After rising steadily through September, October and November, air freight rates remained buoyant through the first half of December – before falling sharply over the Christmas and New Year holiday period. According to data from TAC Index, the overall Baltic Air Freight Index (BAI00) ended lower by -16.9% in the four weeks to 1 January, leaving it down by -31.7% over the calendar year. In the first week of January, there was no immediate bounce with the BAI00 index shedding a further -6.6% to leave it at -31.8% YoY. The fall in rates ran counter to some expectations rates would spike again following disruption to ocean shipping in the Red Sea – with Houthi rebels in Yemen firing rockets at ships and carriers diverting vessels around the Cape of Good Hope, adding a lot of time and cost for shippers. So far at least, it seems little if any ocean shipping was diverted immediately to air cargo – though that could of course change and looks increasingly likely in the weeks ahead. Indeed, sources are speculating this could stimulate a boost to Sea-Air solutions, with more shippers opting for sea lanes from Asia to the Middle East and then air to Europe to meet delivery deadlines. With Chinese New Year also coming soon – which often stimulates a ‘mini-peak’ in any case – many do expect rates to spike again in the next few weeks. What’s happened so far, however, seems to be that the traditional peak season for air cargo – through the runup to Thanksgiving in the US, Black Friday and the Christmas holidays – has followed its normal course. The rise in air freight rates through the autumn was led very much by e-commerce business out of China – and so was the subsequent fall in the final two weeks of December. The index of outbound rates from Hong Kong (BAI30) suddenly dropped a whopping -22.9% in the final two weeks of December – putting it lower by -16.3% for the month as a whole, and back in negative territory YoY by -14.4%. That said, the decline in rates over the full year was still far less from Hong Kong than from other big outbound centres – reflecting Hong Kong’s role as the leading hub for the boom in e-commerce activity out of southern China, and continuing status as the top airport in the world for air cargo. After a big fall in the final fortnight of the year, the outbound index for Shanghai (BAI80) fell much more sharply by -30.8% MoM to leave it lower by -30.3% over 2023. Sources suggest the big drop in rates out of China overall probably reflected a sudden drop in spot volumes, which had been trending up sharply – leaving a much higher proportion of the business going through at previously agreed (and much lower) contract levels. Rates from elsewhere in Asia were not falling so much, they noted, and indeed still rising on some lanes to Europe – such as fromVietnam,Bangkokand India – as well as on Transatlantic routes. The data on rates has certainly been following very different patterns on different lanes. Out of Europe, for instance, rates overall ended December actually higher – the index of outbound Frankfurt routes (BAI20) up +7.2% MoM, though still a long way lower by -47.8% over 12 months. Likewise, rates out of London (BAI40) were higher by +4.0% MoM, though still languishing at -51.7% YoY. While rates out of Europe did not see the same sort of dramatic fall as from China over the holiday period, they had of course not enjoyed the same sort of strong peak season rally either in the months before. Out of the US, rates from Chicago (BAI50) did soften in December, though to a modest extent – showing a fall of -7.0% MoM to end lower by -45.2% YoY. Aside from the obvious geopolitical concerns – with ongoing wars in Ukraine and Gaza, plus developments in the Red Sea – the global macro outlook actually brightened to some extent during the final part of 2023. Sentiment in markets was buoyed by more dovish guidance on the direction of interest rates from Jerome Powell, chairman of the US Federal Reserve. That in turn helped fuel a further surge in equity markets in December, with the S&P500 index ending the year up more than 24%. The more bullish outlook even extended to Europe – where the economy has been in borderline recession for some time – with even the German DAX index ending the year up more than 18%. One significant exception continued to be the UK, where the FTSE100 delivered a paltry 3.5% in 2023 – weighed down by slower progress on quelling inflation, and hence expectations for interest rate cuts in sterling. The other major developed economy still in a different place is Japan, which continues to be the last holdout against normalisation of monetary policy following the prolonged era of low to negative interest rates and quantitative easing (QE). Even there, however, there have been increasingly strong signals from the Bank of Japan that it is setting a course towards normalisation – which could have significant effects on markets given Japan’s status as the third biggest economy in the world. That task will of course be made much easier for the BoJ if rates are already falling in dollars and euros. Some see the recent rise in equities as a case of investors getting over-excited – which may lead to disappointment with returns ahead. But plenty now foresee the first interest rate cut being just weeks away, starting in the US. If so, that should stimulate faster economic growth – and a better outlook ahead for markets. For air cargo in particular, with demand likely to be stimulated at least to some extent by the problems with shipping in the Red Sea, any pressure on capacity levels – such as from higher levels of military traffic – could indeed spur more than just

