Air cargo outlook: challenging market ahead
06 / 02 / 2023
It’s been an interesting period for the air cargo industry as volumes have been trending downwards since the first half of last year, while the capacity situation continues to change and rates remain above pre-Covid levels despite recent declines.
The fall in volumes reflects high inflation that is affecting consumer spending, the ongoing war in Ukraine’s effect on trade flows, the strength of the US dollar and high inventory levels amongst many major retailers.
Meanwhile, the recovery of the ocean industry has seen market share gained during the pandemic move back to the box shipping industry.
Looking ahead, IATA has predicted a 4.3% decline in air cargo volumes this year to 57.7m tonnes and yields are expected to decline by around 22%.
DSV executive vice president air and sea in the US Mads Ravn agrees that the outlook is tough, although he is hoping for an improvement later in the year.
“We do not know how and when the global economy will recover, but a small uptick in the second half of 2023 is realistic,” he says.
“Inventory levels still need to replenish to meet demand, and with a looming recession, we do not see that happening until the second quarter for particular retail commodities.
“There is massive pressure on cost savings from all sectors after logistics spend went through the roof in the past couple of years.
“Transit time on the ocean has improved, and with slow demand, we see air cargo levels declining further in the short term.”
He adds there are also uncertainties around China’s re-opening and the situation around Russia.
Scan Global Logistics (SGL) global head of airfreight David Wystrach agrees that the market will be soft this year, with some lanes suffering decreases in demand.
He points out that the Chinese New Year (CNY), which usually sees a surge in demand ahead of factory closures and after re-opening, is expected to have limited impact on the market this year.
“Stock levels seem to be looking good, even after Christmas sales,” Wystrach says.
“This is another reason why the expectation is only a limited uptick in demand after CNY.
“Besides, there is a well-saturated market, while the focus of ‘goods over service’ during past years led to a decreasing demand for various goods by now.
“There might be nuances in some markets, but at least for the first half of 2023, most likely even the first nine months, we do not expect an upswing in demand.”
Flexport head of airfreight Europe, Middle East and Africa Paul Rombeek points out that economic growth is expected to slow from 3.2% last year to 2.7% this year.
“Demand will likely decrease in 2023 compared to 2022 as consumer spending is declining. The world is entering a period of uncertainty and we anticipate the first half of 2023 to be a difficult period with inflation, a slowing global economy, and more supply than demand typically preceding a turbulent airfreight market,” he says.
Rombeek says that rates on trades to Europe and North America have been declining but adds: “Even with a deteriorated market, global average airfreight rates will remain around $2.60-2.80 per kg, about 35-50% above pre-Covid levels.
“This suggests a more financially stable and sustainable future for the industry.”
Brandon Fried, executive director, Airforwarders Association, says that volumes are normalising to more traditional levels.
He points to record-setting inflation, the Russian invasion of Ukraine, sporadic Covid lockdowns and high fuel prices as factors that will affect the market.
“A bright spot continues to shine in the e-commerce sector, with 22% of retail goods now purchased over the Internet,” he adds.
“This buying results in 80% of cross-border e-commerce being shipped by air as there is a need for fast delivery.
“However, online ordering is subsiding as consumers begin to feel the pinch of the higher cost of living.”
For charter broker Chapman Freeborn there has been high demand so far this year across multiple sectors, including automotive, energy, government-related, and humanitarian.
The firm’s chief commercial officer Neil Dursley says: “The ongoing conflict in Ukraine is keeping demand high for government and humanitarian support, but this also pertains to multiple countries in Africa and the Middle East.
“I predict that we will see this demand continuing to grow throughout the year.”
Securing capacity has been one of the main challenges faced by forwarders over the past couple of year, but a weaker demand outlook and returning belly capacity makes that less likely this year.
“There is increasing passenger travel that reopens markets that have been closed due to Covid-19,” says Wystrach.
“The start of the summer schedule in the second quarter for passenger flights adds to this. Furthermore, additional freighter aircraft are coming to the market, including conversions.”
He adds that additional capacity from sea-air operations that were launched to sidestep supply chain disruption may also remain in the market.
DSV is also not expecting to see a shortage in air cargo capacity in 2023.
However, Ravn is expecting some freighter capacity to be removed from the market as more belly capacity returns and as the cost of operating all-cargo aircraft no longer matches the market rate and demand.
He points out that passenger ticket sales are strong, supporting the return of passenger operations.
Fried of the AfA agrees that a recovering passenger market makes it unlikely that capacity will come under pressure.
However, he points out that there are some uncertainties.
“A global pandemic may not be the culprit behind the lack of cargo space,” he says. “For example, the US narrowly avoided a nationwide freight rail strike thanks to the US Congress, forcing workers to an agreement last month.
“With that threat abated, port workers on the US west coast are still negotiating maritime longshore contracts, which, if unsuccessful, could result in a work stoppage.
“If that happens, the actions could spike air cargo demand, causing a capacity shortage as ocean and rail options diminish.”
