Hope for 2023 shipment improvement rests on inventory levels, China COVID policies
MIAMI — Air cargo airline and logistics executives have written off the traditional peak season bump in shipping business as the global economy decelerates, leaving them to speculate whether prospects will improve sometime in 2023.
The growing pessimism, following 18 months of record-setting volumes and revenues, was underscored by International Air Transport Association data last week showing a 10.7% decrease in cargo demand in September compared to the prior year. Continued contraction in export activity, the war in Ukraine, labor shortages and inflation contributed to mid-double-digit declines in demand for Asia-Pacific, European and Middle Eastern carriers.
Although IATA’s data is a lagging indicator, it underscores the worsening trend line since March. The year-over-year (y/y) volume decline was 6.7% in June and 8.3% in August.
Xenata, a market intelligence firm with more current data than IATA, recently reported October air cargo demand fell 8% y/y. And early indications from other sources suggest shipment performance in November so far is worsening.
“The slide was more like a cliff. It happened fast once it pulled back” in September, Amerijet CEO Tim Strauss said during an interview in his office at Miami International Airport. “I’m not sure what precipitated that exact timing, but it happened everywhere.”
Some of the largest carriers in the world, not including express carriers, have cut back as many as 100 flights per month coming out of Asia to the U.S., he added.
FedEx in October eliminated eight to nine daily international flight frequencies and about 23 domestic frequencies to help achieve $2.2 billion to $2.7 billion in accelerated savings, CFO Mike Lentz said Nov. 8 at the Baird Global Industrial Conference. The cost-cutting strategy was implemented after the integrated parcel carrier recently announced a steep drop in fiscal first-quarter earnings.
The company plans to chop eight to nine more domestic frequencies this month and is temporarily parking aircraft because not as many are needed anymore, he added.
The speed at which consumer spending shifted from goods to services caught the company by surprise. “Unquestionably, the commencement and the speed and depth of that shift was beyond what we had certainly anticipated,” Lentz explained. “That’s why we have been taking down trans-Pacific flights.”
Equally disconcerting to many is that the airfreight tail off is approaching the levels in 2019, a weak year for air cargo and the benchmark used to judge performance against normal conditions before the pandemic massively skewed the global economy and supply chains. IATA said cargo throughput, as a function of distance carried, was 3.6% lower than three years ago.
Global air cargo rates are also climbing down toward 2019 levels, according to market indexes. They have tumbled two-thirds since December and about a third from this time last year. Rates on the key China-U.S. lane are down almost 50% y/y, reflecting very soft market conditions. Some regions, such as the trans-Atlantic, are holding up better.
Canadian carrier Cargojet recently gave positive guidance about the fourth quarter because its business model is weighted toward strategic partnerships that require daily flying to maintain network connectivity regardless of demand fluctuations. But Strauss said even long-term Amerijet customers are pushing for contract adjustments.
“We’ll still have a growth year this year, partly because of contracts, but it’s not going to be the growth we projected,” he said.
Logistics experts say conditions vary by geography and can quickly change week to week, adding to uncertainty.
Many airfreight logistics providers that signed high-price block space agreements with carriers early this year, with expectations of a strong shipping season, are now losing money.
“You have a situation where market rates out of China are $2 lower than the block space rate that they signed. So a lot of them have a huge loss,” Christos Spyrou, CEO and founder of independent cooperative Neutral Air Partner, said at his booth at The International Air Cargo Association’s (TIACA) trade show here last week.
Other industry professionals said freight forwarders are trying to renegotiate the long-term contracts for allocated space and take other measures to mitigate having to pay beyond-market rates.
Shipping rates are even lower in some cases because airfreight middlemen that committed to full, or partial, charter flights are offering discounts to attract some cash to cover their commitment.
“You see some pricing that you otherwise wouldn’t see from an asset owner,” Neel Jones Shah, global head of airfreight at Flexport, told FreightWaves at the event. “And it’s because you’ve got a non-asset owner owning an asset when they’re not used to doing that.”
United Airlines (NASDAQ: UAL) has partially buffered against cargo volatility by focusing more on specialty, high-value products such as pharmaceuticals. “You have more grip on your customers because they cannot move away for 5 cents,” United Cargo President Jan Krems said in a brief interview.
United’s cargo revenues held up well in the third quarter, only dipping 4% y/y to $498 million.
Strauss expressed concern that China’s strict zero-COVID policies could remain a drag on airfreight shipments unless they are lifted. China is dealing with its worst outbreak since the spring, when Shanghai was sequestered for two months. Millions of people in the city of Guangzhou are now under stay-at-home orders as authorities try to contain the virus’ spread.
Last week, Apple (NASDAQ: AAPL) warned that shipments of new iPhones would be delayed because of lockdowns in Zhengzhou that have significantly reduced output for primary supplier Foxconn Technology Group. The technology giant said it expects to ship fewer iPhone 14 Pro and Pro Max models.
The Zhengzhou economic zone where Foxconn is located lifted weeklong COVID curbs, but Foxconn said it will indefinitely maintain its closed-loop system where staff live and work on site to prevent virus exposure.
There is no consensus view among airline and logistics executives about how long the economic slowdown will continue, especially with record inflation in Europe and consumers struggling with high energy and housing prices. The longer central banks keep raising interest rates to contain inflation the more likely the slowdown in economic growth could tip into a recession.
“If [people] are not spending, then the manufacturers are not getting the orders. If they’re not getting the orders the air cargo demand is going down,” TIACA Director General Glyn Hughes told FreightWaves on the eve of the group’s trade show in Miami.
Executives say demand is likely to continue into 2023 in a depressed state but have mixed views about when conditions could turn better. More downward pressure on rates is likely as the number of international passenger flights increase. Airlines are signaling they will have more scheduled capacity next year than before the pandemic, which will increase the amount of available belly space for cargo as demand dwindles.
Korean Air, for example, said it will soon resume weekly flights to cities in China, Japan and Israel after a long COVID break. British Airways on Sunday restarted daily flights between London Heathrow airport and Tokyo with Boeing 787 Dreamliners. And Aeromexico is adding flight routes to Italy, Japan and Spain at the end of March.
Spyrou expressed concern that shipping rates next year will fall below 2019 levels as more passenger underbelly capacity reenters the market. By all indications, airlines could be operating significantly more passenger flights across the Atlantic next summer than in 2019.
During a panel discussion at the TIACA event, Strauss said many aircraft operators won’t be confident about their financial results again until 2025.
Others were guardedly optimistic that air cargo demand could improve after China’s Lunar New Year holiday because shippers are waiting to place more orders.
Tobias König, global CEO of air and ocean at Germany-based Rhenus Logistics, said it’s possible customers that shipped early and have stocked warehouses now will be ready to resume more freight transportation by next spring after winding down their high inventories.
United’s Krems said he envisioned a steady state of cargo flows after Chinese New Year with fewer seasonal peaks and valleys, and the strong dollar impacting directional trade flows.
“2023 will not be a fantastic year. I think it will be a good year,” he said.