Frankfurt For more than two years, air freight has carried the badly hit airlines through the pandemic. Now there are growing indications that the boom is coming to an end. The US logistics giant Fedex announced a comprehensive austerity program at the end of last week. Among other things, the number of cargo flights is to be reduced in order “to adapt to the effects of reduced demand,” said CEO Raj Subramaniam.
The statements match observations by the global airline association Iata. In the summer, he registered a clear downward trend in demand for air freight. Globally, it fell by 9.7 percent in July 2022 compared to the same month last year. In Europe, the minus was even 17 percent. Iata general director Willie Walsh does not want to know anything about a crisis. He diplomatically calls the development “a step backwards” – after two extraordinary years.
During the pandemic, the air freight market had decoupled itself to some extent from economic development and thus at least partially lost its function as an early indicator. The supply chains, for example at sea and on land, have gotten mixed up worldwide. The airlines benefited from this and have been experiencing a boom for months.
Lufthansa Cargo, the freight subsidiary of Europe’s largest airline group, was able to increase sales in the first half of the year by a further 45 percent to 2.4 billion euros – and that from an already high level. Earnings before interest and taxes reached 956 million euros. That’s almost four times what the offshoot earned for the full year in the years leading up to the crisis.
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CEO Carsten Spohr remains confident that the boom will not end anytime soon. The supply chains would continue to be under tension, which will remain the case in 2023, he recently predicted at an event at the company’s headquarters at Frankfurt Airport. Therefore, the freight rates would remain at a high level.
More and more warning signs
But the warning signals add up – also with the freight rates mentioned by Spohr. This is shown by statements by Niall van de Wouw from the analyst firm Xeneta at the beginning of September at a symposium in the Frankfurt House of Logistics and Mobility (Holm). Before the pandemic began, a kilo of freight on the transatlantic route from North America to Europe cost around two dollars. Then the rate rose to five dollars, but currently it has fallen back to three dollars.
On the other hand, the August figures gave some hope that things might not get that bad after all, the experts at Xeneta found in a current analysis. The drop in demand in August compared to the same month last year was only five percent.
The ups and downs of the curves show: After two and a half good years, the mood in air freight is at a turning point. No one can currently say how badly business will deteriorate. But it will go down. Hardly anyone doubts that. Even the optimistic Lufthansa boss Spohr admits: “Germany will be hit harder by a recession than many other markets in Europe.”
Charles Schlumberger, an air freight expert at the World Bank, listed a number of factors at the industry meeting in Frankfurt’s Holm that speak in favor of a downturn. On the one hand, many airlines have built up capacities due to the strong cargo business during the crisis. Lufthansa Cargo, for example, has been flying the cargo version of the Airbus A321 for the first time in the company’s history since the spring of this year on medium-haul routes with pure cargo jets.
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Schlumberger therefore warns of overcapacity at the expense of rates and revenues if customers now call up less capacity. This could be accelerated by the fact that significantly more passenger traffic has been flown since the summer. Plenty of cargo space is also offered here. Up until the beginning of the crisis, the rule applied: around half of air freight is transported in the bellies of passenger aircraft (belly freight).
At the same time, sea transport, which has been stagnating for months, is slowly normalizing again, Schlumberger named another negative factor for air freight. As a result, goods that are not quite as time-sensitive are likely to be shifted back to the much cheaper container ships. This, coupled with the risk of a recession and the growing pressure on airlines to invest in sustainability, is weighing heavily on airline balance sheets.
European providers in particular are likely to be affected. Because of the airspace closure over Russia – a consequence of the Ukraine war – they have to fly large and fuel-guzzling detours. On the other hand, cargo airlines from China can head to Europe via Russia unhindered – at least for the moment. It remains to be seen whether the partial mobilization in Russia and the recent distancing of the Chinese government from Moscow will change anything.
The expectations for the fourth quarter – traditionally the strongest in air freight – remained subdued, the analysts at Xeneta wrote in a current market update a few days ago. But the relatively good August could indicate that 2022 will ultimately turn out better than last feared.
In addition, analyst Van de Wouw notes that the first airlines are reducing their offers again. That could help stabilize freight rates. On the other hand, some airlines are expanding their capacity immediately before the important final quarter. Cathay Pacific has announced that it will fly its own freighters with a higher frequency.
“We’ve already increased our frequency to the US, and we’re now servicing London daily,” Frosti Lau, general manager at Cathay Pacific, recently gave details. With the additional freight offer, one is preparing for the peak load in the coming weeks, “although we expect that this will not be as permanent and pronounced as last year,” Lau continued.
The air freight market remains chaotic and extremely difficult to predict, says Van de Wouw of Xeneta soberly.
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