February data is in the bag and the market seems to be continuing with its reversion to “normal”, both in terms of a return toward some semblance of seasonality with a very modest post-Lunar New Year recovery, as well as rate reversion to pre-pandemic mean.  From a demand standpoint, the good news is that consensus from transportation service providers seems to be coagulating around a “soft landing” in volumes. Consumer activity has been surprisingly resilient and shippers in that sector are in the midst of a destock, with restocking activity expected to resume in the later part of this year. The bad news, at least for air cargo providers, is that normalising supply chains continue to put pressure on expedited modes, and we continue to see a “reset” in shipper thinking as it pertains to rebalancing airfreight spend. In practical terms, we think that means more pressure on air than most other modes. 

The bad news, at least for air cargo providers, is that normalising supply chains continue to put pressure on expedited modes, and we continue to see a “reset” in shipper thinking as it pertains to rebalancing airfreight spend. In practical terms, we think that means more pressure on air than most other modes. 

Indeed, IATA reported total market volumes declined over 15% y/y in December and over 21% y/y in Asia Pacific. Those figures were corroborated by recent earnings reports from freight forwarders Expeditors International and Kühne + Nagel, pointing toward sustained weak demand for Asia-origin tonnage, which has contributed to the downtrend in rates since last year. On the capacity side, some carriers have moved recently to curb supply, with a 2% y/y decline in available cargo tonne-kilometers (ACTKs) worldwide, and a nearly 4% drop y/y in Asia Pacific for December 2022, according to IATA. But those moves are likely a drop in the ocean when considering that belly space continues to flood back into the market as passenger flights resume. International flights in and out of Northeast Asia are still down 55% since before the pandemic, but capacity is up approximately 80% since October 2022, and approximately 60% since a couple of weeks ago, according to airline schedule data. 

As it translates to rates, core Asia-outbound lanes in February were roughly flat-to-slightly below where they were in 2021 (when they were still on the uptrend post-2020 lockdowns). But a good portion of current rate levels has been supported by still-elevated fuel prices. So, the 40% and 33% premium of today’s rates on Hong Kong (BAI 32) and Shanghai (BAI 82) to North America, respectively vs. February 2019 is probably mostly due to fuel, given that Jet A is approximately 50% higher today than it was four years ago.

As it translates to rates, core Asia-outbound lanes in February were roughly flat-to-slightly below where they were in 2021 (when they were still on the uptrend post-2020 lockdowns). But a good portion of current rate levels has been supported by still-elevated fuel prices. So, the 40% and 33% premium of today’s rates on Hong Kong (BAI 32) and Shanghai (BAI 82) to North America, respectively vs. February 2019 is probably mostly due to fuel, given that Jet A is approximately 50% higher today than it was four years ago.

On a year-over-year basis, North America-destined air freight from Hong Kong (BAI 32) and Shanghai (BAI 82) was down a hefty 49% and 41%, respectively, reflecting the demand and capacity dynamics discussed above. Europe-destined freight from Hong Kong (BAI 31) and Shanghai (BAI 81) were down more modestly, at 26% and 32% y/y, respectively, which was reflective of a less peaky market, with less of a vacuum from stimulus-driven activity, less congestion-driven rate inflation, and less inventory restocking to contend with. Even Westbound Transatlantic rates from Frankfurt to North America (BAI 22) were down 33% y/y in February, although they do appear to be more stable. The outlier in rates seems to be certain non-China IntraAsia, with the likes of Singapore to Southeast Asia (BAI 63) up 16% y/y in February. We believe those results are indicative of lower Intra-Asia capacity versus rest-of-the-world, as well as some early supply chain shifts between geographies. We believe these supply chain shifts are happening and may be an indication of longer-term nearshoring, reshoring, or offshoring trends, most of the “nearshoring” activity is still forthcoming, in our view, and will take years, if not over a decade to play out in full. While some things are returning to pre-pandemic norms, other things may look quite different in the future. 

About Bruce Chan, Director and Senior Research Analyst covering Global Logistics and Future Mobility, Stifel

Bruce Chan joined Stifel in 2010. Based out of the Miami office, Mr. Chan is a Director and Senior Research Analyst covering Global Logistics and Future Mobility.

Bruce Chan can be reached at [email protected]. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2023 by J. Bruce Chan.