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Mood in Munich buoyant despite falling rates

Supply chains changing, e-commerce set for further growth, but SAF far from the complete solution on sustainability

Air freight prices continued to trend down in May, if at a slower pace after the steep declines of the previous year.

According to data from TAC Index, the leading price reporting agency (PRA) for air freight, the overall Baltic Air Freight Index (BAI00) fell -1.8% in the week to 29 May to leave it down -48.3% over 12 months.

Given the uncertain global macro outlook, not surprisingly there has been no sign yet of a peak season in container shipping, which usually comes earlier in the year than in air cargo – with spot rates from China continuing to slide.

But in air freight, sources said rates had been holding up better than anticipated so far, especially out of southern China – boosted by robust e-commerce volumes – with Hong Kong to Europe (BAI31) down only -2.4% in the last week of May, but HK to the US (BAI34) up +0.8%.

Further north in China, outbound Shanghai (BAI80) was also only off about -0.3% WoW – taking its YoY decline to -53.8% – with sources suggesting capacity may have dropped a little with some Middle Eastern carriers moving planes to other markets.

Despite the long-running fall in prices, there was still an unmistakeably upbeat mood at the recent Air Cargo Europe event in mid-May, part of the huge Transport Logistic trade show in Munich – attended by a record number of 75,000 visitors.

Among announcements at the show was news of yet more new air cargo capacity being added, including new freighters at Lufthansa Cargo and Emirates Sky Cargo.

And there was plenty of enthusiasm about developments in various areas, including e-commerce and digitalisation. Plus talk about progress on greater sustainability through the use of sustainable air fuel (SAF) and other measures offering clients ways to address the sector’s carbon footprint.

That positive feeling at the show came despite what still looks a highly challenging global macro outlook.

In the background, of course, has been the US debt ceiling stand-off, ongoing worries about the US banking sector, a looming recession and serious geopolitical issues ranging from conflict in Ukraine to tensions over Taiwan.

One thought provoking session in Munich was a presentation and seminar hosted by Buck Consultants focusing on European supply chains – and how they are changing post-Covid and Ukraine.

As Buck partner Kees Verweij pointed out, there has been much talk of ‘near-shoring’, ‘reshoring’ and ‘deglobalisation’.

What it all amounts to, he suggested, is a trend towards ‘de-risking’ – with more and more companies seeking to reduce reliance on single suppliers, particularly out of China, and diversify sources of supply.

This is starting to have various observable effects, Verweij suggested. First, an increasing number of companies – from Benetton, Hugo Boss and Burberry in the fashion sector to Iberdrola in energy markets – have been setting up more production facilities locally in Europe. And China has been losing investment flows.

Second, more producers in Asia – including companies in China as well as Taiwan – have been responding to changing demand by adding production facilities closer to customers in Europe.

Third, there has been a growth in European logistics hubs – particularly in Eastern Europe, but also in the Mediterranean.

That said, as participants at the seminar pointed out, this does not mean the vast bulk of production can or suddenly will be relocated from China to Europe.

Indeed, far from it. China will remain a leading source of supply for the foreseeable future. And the need for large scale transportation of cargo and logistics – including air freight – will very much remain the case.

Against that backdrop, there was plenty of optimism in Munich about growing demand in key areas of the market, notably e-commerce.

Accurate statistics are tricky to find, because what to count as e-commerce is not easy to establish. But a panel to discuss the sector agreed it now accounts for probably 20-30% of the total market. Neel Jones Shah, strategy EVP at Flexport – a leading digital forwarder – estimated e-commerce may be as much as 50% of his firm’s business.

At its press conference, Lufthansa highlighted a greater focus on e-commerce, citing figures which suggested it will amount to some $712 billion of air cargo trade in 2023 – projected to grow to over $1 trillion a year by 2027.

Nevertheless, Lufthansa Cargo CEO Ashwin Bhat agreed that in the current market there was still “massive” pressure on rates – though he also argued the steep fall of the past year has “flattened out”. We may not be at the bottom yet, Bhat suggested, but could get there soon.

Speaking to delegates on the e-commerce topic, WestJet cargo EVP Kirsten de Bruijn cited the huge growth in e-commerce during the Covid period, and also saw it as a sector that would continue to grow in the medium to longer term.

But in the current falling market, de Brujn conceded, there were indeed now plenty of “cost-cuttings and de-orderings”.

Sustainability, a serious challenge for airlines given the enormous carbon footprint of the industry, is also being seen by some as a potential opportunity – with various carriers vying to offer shippers more environmentally friendly solutions using SAF to help assuage customers and other stakeholders.

DHL Express arguably stole a march on the competition with the announcement in Munich of its Go Green Plus Option for air cargo customers. This offers the use of SAF produced from waste oils to generate greenhouse gas emission reductions of up to 80% as compared with conventional jet fuel.

One problem, however, is that there is still very little SAF being produced – which means purchases by a few big players like DHL can effectively corner the market. It is also extremely expensive compared with jet fuel – which will remain the case at least until production is hugely ramped up and there are greater economies of scale.

Even in the long run, it seems unlikely SAF alone can be the sole solution to the carbon footprint problem. Hopefully, other ways forward such as through electric and/or hydrogen power may develop sooner than currently seems feasible.

In the shorter term, carriers will be hoping the current market reaches a bottom soon.

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