Amid a burgeoning price battle, pessimism is growing in air cargo circles that a market in prolonged recession could drift further downward, after a brief pause, reducing the possibility of a modest recovery throughout the traditional preholiday shipping rush.
Logistics professionals had hoped for an upturn by now that may steadily construct into the second half, but that hasn’t happened. Freight forwarders and, increasingly, cargo airlines have responded by chasing volumes without regard to cost, which observers say is accelerating a decline in rates.
Aggressive price discounting, and reports that some carriers are shelving older aircraft, suggests firms are increasingly nervous that demand won’t improve this yr in a world with excess capability. In truth, freight rates are lower than supply and demand fundamentals actually support because freight forwarders and carriers, desirous to generate some money from committed airlift, are undercutting one another on price to maintain bookings and steal business, transportation managers and analysts say.
“There’s a little bit of a rat race happening in securing volumes that aren’t growing, combined with the rise in capability, that makes it quite a toxic environment where we see irrational pricing each towards the shippers by the forwarders and forwarders from the airlines side,” said Niall van de Wouw, chief airfreight officer at market intelligence firm Xeneta, in a webinar this month.
Many freight forwarders feel squeezed by high airfreight rates locked in with airlines under contracted space allocations while their very own customers push for multi-month contract renewals based on rates at the brand new market level, in response to Xeneta’s latest update.
“We see some forwarders agreeing to 12-month fixed rates with shippers, including fuel, which can be lower than the rates we see out there overall. That is almost ‘going to Vegas’ when it comes to risk, but forwarders are anxiously seeking to secure volumes within the face of fierce competition,” van de Wouw said within the report. “Shippers we’re talking to are, generally, not searching for an enormous overhaul of their supplier base, but they do wish to see a profit because rates and market conditions are a lot lower than they were six-to-nine months ago.”
Similarly, some forwarders are still stuck with entire freighter aircraft they leased to ensure capability when business was booming in 2021 and early 2022.
“If you end up with capability and the terrible market conditions we’ve got, you are inclined to do anything to generate money, which implies you sell at low yields because $1 is healthier than flying empty,” said Neel Jones Shah, executive vice chairman of air strategy and carrier development at Flexport, in an interview during last month’s Cargo Network Services conference in Miami. “That’s not necessarily the behavior that’s best for the general health of the industry.”
San Francisco-based Flexport, for its part, controls three Boeing 747-400 freighters under a long-term contract with Atlas Air. The network connects Seoul, South Korea, Shanghai, Hong Kong and Taipei, Taiwan, with Los Angeles and Chicago.
Logistics firms that procured their very own freighters at the peak of the pandemic “are likely bleeding money on their each day operations,” said Derek Lossing, founding father of Cirrus Global Advisors, a boutique e-commerce supply chain consulting firm.
Van de Wouw predicted it’s going to take a number of more quarters before the panic subsides and shipping prices align with real economic conditions.
Buyer’s market
Air cargo volumes, load aspects and rates have moved sideways in recent weeks after steadily declining 7% to 10% since March 2022 as a consequence of a slowing global economy, bloated inventories and improved ocean shipping reliability. The speed of decline began slowing in February and leveled off in May and June, bringing a way of stability to the market.
Xeneta reported that year-over-year air cargo volumes in June contracted 1% for the second consecutive month — the smallest declines up to now yr — while capability increased 8% as passenger airlines continued to revive international service. Figures vary by data sets. WorldACD estimates tonnage fell 4%, but improvement was directionally the identical. Lagging statistics from IATA shows global cargo demand fell 5.2% yr over yr in May, higher than the revised 6.3% decline in April.
Essentially the most current evaluation from multiple sources put air volumes 5% to six% lower, yr over yr, throughout the first week of July — at a level that’s barely worse than typical for the slow summer season.
Lower volumes and more aircraft space have created a situation during which planes, on average, now are only 56% full with cargo and rates are 40% to 50% lower than a yr ago. Some analysts estimate aircraft load aspects are lower than half.
Prices on most trade corridors have slipped below pre-pandemic levels, on a fuel-adjusted basis, in response to the Baltic Air Index. The speed at the bottom quartile of the market has dropped to its 2019 point of only $2.53 per kilogram on the trans-Pacific route, Xeneta reported.
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Dedicated freighter utilization fell 7.5% yr over yr in June, a steeper slide in comparison with the drop recorded within the previous 4 months, said Fadi Chamoun, a transportation analyst at BMO Capital Markets, in a research note. Flight hours and cargo demand are strongly correlated. June represented the fifteenth consecutive decline in flight hours for the all-cargo sector and low for the 12-month moving average.
Intra-Asia flying accounted for the majority of the decline, in response to BMO.
On Thursday, Delta Air Lines reported second-quarter cargo revenue fell 37%, or $100 million, from the prior yr.
With prospects dimming for a rebound in business, cargo airlines are starting to ground aging freighters which can be expensive to operate.
China Cargo Airlines shut down its two Boeing 747-400 aircraft at the tip of June because it transitions to an all-777 fleet, in response to Cargo Facts and ch-aviation. JetOneX, a U.S. carrier that outsourced flying to Air Atlanta Icelandic, has shut down all 4 of its 747-400s, The Loadstar reported. All contact information has been faraway from the corporate’s website, raising questions on whether it continues to be in business. Also, Amerijet recently laid off some employees due to a severe downturn in business.
Express carriers, notably FedEx Express, are streamlining route structures and flying less often.
Bear market scenario
The air cargo market normally starts to see more activity within the second half of the yr, driven by back-to-school and holiday sales inventory buildup. Whether that happens in 2023 is an open query. The consensus inside the logistics sector initially of the yr was that overstocked importers would filter out inventories by late spring and begin reordering from Asian manufacturers, but that hasn’t materialized to a big extent.
