2022 turned into another rollercoaster year for the high-octane world of air cargo – and the volatility seems set to continue.
But whatever lies ahead in terms of price trends, there are likely to be some developments for the industry itself – including a shift away from forward contracts towards more spot market activity, and toward more use of index-linked agreements (ILAs).
Looking back, last year had begun with air freight prices still elevated from an unprecedented surge during the Covid pandemic. But for most of the year prices then dropped steadily.
The Baltic Air Freight index (BAI00) – calculated by TAC Index, the leading price reporting agency (PRA) for air freight – eventually fell -33.6% in the 12 months to 2 January 2023.
The fall in prices overall was not surprising given the array of headwinds facing the global economy.
The list of negative news was long – from heightened energy prices and inflation, exacerbated by the war in Ukraine; to the consequent trend towards higher interest rates and stagflation; plus continuing problems with supply chains and Covid restrictions in China – which had already helped stimulate a large increase in inventories, trimming marginal demand.
The fall in prices clearly caused some problems along the way for carriers. FedEx was forced to substantially cut its earnings projections – and then its costs.
IPP Air Cargo, which had aimed to be the first dedicated cargo airline in Vietnam, was forced in October to scrap its launch entirely.
And more recently, stories were circulating about CMA CGM cutting back schedules for the rollout of its new air cargo business.
In the circumstances, it was hardly surprising that the traditional ‘peak season’ ahead of Thanksgiving in the US and Christmas in Europe seemed to come and go with hardly anybody noticing.
There was finally a mild bounce in air cargo prices just before Christmas – with the broad BAI00 index up +5.1% in the week to 19 December.
The Outbound Shanghai index (BAI80) led the way with a gain of +14.5% that week, encouraging some thoughts that a long-awaited easing of Covid restrictions in China might be stimulating pent-up demand in that key market after a prolonged period in the doldrums.
Upon closer inspection, however, the reasons for the pre-Christmas bounce in Shanghai appear somewhat more murky.
For one thing, there was bad weather in Anchorage, which was hindering air traffic to the US ahead of the severe winter storms that hit North America over the Christmas period.
There were also rumours of some Trans-Pacific capacity being shifted to other routes – such as to Russia.
If the latter were true, this would mirror a trend already visible in shipping, where firmer prices on Trans-Atlantic trade had been encouraging capacity to shift away from Asia-Europe and Asia-US routes.
In practice, it also seemed that although there was a relaxation of Covid rules in China, supply chains were if anything disrupted even further – by the sudden faster spread of the disease and impact of that both on factory production as well as distribution by reducing manpower in air transport.
So what of the outlook for 2023?
Well, if trends from the world of ocean shipping are any sort of guide, then the news is worrying – but may not be all bad.
Despite a massive fall in spot rates for ocean freight and the prospect of a lot of new shipping capacity coming on stream, shipping commentators ended the year picking up signs that ocean rates may be close to bottoming out, notably for key Asia-North Europe and Asia-US West Coast routes.
For air carriers, who had seen margins put increasingly under pressure in the past year, there was also some respite from jet fuel prices.
After dealing with YoY surges of 100%-plus at some points during the past year, jet fuel prices were easing off towards the end of the end of 2022. Despite an 8% jump in the final week to 30 December, the latest data from Platt’s was showing the rise in jet fuel slipping back to +41.8% for the full calendar year.
A calmer fuel market may ease things for carriers, but most economists and macro commentators are still expecting a recession in 2023 across much of the world economy.
The key questions are how deep and long-lasting that recession might be. That will likely be driven by how high inflation goes and when it peaks; how high interest rates have to go in response; and the effects on consumer demand and equity prices.
The briefer and more shallow the recession looks likely to be, the sooner air freight prices may reach a bottom.
However, the continuing volatility – and steep drop in prices during the year – has also been having an impact on how the market operates.
In the first instance, it has made shippers less keen to commit to forward contracts – and look to take advantage of lower spot prices. But it has also made both shippers and carriers keen to find new ways to manage the price volatility.
Rather than being forced to renegotiate contracts over and over again as prices gyrate, more have been looking to enter index-linked agreements (ILAs) – where prices paid are automatically reset as they go along based on the movement of index rates such as the Baltic BAI indices.
In such a volatile market, it seems likely that demand for solutions like ILAs to help manage risk for all parties can only increase.