Date: Friday, January 13, 2023
Air cargo ended 2022 on a weak streak that is expected to continue well into the first half of the year, with logistics companies hanging hopes for better demand on retail inventory clearance bottoming out by summer.
Uncertainty is the watchword for 2023. Any progress in freight transport could be undone by a recession predicted by most economists or more unexpected geopolitical events.
Overall shipment volumes were down 8% in December versus the same period the prior year. More importantly, because 2021 was such an unusually strong year for comparison purposes due to pandemic-led distortions, demand was 13% below the pre-COVID period, said freight benchmarking firm Xeneta in its latest report.
It was the 10th consecutive month that the amount of goods moved by air declined, as the Ukraine war, high inflation, COVID isolation mandates in China, excessive inventory buildups and improved ocean shipping reliability reduced consumer purchases and the need for companies to ship via air. Global export orders — a leading indicator for air cargo procurement — continue to decelerate, according to the Purchasing Managers Index.
Lagging data from the International Air Transport Association, which uses a different distance-based methodology and only data from airline members, validates the negative trend line for air cargo. The airline group this week reported cargo traffic fell 13.7% in November, nearly six points more than Xeneta previously said.
Both shippers and carriers can claim victory from the market normalization underway: Spot market shipping prices are down 30% to 35% from the pandemic peak but still 75% more than pre-COVID levels, according to market reporting agencies.
The slump in consumer electronics shipments is a prime indicator of the slowdown in global economic activity and trade, illustrating why businesses have less need for the fastest, most expensive mode of transport.
Global shipments for traditional PCs fell below expectations in the fourth quarter to 67.2 million units, down 28.1% from the prior year, according to preliminary results from International Data Corp., which tracks the tech industry. It also estimated shipments of smartphones declined 11.5% in 2022, with demand for smart home devices and wearable technology also shrinking by low single-digit amounts.
Sales of computers and other gadgets, which frequently are shipped by air because of their high value and consumer expectations, soared during the pandemic with people engaged in social distancing. The PC outlook for 2023 has turned negative because most users have relatively new PCs and there is potential for a global recession. Analysts say demand for new computers could pick up late next year and in 2024 as Microsoft prepares to end support for the Windows 10 operating system loaded in existing machines.
Xeneta’s load factor, which measures how full aircraft are by volume and weight, fell seven points from the prior year to 57% and was five points below the figure for December 2019.
Rate declines vary by origin-destination pairs, but are noticeably negative on many major trade lanes, including out of China, Hong Kong and North America despite a late December bump associated with reduced winter flying for passenger carriers. Rates from China to North America and Europe remain stable compared to November, but at $6.76 and $4.34 per kilogram, respectively, are about 40% lower than a year ago, per the Freightos Air Index.
San Francisco-based freight forwarder Flexport reports demand out of northern China remains low and that the traditional increase in bookings before the Lunar New Year holiday, which begins Jan. 22, remains unlikely. Logistics companies continue to cancel some charter flights due to the low demand forecast.
Under the circumstances, shippers have been gravitating toward one-time quotes for immediate delivery rather than committing to contract rates.
Massive deterioration in ocean shipping business doesn’t bode well for air cargo growth in the near term.
New data from Descartes Datamyne shows ocean imports approaching pre-COVID levels. The National Retail Federation (NRF) this week said U.S. container imports in November dropped below 2 million twenty-foot equivalent units for only the second time in nearly three years and should remain there through the spring. It forecast steep volume declines through May relative to 2022 and 2021. The NRF projects that growth will return in the back half of the year. Ocean freight rates have also crashed to 2019 levels from record highs, making the sea option more attractive for many businesses.
On Wednesday, Flexport announced a 20% reduction in staff because of slow international business.
Passenger airlines have restored many of their flights since the pandemic, but the remaining 7% shortage of cargo capacity relative to 2019 partly explains why — along with aviation staffing shortages, the need to reroute around Russia and weather delays — rates remain high. Cargo capacity on freighter aircraft is down roughly 8% year over year and dropped an additional 2% from November as more shippers shift to cheaper space on passenger aircraft re-entering service after COVID, according to consultancy Seabury Cargo, part of Accenture.
Airlines and logistics companies are cautiously optimistic that demand will improve after June.
How quickly air cargo volumes bounce back depends on several wildcards: The severity of any recession that materializes; whether there will be a post-spring inventory correction resulting in strong cross-border orders; and whether inflation is skewed toward the service sector and less toward goods.
Logistics professionals are also watching how China deals with the latest COVID outbreaks. Authorities late last year ended lockdowns and strict international travel restrictions, allowing full-scale manufacturing and other economic activity linked to export shipping to resume. But the flip from nearly three years of zero-COVID policy has resulted in a huge rise in infections, further disrupting factories and logistics operations.
The rapid spread of the virus has already led to labor shortages at key ports in China, resulting in slowdowns and backlogs. Another wave of COVID outbreaks could occur as people travel to visit relatives later this month for the Chinese New Year holiday, with more employees expected to call in sick, cautions Everstream Analytics.
“For [ocean and air] volumes to remain unchanged from 2022, a fast normalization of energy prices, a swift decline in European inflation and a China without a zero-Covid policy must occur. At their very best, transported volumes will be on par with the 2022 level, with most being to the downside,” Xeneta CEO Patrik Berglund wrote in a recent blog post.