Like much of the transportation industry, the pace of change in the air cargo sector remains uncharacteristically high. Disruptions in other freight markets and emerging business models have added new demand for airfreight. The result for shippers has been more variability in rates, capacity availability, and service offerings than we saw last year.
Airfreight capacity levels have risen to historical highs this year in large part due to a growth in air passenger travel, which has opened up more belly-hold capacity for freight. As Boeing reports in its 2024 Commercial Market Outlook, air passenger demand has recovered from the pandemic and has returned to the long-term growth trend that Boeing had projected 20 years ago in 2004.
At the same time, however, demand for airfreight has also increased. As result, the sector is also seeing high utilization rates. The International Air Transport Association (IATA), the leading source of air cargo intelligence, reports that load factors (the volume of cargo versus available capacity) have been increasing in 2024 and are now approaching pre-pandemic norms.
Tailwinds and headwinds
While airfreight rates have dropped significantly from a high in 2021, they are still volatile.
Freightos Air Freight Index, https://www.freightos.com/freightos-air-index/
Several trends are impacting the balance of supply and demand. One of the obvious benefits of air cargo service is its speed and reliability relative to ocean service. With the levels of disruption seen in the ocean market—drought, port strikes, and war being only a few—the case for airfreight has been made stronger. As shippers seek predictability for their operations and their customers, the demand for airfreight has risen.
Another large tailwind driving air cargo market is the continued success of offshore e-commerce platforms like Shein and Temu. Their model focuses on fulfilling orders in markets like the United States and Europe directly from East Asia, negating the need for holding inventory in destination countries. This model has large cost and cash benefits but depends on faster delivery of consumers’ orders than ocean shipping can provide, leaving air service as the only realistic option.
The subsequent growth in demand on lanes from China to the United States has resulted in higher rates and tighter capacity availability. Shippers have also reported difficulties in securing capacity on niche lanes because carriers have been pulling capacity from these lanes and using it to serve more lucrative opportunities on e-commerce lanes.
While disruptions in other modes and new sources of demand have served as tailwinds for the airfreight market, there are other factors that are working to dampen demand. One of the major headwinds for the air industry is a renewed focus on cost containment on the part of shippers. When demand for goods spiked during the pandemic, many shippers turned to airfreight to fulfill orders and keep products stocked. Four years later, many shippers still have more reliance on air services than they would prefer. As a result, they are looking to rebalance or reoptimize their air and ocean allocations, pushing service-sensitive cargo to air while moving less sensitive cargo back to ocean.
Given these countervailing trends in the market, it’s not surprising that rates are volatile. The Freightos Air Index (see chart above) shows a significant decline in rates from a high of $5.16 in 2021. Since mid-2023, rates have ranged between $2.20/kg to $2.80/kg. While shippers are happy to be well below pandemic rates, 30% month-to-month variations make financial projections difficult.
Stability on the horizon?
With major shifts underway in routes, demand, capacity, and rates, there’s never a dull moment for users of air services. Looking ahead, however, one can begin to see a more stable future.
Systemic capacity growth driven by passenger volumes can be expected to continue. On certain lanes, like Asia to the United States, growth in e-commerce volume will continue to drive capacity challenges and higher rates—at least as long as existing laws allow offshore platforms to enjoy tax and duty benefits that subsidize their business model. For the rest of the world, however, we can expect to see capacity growth outpace demand growth and a continued reduction in rates.
Route churn can be expected to continue as air carriers respond more quickly to passenger and cargo demand shifts. We expect to see carriers’ analytics capabilities continue to improve, and yield and margin gains to follow.
Additionally, we expect that carriers and freight forwarders will invest in technology tools that can enhance collaboration and improve efficiencies. These efforts will give them a stronger position to handle inevitable future disruptions.
On the shipper side, we expect to see more companies lock in longer contracts as a way to mitigate the effects of rate volatility. This shift is already beginning to occur. In the fourth quarter of 2023, 45% of new contracts were for longer than six months, up from 27% in 2022. Additionally, shippers should look to technologies such as market monitoring and digital compliance tools to help them can keep on top of market trends and opportunities. These steps can help companies navigate and thrive in the highly dynamic airfreight marketplace.
