BAI Index February 2024: Demand is Stable, but Slow and Rate Development Will Likely be Slower; Keeping a Careful Eye on Global Conflict, Climate, and Political Events

January’s BAI data is in the books, and we’re still seeing year-over-year (y/y) declines in air cargo rates as capacity, core pricing, and fuel all normalise to pre-pandemic levels. Hong Kong to Europe (BAI 31) and Shanghai to Europe (BAI 81), for example, were down 16% and 26% y/y, respectively, but are still up 46% and 21% against pre-pandemic levels. Rates to North America follow a similar pattern, down 18% and 26% y/y from Hong Kong (BAI 32) and Shanghai (BAI 82), but still up 36% and 23%, respectively, since just before the onset of Covid. Apart from that general trend, there are a lot of moving pieces to sift through as we consider the potential trajectory for rates this year.
Underpinning the outlook on the demand front, core volumes seem to be okay: stable and recovering gradually. IATA reported that cargo demand grew 11% y/y, which was the largest increase in two years. We believe that the result is consistent with our commentary last month about robust late-peak season activity in the air.
Underpinning the outlook on the demand front, core volumes seem to be okay: stable and recovering gradually. IATA reported that cargo demand grew 11% y/y, which was the largest increase in two years. We believe that the result is consistent with our commentary last month about robust late-peak season activity in the air. However, volume development has not been globally consistent. On UPS’ recent earnings call, management laid out expectations for a resilient US consumer and recovering US industrial manufacturing sector, but noted that several economies in Europe remain in recession and/or are facing persistent inflationary pressure. If these markets continue to diverge, we might expect some bifurcation in underlying rates as well.
In the near term, new disruptions have emerged to global shipping lanes - most notably in the Red Sea and Gulf of Aden, where missile and drone attacks have driven many container lines to avoid the region, siphoning capacity, adding time to transit, and complicating supply chains. While these events have caused seaborne rate increases, we do not anticipate the same level of sympathetic airborne rate increases that we saw during the Ever Given grounding in 2021, principally because both ocean container and air cargo capacity are much looser now than they were three years ago. Still, with no concrete timeline for conflict resolution, and with other emerging issues like low water levels in the Panama Canal, an impending labour contract renegotiation on the US East Coast, and an upcoming US election (and the policy fallout therefrom), the situation could become more acute.
Structurally, capacity is still a headwind to air freight rates as passenger belly space continues to come back online. As of December 2023, IATA available capacity (ACTKs) grew 13.6% globally, with the Asia Pacific region seeing a staggering 31% increase against a 19% rise in demand.
Structurally, capacity is still a headwind to air freight rates as passenger belly space continues to come back online. As of December 2023, IATA available capacity (ACTKs) grew 13.6% globally, with the Asia Pacific region seeing a staggering 31% increase against a 19% rise in demand. European ACTKs grew 7.4% against demand of 8.6%, and North American capacity increased just ahead of demand at 2.4% versus 2%, respectively. Earnings reporting season for global passenger airlines is currently underway, but management commentary so far seems to suggest few signs of cooling air travel demand, even in the softer economies discussed above. The implication, in our view, is that belly space, in particular, will continue to increase at a healthy rate.
Last month, we laid out our prediction for air cargo rates in 2024, and they included still-difficult comparables, especially toward the outset of the year as market normalisation continues to unfold. We called for continued y/y declines averaging in the 20-30% range out of Asia, and that seems to have occurred ex-Shanghai, although Hong Kong origin rates were a shade better. For the rest of the year, our baseline assumption is that demand will improve, but very gradually, which will cause y/y rate declines to narrow but with a lag. In the meantime, while global supply chain disruption from geopolitical or other events might accelerate the process, based on what we see today, a return to annual air cargo rate growth probably won’t happen until 2025.
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.
©2024 by J. Bruce Chan.