No summer siesta for airfreight

22/04/2024

Traditionally, air cargo spot rates tend to decline or remain flat at best during H1, before rebounding from September onward until the year-end holiday season.

And yet, the average global air cargo spot rate has secured its seventh consecutive week of growth in the week ending 14 April. It was up 9% from four weeks ago and up 6% from the same period last year.

The surprisingly strong start to 2024 for air cargo rates has been mainly demand-pull and can be (partly) attributed to a lower base in the corresponding months of 2023, when consumer demand was weak.

This blog draws from the Q1 2024 Xeneta Air Deep Dive report and is a snapshot look at some of the reasons why airfreight has experienced such growth. We cover:

Market uncertainty diverting cargo to air
Outbound markets in Asia
E-commerce challenging cargo capacity seasonality
Potential escalation of Israel-Iran conflicts
Summer belly capacity

Market uncertainty diverts cargo to air

This unexpected first quarter bonus for forwarders and airlines can be explained by buoyant e-commerce volumes as well as disruption in ocean containerised shipping. For those closely following ocean freight, you’ll be unsurprised to see the Red Sea, Baltimore Bridge and the recent Panama Canal drought included among these disruptions.

While the transatlantic air cargo corridor has had a weak start to the year, the global air cargo market has seen demand rise to +11% year-on-year for a third consecutive month in March. These higher volumes have outpaced growth in capacity supply in Q1, which increased by +8% year-on-year.

On lanes linking the Middle East and South Asia to Europe, average spot rates rose 46% from February to March to $2.82 per kg, a 71% increase from last year. The average global spot rate to ship cargo by air in March rose 7% from a month earlier to $2.43 per kg.

“The question is, should we be surprised by it, or should we get used to it?” asks Niall van de Wouw, chief air freight officer at Xeneta#.

(Click on chart to enlarge)

“Although the market didn’t benefit immediately, the Red Sea disruption was clearly a factor in these latest figures. Airfreight growth was primarily driven by increased volumes from the Middle East and South Asia as shippers shifted services from ocean to air to avoid Red Sea delays.”

What’s interesting, is that even after actions taken by carriers – namely rerouting via the Cape of Good Hope – prompted ocean freight spot rates on the Asia to Europe corridor to decrease ~20% month-over-month in March, the air cargo market continues to experience upward pressure on air cargo spot rates.

This means that even though ocean rates have softened, exporters will continue to utilise air freight, or opt for a mix of sea-air or air-sea modes to meet consumer demand, strict delivery schedules and supply chain resiliency in response to geopolitical events and other black swan disruptions.

Outbound markets in Asia

As one of the top three global air cargo corridors, the air cargo demand from Asia to Europe saw a remarkable increase in the first three months of 2024. This saw spot rates on this corridor jump 15% month-over-month, even surpassing the peak season level observed in November 2023.

(Click on chart to enlarge)

The India outbound market was particularly affected by the mode shift caused by the Red Sea crisis. Aside from Indian exports, apparel exports from Bangladesh were trucked to Indian airports, such as Delhi, to avoid the congested Dhaka airport and to benefit from cheaper air freight rates.

As Wenwen Zhang, Xeneta airfreight analyst, explains: “The surge in spot rates from India to Europe is primarily due to spikes in demand in recent weeks, in particular, apparel. In the week ending 14 April, air cargo spot rate out of India was 172% higher than the same period last year.”

E-commerce is challenging cargo capacity seasonality

The growing cargo demand from the cross-border e-commerce industry is challenging traditional long-term customers for limited air capacity and the concept of seasonal demand for airfreight.

This demand is being driven by consumers, who continue to spend despite inflation. But as Mr van de Wouw notes: “It’s not how much they are spending that’s boosting airfreight, it’s where they are spending. Trends indicate more consumers are buying on e-commerce platforms and the intercontinental nature of these businesses, as well as the speed with which they are expected to deliver, is benefiting air cargo.”

This is especially relevant for the transpacific market. US non-store retail sales, which e-commerce accounts for a major share, showed double-digit growth of 11% in February, with no sign of slowing down (source: US Census Bureau).

Top tip: shippers should consider diverting some of their shipments away from South China and Hong Kong during this year’s peak season. This is particularly relevant for shipments originating from South-east Asia.

Potential escalation of Israel-Iran conflicts

Record rainfall in Dubai early last week follows escalation in conflict between Iran and Israel, which saw airspace closures across the Middle East due to drone attacks and the seizure of the MSC Aries ocean freight containership in the Strait of Hormuz – the gateway to the Arabian Gulf and Jebel Ali port.

“Disruption from rainfall is temporary, but the knock-on effects of flight cancellations and missed connections could be felt for one to two weeks because of the tight capacity situation that was already present prior to this downpour.”

If this situation escalates further, alongside war-risk premiums, jet fuel prices could surge in response to a potential increase in crude oil prices, as was witnessed at the start of the Russia-Ukraine war. At time of writing, there has not been a spike in oil prices.

Furthermore, prolonged conflicts could raise concerns about the viability of the current sea-air route via Dubai. Red Sea shipping disruptions have prompted exporters to use Dubai as a transit (air)port for routes to Europe. This could lead to further implications, potentially triggering a complete shift from ocean to air transportation.

Could summer belly capacity put a stop to air cargo rate growth?

Around now, you’d expect airlines to be settling into the quieter months for airfreight, looking instead at how they can maximize the air passenger season with the launch of the summer schedule (31 March). But between the popularity of e-commerce and regional demand shift from ocean to air cargo, this year, airfreight will have less time for a summer siesta.

For the China to US market, the passenger belly capacity will only recover to about 30% of pre-pandemic levels by this summer. While the new summer schedule will see an increase in passenger flights, the ongoing political tensions and restrictions flying over Russian airspace for flights from the US east coast will affect uptake. This in turn will impact belly capacity. Even though passenger belly capacity accounts for no more than 20% of the total cargo capacity on the transpacific market, additional capacity would help bring rates closer to pre-pandemic levels.

In contrast, the summer season will see the Europe to North America market experience an influx of passenger belly capacity (last year, capacity increased to 33% – from March to its peak in June). Whilst an increase in air cargo is typically paired with flat demand during the summer months, we anticipate that this year, those using the transatlantic corridor will see downward pressure on freight rates.

Another consideration is trade flow directional imbalances.

Want more insights?

If you are curious to understand more about how the airfreight market is responding to global supply chain disruption, and the effect this will have on your upcoming contract negotiations, we invite you to read the Q1 Xeneta Air Deep Dive in full.

Normally reserved for Xeneta customers, the XADD is an exclusive quarterly overview of the major developments in air freight.