Lower energy prices and cargo rates may lead to a soft landing for the world economy – and a quicker rebound

The global economy has been stalling – and air freight prices falling. After a big surge during Covid, is the market dropping back as far as pre-pandemic levels?

Shippers and carriers are looking increasingly towards index-linked agreements (ILAs) to manage price volatility.

Following a massive surge during the Covid-19 pandemic years, air freight prices have been trending a long way back down over recent months. According to the latest data from TAC Index, the leading price reporting agency (PRA) for air freight, the overall Baltic Air Freight Index (BAI00) is now down a massive -41.3% in the 12 months to 28 November – though still remains, so far, comfortably above pre-pandemic levels. During the past year, there have been some notable regional variations – with routes from China more hard hit than from other major locations, with the index for Outbound Shanghai routes (BAI80) down more steeply by -52.5% YoY. In parts of Southeast Asia, the drops have been more extreme with Vietnam to US and Vietnam to Europe routes, which are dominated more by spot market activity than bigger markets like Shanghai and Hong Kong, both down more than -70% YoY according to the latest TAC data. Over the same period, prices have held up more strongly out of Europe, with the Outbound Frankfurt index (BAI20) only down by -26.4% YoY. And out of North America, the Outbound Chicago index (BAI50) is only down -27.1% YoY. Over the same period, US to Europe routes are only down -7.6%. And US to South America routes are also less negatively affected, with Miami to South America only down -8.7% YoY. So there has been plenty of regional variation. But the overall narrative has been pretty consistent – and consistently bad given negative factors like: These developments have also come at a time when more air freight capacity has been coming back on stream following the pandemic – making more planes available to move less goods. And following a general move by shippers away from ‘just in time’ and towards ‘just in case’ supply chain systems – which has meant inventories high and warehouses full – at a time economic activity has been stalling. All of which leading of course to lower rates for air freight. But, despite the negativity, could all that be about to change? Could the tide turn – and we suddenly reach an inflection point? Over the past month or so, there have been some signs such a change of direction may be coming. First of all, there has been a collapse in European gas prices – arriving like manna from heaven for governments in Europe and the UK, who had been forced into massive support packages to shelter households and businesses from soaring gas and electricity prices. Big support packages for the winter of 2022-23 are already in place. But this recent drop in gas prices should much reduce the level of support required for the following period. That in turn seems to have eased the most gloomy scenarios of a major recession in Europe – boosted by a feeling that Ukraine has now gained the upper hand over Russia, which may help end the war there more swiftly. Second, expectations of rising inflation in the US – which had been causing alarm for markets all around the world – appear to be approaching a peak. With the latest US inflation figures coming in below expectations, markets now expect Federal Reserve chairman Jerome Powell to have more leeway not to push interest rates so high – and hence not squeeze so much growth out of the global economy. Third, and perhaps most importantly, have been expectations that a full reopening of China – post-Covid – must finally happen, and perhaps soon. All of this has been reflected in a sudden surge in global equity prices over the past couple of months, with the MSCI World up more than 6% in November as we approached month-end – and more than 10% in European markets, buoyed by that falling gas price. Taken together, these developments have raised expectations that although the global economy may still be heading for recession, it could be with more of a ‘soft landing’ – which might also mean the ongoing fall in air freight prices coming to an end. Against that, it must be said that plenty of economists and macro commentators remain sceptical that a soft landing can indeed be achieved. Some of these sceptics view the recent equity market rise as something of a ‘dead cat bounce’ – the kind of short term relief rally that often occurs in a bear market. They point to various things – not least that the Ukraine conflict remains far from over, ongoing trade tensions between the US and China, and what they see as a disappointing outcome at the recent Chinese Party Congress – all as factors of concern. The more recent outbreak of nationwide protests across China against continuing Covid restrictions – and market reaction in Asia – will not have eased such concerns. With supply chains in China far from back to normal, there is clearly still plenty to beconcerned about. But it could be that an inflection point is coming. Even if so, an end to the long running fall in air freight prices may take a while to show through – perhaps not until next March or April at the soonest. Any sign of it before then would indeed be an early indicator.

