Gulf ceasefire eases pressure on jet fuel, butair freight rates stay firm through June

Despite a well-anticipated memorandum of understanding (MoU) to end the war in the Middle East between the US and Iran, global air freight rates continued to grind higher through most of June.

The global Baltic Air Freight Index (BAI00) calculated by TAC Data gained a further +5.8% over the four weeks to June 22, leaving it ahead by some +37.3% from 12 months earlier. And despite a subsequent fall of -5.0% in the week to June 29, rates remained higher by +31.1% year-on-year.

That was still above levels even at the very highest points of the previous three peak seasons – and only exceeded in the past during the Covid pandemic when passenger bellyhold capacity was severely disrupted.

The formal announcement of the MoU draft did not come until June 14 and not signed until June 17. Nevertheless, crude oil and jet fuel prices had already started to fall sharply in anticipation of the agreement.

The price of Brent crude fell from over $95 per barrel at the start of the month to under $80 by June 16. The price of jet fuel – according to the IATA Jet Fuel Price Monitor, based on Platts data – had plummeted some -26% by June 26 from the previous month’s average.

Jet fuel prices remained up some +29.5% from the previous year according to the Platts data – but had clearly eased a great deal from the extreme levels of March and April when the ‘crack spread’ between crude and jet widened dramatically.

Nevertheless, this big fallback in jet fuel prices did not seem to feeding through very quickly into lower air freight rates. 

BAI Spot rates out of Hong Kong had started the month on a firmer note – rising again in the first part of June, before starting to fall back in the latter part of the month. 

BAI Spot from HK to Europe ended May at HK$44.54 per kilo – and was still at HK$42.53 by June 30.

BAI Spot from HK to the US East Coast had been $55.54 at end-May – and was still at $53.49 by June 30. Likewise, HK to the West Coast began June at HK$51.71 and was still at HK$49.43 on June 30.

The overall index of outbound routes from Hong Kong (BAI30) – reflecting the full spectrum of spot and forward rates being paid across multiple lanes from the world’s biggest cargo airport – also edged higher, rising +4.5% over four weeks to June 22, leaving it up +41.4% year-on-year. Despite falling the following week it was still at +34.1% YoY by June 29.

Similarly, outbound Shanghai (BAI80) was almost unchanged over the month to June 29, and still at +37.0% YoY.

Rates out of Europe were more mixed. The index of outbound routes from Frankfurt (BAI20) gained +14.3% over the four weeks to June 29, leaving it at +27.9% YoY. 

By contrast, outbound London Heathrow (BAI40) shed some -20.9% MoM to June 29 – giving back a big chunk of its gains from recent months – leaving it up only +1.8% YoY.

Out of the Americas, the index of outbound routes from Chicago (BAI50) gained +5.5% MoM to June 29, leaving it at +34.9% YoY.

Clearly, it was taking some time for lower jet fuel prices to feed through to air freight rates – not surprisingly, perhaps, given that many carriers were perhaps still flying planes using fuel they had contracted to buy at those recent higher prices.

But sources were also suggesting various other factors were helping keep air freight rates up. As we noted last month, one specific factor was the abolition of de minimis rules into the EU (which had exempted packages of up to €150 from import duties) due to take effect from July 1 – with some shippers rushing to shift products for Europe ahead of that date. 

Oher sources had also cited continuing strength of demand on Transpacific and inter-American lanes. Plus some shippers looking to move early to lock in capacity longer-term ahead of peak season.

Looking ahead, however, sources were also anticipating that prices must start to ease much further – so long as the ceasefire in the Gulf held – even if it would probably take many weeks or months for the market to get back to normal following the reopening of the Strait of Hormuz. Indeed, it seemed quite likely rates may continue to price in a risk premium all the way through to peak season.

Meanwhile, from a macroeconomic perspective, equity markets continued to rise higher driven by the AI theme. That was despite some wobbles in June, notably in the tech-heavy Nasdaq Composite index in the runup to the blockbuster IPO of Elon Musk’s Space Exploration Technologies Corp, better known as SpaceX.

The SpaceX IPO was seen as remarkable in many ways – not least for placing such a stratospheric valuation on a company that has hitherto made billions of dollars of losses and where the business case seems to depend at least partly on data centres yet to be built on Mars. 

Predictably, SpaceX shares initially soared after launch – but were soon to suffer the second biggest ever single-day decline in value any stock has ever recorded on June 22 (dropping about $400 billion). 

With Anthropic, Open AI and others also lining up huge IPOs – plus existing players like Google looking to raise massive amounts of extra capital to fund investments in AI – the AI theme looks set to roll on.

Most investors – at least for now – seem to expect capital markets to keep the funding coming, though some are cautioning that this AI party must eventually reach a conclusion at some point.

In the meantime, however, air freight rates – despite that recent fall in jet fuel prices, which must surely start to feed through more fully soon – are continuing to look pretty firm.