Reduced demand and returning belly capacity result in “double whammy” for airfreight rates
05 / 06 / 2023
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Soft demand and continued returning belly capacity combined to hit airfreight rates again in May, and pressure on rates is expected for the rest of the year.
“2023 airfreight rates continue to grind lower, and the month of May was no different, enduring a double whammy of soft demand and the continued resurgence of capacity—particularly from passenger flights as both trans-Atlantic and trans-Pacific traffic returns for the summer season,” said Bruce Chan, director and senior research analyst covering global logistics and future mobility at investment bank Stifel.
Writing in his monthly column for the Baltic Exchange, Chan added: “The net result is that West-bound trans-Atlantic cargo spot rates (as represented by BAI22, Frankfurt to US) are up only 10% vs. pre-Pandemic levels, while Asia to Europe (BAI81 and BAI31 indices, representing Shanghai and Hong Kong to Europe, respectively) are only 30% higher on average than pre-pandemic levels, and Eastbound trans-Pacific Asia to US rates (BAI82 and BAI32 Shanghai to US and Hong Kong to US, respectively) are up only 35% on average.”
He said that inventory restocking and constrained spending has fuelled weak demand this year, perhaps more than anticipated, he added.
Referencing IATA’s data on Freight Tonne Kilometres (FTKs) for March, for which the industry body reported a 7.7% decline in March, year on year and an 8.1% decline versus March 2019, Chan noted that the shift back from air to ocean has largely been completed following airfreight’s boom when container shipping was hampered by congestion during the pandemic, which has added to the demand challenge.
“We believe most of the trade-down, or “trade-back” from air to ocean after year-ago supply chain bottlenecks has largely happened, but core airfreight demand remains muted.”
Belly capacity crunch
Rising belly capacity also continues to put pressure on rates, and Chan warned that oversupply could become a problem that isn’t easily addressed following summer demand.
He said: “As for supply, the influx of passenger belly capacity continues to be an issue for freight rates, absorbing elastic demand in a soft freight market. Summer travel season and generally robust passenger activity, especially on trans-Atlantic lanes, has led to healthy supply of lower deck space.
“Airlines may have even over-built for demand, in our view, and it will take time for capacity to moderate after the summer surge wanes.”
Available cargo tonne-kilometers (ACTKs) are up 10% worldwide vs. last year, and are only 1% lower than March of 2019, according to IATA’s data, said Chan. ACTKs in Asia Pacific are up nearly 25% year on year due to the impact of the lifting of pandemic restrictions. Notably, ACTKS in Europe are up nearly 9% year on year.
“The market is likely to be most over-supplied with belly space this summer, so cargo rates will likely trough in the next few months, but we think slack capacity will stick around into 2024,” Chan said.
He added: “In May, Shanghai to North America (BAI82) declined 13% sequentially from April and Hong Kong to North America (BAI32) declined 2%. For Europe bound lanes, Shanghai origin (BAI81) fell 18% from April, while Hong Kong origin (BAI31) declined a little over 3% y/y. On Frankfurt to US (BAI22), rates were down 13% sequentially.”
“We expect demand softness to persist for most of the year and belly capacity to continue to come into the market, so continued rate pressure should be the theme of 2023.”
