The air freight market is likely to end the year strong on account of pent-up demand, even with fuel prices surging and excess inventory among other headwinds on the horizon.
That’s the word from Neel Jones Shah, executive vice president of air strategy and carrier development at digital freight forwarder Flexport, who laid out of five trends he sees for the air cargo market.
Lockdowns in China are lifting as ocean congestion persists, amid fears the dockworker labor contract talks could disrupt goods movement at the ports, which could all help drive air freight demand, Shah said Tuesday during a webinar updating shippers on the air cargo market.
Surging fuel costs remain the greatest headwind facing the industry in the near term.
“If you asked me what keeps me up at night, one of the main things that I worry about is the cost of jet fuel,” Shah said.
The cost since the beginning of the year has doubled, with the executive using a roundtrip flight between Shanghai and Los Angeles as an example. The cost for that route has roughly doubled from $200,000 at the start of the year to now about $400,000.
“Now, what could alleviate some of this is slowing global economic growth,” Shah said. “And I know that we don’t want to solve the jet fuel pricing by having the world go into a recession. But, in reality, what we are seeing is global growth does slow down a little bit. Demand, particularly for the refined products that come out of crude should start to decline a little bit as well. We haven’t seen that yet, but that would be the expectation. And that’s probably the only thing that’s going to help bring prices down.”
Shifts are also taking place in consumer demand as spending on experiences surpasses goods, which could impact the supply chain and air capacity demand.
“Going forward, we’re starting to see the early stages of that,” Shah said. “We’re starting to see orders placed by existing customers down dramatically, year over year. And we should see the impact of this start to filter through in the back half of the year.”
Overall, international capacity is down about 5 percent compared to 2019.
Capacity along the Trans-Pacific trade route is about on par with 2019 levels. Movement in the Trans-Atlantic is bouncing back, driven by passenger demand.
Meanwhile, routes between Asia and Europe, along with Europe to Asia, have fallen about 52 percent and 40 percent, respectively, on account of the war in Ukraine.
Shippers should be looking ahead not just to the end of this year, but what the next few years hold for the air industry.
5 trends to watch
Shah laid out five major trends he sees in the industry’s future, including e-commerce’s role in driving air freight growth, the labor shortage, technology and infrastructure spend, a new normal for rates and reliability over cost.
E-commerce behemoths, such as Amazon and Alibaba, have trained consumers to buy online and expect goods in just days or sooner. Both those companies are also building out logistics arms, Amazon Logistics and Alibaba’s Cainiao Smart Logistics Network, to handle fulfillment and transportation that will come to define the next several years for air freight and other transportation modes.
“This is an enormous shift. It’s creating demand,” Shah said of international e-commerce. “And we anticipate that this part of the market is going to grow at 20 percent plus compounded annual growth rate for the next 10 years. And what it means is these e-commerce players are creating demand, but they’re also absorbing enormous amounts of capacity.”
Shah went on to say the demand for aircraft that e-commerce is helping drive is only in the “very early stages.”
To support that demand, the industry will have to come to terms with a labor shortage that had been a challenge pre-COVID, Shah said. Increased automation could help offset some of the shortage by freeing up workers weighed down by tasks that could be handled with tech investments.
“We see airports beginning to build new cargo handling terminals. We see a host of airlines and freight forwarders and ground handlers implementing new technology,” Shah said. “And we’ve seen a number of entrepreneurs enter this industry in order to find ways to help automate us out of the labor crisis that I described. We’re at the early stages of this.”
Meanwhile, shippers should brace for a new reality when it comes to air freight rates, which Shah said are not likely to return to pre-pandemic levels.
At the same time, executives at companies with the scale to do so will shift to a philosophy that places delivery reliability over cost savings.
“There are a lot of data points now that shippers, particularly very big shippers, are going to be optimizing for reliability, versus cutting every penny out of their cost structure,” Shah said. “Because, at the end of the day, cost isn’t king if your stuff doesn’t show up.”