Air cargo’s busy season looking more like molehill than mountain peak

June 15, 2023

MIAMI — Extreme discounting by freight forwarders with too much committed capacity in a weak market, plus an influx of passenger aircraft with lower-deck storage, explains the continued downward decline in air cargo rates as demand stabilizes 16 months into a freight recession, according to industry experts.

And while airline and logistics professionals remain upbeat that airfreight traffic will revive in the fourth quarter, generating the peak season boost that was absent in 2022, a more sober realization is taking hold in the face of murky economic conditions.

“The overall market sentiment seems to be changing. More airlines and forwarders are clearly getting nervous and are accepting the fact that hopes of an uptick in peak season demand later in the year are dwindling,” said Niall van de Wouw, chief airfreight officer at Xeneta.

The good news is the slide in air cargo volume has slowed after falling 8% last year — a necessary market rebalancing from the massive high triggered by COVID supply chain disruptions. Not so good is that demand hasn’t hit bottom yet as the soft summer season begins and volumes are below pre-pandemic levels.

The International Air Transport Association (IATA) last week projected air cargo demand will shrink 3.8% and airline cargo revenues will retreat by a third to $142.3 billion year over year as a surge in passenger flights ushers in more belly space and global trade slows. Cargo volumes are 5.3% below 2019 levels and will tick down another two-tenths of a point, suggesting there will be little gain by year’s end, it said.

Yields are expected to be nearly 29% lower than last year, the airline group said.

Still, cargo revenues will remain well above the pre-pandemic level of $100 million as labor shortages and fuel expenses lead carriers to charge more for their services.

Various entities, with differing methodologies and data sources, report that the demand drop is less severe now than in December, when growth was negative 10% to 15%.

IATA’s most recent update showed the amount of cargo carried in April slid 6.6% from the prior year while capacity increased 13.4%. Aircraft space for freight now exceeds pre-COVID levels, by 3.2%, for the first time.

Market intelligence firm Xeneta said chargeable weight dipped 1% year over year in May, the smallest monthly decline in 12 months. It said only 55% of cargo space on aircraft is filled, five points less than a year ago, because of the influx of capacity from passenger airlines restoring international services. And new research Tuesday from Susquehanna Financial Group, which relies on Xeneta weekly data, shows demand now is actually up 1%.

WorldACD, also more current than IATA, said tonnage during the first week of June was 8% below the same time last year.

Market watchers say IATA has the deepest global sample of freight and freight capacity, collected from member airlines, but falls short on timeliness. Xeneta works with a smaller data set from forwarders and airlines and is more Europe-centric but has a reputation for strong data.

The combination of more available aircraft and fewer shipments continues to put downward pressure on air cargo rates. The TAC Index, which benchmarks one-time quotes and long-term contracts, says global rates continue to inch down and are now 48% lower than a year ago.

Some analysts note that the improvement in volumes likely has more to do with easier 2022 comparisons when the Chinese economy was still closed down rather than better demand.

Meanwhile, passenger airlines are pouring planes back into service to meet robust travel demand and the trend is picking up in Asia after countries there were late to reopen society after COVID.

Qatar Airways, for example, recently relaunched passenger service with widebody jets between Doha and Tokyo’s Haneda Airport. It also commenced several weekly narrowbody passenger flights to Sarajevo, Bosnia and Herzegovina, and Nice, France. And Virgin Atlantic began flying daily from London Heathrow to Sao Paulo for the first time.

The combination of rising supply and low demand has pushed rates closer to 2019 levels than any time over the past 42 months. The price to ship by air from Europe to North America is only 10% higher than four years ago, while Asia-to-Europe and Asia-to-North America fronthaul lanes are only 30% and 35%, respectively, ahead of pre-pandemic levels.

Adjusting for fuel, which is more than 40% higher now than in 2018 or 2019, core freight pricing is below the pre-pandemic period and likely to move lower this year, wrote Bruce Chan, senior logistics analyst at investment bank Stifel, in his monthly column for the Baltic Airfreight Index newsletter.

There is a strong correlation between freighter flight hours and freight demand. In May, cargo jet utilization fell 5.3% year over year — similar to the April decline and the 14th consecutive monthly contraction — according to research by BMO Capital Markets. About half of the decline was attributed to lower flight activity within Asia, while the rest was driven by the North America-Europe corridor and within North America.

Flight activity in May was the closest to 2019 levels than any month since the pandemic, highlighting the market’s normalization.

Domestic aircraft utilization is down 12% for the year versus 2022, but five points better than last month, Morgan Stanley said in a recent note.

Indirect air carriers in price war

Airfreight rates are lower than justified by normal supply and demand because some freight management companies are undercutting each other on price to capture market share or attract business to offset costs of operating charter aircraft they rented, according to some logistics professionals.

Freight forwarders, not airlines, are the primary culprit behind air cargo deflation, said Jan Kleine-Lasthues, chief operating officer for airfreight at Hellman Worldwide Logistics, on the latest Cargo Masterminds podcast by STAT Media Group.

Many indirect air carriers, on the hook for dedicated freighters they secured when the market was booming but now can’t fill, are willing to offer ultra-low rates to reduce their losses, especially out of countries like Vietnam and Hong Kong.

“Forwarders are driving down the rates below what airlines are selling,” said Kleine-Lasthues.

