Q3 2023
AIR FREIGHT
Quarterly overview of the majordevelopments in air freight rates
During Q3, the global average air cargo spot rate paid by freight forwarders stayed below levels seen in the past three years as the market gradually normalizes.
However, the market finally bottomed out in September and, as we head into air cargo’s traditional year-end peak season, average spot rates in the week ending 8 October ticked up 11% to USD 2.33 per kg compared to the previous month. This spot rate is also 35% higher than the same month in 2021.
And this is the first time in five months where the global average spot rate (valid for up to one month) climbed to the level of the global average seasonal rate (valid for over one month).
The statistic is supported by the increase of cargo volumes (+4% month-on-month in the week ending 8 October) as shippers return from their summer break and prepare for the year-end holiday seasons.
Consequently, the global air cargo load factor, which measures the capacity utilization of aircraft, ticked up three percentage points in the same timeframe, with cargo capacity staying on par with last month.
In terms of freight rate developments, we can see the rates freight forwarders paid to carriers fluctuated more than the rates freight forwarders charged to shippers in the past two years.
During the peak season of 2021, freight forwarders experienced decreasing margins as the rates they paid increased faster than the rates they charged.
However, the reverse is seen since the slack summer months in 2022.
Freight forwarder margins expanded as freight forwarder ‘sell’ rates followed the changes in the freight forwarder ‘buy’ rates, with some delay.
Looking at recent developments, freight forwarders face increasing pressure on routes from Northeast Asia, where the rates they paid increased more than the rates they charged. This may add upward pressure for rates paid by shippers eventually.
This is mainly due to the different contract terms adopted by shippers and freight forwarders. Because of the air cargo market downturn, shippers and freight forwarders are finding common ground on longer term contracts. However, freight forwarders are continuing to utilize the volatile spot market.
Against the backdrop of the air cargo market downturn, some carriers’ revenues have already fallen back to their pre-pandemic level as the demand/supply balance shifts towards oversupply. This leads to higher operating costs squeezing carriers’ margins.
Firstly, carriers are facing higher jet fuel prices, one of their largest operating costs. In the third quarter, the US Gulf Coast jet fuel spot price was on average 54% above the level in the same period of 2019. This is reflected in carriers’ fuel surcharges to freight forwarders, which also remain higher than 2019. In line with this, the market sees higher fuel surcharges charged by freight forwarders to shippers.
In addition, as inflation remains high, airline workers’ unions have threatened to strike and disrupt air cargo services during wage negotiations.
United Airlines and Cargolux are some of the latest carriers to report pay increases for employees in the last quarter, adding further pressure on the bottom line on top of jet fuel, both of which account for a significant share of overall operating costs.
Freighter airlines will likely be particularly hurt by these cost increases as the cargo business is their primary revenue stream.
In comparison, passenger airlines traditionally have a larger share of their revenues generated from passenger businesses, so the recent downturn in cargo revenue will be well covered by the pickup in passenger numbers.
