Air Demand ‘Challenging to Read,’ but Lower Prices Were Good News for Gap, A&F

Glenn Taylor
·6 min read

The decline in air cargo demand appears to be slowing, leading to an influx of capacity not seen since the pandemic started.

According to data from the International Air Transport Association (IATA), global demand for air cargo, measured in cargo tonne kilometers, fell 6.6 percent compared to the year prior, and 7 percent for international operations. This marks an improvement over the previous month’s 7.6 percent decline.

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But overall capacity was up 13.4 percent compared to April 2022, and 3.2 percent compared to April 2019. The strong uptick is primarily driven by belly capacity as demand in the passenger business recovers. Adjusting for this, freighter capacity declined 2.3 percent. “Preighter” air craft operations, a pandemic-era practice in which airlines without travelers temporarily retrofitted to carry freight in passenger cabins, ceased in March 2023 across both the U.S. and Europe after 2.5 years.

The slowdown represents a move in the right direction, but according to Freightos CEO Zvi Schreiber, “there is not a lot of optimism for a rebound in demand, at least until peak season in the fourth quarter.”

The waning demand has pushed air freight costs down, a positive development for fashion retailers. Gap, Inc. reported gross margin of 37.1 percent in its first quarter, up 5.6 percentage points from the year-ago period, with Old Navy and Athleta parent primarily attributing the margin expansion to lower air freight expenses.

Abercrombie & Fitch, which saw gross margin expand to 61 percent from 55.3 percent in the year ago period, attributed 7.6 percentage points of growth to lower freight rates. Chief financial officer Scott Lipesky noted in the company’s earnings call that the increase in air capacity has helped the firm to better chase merchandise amid stabilizing supply chain productivity.

“We have the ability, and our teams are using that ability,” said Lipesky. “We’re running the inventory lean and as we see wins, we’re able to chase them pretty quickly.”

Other companies in the apparel and footwear space including Ralph Lauren, Deckers Brands and Genesco’s Johnston & Murphy cited lower air freight costs as a tailwind to margins in their most recent earnings calls.

The rate collapses, like containers coming through the ocean, have been substantial. In an earnings call on May 23, Schreiber cited his company’s Freightos Air Index (FAX), noting that Asia-to-Europe air freight rates were 57 percent lower than a year ago, while Asia-to-North America rates plummeted more than 70 percent lower than the year prior. Transatlantic prices at the time were 40 percent lower than last May.

Yet despite the costs declining, companies appear to choosing ocean freight when possible amid wider cost cutting measures, according to Steen Christensen, chief operating officer, international, Seko Logistics.

“A lot of customers have simply taken the stand that ‘We don’t need air freight. Ocean freight is now performing and we can’t afford the air freight cost at this point,’” Christensen said during the company’s media call on May 22. “So air freight volumes have also seen a compression in demand and that leads to the need for longer term BSAs [block space agreements] not necessarily being as urgent as we thought it would’ve been just a couple of weeks ago.”

That’s not to say air cargo demand declines are linear across the board. Although the rate collapses may feel similar, air freight demand is not following the same curve as ocean freight demand, according to Brian Bourke, chief commercial officer of Seko Logistics.

“At some point this year, even before the GRIs (general rate increases) that were announced began to stick for the first time after a solid eight months of decline, we were seeing air freight rates, especially from Asia into the U.S., start to go up,” said Bourke. “Some of that was based on fuel, but some of it was based on just this pent-up demand that was out there.”

Even Willie Walsh, IATA’s director general, said the current demand environment is “challenging to read.”

Bourke pointed out that unlike ocean freight rates, the air freight market is still fluctuating depending on the business despite a general demand decline. He noted that some companies still need speedy transport as they exit markets and establish new supply chain networks, while others never transitioned to a just-in-case model during the pandemic and need faster replenishment than ocean shipping can provide.

“They kind of still rely on more of a just-in-time supply chain,” said Bourke. “That’s why we’ve seen a lot more fluctuations, because whether it’s perishables, seafood, flowers, fast moving consumer goods like lipstick, the demand is still there and the supply is still elsewhere…than the country where the purchasers are buying the goods.”

The slowing overall demand and dip in prices could hold consequences for air freight services. For one, CMA CGM Air Cargo discontinued its service in the U.S., instead opting to shift its freighter aircraft to Asia, the Middle East and India. The container shipping giant launched the air freight wing in March 2021 as it worked to expand its global logistics services.

FedEx pilots reach tentative labor deal

One potential positive development of the declining demand is the creation of a tighter labor market, which benefits workers in the industry seeking better contracts, working conditions and pay.

On Tuesday, FedEx revealed in a statement that it reached a tentative agreement with pilots of its air delivery unit who had voted in favor of a strike earlier this month seeking higher pay, the package delivery company said in a statement on Tuesday.

The Air Line Pilots Association (ALPA) had voted in favor of a strike if needed, when it had entered the final stages of a contract negotiation with the package delivery company.

“For more than two years, our pilots have demonstrated their unwavering support of our Negotiating Committee, and just two weeks ago voted overwhelmingly to authorize a strike,” said Capt. Chris Norman, chair of the FedEx ALPA Master Executive Council (MEC), in a statement. “This tentative agreement represents the culmination of a tremendous effort, and would not have been possible without the solidarity, patience, and determination of every FedEx pilot.”

The pilots last signed a contract in 2015; ALPA and FedEx began negotiations in May 2021 and have been in mediation with the National Mediation Board since November 2022.

The preliminary contract agreement comes less than a week after more than 500 FedEx pilots picketed in front of the FedEx Express Air Operations Center in Memphis, Tenn. to protest their frustration with the pace of talks.

Terms of the tentative agreement are not being released, as they first must be reviewed and approved by the FedEx MEC. If approved, the deal will be subject to a ratification vote of the FedEx pilots.

Founded in 1931, ALPA says it is the largest airline pilot union in the world, representing more than 74,000 pilots at 40 U.S. and Canadian airlines.

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