Ocean disruption modal shift puts air cargo on course for solid 2024

Source: Journal of Commerce
Date: 7th June 2024

Volume and rates on the main air cargo trade out of Asia and the subcontinent rose sharply in May from already inflated levels as months of container shipping disruption continued supporting the modal shift from the ocean.

Cargo owners battling to find space on ships filled by an unseasonal demand surge are driving up demand for air freight out of Asia, the Middle East and India, pushing some analysts to predict that global air cargo is on course for a solid year.

“When we take a mid-term view of the market, with these kinds of numbers we might be on track for double-digit growth for the year. It is now a possible scenario,” the chief air freight officer at rate benchmarking platform Xeneta, said in a market update this week.

While reasons for the unexpected ocean demand vary from restocking to an early peak season to frontloading ahead of potential US tariffs on China, the increasing volumes have forced shippers of urgent or time-sensitive cargo into the air, and huge increases are recorded in rates and volume.

The average air cargo spot rate on the Middle East/Central Asia to Europe corridor of $3.21 per kilogram in May was up 110% compared with the same month last year, according to Xeneta. Southeast Asia to North America rates rose 65% year to year to $4.64/kg, while China to North America rates were up 43% at $4.88/kg. China-Europe spot rates for May were up 34% from May 2023 at $4.14/kg.

Data from Netherlands-based air cargo analyst WorldACD is also reflecting surging demand and rates from origins across Asia, South Asia and the Middle East. Spot prices from India to Europe of $3.78/kg were up 160% in May, while Bangladesh to Europe rates rose 189% to $4.38/kg. Rates from Dubai to Europe of $2.28/kg are almost double those recorded in May last year.

When contracted air freight rates were included, overall average rates in May from Middle East and South Asia origins to Europe were up 77% year over year. Volume from Asia-Pacific origins was up 21% in May year over year, with spot rates 12% higher.

US e-commerce crackdown
Xeneta said the air cargo market from China to North America continued to gain from the resilient US economy and strong e-commerce demand but he pointed to the US crackdown on e-commerce shipments out of China as a worrying sign for the industry.

The US de minimis rule allows for the import of one package per day worth $800 or less without filing a formal customs entry with Customs and Border Protection (CBP) and — perhaps more importantly — without paying duties or tariffs. But scrutiny of the de minimis rule, also known as Section 321, has risen over the past year, largely due to the extensive use of the program by China-based e-commerce giants Temu and Shein.

In late May, CBP suspended access for several customs brokers to its Type 86 program, a voluntary initiative aimed at facilitating low-value import shipments such as e-commerce.

“At the end of 2023 we saw the dramatic impact China’s e-commerce behemoths had on the air cargo market,” Xeneta said. “Everyone is now waiting anxiously to see what happens in the upcoming peak season. But if the potential rising costs and increasing transit times of e-commerce ex-China leads US consumers to procure less and less, that can have a ripple effect globally.”

Profit upgrade
For now, though, the global airline industry is in solid recovery mode. Air cargo demand and fast-growing passenger travel numbers saw the International Air Transport Association (IATA) upgrade its 2024 industry profitability expectations.

“The airline industry is on the path to sustainable profits, but there is a big gap still to cover,” IATA Director-General said in a statement. “To improve profitability, resolving supply chain issues is critical importance so we can deploy fleets efficiently to meet demand.”

Total airline revenue in 2024 is expected to reach $996 billion which would be a 9.7% year-over-year increase and a new record high for the industry. IATA also upgraded its net profit expectations from $25.7 billion to $30.5 billion. Total air cargo volume is expected to reach 62 million metric tons in 2024, while the 4.96 billion passengers forecast to travel through the year will also be a record high.

However, IATA noted that air cargo is continuing to correct following the exceptional pandemic year of 2021. Key metrics are moving from the extraordinary mid-pandemic situation toward a continuation of pre-pandemic trends and levels, including yields, capacity growth, and the belly cargo-freighter capacity split.

Despite the strength of demand, cargo yields are expected to fall 17.5% in 2024 with significant belly capacity entering the market with the recovery of passenger travel. Cargo revenue is expected to fall to $120 billion in 2024, down from $138 billion in 2023, although an improvement on the previous forecast of $111 billion was announced in December.

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