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Air freight rates come off the Big Dipper

The pace of decline in rates slowed in June, but are we near the bottom yet? Or is that wishful thinking?

Following the rollercoaster of a massive surge during the Covid-19 era and the subsequent ‘Big Dipper’ style fall over the past year, it was a quieter month for air freight markets in June.

The market ended the month on a slightly weaker note with a fall of -2.4% in the overall Baltic Air Freight Index (BAI00) in the week to 3 July. Over the previous four weeks the decline had been -4.8%, taking the year-on-year change to -49.4%.

Regionally, the strength of demand in e-commerce business especially out of southern China continued to shine through, keeping the Hong Kong (BAI30) index relatively stronger – it was off only by -2.8% in the month, taking its YoY decline to -41.1%.

Outbound Shanghai (BAI80) was off a similar looking -3.1% MoM, though YoY its decline was looking more precipitous at -56.7%.

Out of Europe, rates softened much more in June – with the outbound Frankfurt (BAI20) index -12.5% lower MoM to take its YoY change to -53.0%, and London (BAI40) down -11.9% MoM taking its YoY fall to -52.1%.

Out of North America, rates were more robust – with outbound Chicago (BAI50) actually up +1.8% MoM clipping the YoY fall to -45.7%.

The big question for all in the industry, including shippers, forwarders and airlines / carriers, continues to be whether that long-running decline in rates is reaching a bottom – and if not when that will happen.

The global macro outlook continues to send mixed signals. Geopolitical concerns remain elevated, as demonstrated again by recent power play events in Russia.

On the other hand, inflation has been falling in the US and Europe – though core inflation looking more sticky in some places like the UK.

Unemployment in the developed world remains very low. And the accumulated savings of the Covid era – followed by the energy crisis sparked by the Ukraine conflict, which led Europeans to save even more – seems to have left consumers with plenty of firepower to keep spending.

All of which means it looks like interest rates may need to be raised further, at least in economies like the UK – and kept higher for longer in order to quell inflation.

Superficially, global equity markets seem to have taken all this in their stride, with the MSCI World Index up about 8% for the first half of the year.

Looking more closely, however, that rise seems to have been concentrated almost entirely in a select group of mega tech stocks – with the latest craze for artificial intelligence (AI) driving up the share price of Nvidia to join an elite group some have now dubbed MAGNAM (Microsoft, Apple, Google, Nvidia, Amazon and Meta).

Without that MAGNAM group of companies, global equities would have been roughly flat for the first half of 2023. And the incredible rise of that select group has left a concentration in market capitalisation among those few stocks by some measures near the highest levels ever, representing close to 25% of the S&P500 index.

So a more mixed picture indeed than first appears.

At the recent CNS Partnership conference in Miami, IATA economist Pavlos Lakew cited OECD figures which suggest global GDP growth is continuing to slow. After a rebound of 6% in 2021 following the pandemic, global growth slowed to about 3% on 2022 – and is predicted to fall further to 2.7% or so this year – and to very low levels in developed economies.

In air cargo, prices have been falling for a long time due to two main factors. First, from rising capacity – both from dedicated new freighters and from more bellyhold space in passenger planes as airline schedules have got back to normal post-Covid.

And second, from falling demand. Demand has been lower partly due to falls in certain sectors – like pharma now the Covid vaccine roll-out has effectively ended, and various consumer goods where inventories had got built up to very high levels.

Demand for air cargo has also fallen due to the revival of sea container transport as a much cheaper and now more reliable alternative again – after it had become both expensive and unreliable during the pandemic.

While overall air freight capacity is now back above pre-Covid levels, demand has clearly slackened. So it was no surprise to see the numbers IATA was showing in Miami put cargo-tonne-kilometres (CTKs) flown so far this year some -5.3% below 2019 levels.

On the other hand, the outlook for rates may not be that bad. There are some signs for instance that the capacity glut is starting to be addressed – with news of some big players cutting back.

FedEx for instance announced in late June a net cut of 29 units from its fleet by parking 20 planes and retiring early some nine old MD-11 freighters.

Sources suggest this is becoming part of a wider trend for old ‘rust bucket’ freighters to be brought in for ‘heavy check’ servicing – perhaps never to reappear given the high cost of maintaining and running them.

According to Platt’s data, the long-running fall in jet fuel prices also seems to have petered out. Jet fuel prices firmed up about +4.4% in the month to 30 June, cutting the fall over the past 12 months to -31%. That alone will be adding renewed pressure on carriers to resist any further cuts in cargo rates.

Another factor which some are starting to debate is whether the run-down of inventories may have started to run its course.

As shipping advisor Dr Walter Kemmsies argued in a recent interview with The Loadstar, purchasing managers may have become too blasé about inventory levels – which may leave them scrambling to secure more capacity at short notice when peak season approaches. In which case, air freight rates could suddenly bounce.

That may be wishful thinking. Only time will tell. But it has been a quieter market so far this summer.

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

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