During the recent IATA World Cargo Symposium, held in London in late September, you could almost feel a palpable sense of pride in the industry. After all, despite falls this year in air freight price levels as measured by Price Reporting Agency (PRA) TAC Index, the sector had undoubtedly proved its importance to the whole world during the years of the Covid pandemic. Without the ability to fly vast quantities of personal protective equipment (PPE) and key pharmaceuticals, the amazingly rapid global vaccine rollout in response to Covid would simply not have been possible. Yet the very importance of the air freight sector still comes across as something of a surprise even within the aviation industry itself. Ross Baker, chief commercial officer at London Heathrow, caused some gasps in the audience at IATA when he noted, for instance, how an incredible one-third of all UK cargo – by value – had gone through Heathrow in 2019, weighing in at a cool £140 billion that year. The cargo side of aviation – by common consent – had in previous times always been something of an after-thought as compared with the bigger, more glamorous, and more profitable air passenger traffic business. Covid, of course, put a virtual halt to passenger traffic – and at a stroke simultaneously elevated the importance of freight. Air cargo had not been seen in the past as such a priority at Heathrow, Baker admitted. Post-Covid, that was now emphatically no longer the case. Nevertheless, the air cargo sector still faces some powerful and severe challenges and headwinds – including not least due to continuing perceptions and concerns about its environmental footprint, and negative image as a sector in which to forge a career. Brendan Sullivan, global head of cargo at IATA, trumpeted the progress the industry was making towards a goal of net zero carbon emissions by 2050 – and the key role to be played by sustainable air fuel (SAF) in achieving that. But other participants at the conference were more sceptical, with some noting there had been plenty of talk about SAF and cutting carbon for a number of years – and not much progress yet. Jonathan Wood, VP in renewable aviation at Neste, noted how SAF was still generally much more expensive than jet fuel even at a time when oil prices were high and the ‘crack spread’ – the relative price of jet fuel to crude oil – was elevated, as noted by IATA chief economist Marie Owens-Thomsen. Martin Drew, senior VP for cargo at Etihad, also noted a continuing lack of alignment and consistency of regulatory treatment for SAF around the world – with an outlier like the state of California offering subsidies, but in other places SAF being up to eight times the price of jet fuel. There are various initiatives by air freight carriers now in progress towards cutting carbon emissions and steadily using more SAF. But the patchy progress overall so far is no doubt one of various factors that makes air cargo be seen as an undesirable sector in which to work. Indeed, there was a sobering presentation at the Symposium from Arpad Szakal, a principal consultant on recruitment at Cormis Partners, on the challenges to recruiting and retaining talent in the sector. After many airlines had cut both the number of staff and working conditions aggressively during the pandemic, the whole aviation sector now faced a problem in human resources, Szakal noted. This could be seen all too readily on the passenger traffic side – with a lack of sufficient check-in and baggage handling staff feeding through to large numbers of flight cancellations. On the cargo side, there were also perceptions in the workforce of an industry of mostly low skilled work – with jobs packing and shifting boxes – making it hard to attract talented people, and especially females, Szakal noted. Research showed that some two-thirds of companies operating in air cargo were now under-staffed, with a shocking staff turnover in the first year of 40%-plus in many companies, he claimed. Moreover, pay and prospects were not seen to be good or competitive with other sectors at all levels up the corporate scale – not just at entry level, Szakal added. Of course, there are ways to remedy these perceptions – with pro-active approaches on incentives, retention, diversity and inclusion, ‘reskilling’ and ‘upskilling.’ But the central point surely is to emphasise the ongoing importance of the sector – which is surely going nowhere soon given its key role in the global economy, especially if progress on carbon and SAF can be accelerated. With this in mind, it is interesting to note that after trending down in recent months, air freight prices have firmed up recently – with the overall Baltic Air Freight Index (BAI00) up +4.9% in the week to 24 October as the long-awaited ‘peak season’ ahead of the US Thanksgiving holiday finally approached. Though still down -28.5% year-on-year amid a murky macroeconomic outlook, air freight prices overall remain well above pre-pandemic levels. The ongoing importance of the industry to the global economy simply cannot be denied.

