Q2 2023
AIR FREIGHT
Quarterly overview of the majordevelopments in air freight rates
SUMMARY
Market sentiment remains pessimistic and during the past quarter, global air-freight spot rates reached their lowest level since the onset of the pandemic (but still higher than the period just prior to the pandemic).
The pick-up in passenger belly capacity amid increased widebody deliveries will continue to put downward pressure on rates if demand fails to improve.
Although cargo demand was hit hard by the pandemic, there are some signs that the contraction is easing. However, growth has been lagging world GDP and a softened global economy is likely to dampen hopes for a rosy year-end peak season.
In the second quarter of 2023, the global average spot rate for air cargo continued to plunge, falling by a record 40% year-on-year to stand at USD 2.25 per kg by June.
The rate fell by 11% in Q2 from Q1, partly attributed to market seasonality; rates tend to fall at the start of the year from the previous year-end peak, then gradually bottom during the slack summer season until picking up again towards the end of Q3.
The other contributing factor has been the decline in jet fuel prices. On the back of increased production, the US Gulf Coast price fell 45% in June off its historical peak in the same month of 2022, to only 8% above the level in June 2018.
However, the ongoing price volatility of the jet fuel price is a risk factor to consider and manage. However, the price was 4% up from May as the busy summer passenger season pushed the market up.
Aside from seasonality and fuel prices, the major factor behind the rate drop are demand-and-supply fundamentals. On the supply side, capacity has almost recovered to its pre-pandemic 2019 level (down just -2%), while demand has fallen 9% over the same period.
Despite the prevailing market pessimism, the average rate has yet to fall back to its pre-pandemic level. In June, it was still 30% above the same month in 2019. The most likely reason for this is the slowdown in global capacity growth to 8% year-on-year in June from its March peak, in addition to the narrowed negative growth (-1% year-on-year) in global volumes, repeating the market performance seen in May.
Looking at the different cargo types, the global general cargo spot rate has been more sensitive to economic cycles than the global special cargo spot rate. In June, the general cargo rate fell 55% from its peak in December 2021 to only 27% above the same period in 2019. In comparison, the special cargo rate fell by a lesser degree (48%) from December 2021 to remain at 43% above its pre-pandemic level.
The higher sensitivity of the general cargo rate was also clear during the pandemic. The rate peaked in December 2021, increasing by 181% versus December 2019. In contrast, the special cargo rate was less volatile, rising by 163% in December 2021 from the same period in 2019, 18 percentage points less than for general cargo.
For a proper temperature reading of these two markets, we should look at the behavior of both spot rates (valid for up to one month) and seasonal rates (valid for over one month).
For general cargo, the global average spot rate in June was USD 0.26 per kg below the seasonal rate by. This hints at a buyer’s market, with fierce competition from freight sellers. In other words, the downward pressure on the general cargo market remains. Things are quite the opposite for special cargo, where the global average spot rate hovered above the seasonal rate by USD 0.37 per kg in June, which points more to a seller’s market.
One explanation for this state of affairs is the weakened volumes for general cargo, which are yet to recover to pre-pandemic levels, while the flow of special cargo remains relatively steady. Hence the more diversified and improved product offerings we have seen from carriers for various special cargo, notably pharma and perishables.
Zooming into the corridor level, spot rates remain elevated versus pre-pandemic levels on most top trades.
Taking general cargo as an example, the Asia Pacific to North America average in the second quarter topped the list at 54% above its pre-pandemic level. This can be attributed to the pick-up in cargo volumes (still higher than the pre-pandemic level) and tight belly capacity.
The Europe to Asia Pacific and Middle East & Central Asia to Asia Pacific trades came in second and third, respectively. Still-elevated rates on these typically back-haul lanes are partially attributable to capacity shortages resulting from flights rerouted to avoid the airspace around Russia and Ukraine.
As for the major head-haul trades – Asia Pacific to Europe and Europe to North America – these were returning to pre-pandemic levels at a similar pace. General cargo rates on both corridors fell to one-third of pre-pandemic levels, with freight forwarders in both markets continuing to take a large share of spot volumes in the expectation of further rate falls.
Lastly, during Q2 the Middle East & Central Asia to Europe corridor was the only one to see its general cargo fall below the pre-pandemic level.
Across the board, we see freight forwarders continue to allocate larger amounts of spot volumes to take advantage of falling rates on most top corridors, which seems to confirm that the market remains highly challenging.
Shippers, on the other hand, have been relaunching tenders by inviting both existing and new freight forwarders to land lower rates both for spot business and long-term contracts. Six-month and over six-month contracts were most preferred in Q2. Some shippers have even managed to fix one-year contracts at much lower rates, which indicates that freight forwarders either have a growing appetite for risk or are fighting fiercely to retain the business of key customers.
Meanwhile, carriers appear to remain pessimistic, with some freighter airlines currently undertaking major reviews of their route network and capacity strategies as demand for all-cargo aircraft suffers due to increased availability of belly capacity.
