Air cargo market continues to normalize

The air freight market appears to be continuing its return to “normal” — in both demand and rates. There has been a very modest post-Lunar New Year recovery, with rates reverting to pre-pandemic levels, said Bruce Chan, senior analyst at investment bank Stifel , according to the latest pricing data from the Baltic Exchange ’s Baltic Air Index. [caption id="attachment_67911" align="alignright" width="359"] Photo courtesy of Kuehne+Nagel[/caption] The “good news,” Chan said in a report released Friday, is that transportation service providers say they are seeing a soft landing in volumes. “Consumer activity has been surprisingly resilient and shippers in that sector are in the midst of a destock, with restocking activity expected to resume in the later part of this year,” he said. But the “bad news,” at least for air cargo providers, is the price pressure that is being put on them by normalizing supply chains. Shippers are rethinking their airfreight spending, Chan said. Recent earnings reports from freight forwarders, including Kuehne+Nagel , highlighted sustained weak demand for Asia-originated tonnage, which has contributed to the downtrend in rates since last year. On the capacity side, bellyspace continues to return to the market as passenger flights resume. International flights in and out of northeast Asia still are down 55% from pre-pandemic levels, but capacity is up about 80% since October 2022, and about 60% since a couple of weeks ago, airline schedule data shows. “As it translates to rates, core Asia-outbound lanes in February were roughly flat to slightly below where they were in 2021 (when they were still on the uptrend post-2020 lockdowns),” Chan said. “But a good portion of current rate levels has been supported by still-elevated fuel prices.” ‘Interesting’ times ahead Meanwhile, in its latest Air Freight Rate Tracker report, research consultancy Transport Intelligence (Ti) notes that an “interesting period” lies ahead for the air freight sector as volumes trend downward while capacity improves. Air cargo volumes are expected to dip globally by 4.3%, according to the International Air Transport Association . Hence, the moderate decline in air freight rates is likely to persist in the first half of the year, driven by weaker volumes as well as the improvement in transit times and a rate decline in ocean freight, which prompts shippers to switch back to ocean. In light of this uncertainty, freight forwarders will be hesitant to sign long-term contracts and even withdraw from longer fixed-rate agreements with cargo airlines, Ti noted. With the “massive” pressure on cost savings following record high logistics spend over last year, shippers finally should see some relief in the short term and benefit from lower rates compared with 2021. “However, a number of factors in the second half of the year could stop the fall in rates,” the Ti report notes. “For instance, even though the process of inventory correction continues to contribute to weaker volumes, once retailers start replenishing their inventories, air freight volumes should increase and stop the fall in rates, provided that consumption holds up and recession is mild.” Increased business in post-lockdown China will boost demand for air freight services, according to the consultant. Demand recovery and inventory replenishment in the second half of 2023 will stop rates from falling, Ti noted.

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