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Jul 23, 2023

Air Freight Market faces worsening conditions, raising concerns for future

Air freight market conditions are worsening to an extent which could see it

Air freight market conditions are worsening to an extent which could see it dismissed from client boardrooms again. It is likely to hit rock bottom within the next couple of months, albeit with some slack remaining in the market through next year.

A latest Baltic Exchange analysis has highlighted the unhappy market conditions caused due to the combination of extra summer capacity alongside weak cargo demand.

"The market is likely to be most over-supplied with belly space this summer, so cargo rates will likely trough in the next few months – but we think slack capacity will stick around into 2024," wrote Bruce Chan, global logistics director for Stifel.

As per an analyst, the rates do continue to fall. The cyclical downturns in air freight which was expected to last between six months and a year, now looks to have a longer impact.

In 2023 airfreight rates continue to grind lower, and May was no different. According to Chan, in may the air freight market endured a double-whammy of soft demand and the continued resurgence of capacity – particularly from passenger flights, as both transatlantic and transpacific traffic returns for the summer season."

He remained bearish on the short term, adding: "Demand is trickier to forecast than supply, we think, but the general trend so far this year has been one of weakness – perhaps more weakness than anticipated, as inventory restocking gets pushed out, especially on the consumer side, and discretionary spending is weighed down by inflation and elevated energy and staples costs."

According to IATA, the faster transit times were also having some impact. The significant shift towards shorter delivery times within a span of less than a year has sustained the decrease in air cargo load factors.

Many of the same demand factors are impacting shipping, but with the additional summer capacity, it is affecting air even more.

While the Global container activity (import and export, system-wide) is down by 6% YTD versus the same period in 2022, Airfreight is faring even worse. IATA reported a 7.7% decline in FTKs in March, YoY, and an 8.1% decline vs March 2019.

"We believe most of the trade-down, or ‘trade-back’ from air to ocean, after year-ago supply chain bottlenecks, has largely happened, but core airfreight demand remains muted."chan said adding that supply in the mean time is plentiful.

He said: "Summer travel season and generally robust passenger activity, especially on transatlantic lanes, has led to healthy supply of lower-deck space. Airlines may have even over-built for demand, in our view, and it will take time for capacity to moderate after the summer surge wanes."

While all this is rather negative, there are some bright spots: yields, for example, are still higher than pre-Covid.

As per TAC Index, the westbound transatlantic spot rates are up 10% on 2019 levels; Asia-Europe is 30% higher and eastbound transpacific to the US are up 35%, on average.

The weak oil demand can be another boost for airline profitability said Peter Stallion, of Freight Investor Services, commenting for the Baltic Exchange.

"The weakened outlook on oil also links back to fear of a deal to extend the US debt ceiling derailing, putting the dampeners on demand. This has a negative impact on fuel demand, with the IATA average jet fuel price marker down 36.3% since last year, with the major impacts in the Americas.

"While this might end up being positive for airline profitability, it also removes the value of fuel surcharges in airfreight rates and removes the onus to price-in any bullish potential for fuel into the airfreight capacity market. On top of this, those looking to hedge fuel might find better relative opportunity as the market pulls back, and helping to remove any bullish impact increases in fuel prices might have."

Mr Stallion pointed that some "alarming" signals were seen in the market, which caused him concern for the longer term.

The mismatch of supply and demand is making the case for air freights eventual regress to its 2019 levels, based on diminished requirement. With the commercial focus shifting back to passenger revenue as it was in the olden day, airfreight is looking at a bad outlook beyond its prices.

Source: Loadstar