The air freight market's uncertainty and volatility.

Milad Nabi|May 25, 2022|No Comment

Uncertainty and volatility in air freight market.

There is a significant level of uncertainty and volatility" in the air cargo industry. According to Ti analyst Conner Wyse, the global air freight market will continue to be characterised by severe disruption and dysfunction in the second half of this year, as it has been since the COVID-19 pandemic emerged in 2020, with demand and pricing rising higher.

According to Transport Intelligence, air freight rates have continued to grow this quarter, defying expectations of a further reduction following a significant drop in the fourth quarter of 2021 and might remain high until a worldwide recession that will happen later this year and will result in demand reduction.

According to the Statista analysis, air freight capacity increased after the recovery in January 2021, permitting the discharge of 2020 pent-up demand. However, the Ukraine war, as well as Russia sanctions, have had an influence on transatlantic capacity and caused significant disruption on the East Asia-Europe route. The dispute also had an impact on spot jet fuel prices.

Since March, the suspension of all flights into Ukraine has resulted in extremely high demand for RFS in neighbouring countries, and cargo facilities at Budapest and Warsaw airports have been congested. 

Chinese COVID restrictions have also added to the instability on the transpacific route. As a result of ocean freight disruptions and congestion, there has been a considerable shift from sea to air. 

According to Bruce Chan, senior analyst at investment bank Stifel, the present easing in the airfreight market may only be a temporary blip, and rates may rise further once Chinese lockdowns are eased.

Shanghai intends to unlock in June, but airlines have very little spare capacity to deploy, so clearing the backlog will take some time. Supply networks remain jammed, and a rise in manufacturing is possible when manufacturers in China reopen following Covid curfews.

While vital economic services remain theoretically operational, the systemic nature of quarantine constraints means that output from some of the country's largest manufacturing centres is at its lowest since the first shutdown in early 2020."

Other reasons that might disrupt the market include continuing capacity cutbacks connected to the Ukraine crisis and if US west coast port and labour negotiations results in strike action.

Assuming no quick and sudden drop in baseline demand levels which cannot be assured, there is a distinct possibility that airfreight costs will jump again, even from these elevated levels.

Bruce noted that, while the market has eased on the demand side in recent weeks due to pressure on household spending and a post-Covid swing from goods to services, rates in April remained at record high levels – albeit there have been some signs of pricing relaxing on certain shipments since then.

Logistics networks remain very congested, and there is a genuine risk that any brief reduction in bottlenecks and prices are 'head fakes,' and instability will remain a concern until the underlying problems are addressed.

While we would have expected a decline in pricing in the first quarter of this year, the elimination of Russian-owned air cargo capacity has artificially tightened limits for airfreight carriers," he said.

Asia-US rates have also risen sharply, with double-digit percentage point rises following a fall in available airfreight demand. However, this rise is still relatively modest in comparison to the actual market price. Transatlantic prices remained volatile, as they have been since the second quarter of 2020.

Rates are also likely to be affected by increasing fuel prices, according to Peter Stallion, head of air and containers, at FIS. This will flow through into fuel surcharges and create a component of overall inflation that bleeds through into the cost of operating airfreight services.

 

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