RATES
Quarterly overview of the majordevelopments in air freight rates
Global air cargo spot rates (airline sell) have seen surprisingly strong growth in the first quarter of 2024, reaching USD 2.59 per kg in the first week of April. This represented the second consecutive week of year-on-year growth after nearly two years of continuous decline.
There appears to be strong momentum behind this growth too, with the global spot rate of USD 2.59 per kg up by 14% compared to four weeks earlier. This growth cannot be solely attributed to jet fuel surcharges either, with the US Gulf Coast Kerosene-Type jet fuel spot rate only increasing by 5% in the same period.
The main driver behind the surge in global air cargo spot rates is the ongoing conflict in the Red Sea region which has caused disruption across ocean freight container services.
Alongside declining service reliability, the average spot rates for ocean freight services from Asia to Europe increased by 114% in March compared to December 2023 before the Red Sea crisis.
Rates have since gradually decreased by about 20% from their peak in March as ocean freight carriers adjusted schedules and diverted services around the Cape of Good Hope in Africa.
However, the return of a semblance of stability to ocean freight services has not relieved the pressure on the air freight market, which is still experiencing upward pressure on spot rates from Asia to Europe.
This growth is being led by outbound markets in Southeast Asia and Central Asia (including Indian subcontinent) as ocean freight shippers turn to the faster – but more expensive – air freight market in order to meet strict delivery schedules for their goods.
The India outbound market is particularly affected by the mode shift. Despite surging demand from local exporters, apparel exports from Bangladesh are being trucked to Indian airports, such as Delhi, to avoid the congested Dhaka airport and to benefit from cheaper air freight rates.
The China to Europe corridor was the only fronthaul trade to register a month-on-month decrease in rates in March (-3% from February).
This was mainly due to a cooldown in the market following the pre-Lunar New Year cargo rush.
The ripple effects of the Red Sea conflict have extended across global supply chains, with Southeast Asia and Central Asia to North America air freight markets also impacted.
Additionally, airports in the Middle East and Europe, which are common transit hubs for cargo en route to North America, are experiencing rate increases.
China to North America spot rates traditionally decline at this time of year, yet they increased by 1% month-on-month in March.
This is due to strong e-commerce demand in the US and limited passenger aircraft belly capacity. Even the Europe to North America corridor – which should not be impacted by disruptions to ocean freight services in the Red Sea – registered a 3% month-on-month increase.
In addition to the Red Sea situation and continued e-commerce demand, other factors such as Ramadan (impacting the transshipment via the Middle East) and Easter (mainly impacting Europe and US destinations) are squeezing air cargo flows and pushing up air cargo rates.
These events are now over and a semblance of normality is returning to ocean freight shipping, so it is likely the general air cargo market will see rates and demand cool off in Q2 this year.
There is a significant caveat to this forecast however following the recent escalation in conflict between Israel and Iran, which will be covered further in the macroeconomics section of this XADD report.
While fronthaul trades have seen a squeezing of available capacity, this has caused a trade imbalance on backhauls where there is ample capacity and rates remained mostly stable with only minor increases. Some backhaul corridors even recorded rates falling below the pre-pandemic levels of 2019.
Freight forwarders are on the frontline to feel the impact of the rate increases, particularly as approximately 43% of global air cargo volumes are exposed to recent spot rate surges.
With the memory of strong year-end peak season rates last year, those shippers who have their contracts renegotiated in the first quarter are hesitant to sign longer-term contracts in 2024.
This caution is demonstrated in data which shows the majority of new contracts are being signed by shippers for no more than three months.
However, shippers with temperature-controlled cargo tend to favor longer-term contracts as they prioritize reliable services for their high-value and temperature-sensitive products.
Looking at the long-term market, Red Sea disruption did not have as significant an impact when compared to the airline-sell spot rates.
Firstly, this is because two-thirds of shippers still had valid rates that were contracted before the first quarter so were largely insulated from rate increases caused by the Red Sea situation.
Secondly, while some shippers did feel some heat from the Red Sea disruption, they were successful in pushing back against service providers over the extent of rate increases.
This was the case on outbound corridors of Southeast Asia and Central Asia where freight forwarders typically procure more than half of their volumes on the spot market.
