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Air freight volumes and freight rates are falling

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Air freight volumes and freight rates are falling

Data published by the International Air Transport Association (IATA) for March 2023 shows that measured demand in tonne-kilometres continues to decline by -7.7% year-on-year. This trend, which started in March last year, has been confirmed for the 13th consecutive month. It has an even greater impact on international traffic, which is down by 8.1%.

At the same time, compared to March 2022, freight capacity has increased both globally and internationally. This increase in supply can be explained by an increase in available capacity in the belly compartment of passenger aircraft as airlines intensify their flight programmes in response to the recovery in this area.

Although demand continued to decline in March compared to the previous period, IATA indicates that the magnitude of the decline is gradually decreasing, compared to -9.4% in February, -16.8% in January and -15.6% in December. However, it is too early to draw any firm conclusions. “It is not clear at this stage whether this is the start of a potentially modest improvement trend or an upturn in market volatility. Regardless, March results are again negative compared to pre-COVID levels,” IATA warns.

Compared to March 2019, demand is down 8.1% (-9% internationally). Overall capacity has almost recovered to pre-pandemic levels, although it is still 5% behind internationally.

Demand falls but capacity rises

This cross-effect between falling demand and rising capacity puts downward pressure on air freight prices, which incidentally was predicted by IATA in its 2023 forecasts after the pandemic outbreak.

According to Upply, the month-on-month decline is now widespread. The Asia-Pacific region is particularly affected by strong capacity growth (+23.6% year-on-year in March), while in North America the dominant factor seems to be weaker demand, as supply growth remains very moderate (+0.4%).

Europe, on the other hand, is in a very specific situation, characterised by the impact of the war in Ukraine. The military conflict has led to a reduction in capacity and the introduction of new, more expensive routes, which may explain the atypical price development in the Europe-Asia corridor compared to the previous year. On the other hand, the massive capacity expansion by Asian airlines in a context of gloomy cargo demand has led to a fall in prices during the year. Asia-Pacific airlines’ cargo volumes in March 2023 were down 7.3% compared to the same period last year. This was a slight decrease compared to February (-5.4%). The drop in demand shows that air cargo traffic in the region has not yet stabilised after the resumption of Chinese air traffic in January.

Despite this general slowdown, overall freight rates are still higher than before the Covid-19 period.

Impact of the global economy on air freight

Volatility in the air freight market reflects to some extent the general economic instability. IATA points to a number of unfavourable parameters in the air freight sector:

The global economy continues to slow “due to a combination of factors such as the tightening global financial conditions, high levels of global debt and supply chain issues, including those related to the war in Ukraine”.

Global trade in goods also continues to decline. In February, it fell by 2.6%, faster than in the previous month (-1.0%).
No sharp reversal is expected in the near future. Quite logically, given the weakening of global trade, the Purchasing Managers’ Indices (PMIs) for new export orders worldwide remained below the critical threshold of 50 in March. Despite the abandonment of the zero-coverage policy, the Chinese economy is struggling to recover. After a slight improvement in February, the Chinese PMI index fell below the 50-point mark in March. Other major economies, including Germany, Japan, the US and Korea, also showed contractions in March compared to February, IATA said.

Air freight activity will continue to be constrained by the need to replenish inventories in the months ahead. The PMI for supplier delivery times reached a record high of 76 in March 2023, compared to an all-time low of 11 in May 2022. This reflects a reduction in delivery times, “particularly in the US and Germany”, IATA said. While the lengthening of delivery times had boosted air freight in the post-Covid-19 period, the opposite trend is now taking place.

Against this worrying backdrop, the main good news is the decline in inflation in the G7 countries. The consumer price index reached 5.4% in March, after having reached 7.8% in June 2022. In the US, consumer price inflation fell below 5% in April for the first time in two years. Producer prices are also on a downward trend. Businesses in particular are benefiting from the fall in oil prices. This is very good news for the transport world in general and airlines in particular.

If inflationary pressures continue to ease, the world’s financial institutions could ease the interest rate hikes decided in recent months in order to reduce overheating, thus helping to boost demand. The air freight industry hopes that this opportunity will finally end the downturn and return to pre-pandemic levels.

Author: Rolands Petersons, logistics expert

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