With a peak that wasn't, air cargo rides into 2023
Taking the Chinese New Year as an indicator for the year coming up, we delve into how the odds are stacking up for the air freight industry amidst inflation, macroeconomic factors, China’s slow trade revival, and reinfection fears
The Chinese New Year is usually a challenging time for global trade considering that the period is beset with supply chain delays, reduced production, staff shortages, and an increase in demand.
However, according to a recent DHL report titled ‘‘Air Freight State of the Industry-January 2023’ released recently, demand has continued to remain low even prior to the Chinese New Year(CNY) which is contrary to a normal pre-CNY or Lunar New Year surge that is usually witnessed.
Factory closings have started as inventories remained high and Covid lockdowns continued. So what indication does the first big supply chain event of the year give when it comes to the year ahead for the world of cargo?
A DHL report holds some clues. It cited, “Overall scheduled capacity remains sufficient to support the comparatively lower volumes. Factory shutdowns have started which means lower manufacturing and lesser demand. Export orders remained low as inventories remain full and sales remain low; shippers (are) still focusing more on short-term refills. The Purchasing Managers' Index (PMI Index) remained below 50 across most major economies which indicates lower volumes and is likely to remain the same as high inflation will continue into ‘23. Among emerging markets, China's export numbers remained low and (those were) also affected by the continued strict Covid policies and factory shutdowns. 2023 is expected to witness the flat growth that we experienced in the later half of ‘22.”
While the demand side of the air cargo industry remains challenging, on the bright side, global inflation is forecast to decline to 6.5% in 2023 and to 4.1% by 2024 and jet fuel prices are likely to witness gradual reduction as crude oil inventories build.
With the end of China’s lockdowns and the reopening of trade, has the world turned the page on the supply chain disruption post-pandemic, and if so where are the markets headed?
An atypical start
Mounting economic pressures, muted consumer spending, shrinking global export orders, and China’s rising Covid-19 cases continue to impact the air cargo sector this year. However, the current geopolitical environment and the overall economic slowdown will continue to have an impact on cargo development this year, believe industry watchers.
The Chinese New Year(CNY) was particularly early this year and started on January 22, immediately following a phase at the beginning of the year, which is typically characterized by weak volumes.
Many cargo airports like Frankfurt did not see any particular increase in cargo volumes in the run-up to CNY so far, while officials at Liege Airport said that while the period before CNY saw a slight increase in volumes at Liege airport, they were still lower than the 2022 volumes.
Max Philipp Conrady, SVP of Cargo Development at Fraport AG, a German transport company that operates Frankfurt Airport told the publication, “We expect the reducing effects from the CNY to be roughly the same as in the previous year. On the one hand, this will increase belly capacity, while this year will also remain challenging for aviation, because in addition to the continuing shortage of personnel at numerous service providers, operational restrictions, such as those resulting from airspace closures, will continue to challenge us.”
Minesh Pore, Co-Founder and CEO of BuyHive believes that while the CNY impact is mostly planned for by supply chain professionals, the air cargo market has bucked the trend when it comes to experiencing that ‘extra demand’ this time.
He commented, “We surely are experiencing delays due to Covid + CNY holidays, but the market is not ready to accept the huge air cargo costs. There are fast shipping (maritime) options that can get goods from the east coast of China to LA / Long Beach ports for a fraction of the cost in 14-16 days, so that would be what most buyers would prefer. However last three years of lockdowns in China have only made sure that the tolerance of supply chain professionals for delays and low inventories are higher, thus not creating any extra demand for air cargo or stocking up more than normal.”
Torsten Wefers, VP of Sales & Marketing at Liege Airport also confirmed that Liege Airport did not expect an increase in volumes ahead of the Lunar New Year holiday season. “In the last couple of weeks, we saw a slight increase in volumes but still being lower than the 2022 volumes. We do not expect any unusual delays to come. All information we have currently on hand are indicating a “normal” Chinese New Year season.”
While a muted CNY was felt this year, many players are busy prepping for a recovery curve. Many stakeholders are of the belief that there will be an improvement in global trade post the CNY as factories start to scale up production. Low demand in the western markets are also likely to pick up in the second and third quarters as consumer confidence starts building up.
Latha Narayan, Director, Commercial APAC, Australasia, and ISC at Etihad Cargo told The STAT Trade Times, “While a surge in demand was not expected over the CNY, Etihad Cargo has continued to expand its operations in Asia, adding frequencies and capacity to key routes in China and the APAC region in anticipation of a recovery in the short term. Outside of China, we have also seen a mixed response from other Asian destinations, with demand for some commodities, such as high-end electronics, remaining relatively strong despite general declines.”
