Q3 2023
DEMAND
Quarterly overview of the majordevelopments in demand
The global air cargo market experienced a stable performance in the third quarter, with cargo volumes matching the level of the same quarter last year. However, compared to the pre-pandemic levels, this was still 7 percentage points lower than the same quarter in 2019.
Weak cargo demand and recovery of capacity is reflected in the carriers’ dynamic load factor, a measure of capacity utilization considering both cargo weight and volume. In September, passenger belly and freighter load factors were 3.5 percentage points and 3 percentage points down from 2019 levels respectively.
The main reason for such gaps was the weak performance of the general cargo market, which saw a sharp drop of 16% in cargo volumes in the third quarter compared to the same period in 2019. This was due to reduced consumer demand for general goods and a move to ocean freight with its increased reliability, lower costs and lower carbon emissions.
However, the downturn may have subsided, as the general cargo volume in the third quarter was on par with the level last year.
The special cargo market, on the other hand, continued to show resilience and growth. The global market recorded a 3% increase in special cargo volumes from a year ago and a 5% increase from the pre-pandemic levels in the same period.
China-plus-one strategy has been a key focus since the US-China trade war. It was made even more relevant when long lasting and tough pandemic restrictions in China highlighted companies’ dependence on the country.
Western countries have therefore been discussing diversifying the global supply chain and reducing dependence on China, in spite of higher costs. So, does the data show the kind of progress some politicians and companies are looking for?
It is clear such trends are emerging in some regions. However, in reality, the China-plus-one strategy is more complex and challenging than it first appears, as the world is so highly interconnected and interdependent.
Taking Vietnam, one of the main beneficiaries of the China-plus-one strategy, as an example, the market sees a huge increase in demand from the US. Vietnam exports to the US in the first seven months of 2023 soared an impressive 106% from the same period of 2018 (the onset of the US-China trade war) to USD 53 billion, creating a large trade surplus.
However, EU countries have been more cautious and have not made significant changes to their supply chain in Vietnam. Vietnam's exports to the EU in the first seven months of 2023 only grew by 5% compared to 2018, which is below the inflation rate.
Moreover, the China-plus-one strategy does not necessarily mean a complete decoupling from China, as Vietnam still relies heavily on Chinese imports of raw materials and machinery. Vietnam's imports from China in the first seven months of 2023 increased by 64% compared to 2018.
As the ocean freight market chaos ebbs away, the comparative cost of air compared to ocean freight rose to its highest level in three years.
This is because the global ocean container freight market has been in the doldrums with a muted peak season this year, leading to ocean freight rates falling off a cliff. On many top volume corridors, box rates have fallen back to, if not below, their pre-pandemic levels. In line with this, ocean freight schedule reliability has also improved as less volumes and lifted covid restrictions are less likely to disturb port operations.
As we have seen before, the cost of shipping by air has not gone down to pre-pandemic levels. If we look at the route from Northeast Asia to Europe, the general air cargo rate was 23 times higher than the ocean 40ft container rate in September. This is a huge difference compared to September 2021, when the air freight rate was only three times more expensive than ocean. It is also much higher than the average pre-pandemic ratio of 13 on this trade.
This results in some shippers returning to the more economical option of ocean freight. Governments and media in advanced economies have also been highlighting the importance of the green agenda, especially for the transportation industry, which is a major source of emissions.
Some shippers, such as Apple, have announced green initiatives and plan to switch their volumes from air to ocean freight to reduce their carbon footprint.