November was an eventful month in air freight markets, with the overall Baltic Air Freight Index (BAI00) rising +17.2% in the four weeks to 4 December, leaving its change over 12 months at -17.0%. Market sources who correctly anticipated the recent rise in rates that began in September had been expecting that to continue – and thus a much more normal ‘peak season’ in 2023 than last year, given the strength of forward bookings. Events during the month appear to have added extra momentum to the trend. The geopolitical backdrop to the market continued to be highly unsettled – with conflict in Gaza now added alongside war in Ukraine. There were also some serious seismic and weather events during the month, including earthquakes and volcanoes around the globe from Iceland to Nepal, from the Philippines to the Kamchatka Peninsula in Siberia. From an air cargo market perspective, however, perhaps the most disruptive development was a prolonged period of record snowfall overall several days in Anchorage, Alaska. Anchorage is the third largest airport in the world by volume for air cargo – after Hong Kong and Memphis (the home of FedEx) – and a hugely important hub and transhipment point for TransPacific trade. If severe weather in Anchorage causes any significant delays or cancellations it can have knock-on effects – especially in peak season when finding extra capacity can be more difficult. Arguably, those knock-on effects could be seen in the TAC Index data during the month. Strong levels of e-commerce business out of southern China have been an increasingly dominant feature of the market all year – with rates out of Hong Kong in particular holding up better than the global average. In November, the index of outbound routes from Hong Kong (BAI30) rose +19.2%, taking its change over 12 months back into positive territory at +0.5%. The index of outbound routes from Shanghai (BAI80) gained an even more robust +25.4% over the month to leave it ahead by +7.3% YoY. Overall, rates from China to the US are now comfortably back above where they were a year ago – and from China to Europe also rising again and not far behind. Rates may be a long way below their Covid era peaks, but are now comfortably back above where they were before the pandemic. Stronger volumes out of Asia were also reflected by higher spot rates on other lanes out of Vietnam, Thailand and India. But across other regions the rise in rates has been more muted – so far at least. Out of Europe, the outbound Frankfurt index (BAI20) was only +1.6% MoM and still at -47.3% YoY. And outbound London (BAI40) was also only +1.6% MoM but still down a thumping -59.1% YoY. Rates out of the US were somewhere in between, with outbound Chicago (BAI50) +8.3% MoM and at -42.0% YoY. Overall, however, there seems to have been a fundamental shift in the market towards e-commerce. General cargo volumes may have remained soft – but that appears to have opened the door for e-commerce to access capacity that wasn’t historically available. Another factor has been a trend towards declining capacity – with older freighter equipment starting to come off the market, and little replacement capacity in the pipeline. In some markets, such as the Transatlantic, there has also been an ongoing shift from wide body to narrow body long range aircraft – further reducing capacity there. Meanwhile, the macro outlook for the global economy continues to look mixed, with traders wavering on the probabilities of various potential scenarios. One is that interest rates may have peaked and will start to fall next year; another that core inflation will remain sticky – and so rates will need to stay ‘higher for longer’ to conquer it. So far the signals continue to be mixed, with longer-term bond yields high and rising, which is not usually a good sign – but with the labour market still very strong in developed markets, though starting to weaken; and inflation definitely falling. That in turn has led to debate about whether there will be a meaningful recession – with serious consequences for economic activity, growth and unemployment. Or whether there will be a recession-free slowdown – or ‘soft landing’ expertly orchestrated by the central banks. As we noted earlier this year, hopes for a soft landing are also sometimes dubbed the ‘Goldilocks’ scenario – not too hot and not too cold, but just right – where interest rates are raised enough to quell inflation, but not so much as to tip the global economy into serious recession. In the past month, talk of a Goldilocks scenario has morphed into talk about a ‘Goldfish market’ – so-called to describe traders being like goldfish, which are said to have only a very short-term memory, as they seem to keep forgetting what happened only a short time before. Certainly, it seems to be the case that equity markets, after a renewed rise in recent weeks, have been reverting back towards where they were earlier in the year. Once again, the rise has been heavily skewed towards the top few stocks, with the so-called ‘Magnificent Seven’ – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – now accounting for an incredible 28% of the whole market capitalisation of the S&P500. Traders are divided as to whether those stocks are good value at current prices, with some trading at very high price-to-earnings (P/E) ratios. Only time will tell if that reflects a renewed tech ‘bubble’ driven by the AI theme that will ultimately burst – or whether the soft landing scenario wins out. Air cargo carriers will be hoping for the latter.

