A lot has changed in the market through what was, by most accounts, a very difficult year, especially from a freight services provider standpoint. Rewinding 12 months, we were focused on the normalisation of supply chains to pre-pandemic levels, which we said was due to softening air freight demand and returning capacity, adding that softening demand “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. Instead, inventory de-stock and fewer bottlenecks in the logistics system all mean less need for emergency “band-aid” air freight to make up for stock-outs, supply critical process goods, and generally compensate for misaligned or deficient inventories.  In addition, as complementary modes like Ocean Freight get back to normal levels of pricing, trade down should accelerate.” 

There are green shoots for rate recovery and market stabilisation this year, but there are also plenty of uncertainties. Comparables will still be difficult in early 2024, but they will get easier as the year progresses.

On the whole, we believe these predictions were true. On a fuel-adjusted basis, we think absolute air freight rates are much closer to pre-pandemic levels and have reverted to more normal seasonal patterns.  The path toward normality, however, was painful, given the historic increases in 2021 and much of 2022. We underestimated the duration of the rate trough. There are green shoots for rate recovery and market stabilisation this year, but there are also plenty of uncertainties. Comparables will still be difficult in early 2024, but they will get easier as the year progresses. Inventories have largely right-sized and consumer spending surprised to the upside to finish the year. For example, Cyber Week sales were up nearly 8% year-over-year (y/) according to Adobe Digital Insights. But at just over 3%, overall retail sales growth this holiday season was slower than in 2022, according to Mastercard, with less of an inflation “boost” this year and more discount-conscious consumers. There are therefore still uncertainties with underlying consumption demand.

IATA forecasts for the year anticipate approximately 5% growth y/y in freight tonne kilometres, which is in line with our base case for a gradual recovery in 2024. However, capacity is still down versus 2019, in our view, with international passenger flights in and out of China about 20% below 2019 levels.  Therefore, the market is still oversupplied, which will be a headwind to rates, despite a modestly optimistic outlook for volumes. 

Nearshoring continues to be a hot topic as shippers seek to de-risk global supply chains, underscored by the recent conflict in the Middle East and the cessation of operations by various container lines in the Red Sea. In addition, the evolution of e-commerce, including Chinese direct-to-consumer shipments to the United States from companies like Shein and Temu is creating an elongated peak, which we think is likely to stick around.

Further complicating the outlook for 2024 and beyond, we are beginning to see the emergence of new structural changes to supply chains. Nearshoring continues to be a hot topic as shippers seek to de-risk global supply chains, underscored by the recent conflict in the Middle East and the cessation of operations by various container lines in the Red Sea. In addition, the evolution of e-commerce, including Chinese direct-to-consumer shipments to the United States from companies like Shein and Temu is creating an elongated peak, which we think is likely to stick around.  These trends were visible in December 2023 BAI airfreight data, with Hong Kong to North America (BAI32) rates up 6% y/y, versus the January-November average of down 38% y/y. Shanghai to North America (BAI82) saw similar results, with December up slightly at 1% y/y (18% y/y if excluding the drop-off in the last week of the month), versus the first 11 months, which were down 38% y/y on average. 

So, there is a lot to consider, we think, in forecasting the rate trajectory in 2024. But here is our best guess for the year ahead: comparables will still be difficult early this year - especially in January, so we expect to see a continuation of significant y/y declines on major Asia outbound lanes, averaging in the 20-30% range. A mitigating factor could be higher early demand for air freight services due to the Suez/Red Sea disruption, driving capacity temporarily tighter and rates temporarily higher. For the remainder of the year, IATA forecasts call for approximately 20% y/y declines in global air cargo pricing. Our inclination is that rate declines won’t be quite that bad, but they will likely still be squarely negative as passenger capacity continues to filter into the market. Based on what we see today, a return to annual air cargo rate growth probably won’t happen until 2025, but there is a lot that can happen in that timeframe.

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.