Date: Monday, July 17, 2023
Amid a burgeoning price war, pessimism is growing in air cargo circles that a market in prolonged recession could drift further downward, after a short pause, reducing the chance of a modest recovery during the traditional preholiday shipping rush.
Logistics professionals had hoped for an upturn by now that would steadily build into the second half, but that hasn’t happened. Freight forwarders and, increasingly, cargo airlines have responded by chasing volumes without regard to cost, which observers say is accelerating a decline in rates.
Aggressive price discounting, and reports that some carriers are shelving older aircraft, suggests companies are increasingly nervous that demand won’t improve this year in a world with excess capacity. In fact, freight rates are lower than supply and demand fundamentals actually support because freight forwarders and carriers, eager to generate some cash from committed airlift, are undercutting each other on price to keep bookings and steal business, transportation managers and analysts say.
“There’s a bit of a rat race going on in securing volumes that are not growing, combined with the increase in capacity, that makes it quite a toxic environment where we see irrational pricing both towards the shippers by the forwarders and forwarders from the airlines side,” said Niall van de Wouw, chief airfreight officer at market intelligence firm Xeneta, in a webinar this month.
Many freight forwarders feel squeezed by high airfreight rates locked in with airlines under contracted space allocations while their own customers push for multi-month contract renewals based on rates at the new market level, according to Xeneta’s latest update.
“We see some forwarders agreeing to 12-month fixed rates with shippers, including fuel, that are lower than the rates we see in the market overall. That is nearly ‘going to Vegas’ in terms of risk, but forwarders are anxiously looking to secure volumes in the face of fierce competition,” van de Wouw said in the report. “Shippers we are talking to are, in general, not looking for a massive overhaul of their supplier base, but they do want to see a benefit because rates and market conditions are so much lower than they were six-to-nine months ago.”
Similarly, some forwarders are still stuck with entire freighter aircraft they leased to guarantee capacity when business was booming in 2021 and early 2022.
“When you find yourself with capacity and the terrible market conditions we have, you tend to do anything to generate cash, which means you sell at low yields because $1 is better than flying empty,” said Neel Jones Shah, executive vice president of air strategy and carrier development at Flexport, in an interview during last month’s Cargo Network Services conference in Miami. “That’s not necessarily the behavior that’s best for the overall health of the industry.”
San Francisco-based Flexport, for its part, controls three Boeing 747-400 freighters under a long-term contract with Atlas Air. The network connects Seoul, South Korea, Shanghai, Hong Kong and Taipei, Taiwan, with Los Angeles and Chicago.
Logistics companies that procured their own freighters at the height of the pandemic “are likely bleeding cash on their daily operations,” said Derek Lossing, founder of Cirrus Global Advisors, a boutique e-commerce supply chain consulting firm.
Van de Wouw predicted it will take a few more quarters before the panic subsides and shipping prices align with real economic conditions.
Air cargo volumes, load factors and rates have moved sideways in recent weeks after steadily declining 7% to 10% since March 2022 due to a slowing global economy, bloated inventories and improved ocean shipping reliability. The rate of decline began slowing in February and leveled off in May and June, bringing a sense of stability to the market.
Xeneta reported that year-over-year air cargo volumes in June contracted 1% for the second consecutive month — the smallest declines in the past year — while capacity increased 8% as passenger airlines continued to restore international service. Figures vary by data sets. WorldACD estimates tonnage fell 4%, but improvement was directionally the same. Lagging statistics from IATA shows global cargo demand fell 5.2% year over year in May, better than the revised 6.3% decline in April.
The most current analysis from multiple sources put air volumes 5% to 6% lower, year over year, during the first week of July — at a level that is slightly worse than typical for the slow summer season.
Lower volumes and more aircraft space have created a situation in which planes, on average, now are only 56% full with cargo and rates are 40% to 50% lower than a year ago. Some analysts estimate aircraft load factors are less than half.
Prices on most trade corridors have slipped below pre-pandemic levels, on a fuel-adjusted basis, according to the Baltic Air Index. The rate at the lowest quartile of the market has dropped to its 2019 point of only $2.53 per kilogram on the trans-Pacific route, Xeneta reported.
Dedicated freighter utilization fell 7.5% year over year in June, a steeper slide compared to the drop recorded in the previous four months, said Fadi Chamoun, a transportation analyst at BMO Capital Markets, in a research note. Flight hours and cargo demand are strongly correlated. June represented the 15th consecutive decline in flight hours for the all-cargo sector and low for the 12-month moving average.
Intra-Asia flying accounted for the bulk of the decline, according to BMO.
On Thursday, Delta Air Lines reported second-quarter cargo revenue fell 37%, or $100 million, from the prior year.
With prospects dimming for a rebound in business, cargo airlines are beginning to ground aging freighters that are expensive to operate.
China Cargo Airlines shut down its two Boeing 747-400 aircraft at the end of June as it transitions to an all-777 fleet, according to Cargo Facts and ch-aviation. JetOneX, a U.S. carrier that outsourced flying to Air Atlanta Icelandic, has shut down all four of its 747-400s, The Loadstar reported. All contact information has been removed from the company’s website, raising questions about whether it is still in business. Also, Amerijet recently laid off some workers because of a severe downturn in business.
Express carriers, notably FedEx Express, are streamlining route structures and flying less frequently.