Global manufacturing is cooling down, with the Purchasing Manufacturers’ Index for brand spanking new export orders, a number one indicator for airfreight demand, falling on the steepest rate in six months in June.
Regardless that the U.S. economy has been surprisingly resilient and inflation moderated significantly to three% in June, it’s useful to keep in mind that the economy involves rather more than physical goods that require shipping. And consumers are spending more of their disposable income on experiences and services than stuff since COVID social restrictions lapsed.
The U.S. manufacturing sector took a pointy turn for the more serious in June, dropping to its lowest reading since May 2020. Manufacturing performance has deteriorated seven of the last eight months. U.S. and international manufacturers, suppliers and customers are cutting production and warehouse stocks within the face of weakening demand, in response to S&P Global Market Intelligence.
Meanwhile, U.S. housing starts are very slow due to high mortgage rates, which translates into less need for construction materials and furniture. Those goods don’t often move by air but illustrate the overall reduction in transport activity. And U.S. real goods imports decreased 2.3% month over month in May.
Bank of America recently said it’s already beginning to see people pull back on spending. U.S. consumer spending barely moved, growing 0.1% in May after a 0.6% gain in April, in response to a government report.
A recent CNBC survey revealed that U.S. retailers expect a weak holiday season, marked by heavy discounting and fewer orders, a sign that holiday-related imports might be weak ahead of the vacation shopping season.
Retail executives, even at firms which have reduced excess inventory, say they’re being very cautious about placing latest orders due to concerns that buyers will spend less due to inflation and the tip of presidency COVID-relief payments.
Small business confidence in sales for the following six months is low, in response to the National Federation of Independent Businesses. The negative outlook may lead firms to defer rebuilding inventories.
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Global PC shipments declined 13.4% yr over yr throughout the second quarter, the sixth consecutive quarter of contraction, in response to International Data Corp. Shipments of smart home devices have also declined since last yr. Electronics are the sort of high-value products that firms typically move by air for safety and speed-to-market reasons. Weak consumer and business demand has caused PC inventory levels to stay above normal for longer than expected.
“Corporations don’t wish to be caught with short supply like they were in 2020 and 2021, but at the identical time, many seem hesitant to make the large bet on a market rebound,” said Ryan Reith, an IDC vice chairman.
The recent Supreme Court decision blocking President Biden’s program to forgive as much as $20,000 in student debt would have boosted budgets for 44 million people by about $200 to $300 monthly. As a substitute, repayments will take about $70 billion out of the U.S. economy, a marginal amount in an economy the dimensions of the U.S., said Greg Valliere, chief U.S. policy strategist for AFG Investments. Mark Zandi, chief economist for Moody’s, predicted a quarter-point cut in U.S. GDP due to the change. And Wells Fargo bank estimated the resumption of debt payments in September would scale back annual U.S. consumer spending by 0.5%.
ING, a multinational bank and financial services company, said in a recent report that global trade growth is more likely to remain muted at the very least until 2024 due to geopolitical issues, protectionism and other aspects. It also projected global trade will lag GDP growth. Still, it expects a stronger second half driven by a pickup in consumer spending on goods, wage growth and inventory corrections.
Downhill from here?
Trends in ocean shipping also can apply to air cargo, albeit on a smaller scale.
Henry Byers, the pinnacle of ocean intelligence at FreightWaves, predicts U.S. container import volumes could decline 10% to twenty% below 2019 levels within the second half. Although box traffic is at a high point for the yr, booking volume is already taking place. The slowdown in bookings proves that a contraction in Chinese manufacturing, cautious retailers still coping with excess inventory and unsure consumer demand are weighing on ocean imports, he wrote in a recent evaluation.
Others imagine retail-based ocean shipping demand has bottomed out but are unsure how much of a recovery there can be. The National Retail Federation forecasts 2023 inbound ocean volumes at U.S. ports will peak in August at 2 million twenty-foot equivalent units, 10% lower than the prior yr.
Even when there’s any upswing in cross-border trade, airlines can be last in line to profit. Container shipping demand has contracted less this yr than air cargo. With ocean carriers offering loads of capability and super-low rates, most shippers with upcoming orders are more likely to book them with ocean carriers as an alternative of airlines.
BMO’s Chamoun suggested the airfreight cycle has not bottomed out yet. Load aspects and freight rates are more likely to feel more downward pressure in the approaching months given the continued addition of passenger supply and demand indicators in contraction territory. And the lagged effect of tighter credit availability on consumer and business spending indicates that airfreight demand may not get better until mid-2024, he said.
If the bottom case for demand being near the underside plays out, it still means any major restocking won’t begin in earnest until the tip of the yr, if not later, said Stifel equity analyst Bruce Chan in a monthly column for the Baltic Air Freight Index.
Xeneta’s van de Wouw said there might be a silver lining for air cargo if there is no such thing as a peak season for ocean freight within the third quarter and consumer spending suddenly picks up. But any bump in airfreight can be short-lived and smaller than in previous years, he added.
“Based on the feedback from our own customer base, while air activity will see an uptick, it’s going to not be at normal peak-season levels of demand. Inventory and market concerns seem like delaying spend on shipping products by air. This might culminate in a better rate of growth in Q4 as a consequence of the cautious approach in Q3,” said Sunandan Ray, CEO of Unique Logistics International in Garden City, Recent York, via email. “Any broad recovery in airfreight volumes is more more likely to be later in 2024.”
Twitter: @ericreports / LinkedIn: Eric Kulisch / ekulisch@freightwaves.com
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