A few conflicting metrics provide a mixed outlook for airfreight.The market is largely unchanged since our commentary last month where we plotted a slow draw down of rates that had been temporarily buckled by slight ticks up on the main Hong Kong to Europe and North America indices. Yields on airfreight remain high even with a slipping spot price, with most sensible assessments comparing 2023 to 2019. Freight rates basis the BAI00 weighted average index are 52.35% higher in 2023 than the full 2019 average.

However, with this relative support come alarming market signals that could upset this supportive outlook for the longevity of higher freight rates beyond the end of 2023. As ever, price fundamentally revolves around the supply of capacity on specific routes (largely in line with global airfreight capacity in the form of freighters and passenger capacity) and how it matches demand. 

Whilst the global inflationary picture has largely been priced in (and is arguably recovering) the key metric shifts towards the availability of passenger capacity. The first warning sign is a drop in Asia air cargo freight tonne kilometers (AFTKs), down 5.5% year on year in April, matched up against soaring domestic and international travel (particularly in Asia) as the market fully sheds any stigma or remaining caution regarding COVID restrictions.

This drives the bear case that airfreight will (eventually) regress down to its 2019 levels based on diminished requirement – this is a bad outlook for airfreight well beyond its price, with the commercial focus shifting back to passenger revenue as it was in the ‘bad old days’. With the new focus on airfreight revenues cultivated in the last three years, we hope this regression in attitudes isn’t realised.

Another core factor that could pull the rug out from under the airfreight market is fuel volatility – with crude prices dropping further since OPEC+ meetings sending out mixed messages and confusion.

The weakened outlook on oil also links back to fear of a deal to extend the US debt ceiling derailing, putting the dampeners on demand. This has a negative impact on fuel demand, with the IATA average jet fuel price marker down 36.3% since last year, with the major impacts in the Americas. Whilst this might end up being positive for airline profitability, it also removes the value of fuel surcharges in airfreight rates and removes the onus to price in any bullish potential for fuel into the airfreight capacity market. On top of this, those looking to hedge fuel might find better relative opportunity as the market pulls back, and helping to remove any bullish impact increases in fuel prices might have.

The last factor is the potential for chronic oversupply of capacity. Whilst outside of the sector, Ryanair boss Michael O’Leary recently highlighted a key problem with aircraft manufacturers being backlogged for newbuild orders until 2030. This is across all aircraft verticals, indicating both heavy newbuild supply and constraints on new capacity well out until the future. This backlog and overdemand for manufacturers creates a medium-term over-supply of capacity, where delivered newbuilds overtakes market demand for capacity. This could result in a bullwhip where some older capacity is axed, parked, or scrapped, and the availability of newbuild capacity diminishes. This leaves everything to play for in the longer-term airfreight market, without even factoring the development of demand should the world lift itself out of inflation and see another bull market.

About Peter Stallion, Head of Air and Containers, Freight Investor Services

Peter Stallion heads up the Air and Container Freight desks at FFA brokerage Freight Investor Services. He started his career in air freight chartering, and has a passion for emerging risk management markets and the logistics industry.