Signals on green for air freight markets but for how long?

The signals are green for air freight markets, driven by eye-catching cross-border e-commerce volumes and the positive impact from the disruption to ocean shipping in the Red Sea, participants heard at a recent webinar hosted by Xeneta, the ocean and air freight rate benchmarking and market analytics platform.

However, in what is nevertheless an unpredictable and volatile environment, the key question is for how long these bullish conditions will last?

Xeneta’s Chief Airfreight Officer Niall Van de Wouw said the company’s data for last month (April) pointed to “a strong global air freight market relative to last year,” with growth in volume (+11%) outstripping growth in capacity (+5%), leading to higher load factors and freight rates.

Focusing on rates he said: “If we go back to April last year, we can see spot rates were 43%, lower than we saw in (April) 2022, which was still in days of the pandemic. But if we look to see where we are now, for the first time, since August 2022, spot rates show an increase (+5%), on a global level, to nearly $2.60/kilo, which I think for many players in the industry is a sign of a very resilient market.”

Also addressing participants at Xeneta’s webinar was TIACA’s Director General, Glyn Hughes who said that on the basis of Xeneta’s current data the air freight markets were “essentially looking incredibly healthy” and enjoying “a perfect scenario,” adding: “I also think the data is actually a good pointer to what's likely to be happening over the next few months.”

Ocean Disruption

Focusing on the impact of the threat to ships in the Red Sea, that has led lengthy detours around Africa and the delays, Van de Wouw said this had clearly resulted in goods typically moved by ocean shifting to air.

Highlighting the routes that are most affected in this respect, he noted: “If we look at flights out of Asia Pacific to Europe and to the Middle East, we see load factors, up nine percentage points (in April) relative to last year, pushing them up into the mid-80s. At this level, we have moved even further to a strong seller's market, changing the relationship between airlines and freight forwarders.

“If we turn to the Middle East and Central Asia, we see an increase in load factors into Europe of 13% and into North America of 18%.”

He said here was a prime example of how a geopolitical situation in an increasingly ‘connected’ world can have an impact on both ocean and air logistics.

“It has driven up transport and logistics budgets for many shippers and left people frantically looking for air cargo capacity to get goods in time into Europe and North America. Combined with the surge in e-commerce volumes, it has created a market that many, including myself, did not foresee a couple of months ago,” Van de Wouw added.

Lack of empty maritime containers

Evaluating the impact of ocean shipping disruption on air cargo, TIACA’s Hughes noted: “Diverting around Africa can actually add up to two weeks to sailing times from Asia to Europe, driving up fuel burn and other operational costs and in some cases, more than doubling the price of a teu. There is also a secondary effect in that empty containers are now taking up to four weeks to be returned to where they are needed. We've heard reports that a lack of containers in some ports in China and Southeast Asia is pushing shipments to air as shippers can't wait for boxes to come back into the distribution cycle.”

Rates to Return to COVID Levels?

The disruption to ocean shipping in the Red Sea is also directly affecting the reliability of ship schedules which was estimated at just 42% earlier this spring, fueling speculation that this could drive up air freight rates significantly.

“On my travels, I'm often asked that given the relatively low reliability in the maritime sector, does TIACA expect to see air cargo rates go back to the levels we saw during COVID? And my response. when talking to operators, is “no,” we don't anticipate that level of peak, largely because there were additional factors in play back then, notably, the total absence of belly space.

“Capacity is much more balanced now, passenger services having resumed and returned to pre-COVID levels. Admittedly, this is not yet the case everywhere, belly space out of China, for example, is still some way short of pre-pandemic levels but is expected to increase as the year unfolds.”

He continued: “So while the disruption in the Red Sea is having an impact on air rates it is not an extreme one. But it’s worth pointing out that comparative differential with ocean has narrowed and we are no longer seeing 20-25 times multiples. These are very positive indicators for the air freight sector and expected to continue over the next few months.”

Turning to e-commerce, Hughes said it was having “a profound effect” on the air freight market, generating demand that is taking out so much freighter capacity and putting a squeeze on space generally.”

It is now estimated to account for 20% of global volumes today and for shipments coming out of Hong Kong and southeast China specifically, the figure is in the 60 to 70% range and on some days it's even higher, he claimed.

“What's astounding is not just the sheer scale of the volumes but the fact that we're still probably only at the starting point. The e-commerce platforms are already foreseeing a considerable increase in their capacity needs in Q3 compared to where they stand today. If you look at Chinese online marketplaces like Temu and Shein, they're opening up new markets, adding to the volumes of traditional players.”

With air freight capacity on the trans-Atlantic now back at pre-COVID levels, following the return of passenger services and the belly space these provide, Hughes said the autumn could see freighters currently plying this trade lane being redeployed to operate from Hong Kong and southeast China as strong e-commerce demand out of Asia continued and where much higher rates would be on offer.”

Shorter-Term Contracts

Xeneta’s data also showed that shippers and forwarders favored more shorter-term contracts in Q1 year-over-year and compared to the final quarter of 2023.

70% of contracts were for three months or less, versus 59% in Q1 last year and 47% in Q4.

“The Red Sea situation and the tremendous surge in e-commerce volumes has made shippers and forwarders a little less comfortable in agreeing longer term deals,” observed Van de Wouw.

“They are waiting to see what will happen in the world rather than sign up for something only to then worry whether they have done so at the right time and at the right level. They see less and less need to gamble when it comes to entering into a fixed deal.”

However, many shippers, forwarders and airlines are nevertheless already thinking ahead to Q4 and the peak season and contemplating what Temu and Shein will be doing then.

“We are seeing forwarders and airlines laying down plans to discuss more longer term deals for that period,” he concluded.