Air freight rates this year continued to trend lower, extending the slide in May as the market is faced with low demand and increased capacity.

"2023 airfreight rates continue to grind lower, and the month of May was no different, enduring a double whammy of soft demand and the continued resurgence of capacity — particularly from passenger flights as both trans-Atlantic and trans-Pacific traffic returns for the summer season," said Bruce Chan, director and senior research analyst covering global logistics and future mobility at Stifel, writing in a Baltic Exchange market update.

As a result, the spot rates for west-bound trans-Atlantic cargo (represented by BAI22, Frankfurt to the US) have increased by just 10% compared to pre-pandemic levels.

Similarly, the spot rates for Asia to Europe (BAI81 and BAI31 indices, representing Shanghai and Hong Kong to Europe) have only seen an average increase of 30% compared to pre-pandemic levels.

For east-bound trans-Pacific routes from Asia to the US (BAI82 and BAI32 Shanghai to the US and Hong Kong to the US, respectively), the rates have increased by an average of 35% compared to pre-pandemic levels.

Trend of demand weakness in 2023 

Chan said demand is "trickier to forecast" than supply.

"The general trend so far this year has been one of weakness — perhaps more weakness than anticipated as inventory restocking gets pushed out, especially on the consumer side, and discretionary spending is weighed down by inflation and elevated energy and staples costs," the Stifel senior analyst added.

In the analysis, Chan noted that global container activity (import and export, system-wide) is down 6% YTD vs. the same period in 2022. 

Meanwhile, the report said airfreight is "faring even worse," with IATA reporting a 7.7% decline in FTKs in March, y/y and an 8.1% decline vs. March 2019.

"We believe most of the trade-down, or 'trade-back' from air to ocean after year-ago supply chain bottlenecks have largely happened, but core airfreight demand remains muted," Chan said.

"As for supply, the influx of passenger belly capacity continues to be an issue for freight rates, absorbing elastic demand in a soft freight market," he added.

The Stifel senior analyst explained that summer travel season and generally robust passenger activity, especially on trans-Atlantic lanes, has led to a healthy supply of lower deck space.

"Airlines may have even overbuilt for demand, in our view, and it will take time for capacity to moderate after the summer surge wanes," he added.

The report cited IATA's latest data release reveals that ACTKs are up 10% worldwide vs. last year and are only 1% lower than in March of 2019, before the pandemic.

ACTKs in Asia Pacific were up a staggering 24% y/y — again largely due to the comp effect from COVID reopening.

North America was up a modest 0.4%, but Europe was up nearly 9% y/y. 

"The market is likely to be most over-supplied with belly space this summer, so cargo rates will likely trough in the next few months, but we think slack capacity will stick around into 2024," Chan said.

Rate "softness" to persist in 2023

In May, Shanghai to North America (BAI82) declined 13% sequentially from April, and Hong Kong to North America (BAI32) declined 2%.

For Europe-bound lanes, Shanghai origin (BAI81) fell 18% from April, while Hong Kong origin (BAI31) declined slightly over 3% y/y.

On Frankfurt to the US (BAI22), rates were down 13% sequentially.

"We expect demand softness to persist for most of the year and belly capacity to continue to come into the market, so continued rate pressure should be the theme of 2023," Chan said.

"But as mentioned above, supply-demand dynamics should be most protracted this summer, with seasonal passenger travel demand driving excess supply, while freight networks reach a bottom on destocking," he added.