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.

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 –off only by -2.8% in June, taking its YoY decline to -41.1%.

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 (YoY) 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 –off only by -2.8% in June, taking its YoY decline to -41.1%.

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

Out of Europe, rates softened much more in June, with outbound Frankfurt (BAI20) -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 its YoY fall to -45.7%.

The big question for all in the industry, including shippers, forwarders and airlines/carriers, continues to be whether the 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 United States and Europe, although core inflation looking stickier in some places like the United Kingdom.

Unemployment in the developed world remains very low, while 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. As a result, 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 – such as 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 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.

Demand for air cargo has also fallen due to the revival of sea container transport as a much cheaper and 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 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 sending nine old MD-11 freighters for early retirement.

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 +6.6% in the month to 23 June, cutting the fall over the previous 12 months to less than -30%. That alone will be putting renewed pressure on carriers to resist any further cuts in cargo rates.

Another factor that 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 but only time will tell. Nevertheless it has been a quieter market so far this summer.

Neil Wilson, TAC Editor

Neil Wilson is Editor of TAC Index, which provides independent, accurate and actionable global air freight data, allowing our customers to make comparative, cost-effective and intelligent air freight decisions.

Neil has more than 30 years’ experience in financial journalism and publishing, specialising mainly in derivatives and alternative investments. He has contributed to various publications including The Financial Times, The Economist and Risk magazine. He has also been a guest speaker at many industry events.

Neil has a B.A. with Honours in Philosophy, Politics and Economics from the University of Oxford.