After a non-existent holiday peak season last year, rates, for the most part, continue to normalize toward pre-pandemic levels. We believe this process is due both to softening airfreight demand, as well as returning capacity.  As to the former, this isn’t just a softening macro - even though global consumer weakness in the face of broad inflationary pressure is a factor and a continued risk. Rather, normalizing supply chains, inventory de-stock, and fewer bottlenecks in the logistics system all mean less need for emergency “band-aid” airfreight to make up for stock-outs, supply critical process goods, and generally compensate for misaligned or deficient inventories.  And as complementary modes like Ocean Freight get back to normal levels of pricing, trade down should accelerate..  Historically, we estimate that Air Freight costs about 10x Ocean for a shipment of equivalent size. During the pandemic and subsequent supply chain congestion, that spread narrowed to around 3-5x, making air relatively more attractive. But that spread is now widening back to normal levels, which means that air cargo is also relatively less attractive, at least to the extent that its fungible with other modes.

Historically, we estimate that Air Freight costs about 10x Ocean for a shipment of equivalent size. During the pandemic and subsequent supply chain congestion, that spread narrowed to around 3-5x, making air relatively more attractive. But that spread is now widening back to normal levels, which means that air cargo is also relatively less attractive, at least to the extent that its fungible with other modes.

On the capacity front, as the world reopens and travelers resume normal operations, more lower deck belly space will come into the market.  That process has already been unfolding, and should continue as China pares back its restrictive COVID lockdown policies. There are some nuances and variations by lane, though, which are reflected in the various BAI indices.  For example, we believe most capacity has come in on Asia-North America Transpacific so far. Demand slowing from weak ordering, COVID lockdowns, and Golden Week shutdowns are reflected in a steeper rate decline there.  Hong Kong (BAI32) to North America and Shanghai to North America (BAI82) both fell 44% and 42% y/y, respectively, and continued to decline through the month. Sequentially, January was down over 6% and 8%, respectively, versus December 2022.  

Demand slowing from weak ordering, COVID lockdowns, and Golden Week shutdowns are reflected in a steeper rate decline there.  Hong Kong (BAI32) to North America and Shanghai to North America (BAI82) both fell 44% and 42% y/y, respectively, and continued to decline through the month. Sequentially, January was down over 6% and 8%, respectively, versus December 2022.  

On Europe-bound lanes, Asia Export wasn’t quite as dire. However, it still pulled back substantially year-over-year, by 25% and 31%, respectively, on Hong Kong (BAI31) and Shanghai (BAI81) to Europe.  Although the cadence of weekly declines was not as pronounced as on the Europe to North America lanes, sequential deceleration for the month as a whole was still 10.4% and almost 12% vs. December. While European demand hasn’t exactly been stellar, we believe the ongoing war in Ukraine is adding costs for most carriers that have to fly around Russian and otherwise conflicted air space, thus bolstering index readings.  Finally, the Transatlantic pricing has arguably been the most organically stable, down 26% y/y in January from Frankfurt to North America (BAI22), and flattish to increasing by week through the month.  

While comparisons on all lanes against the year-over-year comps may look precipitous, we remind readers that on most lanes, current air cargo rates are still at least 50% higher than pre-pandemic levels. The flip side to that coin is that there still could be room to the downside. How quickly we get back to those levels - and how much choppiness there is on the way down - is still up for grabs.

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.