In the absence of a traditional peak season bounce ahead of the holiday shopping season, the best that can be said about the air cargo market is that the year’s deterioration in volumes and rates bottomed out in August.
An uptick in export volumes moved by air, instead of a normal surge, has been enough for business to muddle along. Beyond weekly volatility in supply and demand, conditions suggest air shipping has plateaued on the low end after months of decline and that prospects for an early rebound in 2023 are dim, according to market watchers and logistics providers.
There are several factors behind airlines’ negative cargo performance, on the heels of record gains in 2021, including lower consumer spending outside the U.S., a shift in discretionary spending toward travel and services instead of goods, high inventory levels as retailers moved a lot of products in the front end of the year to avoid a repeat of shipping delays, contraction in new export orders and a marked improvement in ocean shipping reliability.
Global shipping volumes are down 18% from a year ago, while capacity has increased as passenger airlines restored more flights since the pandemic, WorldACD said in its latest weekly update. Meanwhile, air cargo rates are 41% lower than a year ago, according to the Baltic Air Freight index, which measures both spot market and long-term contract prices. Freightos, an online booking platform that also indexes rates for immediate transactions, shows global rates are down 27% year over year and 37% since a late December peak in 2021.
Lagging data issued last week by the International Air Transport Association reinforces the current anecdotal reports and figures about deteriorating market conditions. Air cargo demand fell 13.6% in October from the prior year, continuing a steadily worsening eight-month slide. The October figure follows a 10.7% fall in ton-kilometers moved during September and an 8.3% drop in August. Demand increased 3.5% on a monthly basis from September, demonstrating the muted nature of the seasonal upturn in 2022.
More available airlift is also influencing the fall in rates. IATA said global passenger traffic is nearly three-quarters of 2019 levels and that continued strong demand during the slower autumn travel season is positive for the airline industry’s recovery into 2023. American Airlines, for example, recently added two European destinations to its winter network compared to last year.
Despite this year’s disappointing performance, it’s important to note that volumes and revenue are still better than in 2019, before the pandemic overturned normal business cycles, and that the decline is more of a correction back to previous trend lines after record-breaking demand for goods and a supply shock over the past two and a half years.
Ocean, e-commerce influence air volumes
Cargo and passenger airlines captured a lot of freight business over 18 months when ocean carriers and ports were overwhelmed by supply chain bottlenecks, but industry experts say many shippers are shifting back to ocean in a big way as demand falters and shipping rates collapse.
“With a lot of businesses under pressure to cut every expense they can and ocean rates coming back down to extremely low levels, we have seen customers make a decided shift to move some percentage of their air volumes to ocean,” said Neel Jones Shah, global head of airfreight at freight broker Flexport, in an interview last month. “It’s a calculated decision of carrying a little bit more working capital, but the logistics expense is a fraction of air. And because ports aren’t congested you can comfortably make that decision.”
Inbound air — and ocean — volumes to the United States continue to slow even though total domestic consumption remains steady amid high inflation and an overall economic slowdown. Retail sales in October went up a seasonally adjusted 1.3% from September, according to the Commerce Department. And the National Retail Federation forecasts holiday retail sales will increase 6% to 8% compared to 2021.
Analysts say the disconnect between merchandise imports and sales shows that consumers are pulling more from the big buildup in inventories than from import orders. The conclusion is underscored by the Purchasing Managers’ Index, which has shown shrinking manufacturing exports from most countries in recent months.
The slowdown in e-commerce sales, which exploded during the pandemic as people relied on stay-at-home shopping, is also cutting into air cargo business. Online sales have reverted back to their pre-pandemic growth rate. U.S. digital sales revenue grew 10.8% in the third quarter from the same period a year ago, according to Commerce Department data, the first double-digit gain in four quarters, but less than a quarter of the 49.7% spike during the third quarter of 2020. In Europe, for example, online sales this year will represent 22% of the apparel and footwear market, only 1 point above where they were expected if the pandemic had never happened, according to an analysis by Bank of America.
The return to trend for e-commerce is underscored by FedEx’s recent reduction in flight activity to cut costs after an unexpectedly fast downturn in international package shipping.
Not all freight providers, regions or commodities are impacted similarly. DHL Express expects shipment quantity to increase about 20% to 25% in the last quarter compared to most years when volumes jump 45% from earlier in the year, said U.S. CEO Greg Hewitt, on last week’s The Loadstar podcast. He said U.S. consumers are still buying from Asia and Europe because of the strong dollar.
Brian Bourke, recently promoted to chief commercial officer at Seko Logistics, said on the same program that orders for one-time purchases for durable goods such as grills, exercise bikes and air fryers may have dried up, but e-commerce sales for fast-moving consumer goods and pet supplies are still robust.
Gartner calculated that worldwide PC shipments fell 19.5% to 68 million units in the third quarter. It is the steepest market decline since Gartner began tracking the PC market in the mid-1990s. The global consulting company attributed the decline to high inventory levels and weak consumer and business demand. Many consumers purchased PCs in the past two years and no longer need a new unit, it said.
Air rates for Chinese exports to the U.S. and China are down nearly 50% from a year ago, more than the global average, data from rate agencies shows. Rates from Vietnam to the U.S. and Europe are down even more — by 70% — year over year.
The Ukraine war has contributed to the weakness in Asia exports by increasing fuel prices and undermining consumer demand in Europe and forcing airlines to take long detours. The gradual increase in passenger belly capacity as Hong Kong and other countries reduce travel restrictions has added to the downward pressure on pricing.
Logistics companies say export demand out of north and south China, Taiwan, South Korea and other parts of Southeast Asia is very low. Many have responded by canceling charter flights they booked with the expectation of tight air supply and high demand.
Smartphone and e-gaming companies typically rent full aircraft in the final months of the year to quickly deliver their latest releases to eager customers, but production delays in China and the weak global economy have reduced the need to reserve as many cargo jets. International Data Corp. recently forecast that shipments of smartphones will decline 9.1% in 2022, a downgrade of 2.6 points from its previous estimate.
The latest round of strict isolation policies in China to combat COVID is limiting factory production, and with it the need for airfreight, raising worries that export flows will be hindered into 2023 unless the government there backs off. Apple (NASDAQ: AAPL) last month warned it expects to ship fewer iPhone 14 Pro and Pro Max models because lockdowns in the city of Zhenghzhou have sharply curtained output by contract manufacturer Foxconn. The delays have accelerated plans to move more iPhone production out of China, The Wall Street Journal said.
There is recent hope that more consumer goods and other products will be available for export as the Chinese government starts to ease restrictions in the face of recent protests.
Many transportation and logistics executives are cautiously optimistic that shippers will resume strong order activity after the Chinese New Year in early 2023 as retail inventories get burned off, but future demand will likely depend on whether the global economy officially enters a recession and whether it is mild or severe.