According to the International Air Transport Association (IATA), global air cargo volumes are projected to decline by 4 per cent in 2023 compared to the previous year. This downward trend which is attributed to the challenging economic conditions prevailing worldwide can be a problem for air freight forwarders. IATA’s latest forecast, released on Wednesday, indicates that cargo volume will drop to 57.7 million tonnes in the upcoming year, down from 60.3 million tonnes in the current year.
The cooling down of the market after a robust growth phase during the Covid-19 pandemic contributes to this decline. Andrew Matters, the head of economic analysis and policy at IATA, explained that this forecast primarily reflects the more difficult economic environment, encompassing both international economic growth and global trade. During a press conference in Geneva, Matters further stated, “We also anticipate a decline in yields in 2023.”
Today’s blog will explain the air freight forwarders all the reasons that are contributing to the declining air cargo demand and the outlook for the future.
Challenges facing air freight forwarders: Decrease in demand
Rates reaching a record low
As the summer months approach, tension is growing within the global air cargo market, accompanied by a decline in general airfreight rates. The latest weekly market analysis by CLIVE Data Services, a division of Xeneta, reveals that in May, rates dropped to their lowest point since March 2020. In this scenario, both the carriers and the air freight forwarders are actively seeking volumes. In May, the global airfreight spot rate experienced a significant decline of 40% compared to the previous year, reaching its lowest point in over three years at $ 2.41 per kg. This decline occurred just days after the International Air Transport Association (IATA) forecasted that air freight revenues and yields could drop by more than 31% and 29% respectively in 2023.
The decline in cargo revenue
As a result of lower yields and volumes, the forecast indicates a decline in cargo revenue. The International Air Transport Association (IATA) projects that cargo revenue will amount to $149.4 billion in the coming year, a decrease from $201.4 billion in the current year. However, it is worth noting that this figure is still approximately 50% higher than pre-pandemic levels. Consequently, the share of total airline revenue attributed to cargo is also expected to decrease. Last year, cargo share reached a peak of 40%, but it is projected to decline to 28% this year and further drop to 19% next year, as stated by Mr Matters.
This change is driven by the decline in cargo revenue and the simultaneous increase in passenger revenue. Mr Matters explains that the air cargo market is cooling down after an exceptionally strong and unusual period, and this trend is anticipated to persist. However, he emphasizes that it is not all negative news, as much of the decline is a return from unsustainably high levels.
Decrease in demand
Willie Walsh, Director General of IATA, stated that the air cargo industry is undergoing adjustments to accommodate the implications of the recovery in passenger demand, which includes the expansion of belly capacity. Preighter operations were halted in March, and freighter services experienced a reduction of 2.3% in April. Assessing the demand environment is challenging at present. However, the lowering of inflation is expected to have a favourable impact. Walsh emphasizes that the resilience demonstrated by the air freight forwarders during the COVID-19 crisis is of utmost importance as they navigate the aftermath of the pandemic.
Due to reduced demand and greater capacity, there has been an inevitable decline in the dynamic load factor. In May, the load factor was 55%, reflecting a decrease of 5 percentage points compared to May 2022. Niall van de Wouw, Chief Airfreight Officer at Xeneta, points out that the restlessness in the market is not solely caused by the rise in capacity. Many ambitious air freight forwarders aim to expand their businesses, but their current customer bases cannot support growth due to the lack of airfreight demand. As highlighted in April, these forwarders are now seeking to capture a larger market share from other players.
Simultaneously, many air freight forwarders are entering the market to renegotiate their rates and take advantage of the changing conditions compared to the previous three to six months. Competitors looking to secure volumes see an opportunity to offer lower rates. As a result, overall rates are falling since even if shippers stick with their current providers, they expect them to adjust their rates so as to match the lower market level.
The outlook for the future
Mr Matters stated that in spite of the lowering freight market indicators for the upcoming year, there are notable upside risks to the air freight sector. For example, one significant factor is the potential resolution of the Russia-Ukraine conflict. If this were to happen soon, it would lead to a quick rebound in business and consumer confidence, thereby stimulating economic activity, greater spending on the part of the consumers, business investment, and robust global trade. These developments would have a positive impact on the air freight forwarders.
Furthermore, the ongoing global supply chain disruptions present an opportunity for air cargo growth. As businesses strive to address gaps in their inventory caused by disruptions, air freight can play a vital role in meeting their supply chain needs.
The air freight shipping industry is also expected to take advantage of the increased demand generated by e-commerce boom. According to Brendan Sullivan, IATA’s global head of cargo, the value of global e-commerce is projected to reach $5.7 trillion in 2023 and is estimated to reach $7.3 trillion by 2025. This growth implies a significant increase in parcel volumes, with an estimated 159 billion parcels expected to be sent this year, nearly four times the number from eight years ago. By 2027, this number is expected to nearly double to 260 billion parcels.
Highlighting the significance of air cargo in the e-commerce landscape, Mr. Sullivan noted that approximately 80% of cross-border e-commerce is shipped by air. He further mentioned that e-commerce accounts for about 18-20% of the total air cargo volume, indicating the integral role of air cargo in fulfilling the demands of the e-commerce industry.