Gas prices in Europe skyrocketing. Lockdowns in China lingering. Russia losing ground but now seeking to annexe chunks of Ukraine. Countries like the UK responding with huge subsidies for energy consumers – and large tax cuts to boot – massively increasing their fiscal deficits, and shaking the confidence of markets. Central banks also responding – not with more monetary largesse this time, but with interest rates rising sharply. Nevertheless, still leaving a serious threat of inflation running out of control. And how is all this being reflected in air freight markets – often a leading indicator for the global economic outlook? Well, the air cargo sector is certainly looking a little edgy and nervous. Prices have been slipping for a while, with the overall Baltic Air Freight Index (BAI00) – calculated by TAC Index – now down by some -24.5% year-on-year to 26 September, after another drop of -5.3% in the latest week. Normally, at this time of year, prices tend firm up – as the air freight sector gears up for peak season, when demand traditionally rises in the run up to Thanksgiving, Black Friday, Christmas and New Year. But this year, prices have not been rising but slipping for many weeks. And even a recent rise in the previous week, sources suggested, tended to reflect longer term contracts – prevalent on many of the major routes – rather than spot prices, which were continuing to trend lower. The Baltic air freight indices for almost all of the major outbound locations fell on the latest weekly data – with Shanghai (BAI80) down -8.4% WoW, Hong Kong (BAI30) falling -1.9%, Frankfurt (BAI20) down -3.9% and Chicago (BAI50) off a steep -17.7%. London (BAI40) was the one exception with a modest gain +3.0%. But price trends out of other locations, where more of the market is conducted at spot rates, were more mixed. India to US routes, for instance, fell -4.0% on the latest week – leaving them languishing by -33.3% YoY, a bigger drop than on the Baltic BAI00 index. Vietnam to US routes, on the other hand, did gain a modest +2.9% WoW – but the YoY decline on those routes was still looking very steep at -40.3%. Earlier in the year, when air freight prices were still high or rising, many market watchers had been expecting to see the very opposite of those trends. With local lockdowns – and Covid policies – continuing to disrupt supply chains from important manufacturing centres like Shanghai and Shenzhen, many had expected business to move where possible via other locations such as Vietnam. But that doesn’t seem to have happened – certainly not to much of an extent. And it is indeed a murky outlook ahead – as the recent Q1 results from FedEx, which surprised the market, arguably underlined. FedEx announced a miss on projected earnings of some $500 million – widely described as ‘of epic proportions’ – with the company issuing a profit warning that slashed its share price by more than -21% in a single day. Industry observers pointed to various factors – not least a loss of business due to disintermediation caused by other players such as Amazon taking business away – for the troubles at FedEx. But the weaker recent market will surely not have been helping, with FedEx CEO Raj Subramaniam forced to respond with an urgent plan to introduce cost savings going forward. To be fair, the market does present a complicated picture – as highlighted by Marie-Christina Lombard, CEO of Geodis, when presenting her company’s first-half results in September. Reflecting on what had been a period of strong growth in the first half for Geodis in terms of both revenues and profits, Lombard also highlighted that rates had already been falling in recent months for air freight as well as for ocean traffic. That said, there were some areas where demand remained strong – notably in the automotive sector, according to Lombard. And although e-commerce sector volumes had been weaker than expected, she still expected some uptick to be coming as usually happens by Q4. That may yet pan out, but it seems highly likely to be a bumpy ride ahead. Read our freight blog for the latest insights and trends in the logistics industry.

Whither air cargo rates – which way are they set to go? Are they set to rise as we reach the traditional peak season? Or are they set to crumble and fall – as rising fears about inflation and recession hit global trade?

