Air logistics executives had hoped for a shipping demand recovery after the first quarter and a gradual improvement throughout the year as retailers reduced excess inventories. However, this optimistic outlook is now diminishing, as reported by Yahoo.
Air cargo recession continues
The international freight recession shows no signs of improvement and may continue until October, which is typically the peak season for goods movement. Factors such as the risk of recession, excess inventory, and increased airline capacity from the return of passenger aircraft are causing bookings and rates to remain low for several months. Global air cargo volumes are currently down by 8% to 10% compared to last year, with rates dropping over 40%. Although the rate of decline has slowed since December, it is still gradually decreasing. Temporary signs of stabilization are attributed more to easier comparisons with 2022, when the Chinese economy was closed, rather than an actual increase in demand. Recent data indicates that airfreight volume in April decreased by 4% compared to the previous year, following a 3% decline in March. The International Air Transport Association reported a global demand decrease of 7.7% in March, with shipment levels 8% below the 2019 benchmark.
Chemicals and lifestyle products, including apparel, are leading the decline in air cargo demand, according to Maersk’s quarterly report. This downward trend has continued into May, with a 10% decrease in tonnage reported by WorldACD, partly due to the May 1 holiday in many countries. Logistics experts predict that any improvement in air cargo demand until early 2024 will be minimal. The sentiment regarding airfreight demand is changing due to weak manufacturing activity and the realization that many companies are postponing inventory replenishment due to concerns about consumer confidence amidst the global economic slowdown. Without a significant catalyst for demand later this year, air cargo rates are not expected to strengthen significantly, even if there are seasonal fluctuations.
Economic clouds darken
Evercore Chairman Ed Heyman predicts a recession starting this summer as the aggressive monetary tightening policy by the Federal Reserve and other central banks impacts the economy. Higher interest rates and recent bank failures are reducing the money supply available for business growth. While major economies have fared better than expected due to factors like a mild winter, lower energy prices, and China reopening from COVID-19 restrictions, their strength is primarily concentrated in the service sector. Consumer spending on goods has decreased compared to two years ago when the pandemic limited outside activities. Global manufacturing is contracting due to slow destocking and low confidence in future consumer demand. The Purchasing Managers Index for manufacturing, a key indicator for air shipping, remains in negative territory for major economies, including a contraction in China’s manufacturing sector in April. New export orders globally are also in decline.
Ocean freight – a proxy
Global goods trade experienced an accelerated decline of 2.6% in February. The World Trade Organization has revised its 2023 forecast for merchandise trade growth to 1.7%, citing the impact of the war in Ukraine, high inflation, and financial sector turmoil. Ocean freight serves as a proxy for air cargo, and the National Retail Federation predicts a larger decline in U.S. imports in the first half of the year compared to their previous forecast. Container volumes for the six-month period are expected to be nearly 23% lower than the previous year, with a 7.2% decline expected in the third quarter. The expectation is that imports will remain below recent levels until inflation rates and inventory surpluses decrease. Recent data on ocean container bookings for U.S.-bound shipments from China also indicate weak import demand, suggesting that a sustained rebound in the second half of the year is unlikely. While there is a consensus that inventory levels are normalizing and bookings will improve, some caution against relying too heavily on inventory data for forecasting.
Not enough inventory
During a recent webinar, half of the respondents surveyed by logistics provider Flexport stated that they have all the products they need, while 30% reported having excess inventory. Although the number of companies with excess stock was higher in February, there is a concern that while some companies have excess inventory in certain categories, they may not have enough products for the upcoming holiday season. The readiness to place orders raises the question of whether this will result in a strong peak season or merely a slight improvement from the current low levels. Many corporate leaders are cautious about restocking due to concerns that consumers may reduce their spending if economic conditions worsen. While it is believed that inventory levels are approaching a turning point, the actual demand recovery remains speculative, and shipper forecasting for capacity needs has become less accurate. Maersk executives expect the inventory clearance process to continue until the second half of the year, but the exact timing of when shipments will pick up is uncertain.
Negative economic factors
Maersk, a cargo airline and logistics provider states that the challenging environment has led to the expectation of flat airfreight demand, at best, for this year. The U.S. debt ceiling crisis poses the greatest risk to air cargo and overall trade. If the U.S. legislature fails to raise the allowable federal debt, the government may default on its bills in early June. This possibility raises concerns about economic disruption, financial market chaos, loss of consumer confidence, and a potential deep recession. With multiple negative economic factors emerging, there is a possibility that the air cargo sector may experience a second consecutive year without a surge in demand during the peak season. While it is still early to make a definitive prediction, this scenario cannot be ruled out by logistics professionals.
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