Bear market scenario
The air cargo market normally starts to see more activity in the second half of the year, driven by back-to-school and holiday sales inventory buildup. Whether that happens in 2023 is an open question. The consensus within the logistics sector at the start of the year was that overstocked importers would clear out inventories by late spring and start reordering from Asian manufacturers, but that hasn’t materialized to a large extent.
Global manufacturing is cooling down, with the Purchasing Manufacturers’ Index for new export orders, a leading indicator for airfreight demand, falling at the steepest rate in six months in June.
Even though the U.S. economy has been surprisingly resilient and inflation moderated significantly to 3% in June, it’s useful to remember that the economy involves much more than physical goods that require shipping. And consumers are spending more of their disposable income on experiences and services than stuff since COVID social restrictions lapsed.
The U.S. manufacturing sector took a sharp turn for the worse in June, dropping to its lowest reading since May 2020. Manufacturing performance has deteriorated seven of the last eight months. U.S. and international manufacturers, suppliers and customers are cutting production and warehouse stocks in the face of weakening demand, according to S&P Global Market Intelligence.
Meanwhile, U.S. housing starts are very slow because of high mortgage rates, which translates into less need for construction materials and furniture. Those goods don’t usually move by air but illustrate the general reduction in transport activity. And U.S. real goods imports decreased 2.3% month over month in May.
Bank of America recently said it is already starting to see people pull back on spending. U.S. consumer spending barely moved, growing 0.1% in May after a 0.6% gain in April, according to a government report.
A recent CNBC survey revealed that U.S. retailers expect a weak holiday season, marked by heavy discounting and fewer orders, an indication that holiday-related imports could be weak ahead of the holiday shopping season.
Retail executives, even at companies that have reduced excess inventory, say they are being very cautious about placing new orders because of concerns that consumers will spend less because of inflation and the end of government COVID-relief payments.
Small business confidence in sales for the next six months is low, according to the National Federation of Independent Businesses. The negative outlook could lead firms to defer rebuilding inventories.
Global PC shipments declined 13.4% year over year during the second quarter, the sixth consecutive quarter of contraction, according to International Data Corp. Shipments of smart home devices have also declined since last year. Electronics are the type of high-value products that companies typically move by air for safety and speed-to-market reasons. Weak consumer and commercial demand has caused PC inventory levels to remain above normal for longer than expected.
“Companies don’t want to be caught with short supply like they were in 2020 and 2021, but at the same time, many seem hesitant to make the big bet on a market rebound,” said Ryan Reith, an IDC vice president.
The recent Supreme Court decision blocking President Biden’s program to forgive up to $20,000 in student debt would have boosted budgets for 44 million people by about $200 to $300 per month. Instead, repayments will take about $70 billion out of the U.S. economy, a marginal amount in an economy the size of the U.S., said Greg Valliere, chief U.S. policy strategist for AFG Investments. Mark Zandi, chief economist for Moody’s, predicted a quarter-point cut in U.S. GDP because of the change. And Wells Fargo bank estimated the resumption of debt payments in September would reduce annual U.S. consumer spending by 0.5%.
ING, a multinational bank and financial services company, said in a recent report that global trade growth is likely to remain muted at least until 2024 because of geopolitical issues, protectionism and other factors. It also projected global trade will lag GDP growth. Still, it expects a stronger second half driven by a pickup in consumer spending on goods, wage growth and inventory corrections.
Downhill from here?
Trends in ocean shipping can also apply to air cargo, albeit on a smaller scale.
Henry Byers, the head of ocean intelligence at FreightWaves, predicts U.S. container import volumes could decline 10% to 20% below 2019 levels in the second half. Although box traffic is at a high point for the year, booking volume is already going down. The slowdown in bookings proves that a contraction in Chinese manufacturing, cautious retailers still coping with excess inventory and uncertain consumer demand are weighing on ocean imports, he wrote in a recent analysis.
Others believe retail-based ocean shipping demand has bottomed out but are unsure how much of a recovery there will be. The National Retail Federation forecasts 2023 inbound ocean volumes at U.S. ports will peak in August at 2 million twenty-foot equivalent units, 10% less than the prior year.
Even if there is any upswing in cross-border trade, airlines will be last in line to benefit. Container shipping demand has contracted less this year than air cargo. With ocean carriers offering plenty of capacity and super-low rates, most shippers with upcoming orders are likely to book them with ocean carriers instead of airlines.
BMO’s Chamoun suggested the airfreight cycle has not bottomed out yet. Load factors and freight rates are likely to feel more downward pressure in the coming months given the continued addition of passenger supply and demand indicators in contraction territory. And the lagged effect of tighter credit availability on consumer and business spending indicates that airfreight demand may not recover until mid-2024, he said.
If the base case for demand being near the bottom plays out, it still means any major restocking won’t begin in earnest until the end of the year, if not later, said Stifel equity analyst Bruce Chan in a monthly column for the Baltic Air Freight Index.
Xeneta’s van de Wouw said there could be a silver lining for air cargo if there is no peak season for ocean freight in the third quarter and consumer spending suddenly picks up. But any bump in airfreight will be short-lived and smaller than in previous years, he added.
“Based on the feedback from our own customer base, while air activity will see an uptick, it will not be at normal peak-season levels of demand. Inventory and market concerns appear to be delaying spend on shipping products by air. This could culminate in a higher rate of growth in Q4 due to the cautious approach in Q3,” said Sunandan Ray, CEO of Unique Logistics International in Garden City, New York, via email. “Any broad recovery in airfreight volumes is more likely to be later in 2024.”