The global economy seems to be grinding on remorselessly towards a new era of stagflation – with prices rising but growth stalling. Towards conditions not witnessed last since the troubled era of the 1970s. There are of course various reasons underlying this trend, including the Covid pandemic – and the huge fiscal and monetary response around the world; ensuing higher demand and tighter labour markets; and Russia invading Ukraine, adding a further shock to key commodity markets like oil and gas, agriculture and food. But how is all this playing out in terms of global trade – and the not insignificant role of the air freight sector in facilitating it? Well, many economists think Europe may already be in recession – with the added risk that Russia could simply pull the plug on the supply of gas to Germany hanging like a sword of Damocles over prospects for the whole region. Recent surveys in the US, such as the widely followed Atlanta Fed GDP Now Forecast, are pointing towards a sharp slowdown there too. Meanwhile, growth in China – in recent years the main engine room of global growth – was squeezed down to only +0.4% in Q2 following severe local lockdowns in key economic centres like Shanghai. Although global growth is clearly weak and falling, which may normally ease inflationary pressures, economists worry that this time inflation may be more sticky – given not least tighter labour markets in the developed world post-Covid. That gives workers more leverage to press for higher wages – which then threatens a wage-price spiral. There are other reasons too, such as the trend away from ‘just in time’ towards ‘just in case’ supply systems – after the shock of the pandemic, and subsequent scramble for PPE and vaccines, demonstrated how important it is for countries to secure supplies of ‘strategic’ goods. ‘Just in case’ may be a safer approach to maintaining supplies, but it is usually more expensive too. Arguably, the biggest factor in the growth of free trade and low inflation in the last 40 years was the opening up of China to the West. But the expansion of global trade that sparked off began to run out of steam and go into reverse after the global financial crisis of 2008 – a new trend that has accelerated since Covid and the war in Ukraine. Some are already calling this a new era of ‘deglobalisation’. There are also medium to longer term demographic trends in China that point towards a slowdown there anyway from the high growth rates of recent decades. Instead of exporting deflationary pressure, as before, some expect China could soon be exporting inflationary pressure. Hence the troubling outlook for stagflation. Economists and money managers don’t all agree about whether it will lead to a big recession – with some arguing that it may be just a shallow or ‘technical recession’ given the high levels of savings built up during the pandemic. But the outlook does not look great. Arguably, all these big geopolitical and macroeconomic trends are already reflected in the weekly data on air freight prices published by TAC Index. After rising sharply during 2020 and 2021, air freight prices globally have eased off this year, according to the TAC data – with the overall Baltic Air Freight Index (BAI00) up only +15.6% year-on-year through 01 August. And that was against the backdrop of much higher jet fuel prices, up more than +85% YoY according to Platt’s data. The TAC data for routes between specific locations and regions look even more interesting. For instance, the index number for China to US overall was up only +1.6% YoY – while US to China was up a huge +69.0% over the same period. Does that reflect a shortening of US supply chains – and movement of production for the US market away from China either into the US or to other locations? And rising demand from China for key inputs from the US? Perhaps time will tell. Looking at alternative locations to source supplies, the latest data for India to US routes had been showing a significant increase in air cargo prices at the start of the year as high as +66.5% YoY but now pricing trending downwards to – about -4.8% YoY – a significant decline. Similarly, Vietnam to US has also seen a more exaggerated downward trend with highs at the start of year touching +198.0% YoY and has now dropped to -33.6% YoY based on the latest numbers. At the same time, air freight prices between China and Europe have been rising strongly in both directions: China to Europe up +40.1% YoY, with +48%-plus increases for both Shanghai-Frankfurt and Shanghai-Amsterdam routes. And an even more eye-popping increase of +95.9% YoY in rates for Baltic Air Freight Index (BAI23) Frankfurt to China overall. Alongside the US to China numbers, perhaps the surge from Frankfurt reflects some latent growth in the Chinese economy – waiting to be unleashed after key inputs for the economy are urgently imported by air from Germany. After a ‘summer lull’, the peak season for air cargo is anticipated soon – and will be a key indicator of how much real growth in trade might offset those dark forces of stagflation. Read our freight blog for the latest insights and trends in the logistics industry.

