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With inflation set to fall, will air freight prices also reach a bottom soon?

Lower energy prices and cargo rates may lead to a soft landing for the world economy – and a quicker rebound

Air freight prices are continuing to trend lower, according to the latest data from TAC Index, the leading price reporting agency (PRA) for air freight.

The overall Baltic Air Freight Index (BAI00) fell another -0.9% in the week to 27 February, taking its decline over 12 months to -36.6%.

Among the major outbound locations, the Shanghai (BAI80) index fell another -9.6% in the last week of the month, taking its YoY fall to -42.8%. But Hong Kong (BAI30) was up +2.6% WoW, trimming the YoY decline there to -38.3%.

Sources said the market remained soft, not helped by news of further capacity being added – with Lufthansa the latest major carrier to announce extra freighters to operate to and from China – but with the first hints of a rebound on the horizon.

TAC data in recent months has been showing the lower quintiles in the range of prices being paid falling ever closer to the pre-Covid levels of 2019 – probably signalling an end to the extraordinary boom of the pandemic years, and a ‘normalisation’ of the market going forward.

If so, we might expect air freight prices to continue to trend down in the short term – at least until all the contracts negotiated at the height of the boom finally roll off or get renegotiated at lower levels.

That said, sources are also now saying they see some early signs of recovery after recent steep falls, citing a lot of contract shifting in and out of block space agreements (BSAs) after the recent volatility.

With trading positions being put in place for the summer schedule, the effects might be revealed by late March, some suggest – with spot rates perhaps starting to rise above the lower new contract rates, and the market then reaching a bottom.

Indeed, the broader macroeconomic outlook is no longer looking so bad – or certainly nothing like so bleak as it had been only recently.

First of all, energy prices have been easing. Crude oil prices have been comfortably below $90 a barrel since last November, and are currently close to 20% below where they were a year ago.

More importantly perhaps, natural gas prices have also fallen back considerably – especially in Europe, where they had spiked so sharply last year after Russia invaded Ukraine.

Indeed, gas prices in Europe have now dropped back below the levels they were before the war in Ukraine – easing the need for any further massive borrowing by governments to subsidise consumers.

In some places, such as the UK, the unexpectedly good news kept coming with an unpredicted public sector surplus of some £5.4 billion in January – widening the ‘wiggle room’ for increases in spending to solve public sector strikes and/or tax cuts to stimulate growth.

As Savvas Savouri, chief economist at London-based hedge fund group Toscafund, had been arguing, the Bank of England and other forecasters have probably been too pessimistic for some time on UK performance prospects.

For the air freight industry, the fall in energy prices has also been following through to good news on jet fuel – where a 22.7% plunge in prices in the month to 24 February, according to Platt’s, also took that back towards levels of 12 months earlier.

For air carriers, that will be good news – helping to offset the fall in what they can charge for air cargo by cutting fuel costs.

Looking ahead, all these falling prices – including not just jet fuel but also container shipping as well as air cargo – should have the effect of helping to ease inflationary pressures.

As Steven Bell, a highly experienced macro hedge fund manager and chief economist at Columbia Threadneedle Investments, put it in a recent comment: “The inflation outlook has improved significantly.”

As Bell also pointed out, consumers in Europe in particular had become very cautious over the previous year or so – following that spike in energy costs –with savings rates rising sharply.

Now, with China reopening again as well, there is a chance consumer demand could revive substantially in both Europe and Asia.

With wage inflation still high in the service sector, there is a remaining risk that inflation overall may fall more slowly than some are hoping after the fall in prices for goods and commodities.

But many economists now think inflation could still fall back from double-digit levels recently to as low as 3% in Europe and the UK by the end of the year.

We shall have to see whether that optimistic scenario pans out. But if so, it should provide a good springboard – together with the revival of business in China – for air freight prices to reach a bottom fairly soon.

Typically, one of the busiest periods of the year for contracts to be renegotiated is around 1 April – as the summer season schedule begins, with passenger traffic increasing and bellyhold capacity too.

We shall be looking closely at market activity around that date to see if the trend in prices starts to turn.

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

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