A rebound in ocean freight
Further, with capacity and transit times having come back on the ocean side, there is very little incentive for ocean-to-air conversion now feels Neel Jones Shah, EVP of Air Strategy and Carrier Development, Flexport.
“Ocean transit times have almost normalized to pre-Covid levels while rates on the spot market are actually below pre-Covid levels on trade lanes like the Transpacific Eastbound (TPEB). This means there’s little incentive for a consignee to do an ocean-to-air conversion,” he says.
As supply and demand moved toward a state of equilibrium, inventory levels were well above normal. Shah pointed out, “Consignees imported at record levels to meet consumer demand in H2 '21 and H1 '22, only to find they were over-inventoried. Inflation has only exacerbated the situation.”
TIACA director general Glyn Hughes says, “Stock and inventory levels look to be in balance, and in some cases, retailers are potentially looking at short-term shifts to maritime transport as demand continues to slow and the risk of inventory shortfalls dissipates.”
Yields to be under pressure
Shah adds, “We typically see a small spike in demand on the Transpacific east-bound and Far East westbound (routes) in the weeks leading up to Lunar New Year as consignees rush to get orders completed and shipped before their suppliers throughout Asia shut down for the week to celebrate. This has not been a typical cycle. Yields fell throughout the last quarter of 2022 as a result of tepid demand. We expect rates to continue to fall in January 2023, and for rates to remain low for the balance of Q1’23 as most consignees haven’t forecasted robust demand until the second half of 2023.”
Looking at a challenging period ahead and for ‘inventory correction’ to happen, Shah forecasts, “As for the rest of 2023, we anticipate the first half to be a difficult period. Inflation, a slowing global economy, and more supply than demand will lead to tough market conditions and yields will continue to be under pressure. Further, we anticipate they’ll never return to pre-Covid levels as the cost of producing a kilo of airfreight capacity have gone up significantly due to high jet fuel prices and other input costs like pilot salaries and ground handling costs. Yields have also fallen over the past several months and are currently at their lowest levels since the onset of the pandemic. If we look into our crystal ball, demand should begin to recover in the second half of 2023, as shippers work through their inventory and business demand recovers.”
Demand to stay muted
Shah listed additional capacity returning to the market, and tepid demand as some trends that have been in firm control since the summer of 2022 because of which there wasn’t a peak ahead of the Lunar New Year and he believes that the demand is expected to stay muted for the foreseeable future.
Inventory correction remains par for the course this year for the industry. “The retail industry in particular is still recovering from its pre-holiday “inventory glut.” Many stuffed their warehouses during Covid to ensure they could fulfill orders; but now, much of that inventory is still sitting unsold or is out of season due to changes in consumer demand (for example, people going on vacation instead of buying sweatpants). We expect this to work itself out over the course of 2023,” Shah adds.
Narayan echoed Shah’s sentiment and added that several manufacturers were already derisking by moving operations out of China and into India, and this trend will likely continue. While this is likely to result in a decrease in volumes in the short term but that may not be the case in the long run. In response to this trend, Etihad Cargo has reinstated flights between Shanghai and Chennai, adding capacity to meet demand from manufacturers in both countries.
“We have seen declines in stock accompanied by muted demand across some segments out of Asia, including retail, garments, and clothing, and we think this situation will continue in the short term. However, some segments, such as semiconductors, are primed for growth, and while the purchasing index may be negative currently, we will see momentum building over the coming months,” Narayan said.
Giving his take on the muted demand during CNY, Pore added, “The reason for this is that the retail stocks in US/Europe seem to be holding stable across categories post-Christmas. Many factories across China also have had to be closed since late December / early January due to the widespread Covid infections in China and so, not much new product has been made. Post CNY we may see a small uptick in demand for air cargo, but I don’t think it's going to be very much.”
Outlining the effect of these trends on the e-commerce sector which had been a bright spot during the post-pandemic phase for the air freight industry, Narayan revealed, “E-commerce has been impacted, especially for the charter segment. While charter volumes have declined, contracts are still in effect and charters are operating where there are no getaway clauses. The knock-on effect is that scheduled flights have witnessed lower volumes, as cargo is being moved via charters. Again, this trend is not sustainable in the longer term, as demand and volumes will normalize. We expect low double-digit growth in cross-border e-commerce with consumption patterns changing, especially in developing economies where per capita income is going up.”
What is the industry doing?