Global supply chains are clearly in something of a tangled mess, particularly in the key area of container shipping. According to Maersk Line director Neil Ashby, speaking at the recent Multimodal 22 conference in the UK, some 10% of current container capacity is being lost right now simply due to port congestion. Indeed, according to regular data published by Oceanic Investment Management, congestion – defined as when vessels are chartered or employed but are stopped waiting to load or unload, or to cross canals and other pinch points – has increased markedly in the past 18 months, and is still higher this year than a year ago. According to Oceanic CIO Cato Brahde, one of the longest-running hedge fund investors in the shipping sector, this looks like being a problem for some time going forward. Perhaps reflecting this, there are obvious major problems in the supply chains for key sectors – such as semiconductors, which have been hitting production in big industries like car manufacturing. Julian Walker, chief commercial officer at Associated British Ports, told the Multimodal audience for instance that UK exports of cars are down about 46% from this time last year – and car imports also down some 35%. But to what extent does that offer opportunity to the air freight sector – long regarded as a relatively smaller if far from insignificant dimension (certainly by value) in the total freight market? To what extent, in short, could air freight ride to the rescue? Geopolitical developments and other major events in recent years – from Covid pandemic lockdowns to closure of the Suez Canal and war in Ukraine – have certainly heightened awareness about the capabilities and possibilities of air freight. If you need something moved urgently from A to B and other ways of moving it are not functioning normally, then sending by air is one option – if an expensive one. Obviously, air freight might not be the answer for all types of goods or commodities, such as with heavyweight materials. Certain types of goods can also be dangerous to carry, such as lithium batteries, though in most cases can probably still be handled by air through appropriate controls and safety procedures. Beyond that, there are also widely held objections to the huge carbon footprint of the airline industry – though increasing use of sustainable air fuel (SAF) will hopefully see that issue increasingly resolved over the coming years. There is also a lot of complexity to the air freight sector. The Covid pandemic, for instance, may have highlighted the attractions of air freight as an alternative. But it also came with a sharp reduction in air freight capacity – as the huge reduction in passenger plane traffic removed a lot of bellyhold capacity from the market. Some airlines responded during the pandemic by increasing their air freight capabilities, such as through conversions of passenger planes to handle freight. And over time more capacity has gradually come back on stream as passenger traffic picked up again – notwithstanding the recent spate of cancellations of scheduled flights by many airlines across the industry. According to data from IATA, the airline industry trade association, air cargo volumes rose 18.7% in 2021 – back above the pre-pandemic peak, but not quite above the biggest ever year IATA had recorded, which was back in 2010. Though then fell back again in Q1 this year as lockdowns came into effect in various parts of the world, notably in key export markets like China. Perhaps of more interest are the Baltic Air Freight Index (BAI00) numbers collected by TAC Index on industry pricing activity, which most recently showed a rise of 31.9% in overall air freight prices year-on-year to 20 June, 2022 – though with considerable regional variations by outbound location. Net of any fall in volume, this no doubt reflects a considerable increase in the dollar value of air freight being transported. On the other hand, the cost of jet fuel had also gone up by a whopping 120-130% over the same period, according to data from Platts – depending on which region you were looking at. So, if anything, the profit margins for air cargo carriers overall seem to have come down. At first sight, this might look surprising – if one might be expecting a rise in demand given the problems with containers and other modes of transport. On the other hand, there is no doubt plenty of complexity behind the numbers. For instance, the inability to move either components or manufactured goods by container – whether they be personal computers or mobile phones – does not necessarily mean they can be moved by air instead. Local lockdowns in key manufacturing centres such as Shanghai have hit both production and the ability to move things on the ground – whether to local ports or airports. Another theme which came up repeatedly at the Multimodal event was an ongoing move from ‘just in time’ production systems to ‘just in case’ – accelerated by fears about vulnerabilities to long and over-extended supply chains during the pandemic. While most industry participants do not anticipate the world moving over entirely to a ‘just in case’ approach – with manufacturers hoarding stockpiles of inventories – there has clearly been a significant move in that direction. So there is a likelihood that inventories are now pretty high in many sectors – notably in consumer goods like textiles. At the same time, following the onset of the Ukraine war, soaring fuel prices and fast-rising inflation in a stagnant global economy, there is also an expectation that consumers are likely to become more cautious – if not be more cautious already. Against that, there is still a sense that production levels and supply will rise as the year goes on through Q3 and Q4 – notably in important manufacturing centres like China. And so – if container congestion continues to be a problem, which it looks like it will be – then air freight carriers