News / Soft air freight market and volatile rates an opportunity to review capacity buying

© Alan Budman

The air cargo market is soft, with few signs of strength – but it could be an opportunity to change the way capacity is bought, according to some analysts. 

Released today, Air France-KLM Cargo’s first-quarter results show negative trends, with unit revenues down 4% at constant currency.  

“A slowdown of volumes in the first quarter is visible in the whole air freight market, due to economic slowdown, political uncertainties and trade disputes. This has put pressure on freight rates,” noted the carrier. 

WorldACD released its March figures yesterday, which reveal that the first quarter ended with a year-on-year (YoY) decrease in chargeable weight of 3.1%. March’s total chargeable weight was down 2.4%, YoY, while general cargo saw a fall of 4.8%. Direct ton km fell 1.8%. 

But on an earnings call this week, chief executive of Atlas Air Bill Flynn spun a positive note to investors.  

“Where we’re really encouraged is to see the China PMI Index up… We’re hearing, I would say, pretty good news out of China. 

“We were talking with our marketing organisation … and they’re seeing volumes pick up, they’re starting to see yields pick up.  

“A more typical first quarter, and I think very strong signs about pick-up more broadly as we come into the back half of the second quarter.” 

But TAC Index figures released this week show rate drops from all major tradelanes except intra-Asia. 

These conflicting stories and attitudes belie a trend that is becoming more transparent with the rise of the accuracy and number of air freight indices. They are showing that air freight rates are far more volatile than anyone quite realised – a result of different strategies in the market.  

“Lots of data providers will try to find a driver, and pick something like falling volumes, but airlines will react to that in different ways,” explained Peter Stallion from Freight Investor Services.  

“Cargolux has said it would not drop rates despite falling tonnage; Lufthansa is dropping its rates. And each route is different. 

“It’s systemic – it’s the nature of the way spot prices are issued. They are spread between different airlines and different routes, which makes volatility inherent in the market. No one knows what everyone else is doing; it’s only since we’ve been able to observe it that we can see what the market does. 

“Airline rates will be volatile throughout May – it’s almost a given.” 

Observers have noted that forwarders that had bought blocked space agreements in the first quarter have had difficulty filling them; but others, working on the spot market, have had to contend with volatility. 

As a result, there has been a growing interest in index-linked agreements, spurred on by the likes of Freightos and the TAC Index, which track rates. 

“There are two advantages,” said Mr Stallion. “It’s a fair, transparent way to sell and buy rates, and most forwarders and airlines like it.  It also removes manpower, effort and cashflow away from tendering.” 

He admitted that so far, however, no one wants to be first.

“The top 10 forwarders want someone else to be the first entrant. Most airlines are on board – but not all. Some know they benefit from keeping rates as a bilateral discussion, where it is not transparent to the market. But with more indices, the market is going towards that – you can’t fight it for long.” 

Six or seven pilot trades are expected to happen this month, giving the participants a chance to see what happens.

“We are doing test cases to find out where value can be derived,” added Mr Stallion. 

“Dynamic pricing has been around for a long time as there was no mechanism to enforce a floating price.  But that mechanism is now in place – only on major tradelanes, which is a bit constraining – but a year down the line, things will be massively different.”