London — A recent slide in global demand for air freight could be a harbinger of weaker jet fuel prices, according to trading sources and analysts, despite current firm aviation fuel values on resilient spot demand.

While global air passenger traffic has grown every month since the 2008-09 financial crash - with an increase of 4.5% on the year in May - global air freight demand is contracting and may indicate a weaker global economy ahead, according to International Air Transport Association data.

Overall air freight demand fell 3.4% on the year in May, marking the seventh consecutive month of contraction, driven by weakness in the Asia Pacific region, data from IATA shows.

"It's a worrying trend. Cargo [air freight] tends to be the canary in the coal mine in the airline industry," said one European jet fuel trading source. "If freight rates go down, it's usually indicative of what is to come for the industry as a whole."

The most dramatic decline has come from international traffic within the Asian market, where air freight demand has fallen sharply in recent months.

"There has been a big fall in numbers coming in and out of Singapore," said the source. Singapore is a particularly important hub given its high dependence on international trade.

Air freight is seen as a better leading indicator of the health of the economy than passenger numbers.

Economic recessions have typically coincided with a contraction in airline passenger numbers. The last recession to coincide with a crash in global passenger demand came in 2008-09, during the global financial crisis. Before that, there was also a contraction during the recession of 2000-01 after the US tech bubble burst.

SLOWING GROWTH RATE

While passenger air demand continues to increase, its growth rate has also started to slow.

On a seasonally adjusted basis, the annualized passenger demand growth rate is now around 4%, compared with 7% at the beginning of 2018.

A reliable leading indicator of air passenger demand, the global composite Purchasing Managers Index (PMI), a measure of business confidence, is on a downward trend, at a level not seen since 2016, suggesting passenger demand growth will continue to slow in the near term, according to IATA.

This softer PMI rate is being driven by falling passenger demand in both developed and emerging economies, including the US and China.

Lower oil prices in the wake of the oil price crash in 2014 allowed airlines to bolster passenger numbers by reducing air fares, according to Francesco Martoccia, senior associate for commodity research at Citi. This could make passenger demand growth vulnerable to any sustained rise in oil prices.

Trade tariffs and a slowing Chinese economy are contributing to a slowdown in trade, with the US-China tensions already causing damage to the air cargo sector, according to IATA.

GLOBAL SPOT JET FUEL PRICES STRONG

Global spot jet fuel prices, however, remain strong despite sliding demand air freight in Asia.

S&P Global Platts assessed FOB Singapore jet fuel/kerosene cash differentials 6 cents/b higher day on day at a 10-month high of plus 40 cents/b Monday, with tight regional supply supporting strength to cargo premiums.

European jet fuel prices have also been particularly strong, buoyed by robust summer demand, in addition to a lack of jet fuel cargo availability, despite adequate levels of imports, according to traders.

The physical jet CIF Northwest Europe cargo premium to front-month ICE low sulfur gasoil futures reached a 14-month high of $59.25/mt on July 19, rising from a low of $24.50/mt on May 2, Platts data shows. This premium was trading around at $54/mt on Monday, according to trading sources.

The rising jet premium reflects the strength of the jet fuel market versus the European diesel barge market. The jet premium rather than its outright price is generally seen as being more indicative of the market, since the highly liquid ICE LSGO futures contract can easily be hedged.

"Jet fuel demand is quite strong ... and is quite attractive for suppliers," a second jet fuel trading source said.

-- Gary Clark, gary.clark@spglobal.com

-- Eklavya Gupte, eklavya.gupte@spglobal.com

-- Emma Thomas, emma.thomas@spglobal.com