Air cargo execs more nervous about consumer pushback

MIAMI — Air freight and logistics executives have written off the traditional high-season rally in shipping amid the slowing global economy, leading them to speculate whether the outlook will improve sometime in 2023.

Growing pessimism after 18 months of record volumes and revenues was underscored by data from the International Air Transport Association last week, which showed a 10.7% year-on-year drop in freight demand in September. The continued decline in export activity, the war in Ukraine, labor shortages and inflation contributed to double-digit declines in demand from airlines in Asia-Pacific, Europe and the Middle East.

Although the IATA data is a lagging indicator, it underscores the deteriorating trendline since March. Year-on-year volume declines were 6.7% in June and 8.3% in August.

Xenata, a market research firm with more up-to-date data than IATA, recently reported that air freight demand fell 8% year over year in October. And early indications from other sources are that November shipping performance is deteriorating so far.

“The fall was more of an abyss. It happened quickly when he retired,” Amerijet CEO Tim Strauss said in September during an interview at his office at Miami International Airport. “I’m not sure what exactly triggered that moment, but it was happening everywhere.”

Some of the world’s largest airlines, excluding express carriers, have suspended up to 100 flights a month from Asia to the United States, he added.

Air logistics companies presented their services at the International Air Cargo Association forum in Miami Beach. (Photo: Eric Kulish/Freight Waves)

FedEx cut between eight and nine daily international flight frequencies and about 23 domestic flights in October for faster savings of between $2.2 trillion and $2.7 trillion, said chief financial officer Mike Lentz, Nov. Baird. The cost-cutting strategy came after the integrated package company recently announced a sharp drop in earnings for the fiscal first quarter.

The company plans to cut eight to nine more national frequencies this month and is temporarily grounding the planes as so many are no longer needed, he added.

The company was surprised by the speed at which consumer spending shifted from goods to services. “Undoubtedly, the onset, speed and depth of this change exceeded what we certainly anticipated,” said Lentz. “That’s why we’ve reduced transpacific flights.”

Equally troubling for many is that the end of air freight is nearing the levels of 2019, a weak year for air freight and the yardstick used to judge performance compared to normal pre-pandemic conditions affecting the global economy and the have massively distorted supply chains. According to IATA, freight throughput, based on transported distance, was 3.6% lower than three years ago.

According to market indices, global air freight rates are also falling to the 2019 level. They’re down two-thirds since December and about a third since this time last year. Fares on the key China-US route are down almost 50% year-on-year, reflecting very weak market conditions. Some regions, like the transatlantic, are holding up better.

Canadian carrier Cargojet recently issued positive fourth-quarter guidance as its business model relies on strategic partnerships that require daily flights to maintain network connectivity regardless of fluctuations in demand. But Strauss said even longtime Amerijet customers are pushing for contract adjustments.

“This year we will continue to grow, partly because of the contracts, but it will not be the growth expected,” he said.

Logistics experts say conditions vary by region and can change rapidly from week to week, adding to uncertainty.

Many air cargo logistics providers that secured high-priced block area deals with airlines earlier this year in anticipation of a strong shipping season are now losing money.

“The situation is that the market prices in China are $2 lower than the block space prices they signed. As a result, many of them have huge losses,” said Christos Spyrou, CEO and founder of the independent cooperative Neutral Air Partner, at his booth at the International Air Cargo Association (TIACA) last week.

Other industry experts said shippers are trying to renegotiate long-term contracts for allocated space and take other steps to mitigate paying above-market rates.

Shipping costs are even lower in some cases as air freight brokers who have committed to full or part charter flights offer discounts to attract some money to cover their commitment.

“You’re seeing some prices that you wouldn’t otherwise see from an asset owner,” Neel Jones Shah, Flexport’s global head of air cargo, told FreightWaves at the event. “And that’s because you have a non-asset owner if he’s not used to it.”

United Airlines (NASDAQ: UAL) has mitigated some of the cargo volatility by increasing its focus on high-value and specialty products like pharmaceuticals. “You have more control over your customers because they can’t walk away for 5 cents,” United Cargo President Jan Krems said in a brief interview.

United Cargo’s revenue held up well in the third quarter, falling just 4% year over year to $498 million.

Outlook for 2023

Strauss expressed concern that China’s strict zero-COVID guidelines could continue to weigh on air cargo shipments if not lifted. China is facing its worst outbreak since the spring, when Shanghai was held hostage for two months. Millions of people in the city of Guangzhou are now forced to stay at home as authorities try to contain the spread of the virus.

Last week, Apple (NASDAQ: AAPL) warned that new iPhone shipments would be delayed due to lockdowns in Zhengzhou, which have severely reduced production at major supplier Foxconn Technology Group. The tech giant said it expects to ship fewer iPhone 14 Pro and Pro Max models.

The Zhengzhou Economic Zone, where Foxconn is based, lifted COVID restrictions for a week, but Foxconn said it will maintain its closed system, where on-site employees live and work, indefinitely to avoid exposure to to avoid the virus.

A cargo technician prepares to unload a shipment from an Amerijet freighter at Miami International Airport. (Photo: Eric Kulish/Freight Waves)

There is no consensus among airline and logistics executives on how long the economic slowdown will last, especially amid record inflation in Europe and consumers struggling with soaring energy and property prices. The longer central banks raise interest rates to curb inflation, the more likely it is that slowing economic growth will lead to a recession.

“If people don’t spend, manufacturers don’t get orders. If they don’t get the orders, the demand for air freight goes down,” TIACA CEO Glyn Hughes told FreightWaves on the eve of the group’s Miami show.

Executives say the lawsuit is likely to continue into 2023 in a state of depression, but have mixed views on when conditions could improve. With the increasing number of international passenger flights, the pressure on tariffs is likely to increase further. Airlines say they will have more planned capacity next year than they did before the pandemic, increasing the amount of cargo space available when demand slacks.

Korean Air, for example, said it will soon resume weekly flights to cities in China, Japan and Israel after a long COVID hiatus. British Airways resumed daily flights between London’s Heathrow Airport and Tokyo on Sunday using Boeing 787 Dreamliners. And Aeroméxico is adding routes to Italy, Japan and Spain at the end of March.

Spyrou expressed concern that shipping rates will fall below 2019 levels next year as more passenger carrying capacity returns to the market. All indications are that airlines could operate significantly more passenger flights across the Atlantic next summer than in 2019.

During a panel discussion at the TIACA event, Strauss said many airlines won’t trust their financial results again until 2025.

Others were cautiously optimistic that air freight demand could pick up after China’s Lunar New Year holiday as shippers wait to place more orders.

Tobias König, general manager for air and sea freight at Germany-based Rhenus Logistics, said customers who shipped early and have full stocks could now be ready to resume freight next spring after high stock levels reduced became.

United’s Krems said he expects a steady state in cargo flows after the Chinese New Year, with fewer seasonal ups and downs and a stronger dollar affecting directional trade flows.

“2023 will not be a fantastic year. I think it’s going to be a good year,” he said.

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