Airfreight rates ticked up healthily through September on major Asia-outbound lanes, giving credence to the possibility of a peak season in 2023. While Transatlantic rates were flat, with Frankfurt to North American (BAI22) pricing down 1.7% since August, Hong Kong to North America (BAI 32) and Shanghai to North America (BAI 82) increased 8% and 11%, respectively, in September versus the previous month. Meanwhile, Hong Kong to Europe (BAI 31) and Shanghai to Europe (BAI 81) monthly rates rose 7% and a healthy 34%, respectively. These increases follow what have been consistently low rates all year as demand fundamentals have been, in our view, soft.

Exhibits 1-4: Rates on Asia outbound lanes ticked up in September vs. August after being flat for most of the year

Source: Baltic Air Freight Index, Stifel Format

While recent increases are a positive indication that could suggest a stabilising market, we think it may be premature to celebrate. Rates are still well-below where they were last year and where they started this year, and supply continues to enter the market.

While recent increases are a positive indication that could suggest a stabilising market, we think it may be premature to celebrate. Rates are still well-below where they were last year and where they started this year, and supply continues to enter the market. According to IATA, capacity (as measured by available cargo tonne kilometers, or ACTKs) was up more than 11% year on year in July, the last available reading, and we believe that passenger belly capacity continues to re-enter the market, which will continue to put pressure on pricing. Moreover, average fuel prices are up in the mid-single-digit percentage range in September compared to  August, accounting for roughly half of the overall rate increases on certain lanes.

 

Exhibit 5: US Gulf Coast jet fuel spot prices have climbed steadily since summer, accounting for a sizeable chunk of recent rate increases

Source: U.S. Energy Information Administration; Stifel format

On its most recent investor call, FedEx stated that it does not see much likelihood for a peak season this year and, on that basis, guided investors to flat revenue over the next year. UPS reiterated comments from its previous earnings call and likewise pointed toward a flat peak.

On its most recent investor call, FedEx stated that it does not see much likelihood for a peak season this year and, on that basis, guided investors to flat revenue over the next year. UPS reiterated comments from its previous earnings call and likewise pointed toward a flat peak. So, could we be seeing emerging evidence of a better-than-expected finish to 2023? Potentially, but with inflationary pressure and rising energy prices putting a strain on consumer discretionary spending, the likelihood of a breakaway restocking is unlikely in our view. While we think inventories have for the most part bottomed, we also think the risk of fundamental demand grinding lower, coupled with the memory of last year’s overstocking will likely lead shippers to position conservatively. As capacity and inventories both come back into balance, core demand should once again become the primary determinant of air cargo rates, but that does not make it any easier to forecast. For now, we continue to expect a modest sequential rise in pricing through the end of the year, although pricing will generally remain well-below last year.

About Bruce Chan, Director and Senior Research Analyst covering Global Logistics and Future Mobility, Stifel

Bruce Chan joined Stifel in 2010. Based out of the Miami office, Mr. Chan is a Director and Senior Research Analyst covering Global Logistics and Future Mobility.

Bruce Chan can be reached at chanb@stifel.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2023 by J. Bruce Chan.