and Peloton's expected supply time, lost 12 days due to this while their product was nearly within swimming distance of shore," said trade data analyst William George of Import Genius. "This is a crazy illustration of the problem Peloton and other U.S. importers are struggling with."

The combination of record container volume arriving at the Port of Los Angeles — the busiest container port in the Western Hemisphere due to its proximity to Asia — and Covid-19 delays are slowing down imports coming to the U.S. According to the International Longshore and Warehouse Union, around 800 of its 15,000 members have been out of work due to Covid-19 — either recovering from the virus or otherwise quarantining at home.  

The record congestion at ports across the world has some companies forgoing maritime shipping for air freight to get popular or seasonal items on store shelves faster. Not only is it saving valuable time, but it's also saving money. Air rates are still more expensive than shipping via ocean freight, but they've been dropping in recent months, according to the online international freight marketplace Freightos.

400% increase

"While air cargo had its period of volatility in the first few months of Covid, tracking a 400% increase between February and April 2020, ocean freight has become a bottleneck in global supply chains, making air cargo a more viable option in some cases," explained Eytan Buchman, chief marketing officer of online international freight marketplace Freightos.

Some of the congestion at U.S. ports is expected to ease as more longshore workers get vaccinated against the coronavirus, which started Feb. 12. Just 5% of longshore workers have received vaccinations so far, said Gene Seroka, executive director for the Port of Los Angeles. He said the port is lobbying "all levels of government" for more vaccines to help ease port congestion.

Peloton, which declined to comment for this article, referred CNBC to the company's quarterly shareholder letter released last month. The company said its profit margins during the last three months of the year, during the critical holiday shopping season, were squeezed by $100 million in extra shipping costs.

"The global increase in shipping traffic has added significant delays to all sorts of goods coming into US ports, including Peloton products," Peloton CEO Josh Foley said in a Feb. 4 letter to members. "These unpredictable delays have resulted in painful delivery reschedules for many people as Peloton Bikes, Treads, and accessories have been held at Port for upwards of five times longer than usual." 

Peloton's December shipment is just one example of the variety of goods getting held up at U.S. ports.

Waiting to dock

As of Monday, there were 30 container vessels at anchor outside the ports of Los Angeles and Long Beach, according to MarineTraffic data. Another 30-plus container ships are expected to arrive at the Port of LA and 27-plus are expected to dock at the Port of Long Beach by the end of March. Among the anchored vessels waiting to unload at the Port of Los Angeles is the APL Charleston, which carried the delayed Peloton deliveries in December. She arrived again fully loaded with Chinese exports on Feb.18.

The delays in December weren't unusual, said Capt. Adil Ashiq, executive of MarineTraffic's  U.S.  Western Region.

"It is a reality many vessels, supply chain and logistics providers are currently facing at the Port of Los Angeles and Port of Long Beach," he said in an interview. Port congestion data shows the median time a container ship spent anchored outside the dock last week was just over 7.5 days before it could head inland, Ashiq said. "Now that the APL Charleston is back at anchorage, she may face similar circumstances as she did from her previous port visit in December, but of course this is shipping so anything can happen."

The bottleneck at ports has added costs to maritime shipping that make air freight, which is normally significantly more costly, look like a relative bargain — especially when factoring in the time saved. Prices on air shipping have dropped dramatically in recent months.

A 250 kilogram air shipment with a full container from China to the U.S. dropped in price from about about 60% of the cost of a full container to just about 36%, he said.

"In other words, for the right type of cargo, and certainly the right value, air is absolutely becoming a more enticing option, with both capacity and far faster transit times," explained Buchman of Freightos.

Hot tubs and bikes

The time saved in transporting a product justifies the cost for some clients who are trying to meet consumer demand, said Brian Bourke, chief growth officer at Seko Logistics.  

"If you want to ship a hot tub via ocean from Shanghai to New York, that will cost you around $1,000 for the transportation for a lighter hot tub, but it will take a minimum of 35 to 45 days," he said in an interview. That doesn't include an additional seven to 14 days if you need to book in advance, he said. Airfreight costs around $2,000 to $3,000 to ship, depending on the weight, he said.