The outlook for inflation and interest rates continues to generate lots of debate in markets right now. Central banks, led by the US Federal Reserve, hit the pause button after a long and steep series of rate hikes in September – leading many to suggest we may be near the top of the hiking cycle. Indeed, some optimists suggest that with inflation dropping there could be room for rates to fall again next year. On the other hand, plenty of others have been pointing out that core inflation looks pretty sticky – which may mean rates need to stay ‘higher for longer’ in order to quell it decisively. Meanwhile, geopolitical stresses were ratcheted up further in the past month by events in Israel and Gaza – adding to the war already happening in Ukraine, plus tensions over Taiwan. Events in Gaza should only impact air cargo if that war spreads across the Middle East – which might mean some aircraft taken off the commercial market. Against that troubled backdrop, the oil price – which spiked then eased after Saudi Arabia cut production in September – spiked then eased again in October. Some commentators see the oil market as ‘tight’ – thus prone to a further big jump if tensions in the Middle East escalate. Others, however, point to rising US shale production plus higher sales of oil from Iran – and Russia successfully circumventing sanctions – to argue the market shouldn’t have too much further upside from here. In the midst of all this, global air freight rates maintained a firm tone during the month. The overall Baltic Air Freight Index (BAI00) was up another +2.9% over the four weeks to 30 October. Although the index was still down -30.2% from 12 months earlier, that clocks up a second successive monthly again – after an +11% rise in September – adding evidence of a genuine if modest peak season bounce this year. Sources suggest the firmer tone should continue as forward bookings look strong not just through the Thanksgiving and Christmas holiday seasons but all the way to Chinese New Year. The rising trend has been led by rates out of southern China, with the index of outbound Hong Kong routes (BAI30) up another +11.6% in October, leaving it lower by only -16.4% YoY. Market activity continued to be led by e-commerce, with some forwarders said to be scrambling for capacity at rising spot prices – having failed to secure it previously through forward contracts and block space agreements (BSAs). It was led initially by strong demand on TransPacific routes to North America – where consumers have kept spending, despite running down their savings – though with rates to Europe also rising. The index for outbound Shanghai routes (BAI80) was also up, gaining +6.4% in October to leave it lower by only -22.0% YoY. Rising spot market activity was particularly visible out of Vietnam, from where rates spiked sharply during October both to Europe as well as to North America. A new route added to the data, from Bangkok to Europe, also rose in late October. Out of Europe, the market remained much weaker. Outbound Frankfurt (BAI20) was -3.0% in October, leaving it lower by -44.3% YoY. And London (BAI40) was -12.4% MoM, leaving it languishing at -59.2% YoY. Out of the Americas, the data on outbound rates from Chicago (BAI50) showed a lot of short-term gyrations week to week, but over the month were also lower – to leave the YoY figure at -42.5%. As noted in previous months, the performance of equities this year has been skewed towards a handful of mega tech stocks in the US – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – leaving the rest of the market pretty much flat to down. During the more recent market sell-off over the past couple of months, airline stocks have been among those hit. This seems strange given the three largest airlines in the US, for instance – United, American and Delta – have all posted increases in overall operating revenues so far this year. Despite falls of 30% or more in their air cargo revenues for Q3 compared with last year, all three airlines were benefitting from increased passenger traffic and load factors. And it seems hard to imagine their cargo revenues will fall much further – indeed, cargo volumes have been holding up well. In Europe, meanwhile, markets have been particularly depressed by side effects of the Ukraine war – with little or no growth in Germany dragging down the European economy as a whole as it has had to adjust away from over-reliance on Russian gas. That said, the European economy has indeed adjusted impressively, with gas consumption now down some 20% since the Ukraine conflict began – and overall power consumption down 10%. These are very significant savings given that overall economic activity has hardly shrunk if at all. Some suggest therefore that European stocks could be significantly undervalued compared with the US – and may offer a lot of upside from here. In Japan, meanwhile, the process of ‘normalisation’ of interest rates – after decades of low to negative rates and QE – is still in its early stages. But with underlying inflation now edging up, investors are gearing up for potential opportunities – especially in financial sector stocks. In air cargo specifically, shippers and carriers will both have been watching carefully the gyrations of the oil market. So far, however, recent spikes in crude oil have not fed through much to the jet fuel market – given a contraction of the ‘crack spread’. According to Platt’s data, the Brent crude price was lower by 4.4% over the month to 27 October. But jet fuel prices actually fell an average of 9.4% over the same period, given the expected easing of passenger demand as the winter season approaches. So the outlook for air cargo demand looks positive and the outlook for capacity and jet fuel prices doesn’t too scary

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