Air carriers are more nervous about consumer withdrawal

MIAMI — Executives at air cargo airlines and logistics companies have written off the traditional shipping high season as the global economy slows, leaving them speculating whether the outlook will improve sometime in 2023.

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

Although the IATA data is a lagging indicator, it underscores the deteriorating trendline since March. The yoy (y/y) volume decline was 6.7% in June and 8.3% in August.

Xenata, a market research firm with more recent data than IATA, recently reported that air freight demand fell 8% year over year in October. And early indications from other sources suggest shipping performance has been deteriorating so far in November.

“The slide was more like a cliff. It happened quickly when it pulled out,” Amerijet CEO Tim Strauss said in September during an interview at his office at Miami International Airport. “I’m not sure what exactly led to this point, but it’s been happening everywhere.”

Some of the world’s largest airlines, not including express airlines, have cut up to 100 flights a month from Asia to the US, he added.

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

FedEx cut eight to nine daily international flight frequencies and about 23 domestic frequencies in October for faster savings of $2.2 billion to $2.7 billion, CFO Mike Lentz said Nov. 8 at the Baird Global Industrial Conference . The cost-cutting strategy was implemented after the integrated parcel service provider recently announced a sharp decline in its fiscal first quarter results.

The company plans to cut eight to nine more domestic frequencies this month and is temporarily parking planes as not as many are needed anymore, 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 shift exceeded what we safely anticipated,” Lentz said. “That’s why we stopped transpacific flights.”

Equally worrying for many is that air cargo shrinkage is approaching levels seen in 2019, a weak year for air cargo and the yardstick used to judge performance against normal conditions before the pandemic massively distorted the global economy and supply chains. According to IATA, freight throughput was 3.6% lower than three years ago, depending on the distance carried.

Global air freight rates are also falling to 2019 levels, according to market indices. They have fallen by two-thirds since December and by about a third since this time last year. Rates on the key China-US link are down nearly 50% year-on-year, reflecting very soft market conditions. Some regions, like the transatlantic, are holding up better.

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

“We’re still going to have a year of growth this year, partly because of contracts, but it won’t be the growth that we projected,” 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 signed high-priced block space deals with airlines earlier this year with expectations of a strong shipping season are now losing money.

“They have a situation where market prices from China are $2 lower than the block space rate they subscribe to. So many of them have a big loss,” said Christos Spyrou, CEO and founder of independent cooperative Neutral Air Partner, at his booth at the International Air Cargo Association (TIACA) show last week.

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

Shipping costs are even lower in some cases as air freight intermediaries who have committed to full or partial charter flights offer rebates 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 airfreight, told FreightWaves at the event. “And that’s because you have a non-asset owner who owns an asset when they’re not used to it.”

United Airlines (NASDAQ: UAL) has partially cushioned itself from cargo fluctuations by focusing more on high-value specialty products like pharmaceuticals. “You have a better grip on your customers because they can’t move away for 5 cents,” said United Cargo President Jan Krems in a short interview.

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

Outlook 2023

Strauss expressed concern that China’s strict zero-COVID guidelines could continue to weigh on air cargo shipments if not lifted. China is grappling with its worst outbreak since spring, when Shanghai was seized 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 that have significantly reduced production at key 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 located, has lifted the week-long COVID curbs, but Foxconn said it will maintain its closed system, where on-site employees live and work, indefinitely to limit virus exposure impede.

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

There is no consensus among airline and logistics executives on how long the economic slowdown will last, especially with Europe’s record inflation and consumers grappling with high energy and property prices. The longer central banks raise interest rates to curb inflation, the more likely the slowdown in economic growth could turn into a recession.

“If [people] don’t spend it, then the manufacturers won’t get any orders. If they don’t get the orders, air freight demand falls,” TIACA CEO Glyn Hughes told FreightWaves on the eve of the group’s Miami show.

Executives say demand is likely to remain in a depressed state into 2023, but have mixed views on when conditions could improve. Further downward pressure on rates is likely as the number of international passenger flights increases. Airlines are signaling they will have more planned capacity next year than pre-pandemic, which will increase the available belly space for cargo if demand eases.

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 Heathrow Airport and Tokyo on Sunday using Boeing 787 Dreamliners. And Aeromexico 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 capacity comes back 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 aircraft operators won’t feel confident about their financial results again until 2025.

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

Tobias König, global CEO for air and sea freight at Germany-based Rhenus Logistics, said it’s possible that customers who shipped early and have now filled warehouses are ready to resume more freight transport by next spring, after they have reduced their high inventories.

United’s Krems said he envisions a steady state in cargo flows after the Chinese New Year, with fewer seasonal peaks and troughs and the strong dollar affecting directional trade flows.

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

Click here to read more reports on FreightWaves/American Shipper by Eric Kulisch.

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