He adds that the association has been encouraged to see new entrants in the market, specifically ocean freight firms that have started cargo airlines, as they create new opportunities for forwarders.
Rombeek of Flexport says that capacity grew 6% year on year in 2022, but he adds that much depends on how carriers react to changes in demand.
He says that the market remains dynamic and companies should still plan for the possibility of capacity constraints and price fluctuations.
“While the demand for air cargo capacity has started to decrease with the pandemic being under control in many countries, the recovery of the global economy will also play a significant role in the air cargo market,” he says.
“If the economy recovers quickly and businesses return to normal operations, demand for air cargo capacity is likely to increase, which could lead to capacity constraints and higher prices.”
To manage this potential volatility, Rombeek says that forwarders should be flexible to adapt to changing market conditions and explore different solutions, such as chartering aircraft, consolidating shipments, or even looking at ocean freight as an alternative.
“It is essential to leverage technology to automate processes and gain real-time visibility into the market and capacity availability to help to identify potential bottlenecks and take action to secure capacity quickly,” he says.
From a broker’s perspective, Dursley is also expecting a more open market.
He says that new entrants into the market are helping to offset the capacity lost by the exit of Russia’s AirBridgeCargo.
However, he adds that there are several events that will impact the capacity situation, such as the situation in China and events like CNY.
He adds that he expects brokers will continue to be in high demand.
“Chapman Freeborn has the benefit of having our in-house capacity as well as third-party capacity to support our clients moving forwards,” he adds.
Long term v short term
Ravn says that securing long-term capacity at relevant rates will be a primary issue.
“There is little loyalty left from shippers who were asked to pay whatever the market dictated for the past couple of years,” he says.
“Now that the tables have turned and we are facing a buyer’s market, shippers are doing the same to the forwarders.
“Being agile and teaming up with the right partners will be key, going into a challenging year ahead.”
He adds that other challenges facing forwarders over the coming 12 months include navigating “a huge spot market” and a very competitive pricing environment; balancing shippers’ appetite for short-term deals with airlines’ desire for longer contracts; and not having the backing of base loads that can be counted on.
SGL is also expecting to face the same challenge of balancing long- and short-term capacity, with the market expected to remain under pressure and tackling constant volatility.
“This would impact asset-heavy operations (own freighter flights) and, dependent on how the market will develop, lead to a decrease in these operations,” says Wystrach.
“However, the impact would be to only balance out the market, but not to bring it up again short term.”
He adds: “2023 will mark a return to a new normal, which – on some lanes – might be even a ‘back to normal pre-Covid’.”
“There will be differences in the pricing as well. This will be driven by the higher fuel prices or with a different freighter- versus passenger-aircraft-mix.”
Wystrach adds that there are expected to be ongoing supply chain challenges around staffing shortages for ground handlers and airport personnel as well as air crews and truck drivers.
“The shortages will impact ground operations and door-to-door reliability from a transit time perspective.”
He adds: “At Scan Global Logistics, we remain optimistic even about gaining market share as this market environment will hold many opportunities for agile and customer-centric forwarders.
“Rate volatility will remain, but it will differ from the past two years.”
Other areas of focus for the industry this year, he says, are attracting talent and meeting demand for more environmentally friendly operations using sustainable aviation fuel, ocean shipping or using sea/air services.
Rombeek also believes that reducing emissions will continue to rise in importance and forwarders will need to adapt and find ways to make operations more sustainable.
Elsewhere, e-commerce and volatile rates will be a focus for forwarders, he says.
“Forwarders will need to navigate these volatile pricing conditions to secure capacity for their clients and maintain profitability,” says Rombeek.
“In addition, the shift toward e-commerce is expected to continue in 2023. Airfreight forwarders will need to adapt to this new market dynamic and find ways to serve the needs of e-commerce businesses effectively.”
Digital transformation will be another key area of focus as forwarders streamline and automate operations to remain competitive.
Looking at other challenges, Fried says that trucking congestion at airports’ cargo areas is an ongoing issue.
“Our association surveyed its members recently, finding several reasons for these delays,” he says.
“These include attracting talent in a continuing constrained labour market, antiquated service access roads and building infrastructure within these airports, extended security credentialing processing times, and insufficient leveraging of technology to automate trucker appointment management in the tender and cargo recovery of shipments.”
Dursley says Chapman Freeborn also expects further bottlenecks this year.
“Covid-19 still hasn’t left the planet and will still have a continuing impact on travel,” he says.
“I’ve seen, just in recent days, new restrictions put in place in parts of Southeast Asia for example, and that can impact not just passengers travelling on vacation, but also operators flying in and out of those countries.
“I believe the majority of the bottlenecks are now over in terms of Covid-19, but of course one of the biggest bottlenecks right now is the situation in Ukraine.”
For Chapman Freeborn, another challenge is recruitment of experienced staff on a global scale as the firm continues to expand with new offices, products and clients.