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Peak season for air freight – not with a bang but a whimper?

Whither air cargo rates – which way are they set to go? Are they set to rise as we reach the traditional peak season? Or are they set to crumble and fall – as rising fears about inflation and recession hit global trade?

On the evidence of the data so far, no clear direction has been established yet – with the overall Baltic Air Freight Index numbers, published by TAC Index, bouncing along in a fairly narrow channel in recent weeks.

For the latest week to 29 August 2022, the Baltic Air Freight Index (BAI00) slipped -1.1% – leaving the year-on-year change now also under water at -2.3%.

Air freight rates have clearly been sliding then consolidating for a while – following sharp rises during the Covid pandemic of 2020 and 2021.

But now it feels like we are approaching a key inflection point.

Normally, at this time of year, market participants are anticipating prices to firm up – as the air freight industry reaches a peak season which often starts in September in the run-up to

Thanksgiving, Christmas, and New Year.

Some have been predicting a strong or robust peak season in 2022 – following the severe local lockdowns this year in parts of China, especially in key manufacturing and distribution centres like Shanghai. That has disrupted some important supply chains – and delayed a lot of normal air traffic.

At some point, these observers have been expecting output to jump in China and supply chains to catch up again. And that hasn’t really happened yet.

On the other hand, there are various reasons to be more cautious about the outlook this year.

For one thing, following the rise of ‘just in case’ supply chain planning in a post-Covid world – displacing the previous ‘just in time’ approach – inventories are now said to be high all around the developed world.

Warehouses are very full. As Nick Winder, group managing director of WIN Logistics Group, put it at the recent Multimodal 22 conference in the UK – and only half-jokingly, it seemed – he would talk to almost anybody right now with some unfilled warehouse space to offer.

And against that backdrop, the macroeconomic outlook does look rather gloomy.

Governments are struggling to rein in huge deficits, and central banks are grappling with soaring inflation. Disruption to supply chains from the Covid pandemic lingers. And gas and electricity prices – notably in Europe since the Russian invasion of Ukraine – look to be running out of control.

Economists at Citibank are now predicting inflation in the UK might spike at over 18% in the next few months.

In these circumstances, would it be surprising if demand for air freight capacity does not rise as it usually does at this time of year?

There are some other lingering factors that some feel may aggravate the downward pressure on air cargo rates.

The long-awaited full reopening of China from its zero-Covid lockdowns may indeed boost air cargo volumes, these sources agree. But any rise in air traffic will likely give a major boost to bellyhold capacity too – which could then act as a drag on air freight prices.

Some of those with a more bullish perspective actually believe any further delay to China reopening – perhaps into next year – may actually help keep prices up as that would continue to limit capacity.

During this Covid hiatus in China, some industry players have also been watching closely to see if demand for air freight might rise instead from alternative locations – such as Vietnam.

The TAC Index data on Vietnam routes is viewed by some users as a particularly good early indicator on regional and global trends.

In the biggest outbound centres for air cargo – such as Shanghai and Hong Kong – a large part of the market is conducted at pre-agreed forward contract rates, which makes prices from those locations less volatile.

From Vietnam, much more of the market is conducted at spot rates – which can highlight trends more quickly.

Shanghai to North America routes had been showing firmer prices recently – but dropped again -3.3% in the latest week, dragging down the YoY change to -14.2%.

Prices for Vietnam to US routes had by contrast firmed up +4.5% in the latest week – but the YoY change on those routes was still languishing in negative territory at -25.6%.

If Vietnam to US is such a good early indicator – as some believe – then that does not appear to presage a particularly strong peak season ahead.

Recent price developments in the wider freight industry may also underscore that feeling.

Peak season for container shipping tends to come slightly earlier in the year than for air freight – usually reaching a zenith in July. But this year it appears to have passed without much of a peak at all – and in the past month rates have been sliding rapidly.

According to recent reports in The Loadstar, for instance, container rates have been coming under “intense pressure” – with prices on China to Middle East and intra-Asia routes collapsing in recent weeks, and prices on Trans-Pacific and North Europe routes also dropping sharply.

Lower rates for freight are of course not bad news for everyone. Indeed, for shippers and forwarders lower rates mean they might be able to move things much more cheaply than they expected – and perhaps take some of the sting out of inflationary pressures across many sectors at the current time.

It is also ironic perhaps that many shippers and forwarders were probably denied allocations for air cargo capacity by a lot of the airline carriers earlier in the year – when prices were higher, and they were anxious to secure capacity.

Without being tied into high prices for allocations, they should now be well placed to press the airlines for lower spot prices.

Read our freight blog for the latest insights and trends in the logistics industry.

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