Hellmann got rid of most charter leases during the past year and is booking freight with about 10 core carriers in normal scheduled service. “So we don’t have charter planes flying half empty,” he explained.

Similarly, the large German logistics company has significantly reduced the number of block space agreements signed for guaranteed capacity. “We’re surfing the wave of the spot market to get the best out of it,” said Kleine-Lasthues.

At the same time, many shippers are interested in updating their contracts or buying space on the spot market to take advantage of lower rates and forwarders are offering bargains to steal their business from competitors, said van de Wouw in Xeneta’s monthly update.

“Whether they get the business or not, the overall rates drop because shippers often stick with their current provider but expect them to adjust their rates accordingly to this lower market level,” he added.

Peak season crystal ball

Many air logistics companies still trust that the market will naturally swing upward by the start of the fourth quarter as retailers rush to get merchandise to stores for the holiday season. But those same industry players also expected a correction in high inventory levels to materialize by now, leading to more orders and need for international air and ocean shipping.

Airline and other executives said on the sidelines of an air cargo conference here last week that shippers have indicated they will start ordering soon for the fourth quarter.

“From every source we talk to, it seems like this will be a better peak season than last year, or at least there will be one now,” Jared Azcuy, CEO of Alliance Ground International, told FreightWaves. “We’re definitely cautiously optimistic.”

Asok Kurmar, head of global airfreight at logistics powerhouse DB Schenker, said on another recent edition of Cargo Masterminds that he expected shipping activity to get busier in the second half of the year. He also opined that rates won’t drop much further because cargo airlines are starting to park older freighters that are uneconomical to operate at current yields.

Chan noted that shipper forecasts about their expected order flows are increasingly inaccurate. And with growing concern about underlying consumer demand due to rising interest rates, inflation, elevated energy costs and more spending on services than goods, not everyone is as optimistic about the second half.

The container shipping market offers some cues for the direction of airfreight. So far this year, container import volumes to the U.S. West Coast are down 30% from 2022. The National Retail Federation projected a slight uptick in container volumes at U.S. ports from June through August and then tail off in September and October — with each month lower than the comparable period in 2022. The third quarter is expected to total 5.97 million twenty-foot equivalent units, down 7.9% year over year.

U.S. containerized freight imports fell by 16% year over year in May, with the fastest rate of decline in consumer discretionary goods, which fell 26%, according to trade analytics firm Panjiva. Ocean imports were down 3% versus 2019.

Henry Byers, the head of ocean intelligence at FreightWaves, said in a recent analysis that U.S. containerized import volumes are likely to go down in the third quarter — and be 10% to 20% lower than in 2019 — because of persistently high retail inventories and retailers’ wait-and-see approach to purchasing. FreightWaves analysts also point to the upcoming end of the U.S. student loan deferral program, which could create cash flow challenges for households and suppress consumer spending.

Meanwhile, the reopening of China’s factories after COVID hasn’t produced the expected cargo rush and manufacturing continues to contract in major developed economies, according to the Purchasing Managers’ Index. Manufacturing and export orders are leading indicators of airfreight.

With a surplus of ocean capacity, container rates plunging to pre-pandemic levels and port congestion resolved, shippers are no longer using airfreight as a substitute for ocean transport, as happened during the pandemic. Under the circumstances, most of any resurgence in trade later this year would likely go to container lines rather than air carriers.

Chicago-based Seko Logistics, during a media briefing, described this year’s peak season as more of a ripple than a wave because U.S. importers, worried about the effect of higher interest rates on consumer confidence, are being very cautious about placing goods orders even if they have corrected inventory overhangs.

The Freightos Air Index, ticker FBXD.CNAE), available on FreightWaves SONAR shows rates in early June from China to North America have increased above $5/kilogram.

Target (NYSE: TGT), for example, said last month that sales are softening as consumers pull back on nonessential items. It ended the first quarter with 16% less inventory but is limiting replenishment to certain categories, such as food and beverage and back to school. People are spending less on home improvement projects, according to Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD).

Retailers such as Big Lots (NYSE: BIG), Foot Locker (NYSE: FL) and Nike (NYSE: NKE) are still struggling to downsize inventories, resulting in deferred orders for overseas merchandise.

International Data Corp. recently downgraded its forecast for global shipments of smartphones, saying they will decline 3.2% instead of 1.1% in 2023. Smartphones are a major product category that moves by air.

“Consumer demand is recovering much slower than expected in all regions, including China. If 2022 was a year of excess inventory, 2023 is a year of caution. While everyone wants to have inventory ready to ride the wave of the inevitable recovery, no one wants to be stuck holding it too long,” said Nabila Popal, a research director for mobility and consumer devices at IDC.

Although the pace of decline in freighter flight hours has stabilized, the risk to a normal peak season remains elevated, especially because of weak manufacturing and the lag effect from higher interest rates and tighter credit availability is not fully reflected in current demand, BMO analyst Fadi Chamoun said in a client note. He suggested any air cargo recovery may be pushed to the middle of next year.

“I too was holding out hope there would be a dramatic rebound in the second half. It’s clear now as you look at future purchase orders from the shippers that the second half, while it will be better than the first half and while we will have a peak season, it’s going to be muted,” said Neel Jones Shah, executive vice president of air strategy and carrier development at Flexport, in an interview. “I’m not anticipating us getting back into a real rhythm until 2024.”

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