The Future of Air Cargo: How to Adapt

There is a fundamental shift taking place in the air cargo industry. According to a recent survey by investment firm Stifel, Nicolaus & Co. and U.K. research firm Transport Intelligence Ltd., more than 80 percent of shippers and freight forwarders expect to migrate away from air freight to ocean. This shift is driven by cost-conscious shippers “trading down” to lower-cost ocean services from traditional airport-to-airport air freight. This move was validated by Cathay Pacific’s CEO John Slosar in a recent interview who stated: “There is some thought that some of the changes we see in air cargo may be structural, maybe a permanent movement to sea freight.”

What could the reasons be?

  • Global demand for goods is lower than it has been in the past. While the U.S. is showing signs of recovery, the EU continues to struggle. And it seems that whatever demand there is for goods, there doesn’t seem to be as much demand for emergency or just-in-time shipments – the recent iPhone 5 related surge notwithstanding.
  • A further consideration is costs. If time is not a factor, then shipping by sea will cost you a fraction, so as a shipper why wouldn’t you want to use a more cost-effective method?
  • Finally even if valuable goods like the iPhone 5 need to be shipped by air, shippers are planning smartly, with a first wave by air and subsequent waves by sea. Let us not forget that ships are faster these days and cool container technology has come a long way, making it possible for even perishables to be shipped by sea, albeit over smaller distances.

So, if you are an air cargo carrier, what are your options?
Tactically here are a few options to consider:

  1. Align your capacity to the new demand levels to reduce spoilage and costs. There is no point in having more capacity than can be supported.
  2. Create better partnership and collaboration with your freight forwarders and become better at forecasting your shipments because, in volatile times, going with your gut feeling or just relying on historical performance can be costly.
  3. Ensure you provide the highest service levels for your customers and charge the right rate. Every marketing professional will tell you that it is easier to do repeat business with a happy, loyal customer than to generate new business.

Strategically, however, this may be the best time to really rethink how you do business. Companies that are thinking about long-term growth and profitability are doing just that. They are planning to tear up the rate sheets and negotiated rates which lock them into long term agreements with customers irrespective of changing market conditions and move to a pure market-based dynamic pricing model.  Others are rethinking how they structure allotment contracts so that forwarders bear some of the risk, while some others are wondering if a direct shipper strategy is the right course.  Ocean freight carriers are considering index-linked contracts to smooth out rate volatility so perhaps this could be applied in air freight? Or, this would be a time to finally streamline operations and ensure that the warehouse processes are aligned with revenue management.

No doubt these initiatives will require investments in time, resources and sophisticated technology. In today’s tough economic climate this may seem a counterintuitive suggestion, but I believe this to be the right step. I enjoyed reading Slosar’s quote in the above interview:

One thing that I’ve learnt in my time is that you’re always in the best negotiating position if you’re buying when other people aren’t.”

We all know this economy will eventually rebound and air cargo demand will return, even if the nature of such demand is different than what we are used to seeing. And what has been proven conclusively is that this demand is fragile – both in good times and in bad times – and the old cliché that the “only constant is change itself” may forever be true in our industry. The only successful companies in the future will be those that are nimble and are able to adapt to changing conditions fast.

The air cargo industry is notoriously traditional and resistant to change but the industry captains need to challenge themselves and push this industry into this new era. Those that invest now in new ideas and appropriate technology will “storm out of the barn” when good times return and will be better prepared to “ride out the storm” when the next downturn comes along. Those that don’t will forever lament about volatile markets, unpredictable & opaque demand, customers with too much control and razor-thin margins.

  15 Comments   Comment

  1. 80%?! That”s an incredible loss of customers for air freight. If even half of those companies actually switch air carriers will dramatically need to change the way they do business.

    Reply
  2. Anand Medepalli

    Hello Navdeep,

    Thank you for your comment. The actual quote from the article I reference is that “80% of the shippers expect a continued migration away from air freight and toward ocean”, which suggests that shippers/forwarders are not dropping air freight but are actively seeking ocean freight solutions.

