Flexport: More market fluctuation on horizon

The fluctuation in the air cargo market continues. Several factors, including the war in Ukraine, stabilizing ocean rates and e-commerce, will continue to impact short-term demand, according to Neel Jones Shah , executive vice president and global head of airfreight at trade management platform Flexport . In the platform’s market update webinar today, Shah discussed his outlook for the air cargo market in 2023 and what to expect for the rest of the year and Q1 2024. For the past several months, demand for air cargo has consistently declined from pandemic highs, according to Flexport. Demand was only down 3% year over year in March, according to preliminary data from Flexport. “We don’t have full March data yet, but the slide might be over,” Shah said. Demand “might even be on par with last year” when all the data is in, he added. [caption id="attachment_57135483" align="aligncenter" width="1341"] (Image/Flexport)[/caption] Inflation and geopolitical tensions drive uncertainty Geopolitical tensions in Ukraine and Asia could significantly impact supply and demand in the next three to sixth months, Shah said. The war in Ukraine will continue to affect trade, and most experts expect this to continue through 2023. Shah added that rising tensions between China and Taiwan could also have significant ramifications on supply chains, he said. Meanwhile, inflation and economic slowdown in the United States and Europe have also impacted trade. “If we do get tipped into a little bit more of a recession, it’s something that will clearly impact consumers, and their willingness to spend,” Shah said in the webinar. Other macroeconomic factors have also added to the uncertainty about the next several months for the airfreight industry. “The employment numbers continue to be very good. The consumer continues to be quite resilient,” Shah said. “So, a lot of conflicting headlines out there, which makes it hard to have very strong predictions in terms of how the next six to 12 months will play out.” Ocean freight continuing to normalize will also impact air cargo. Shah said he is no longer seeing any ocean-to-air conversions that had happened over the past couple of years. Some shippers, he said, are partially converting from air to ocean instead to diversify and save money while working through inventory issues. Capacity continues recovery China’s reopening after pandemic restrictions has had a positive impact on capacity, as more passenger flights from Europe and the U.S. to China result in more belly capacity. “Belly capacity between Asia and the U.S. is expected to be up 44% YoY over this time in 2022,” Shah said. “By the time we get to the end of the year, this number will probably be closer to 60%.” Belly capacity on transatlantic routes is ahead of 2019 according to Shah. Although Pacific lane belly capacity was still 31% below pre-pandemic figures, it is recovering, he noted. Cost pressures and short-term irrationality Looking to the next few months, Shah said that airlines’ asset owners will be willing to price irrationally, even below the cash cost to operate flights. The desire to maintain schedules and to weather short-term fluctuations will drive that pricing. However, short-term pricing drops will not last, according to Shah. “In the medium- to long-term, airlines are not going to price below their cash costs to operate,” he said. “Which is why I believe that in the longer term, air freight rates will stabilize 35% to 50% higher than 2019 levels.” [caption id="attachment_57135484" align="aligncenter" width="1467"] (Image/Flexport)[/caption] Average operating expenses for air carriers have been 72% higher in 2023 than in 2021, according to the latest 2023 data presented in the Flexport webinar. The trade management platform did not provide data for 2022. Fuel alone has been 14% higher in 2023 than total average operating costs in 2021. The war in Ukraine has caused “a complete dislocation of the price of jet fuel and the price of crude,” Shah said. Flexport also assumed a 10% increase in insurance costs due to the war. Pilot costs were up 30% to 40% from pre-pandemic levels. Shah also predicted that the average global rate will be between $2.60 and $2.70 per kilogram in the back half of 2023 and into 2024. The average global rate was $2.62 per kilogram in March, according to the latest report from data provider CLIVE by Xeneta .

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