Lunar New Year factory closures and Red Sea crisis boost air cargo volumes

The positives for air cargo markets in the early weeks of 2024 are many and varied. Strong tech and e-commerce shipments, looming Lunar New Year factory closures, and the ongoing crisis on the Red Sea approach to the Suez Canal have together seen volumes from key export hubs in Asia gain momentum since December.

Attacks on shipping by Houthi militias based in Yemen from November onwards have seen, according to Drewry, an estimated 30 percent of all global container traffic impacted by diversions away from the Suez Canal and around the Cape of Good Hope.

By adding two to three weeks to transit times to Mediterranean destinations for shipments from Asia and resulting in lesser delays to shipments to northern Europe and the United States (U.S.) East Coast, the diversions have caused serious disruption to liner networks and equipment availability. Effectively taking capacity out of the available global fleet, they have also closed the vessel supply-demand gap, saving carriers from the worst effects of excess capacity.

The result has been soaring spot ocean freight rates, and not just on the Asia-Europe trades. Major rises in freight rates have been evident from Asia to the U.S. West Coast and East Coast. Backhaul rates have also climbed as container lines impose surcharges to cover diversion costs.

Longer transit times, higher shipping costs, and the need to pay premiums to guarantee slots and boxes have pushed some Asian exports towards faster rail, sea-air, and air cargo shipment options.

"The recent disruption to maritime routes in the Red Sea has seen some shippers pivot to air cargo,” said Willie Walsh, the International Air Transport Association Director General. “The increased demand saw a spike in air cargo yields on related trade lanes.”

And while not all cargo is suitable for air transport, it is a vital option for some of the most urgent shipments in extraordinary circumstances, and as Walsh said, one “that is critical to the continuity of the global economy.

Lunar New Year squeeze

Factory closures in China for the Lunar New Year holidays, which officially commenced on 10 February, have also pushed some shippers to turn to air cargo.

Niki Frank, CEO, DHL Global Forwarding Asia Pacific, explained that the traditional peak before the Lunar New Year was fueled this year by longer sea transit times, higher ocean freight rates, and a shortage of vessels because of the Red Sea disruption. This, in turn, prompted some customers to move to air freight.

"Due to the longer transit time, some customers are also shipping more stocks ahead of their schedules, so we are supporting many customers by diversifying to multimodal options, including air freight, to clear their inventories in time," said Frank.

The January edition of DHL’s January Air Freight State Of The Industry also noted that demand from the tech, retail, and consumer sectors remained on a seasonal upward trend in January, leading to constrained capacity outbound Asia to the U.S.. It added that “capacity constraints from Asia Pacific are anticipated to persist until mid-February amid strong e-commerce demand.” 

Xeneta observed ‘extraordinary’ surges in air cargo volumes from China and Vietnam to Europe for three consecutive weeks in January, surpassing peak season 2023 highs. In response to this, the market also saw an increase in some air cargo spot rates.

The latest data support these trends. The Association of Asia Pacific Airlines (AAPA) said international air cargo demand recorded 13.2 percent year-on-year growth in December, led by increased e-commerce shipments.

“Whilst international air cargo demand declined by 2.8 percent for the full year, the last quarter of 2023 saw an 8.2 percent increase compared to the previous corresponding period,” said Subhas Menon, AAPA Director General.

The International Air Transport Association (IATA) reported that global demand in December was up 10.8 percent compared to a year earlier, the strongest annual growth recorded over the past two years.

A strong start to 2024

The positive numbers rolled through into 2024. Market analysis by Xeneta found that global air cargo volumes rose 10 percent year-on-year in January as shippers’ concerns over hostilities in the Red Sea and an early Lunar New Year more than compensated for an anticipated post-Christmas drop in e-commerce traffic.

Despite the encouraging data, Niall van de Wouw, Xeneta’s Chief Airfreight Officer, said a relatively strong January from a volume perspective had not changed the air cargo market’s fundamentals.

“This is not consumers buying more, it is likely linked to Red Sea disruption as well as the upcoming Lunar New Year and some indicators that the general cargo market is busier than expected,” said van de Wouw. “We don’t see this reflected in rates but that’s not surprising in January because there’s not the same pressure on capacity.”

He added that the situation in the Red Sea had brought nervousness to many supply chains and possibly encouraged some shippers to have a knee-jerk reaction, shifting to air freight, and thus, bringing volumes forward, and securing capacity.

However, the consensus seems to be that this will not produce a long-term positive effect on air freight.

“Once the initial nerves and uncertainty subsides, stability will return once shippers simply accept that ocean freight may just take two weeks longer, causing the need for air freight to then dwindle,” noted van De Wouw.

Similarly, Frank also noted that operations are likely to normalize as carriers adapt to the Red Sea situation.

“Overall, we’re not seeing signs of a strong pick-up in demand, and there was no indication of a traditional Lunar New Year rush in January. So, it is likely that once shippers have cleared their backlog shipments, demand for air freight will balance out capacity in the coming months,” said Frank.

Supply-side rates ceiling

DHL’s January Air Freight State Of The Industry noted that global air cargo capacity in January 2024, boosted by the strong recovery in passenger flights, was 8 percent higher than in January 2023. Bruce Chan, Director, and Senior Research Analyst covering Global Logistics and Future Mobility at Stifel, believes the supply-side part of the air cargo equation will limit rate rises this year, despite the Baltic Air Freight Index climbing by a 6.4 percent increase in the week to 29 January, cutting its decline over the past 12 months to a 24.2 percent decrease.

Structurally, Chan argues that capacity is still a headwind to air freight rate increases as passenger belly space continues to come back online.

“As of December 2023, IATA available capacity grew 13.6 percent globally, with the Asia Pacific region seeing a staggering 31 percent increase against a 19 percent rise in demand,” he said, adding that belly space will continue to expand this year.

“For the rest of the year, our baseline assumption is that demand will improve, but very gradually, which will cause year-on-year rate declines to narrow but with a lag,” said Chan. “In the meantime, while global supply chain disruption from geopolitical or other events might accelerate the process, based on what we see today, a return to annual air cargo rate growth probably won’t happen until 2025.”