"But it will only take you three to four days to get your hot tub," he said. "So, paying two to three times will save you four to seven weeks right now. Ultimately the math makes sense for certain shippers right now."

Kim Peterson, transportation manager of Canyon Bicycles USA, said they are shipping most of their inventory via water, but their most popular bikes are being shipped by air freight to meet a surge in demand.

"Air is faster, and we need to meet the demand of our customers," he said. "While I could pay an additional $1,000 to $2,000 to get my product in (an ocean) container at the head of the line in China, it doesn't matter because the cargo then sits in the LA congestion."

60 to 75 days

Before the pandemic, shipping by ocean took 20 to 30 days, he said. Now it's about 60 to 75 days while air freight takes three to five days, Peterson said. "It's a huge difference. We have a backorder in Asia right now," he said. "We can't wait. It would have an impact on sales."

Shawn Richard, vice president of global air freight for Seko Logistics tells CNBC they don't expect the peak congestion to end anytime soon.

"We are regularly flying 65 inch televisions in from China to the U.S.," explained Richard. "We saw a 40% increase in air freight in December. Large items like hot tubs were also being transported. Our ocean freight teams are now selling air freight."

Richard says large home recreation items like ping pong tables, and exercise equipment such as treadmills, would typically be shipped by ocean because of the cost.  Now they are moving by air because of a spike in demand. The Covid-19 pandemic has people locked indoors but looking for ways to stay fit and entertain outside.

"BBQ equipment and associated goods such as lawn/patio furniture, inflatable pools, filter equipment, and everything that could be used to improve the shelter at home experience in lieu of family vacations are now moving by air," he said.

The lack of trade reliability has stretched the functionality of logistics and supply chains to their limits.

"We see those industries who need expedited shipping being pushed into the air versus the hurry up and wait on the ocean front," said Matt Castle, vice president of air freight products and services at C.H. Robinson. Recreation vehicles and parts that used to ship by ocean have shifted to air freight, he said. "One of the things I never thought we would see being moved by air was vacuum cleaners. It's a hot item now with so many people at home."

Seasonal deliveries

Castle explained the drive to air is a combination of factors: companies with a narrow seasonal window for selling products and production-based industries looking to restore some sort of rhythm and playing inventory catch up.

"The ocean congestion is compounding that need to meet orders and driving demand for airfreight," Castle said.

Stephen Svajian, CEO and co-founder of Anova Culinary, which sells its precision countertop combi-ovens and cookers to COSCO, Target and Amazon, said they are increasing their air freight orders given the surge in demand fueled by the "restaurant experience at home."

"We decide on what products to air freight based on the retail set date and consumer expectations. We don't want to be out of stock and not fulfill orders," Svajian said. "There is more pressure to use air this year because of delays on the ocean."

This logistical strategy of moving some products to air is not only happening in the United States. Castle said they are also seeing companies in Europe making the switch. "That market is very strong. There is a lack of container capacity everywhere."

Ag exports

Air is also becoming an option for U.S. exporters struggling to transport their products overseas as carriers decline U.S. ag exports in favor of sending back empty containers. Carriers make far less shipping exports from the U.S. to China — $744 per container versus $4,922 for Chinese exports bound for the U.S. The time and money saved by not having to load, unload and clean empty containers makes up for the lost money on the route back to Asia.

It's also costing U.S. farmers who are struggling to ship their commodities overseas. Their access to international markets "is being severely undermined by the unprecedented dysfunction and cost of ocean transportation services," said Peter Friedman, executive director Agriculture Transportation Coalition.

Richard of Seko Logistics said spices and perishable commodities like lobster started shipping by air to China as early as October.

There doesn't seem to be a quick fix to unclog U.S. ports, which leaves companies like Canyon with few options.

"In the cycling world, when the sun comes out, people want to take a ride on a bike," said Canyon's Peterson. "Demand is still high. It's quite obvious, we will have to continue and do more air."

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