Sebastiaan Scholte, CEO of Kales Group, sees some positive indicators that point towards a relatively shallow and short recession that could help ease labour shortages and inflationary pressures
It is inevitable that we are heading into a recession. The purchase power, mainly because of high energy costs and subsequent wage inflation, is diminishing faster in Europe than in other parts of the world, which will have a bigger impact on imports into Europe. Also, European exports will decline. Transatlantic capacity is back to pre-covid levels and most likely will remain so, putting bigger pressure on yields. Moreover, increased protectionism will lead to more near- and multi-sourcing and less global trade.
Shipments of smart phones are a leading indicator of the state of our industry. Worldwide smartphone shipments declined 18.3%, year over year, to 300 million units in the fourth quarter of 2022 (4Q22), according to preliminary data from the International Data Corporation. The drop marks the largest-ever decline in a single quarter and contributed to a steep 11.3% decline for the year. 2022 ended with shipments of 1.21 billion units, which represents the lowest annual shipment total since 2013, due to significantly dampened consumer demand, inflation, and economic uncertainties. This tough close to the year puts the 2.8% recovery expected for 2023 in serious jeopardy with heavy downward risk to the forecast.
But there is some light in the tunnel.
Capacity ex-Asia, especially to/from China, most likely will increase. The recent lifting of the COVID restrictions has already had a big impact on the health system. But once stabilised, China will rebound, which will result in more demand and economic growth. The supply chain disruptions in the last two years caused product shortages and also high inflation. With COVID more or less under control, these supply chain disruptions will be something of the past and global transport costs will decline. Inflation in the US is already declining, indicating that we may have a ‘soft landing’ and therefore a mild recession.
According to McKinsey, 15% of all freighters in 2019 were older than 30 years, whereas in 2021 it was already 21%, meaning that older less economically viable freighters are still in service – due to the higher demand and yields. The capacity/demand balance will most likely improve in the coming period because the older aircraft will be retired – thus helping rates to remain slightly above pre-covid levels.
Market correction
Overall, a correction is needed in the market and hopefully a small and short recession will help improve the labour shortages and ease inflationary pressures. On the other hand, higher inflation will lead to higher interest, which again will imply that cost of inventory will go up, favouring air above sea freight for shippers with high-value density goods.
Forwarders will take less own-controlled freighter capacity and will start booking more on scheduled passenger flights.
The only certainty is that there will be uncertainty. At Kales Group we are adapted to change with our lean and agile organisation. One of last year’s highlights for our group was the total cargo management (TCM) contract for Norse Atlantic and the global strategic partnership with Cainiao. We expect TCM outsourcing and e-commerce business to continue to grow in the foreseeable future.
