Middle East conflict sends air freight rates soaring in March

With conflict raging across the Middle East it was not surprisingly an explosive month in March for air freight markets.

The overall Baltic Air Freight Index (BAI00) gained some +19.4% over the four weeks to March 30, leaving it ahead by exactly +10.0% from 12 months previously. To April 7, the four-week gain had risen to +25.2% to leave it up +15.8% YoY – and back close to peak season levels.

But that told far from the full story, with rates surging much more on many key lanes, particularly between Asia and Europe – and with jet fuel prices more than doubling, pointing towards potentially steeper rises ahead.

The sudden surge in rates was sparked by the US and Israel launching massive air attacks against Iran on February 28. And Iran responding with drones and missiles to hit targets throughout the region, effectively closing the Strait of Hormuz to ocean transport – and causing major air space closures and flight cancellations through the Gulf.

BAI Spot rates out of Hong Kong spiked dramatically – rising on lanes to Europe from HK$31.05 per kilo on February 27 to HK$42.70 by March 30. Spot rates from HK to the US were rising sharply too – from HK$31.09 per kilo to HK$45.95 to the East Coast between the same dates; and from HK$30.50 to HK$42.88 to the West Coast.

BAI Spot rates from India rose even more dramatically, more than doubling on lanes to Europe – from US$1.85 per kilo on February 27 to US$4.10 by March 30.

Most of the major outbound indices did not rise so dramatically but were still showing a strong upward trend – with the index of outbound routes from Hong Kong (BAI30) gaining +22.7% over the four weeks to March 30 to leave it up +7.4% year-on-year; and +22.6% over four weeks to April 7, pushing its gain to +13.4% YoY.

Similarly, outbound Shanghai (BAI80) gained +20.3% MoM to March 30 to leave it ahead by +16.9% YoY. By April 7, the MoM gain had escalated to +41.8%, helping push the YoY change to +21.3%.

However, those outbound indices reflect the full spectrum of spot and forward contract business going through – including fulfilments on contracts agreed months previously. Hence, they can give an accurate snapshot of average rates achieved – but not necessarily of marginal prices, which may be a lot higher at times of market stress as the BAI Spot indices were indicating.

TAC Freight indices out of some other locations in Asia – such as from India, but also Vietnam and Bangkok – were also showing steeper rises for the month, reflecting perhaps that these markets are typically dominated more by spot market activity.

Rates from other locations out of Asia, such as Korea and Taiwan, which were already at elevated levels – reflecting the boom in semiconductors and AI-related activity – were also higher in March but to a lesser extent as affected less directly by disruption in the Middle East.

Rates from Europe were rising too in March, though also to a more modest extent. The index of outbound routes from Frankfurt (BAI20) rose +8.5% over the four weeks to March 30, though remained a little lower at -7.0% YoY. By April 7, the MoM gain had escalated to +22.7%, helping push the YoY change back into positive territory at +6.1%.

Outbound London Heathrow (BAI40) gained +9.2% MoM to March 30, though this was building further on strong gains in recent months to leave it comfortably ahead at +31.0% YoY. Despite little change in the week to April 7, the YoY change by then had ratcheted up to +48.8%.

From the Americas, the index of outbound routes from Chicago (BAI50) bounced more steeply by +35.9% MoM to March 30 – though this was largely recovering ground from falls in previous months, leaving its gain at a more modest +8.6% YoY. After little change in the week to April 7, the YoY change slipped back into negative territory at -0.4%.

From a global macro perspective, markets were grappling with what was being seen as an ‘asymmetric war’ – where the US and Israel may wield overwhelming air power, but where the path to a decisive victory was unclear.

Whereas for Iran, mere survival alone for the Iranian regime might be seen as victory. And could be achieved perhaps by waging economic war – through closing the Strait of Hormuz and attacking oil and gas infrastructure in the Gulf states.

After the initial shock, equity markets spent the month oscillating up and down in relation to the news flow – and US President Donald Trump’s wild swings between threats to either totally obliterate Iran’s infrastructure or do a deal to end the conflict.

Traders were looking for ways to make a so-called ‘TACO trade’ – on the basis that there might be a TACO [Trump Always Chickens Out] moment, similar to last year when he backed down from his initial ‘Liberation Day’ threats on tariffs.

The difficulty this time, as one trader quipped, is that “it takes two to TACO” – and there was little immediate sign that a theocratic regime in Tehran would play ball.

By the time of writing, this had played out into the two-week ceasefire announced on April 7 – allowing for a reopening of the Strait of Hormuz while negotiations on a more permanent deal continued.

Nevertheless, the conflict had already caused major effects in energy markets, with crude oil shooting up to $120 per barrel at various points over the month – then falling abruptly back below $100 after the ceasefire was announced (though still way above the $70 or so it was before the conflict).

While crude was escalating, there were even more dramatic effects on liquefied natural gas – with Qatar, one of the world’s largest suppliers, effectively blocked from exporting.

Most importantly for air freight, the effects were also very dramatic on jet fuel prices. Although crude oil was up +59.9% over the month to March 27 according to Platts data, jet fuel was up +103.9% over the same period – due to a more than three-fold rise in the width of the so-called ‘crack spread’ between crude and jet prices.

In normal times, locations in the Gulf enjoy a natural advantage in oil products like jet fuel – given not least the cheap and plentiful supply of the raw ingredient. Which is one reason Gulf-based airlines such as Emirates, Etihad and Qatar have become such big players in cargo – alongside their ideal geographical location about halfway between Europe and Asia.

At one stage in early March, the air space closures in the Gulf were knocking out some 15-20% of total global air cargo capacity, sources estimated – alongside that rising impact on jet fuel prices.

By the end of the month, some of the lost capacity was coming back on stream – with one leading freight forwarder in Hong Kong estimating overall capacity was now down only about 5% globally.

Nevertheless, there were still very significant headaches over routings – given the ongoing lack of passenger (and thus bellyhold) traffic through the Middle East: “Normally we would do all our ULDs [unit load devices] for Europe via the Middle East – and break them down for different final destinations there,” he told TAC. “Now there is less flexibility, transit is longer and costs are much higher.”

Another source suggested that shippers were finding new ways to move things to Europe through alternative routes, such as sea-air solutions via Singapore or Colombo or even across the Pacific to the US – and then by air. Other solutions were being found overland by rail or truck to Central Asia – and then by air.

But with every solution one thing seemed clear: It was costing a lot more – and looked set to rise further whichever way you went, with quotes for jet fuel rates sometimes 4x or 5x what they were a month earlier. And that’s if you could get it – with reports from some locations of jet fuel running out or not available at all.

A swift and decisive resolution to the conflict may of course start to put the market back on the road to normal. But even with that, sources expect significant disruption – and thus higher rates – for quite some time ahead.