Waiting for the end of the extended Chinese New Year holiday caused by the novel coronavirus (Covid-19) outbreak, airlines were bracing themselves for a surge in demand that would overwhelm available capacity, but there was no gleeful anticipation of the air freight rates that were expected to soar as a result.
After a weak 2019, industry executives were hoping for an improvement in the market this year. According to statistics from the Association of Asia Pacific Airlines, 2019 turned out to be the worst year for air cargo since the global economic slump of 2009.
Numbers from the International Air Transport Association (IATA) corroborate this. With the exception of Africa, all regions suffered decline in demand. Global traffic, measured in freight ton-kilometres (FTKs), sank 3.3% last year.
The Asia-Pacific region, with a share of 34.6% of global FTKs the largest market overall, led the decline. A 3.5% drop in FTKs in December brought the tally for Asia-Pacific carriers to a decrease of 5.7% from the 2018 level. Intra-Asian cargo traffic fared even worse, shrinking 8% last year.
Notwithstanding the long-lasting downward trend curve, IATA injected a note of cautious optimism into its report on November 2019 traffic. The airline interest group noted that downward pressures were easing amidst signs of recovery in Europe and the Middle East and increases in international traffic. Moreover, the easing of tensions in US-China relations was encouraging, although uncertainties remain, IATA said.
Airline executives did see some optimism in the market going into 2020. “Before the virus, everyone was cautiously optimistic. Our customers were telling us that there was not going to be wild growth, but there was some sense of optimism – but extremely cautious,” reported Vito Cerone, director of marketing and sales, Americas, at Air Canada Cargo.
“Everybody was expecting a decent year, but then we got hit by the virus,” said Joe Lawrence, president of Airline Services International. “We had a lobster charter to China. It got cancelled. For us, that was the beginning of the snowball.”
The outbreak of the virus has plunged the industry into uncertainty, said Jeff Cullen, CEO of forwarder Rodair International. “The flavour of the day now is chaos. There are significant disruptions in the manufacturing sector and transportation capacity,” he added.
Traditional factors that have shaped logistics planning have temporarily fallen by the wayside. “In the past when you had a load to Asia, you could always return via China and load up there for backhaul. Now that’s not on,” said Lawrence.
“We’re taking it one day at a time. Once the market returns, it will open all the floodgates,” he continued.
Carriers and forwarders were expecting a surge in demand driving up pricing once Chinese production is back in full gear. The anticipated tightness in available capacity will be exacerbated by the fact that passenger airlines have slashed their schedules to China and are not likely to ramp up rapidly when the epidemic wanes.
“Many passenger airlines will not be back until the end of March. Some will likely be out longer. This is not going to be over quickly,” one forwarder executive warned.
Freightos predicted spikes in rates in the China-US sector both in the ocean and air modes.
“Rates may start to fall on China-US lanes in the short term as the shutdown drags on.
But when production does pick up in full force – possibly not until mid-March – the spiking demand and reduced number of ships in the region will push freight prices up, with some experts predicting a spike in backhaul rates as well. Massively reduced air cargo capacity will likely also lead to a spike in air rates,” it warned on February 12.
Cerone was expecting a surge in pricing. “Short term, demand is going to be so great it will drive up rates,” he predicted
Nobody expects air freight rates to remain at lofty levels for long, though, as the underlying fundamentals remain shaky. Global trade is not expected to experience significant growth this year. Sectors like the automotive industry are facing headwinds, and consumer confidence has lost some momentum.
These issues were already on the horizon before the virus outbreak. “Globally the retail sector was already feeling the pain,” remarked Cullen, adding that uncertainty is prevalent in all sectors.
According to CLIVE Data Services, global air freight was down 4% in the four weeks to February 2. The market intelligence firm attributes this in large part to the fact that Chinese New Year was earlier than usual in 2020.
Accounting for this, it estimates the actual downturn to be more around the 1% mark. This would suggest that the air cargo industry is still trapped in a downward momentum, albeit at a slower rate of decline.
The question marks over the mid- and longer-term effects of the epidemic are adding to the uncertainty that is holding back investment and weighing down global trade.
By Ian Putzger
Air Freight Correspondent | Toronto