'Alarming signals' as airfreight capacity rises and rates fall

If you thought the ocean market was poor, air cargo is faring even worse – a decline which could see it dismissed from client boardrooms again.

Air freight looks likely to hit rock bottom within the next couple of months, albeit with some slack remaining in the market through next year.

The latest Baltic Exchange analysis notes the unhappy 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.

Rates do continue to fall. One analyst told The Loadstar cyclical downturns in air freight tended to last between six months and a year – but this cycle looks as if it will be longer.

Mr Chan explained: "2023 airfreight rates continue to grind lower and May was no different, enduring 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."

IATA said faster transit times were also having some impact, explaining: "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.

"Global container activity (import and export, system-wide) is down 6% YTD versus the same period in 2022," noted Mr Chan. "Airfreight is faring even worse, with IATA reporting 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."

Supply, meanwhile, 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.

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

Another boost for airline profitability could be weak oil demand, noted 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 added that there were some "alarming" signals in the market, which caused him concern for the longer term.

"[Mismatch of supply and demand] drives the bear case that airfreight will (eventually) regress to its 2019 levels, based on diminished requirement. This is a bad outlook for airfreight well beyond its price, with the commercial focus shifting back to passenger revenue as it was in the ‘bad old days’.

"With the new focus on airfreight revenues cultivated in the past three years, we hope this regression in attitudes isn't realised."

Indeed.