Giving an overview of how the automotive, electronics, and chip industries are behaving in the current climate, Hughes says, “Automotive sales continue to recover, with growth in 2021, 2022, and further growth is forecast for 2023, although still below 2019 levels. This recovering demand is creating increased demand in the chip sector which is coming under protectionist pressure as a relatively small number of states control a significant portion of global production. Smartphone sales plummeted in 2020 as a consequence of production, distribution, and retail challenges caused by the Covid-19 pandemic. Whilst they recovered slightly in 2021 and forecasts are for further recovery in 2022 and 2023, they are still below 2016 levels.”
Carriers like Etihad Cargo have reinstated two weekly freighter services from Shanghai to Abu Dhabi via Chennai in December 2022, and are exploring opportunities to introduce further flights that can connect China to India directly, thereby strengthening and providing additional capacity to customers in both countries.
Narayan added, “We are also working closely with our freight forwarding partners, who are seeking shorter-term commitment and pricing to mitigate economic uncertainties in the long term. Etihad Cargo is offering in-demand solutions and filling our flights with yield discipline. To further mitigate risks, we are further focusing on specialized commodities, such as live tropical fish, valuables, and pharmaceuticals in addition to general cargo, via our eight-strong premium product range. Ensuring a strong product mix on our flights allows us, in a sense, to avoid putting all our eggs in one basket, so we can continue to achieve maximum loads on our flights.”
With pressure on consumer finances around the world, central banks fighting inflation through interest rate increases, energy costs still running at significantly increased levels, and job cuts in many sectors, extremely cautious consumer behavior will likely continue for some time.
Hughes added, “The demand data that is starting to be released would indicate that supply chain blockages won’t be an issue with demand still below previous levels. The IMF, WTO, and OECD are all forecasting reduced global trade levels for this year so the industry should use this time to continue focusing on implementing new systems and procedures which will enable efficient and effective responses when demand recovers.”
Conrady said, “We generally expect belly capacity to increase in 2023. It remains to be seen to what extent the expanded passenger capacities on China routes will be utilized. There could be additional capacity for air cargo on these flights. However, “preighter” flights will be removed from the market at the same time. We, therefore, do not expect any major growth, as the economic environment is likely to remain weak for the time being.”
Narayan adds, “Trade lanes between Asia and Europe and Asia and the US have historically been the most robust and lucrative for carriers. However, global headwinds and economic pressures have resulted in sharp dips. We foresee a return to stability, where rates may dip a little more but will not return to pre-pandemic levels as belly capacity and freighter capacity will not reach pre-Covid levels in 2023. Additionally, sea freight rates have returned along with stability in that mode of transport. Other trade lanes will continue to command the same air freight rates we are seeing now, including Asia into Africa and Asia into Latin America, and particularly Mexico. This is the result of limited capacity in these regions and a strong product mix.”
Looking ahead, Narayan added that the first quarter of 2023 will continue to be impacted by global headwinds, and declines in production and demand out of China as a result of increasing Covid-19 reinfection rates which will need to be monitored carefully. “We are cautiously optimistic that volumes out of China and Hong Kong, in particular, will start to recover from quarter two with the support of government-led subsidies and incentives to encourage higher levels of production. This will bring back manufacturing stability to the region. For the rest of the South East Asia perspective, particularly Vietnam, recovery in volumes maybe even earlier than that,” she adds.
Huned Gandhi, MD, Air & Sea Logistics, Indian Sub-continent, DACHSER India Pvt Limited strikes an optimistic note as he says, “I see the markets gradually recovering post-CNY, factories will also start to open up for production and we can certainly expect to be back on the growth path in the second half of 2023. We will certainly need more bilateral agreements and trade pacts globally to aid business growth. The air cargo market is currently facing severe headwinds but this will certainly change during the course of the year.”
While capacity will continue to get better in 2023 as more belly services come online and with the increases in main deck availability, resulting in downward pressure on rates overall in line with reduced demand. Rates have however continued to remain above pre-Covid levels reflecting the value attributed to air cargo supply chains.
Sounding an alarm about the fear of reinfections and further outbreaks of Covid in China and of new strains of the Coronavirus leading to further lockdowns, Hughes further added, “Macro-economic concerns will dominate the impact on air cargo volumes through 2023 as central banks continue to tackle high levels of inflation. However, if the measures introduced are successful then we may see an easing of central bank rates in the second half of the year. There is considerable pent-up consumer demand but it is unlikely to translate into increased consumer purchases until job concerns and household costs start to ease.”