    My colleague Mark Heuchan suggests that the key challenge is to predict this rate of this migration and if will it occur at 1% per annum or 5% per annum or something else? Will it be constant or will it accelerate? Can it be contracted or reversed? What is the price-point at which migration would cease? And how do the answers vary by market? Understanding this is very important, which is why I strongly feel that active collaboration between forwarders/shippers and carriers is critical.

    Irrespective, I do share your thought – air carriers do need to change the way they do business, both in the short-term and in the long-term. Will they do what it takes to achieve this change? This is the million-dollar question.

    Best regards,
    Anand

    Reply
  3. I can image their will be a drop but I”m unsure as to whether it will be as high as 80%. The only reason I say that is that retailers and consumers are impatient and may feel inconvenienced if they have to wait longer for goods that could be delivered more quickly by air. There is a trade-off with speed/efficiency and cost, and I think people would be more willing to pay more to receive good more quickly.

    Reply
    • Anand Medepalli

      Hi Navdeep
      Agree with your assessment; but with even flowers now being shipped by sea from South America to North, the threat to traditional demand for air cargo is real. But air cargo is not in any danger of closing down, but they do have to do some breakthrough thinking on how to remain viable and attractive to shippers/forwarders.

      Best,
      Anand

      Reply
  4. Very interesting article. Well done.

    We are seeing not only a migration to ocean, but also to trucking, as many shippers discover that 2nd-day delivery can be had to many destinations in the U.S. at a fraction of the price of air freight. We have quickly diversified our service options and marketing strategy to reflect the new demand.

    As you point out, the only thing certian is change. It will be very interesting to see how carriers like Cargolux and Lufthansa adjust their business models to adapt to the changing market.

    For a similar article posted recently on our blog, see here: http://tinyurl.com/d79raxd

    Reply
    • Anand Medepalli

      Hi Paige
      Thank you for your comments. Nice to hear of your efforts at innovation! I liked the article on your blog.

      As you are able to verify, the modal shift in both domestic and international freight is real and indeed, it”d be very interesting to see what the air cargo carriers do in terms of innovation and business models to stay competitive in this new world.

      Look forward to more discussions,

      Best regards
      Anand

      Reply
  5. As of the moment, Air freight companies cannot lower their cost of freight transfer for the reason that they are also considering other expenses like fuel and airplane maintenance. I believe that in the future, air freight industry will grow up again.

    Reply
  6. While large supermarkets are linking in to weather predictions to ensure they have the right products on the shelves, air freight companies need to be thinking smartly too. Intranets linking road haulage companies together have been hugely successful, but air freight, even with great interactions between agents and logistics companies will still be prohibitively expensive. We have moved into web fulfillment and pack and pack services to make up for the reduction in demand for air freight forwarding and hope that this will carry us through to the upturn. The markets are recovering so we hope that trickles down into everyday business, sooner rather than later.

    Reply
  7. This is a nice post. Thank you for giving your opinion about on how people can adapt air cargo. But still, I know that people will still choose air freight than ocean freight because it is more faster than the sea. People nowadays are so impatient that”s why cargo in the sea won”t click because it will take too much time. This is a very interesting post. Thank you.

    Reply
    • Anand Medepalli

      Thank you for your comment; I appreciate your feedback. True, air freight will never go away, but we can”t deny a structural shift in freight transportation. For instance garments more or less don”t fly by air anymore. Similarly because of technology and smarter supply chain planning capabilities, shippers are using a combination of air and sea freight judiciously. What the air freight industry should focus on is innovation and new ways to serve the customer, improve collaboration with the forwarders and demand a seat at the shipper”s table to better plan their services. A lot of things for the industry to do, but there is no doubt that speed is their USP.

      Reply
      • Mian Muhammad

        Hi
        Thanks for your comments. I totally agree with you.I recently have a bad experience of air freight. I booked a consignment on Mar 13,15 on United Air from Lahore Pakistan to New York. It reached at destination after 21-days. If I route this by sea it should have been there in this time frame.
        As IATA rules are entirely in favour of Airlines, hence most of Airlines do not care about their clients, their money,emotion or time they wasted.

        Reply

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