A second chance

posted on 8th February 2019
A second chance

Through over 40 years of the broadest work experience possible in air cargo, I believe I can now safely say I know what we did wrong as an industry, as well as having insight in the possibilities to correct those mistakes.

Over the past 40 years, airlines gave away the express and small package market to integrators who understood the customer’s product needs and how to organise around that. And 30 years ago, though airline incompetence, we airlines, through IATA, gave away the rest of the possibilities to retain yield through pallet pricing and giving away customer relations − the only true source of information on needs and demands so the customer can succeed − to forwarders.

Imagine what that decision to go to pallet pricing, which was totally driven by reducing handling costs at airports, has done to intermediaries’ positive profit margins at the expense of airlines’ ability to finance investments and support the high capital costs of running an airline. We still have generic rule books for minimum charges and volume calculations based on B707 and DC8 aircraft of the 1960s, which have no place in today’s world. And without control of the airport handling and customer expectations, we lost focus.

Revolution in global logistics
Today, we see another revolution in global logistics driven by consumer expectations where airfreight is one of the major tools in shipper and consignee satisfaction, and that is e-commerce and all other verticals requiring speed, security, safety and, most of all, transparency. Will the airlines and their critical partners like airports, GHAs, GSSAs and IT companies now understand the opportunity this presents, or again fall back into load factor, FTKs, out-dated rules, regulations, and cost-reduction modes so typical of the past?

SASI clients often ask what to expect from the future market and our advice is always to look inward into their own organisation’s expectations for that answer. Today, everything is preferably same-day or next-day, with transparency in all aspects of the purchasing process, and delivered as promised without delays and without problems. If you expect that as a person, why would your business accept less when ordering parts, goods and services, or even your basic day-to-day needs? This new consumer demand cannot be achieved without air freight, and a recent US business review highlighted that on the front page with the comment: ‘Now Intel chips are competing with dog food to get space on a flight’.

These realities and expectations are not anti-forwarder statements as they also struggle and look to scale in network and services to meet expectations. It is not anti-integrator either, as they also are struggling with B to C, extremely high costs, and less-than-efficient hub systems to be competitive.

Nothing is faster than point-to-point flights
Nothing on earth is faster than scheduled airlines’ point-to-point (PTP) flights; but we have not learned enough as an industry to leverage that new demand and expectations − unless we focus on ground logistics, not airplanes as the solution. There is nothing different between a United or Cathay B777 non-stop flight between Hong Kong and Chicago except what they do on the ground, at both ends, to leverage that advantage in speed and reliability.

Airports and all associated industries such as ground handling agents (GHA), forwarders and shippers/consignees and airlines can benefit if the industry gets out of the silo approach of the past and understands what is now possible. Self-interest in these vital components (silos) has led to the broken system we have today. If we do not do something soon to enable a ‘virtual integrator’ possibility in the scheduled air cargo business, airlines and the airports they serve in the future will be relegated to bit players serving only low-yield and high-volume business. Catering to verticals such as pharma, which is the focus today, will not save the scheduled cargo business as it’s too small a niche. As an industry, we have to become a major player in overall logistics.

The way forward
SASI is hard at work with our global airport and facility developer clients to implement a ‘Data and Logistics’ corridor concept. The clients have accepted this process as a strategic objective to work with, as they see this as the way forward:
1) Full data capabilities will have to be there, and that will mean systems that support APIs, and XML − ASAP. We need cargo community systems (CCS) that are ‘plug and play’ at all airports, linking all support entities on airport and off airport, including last-mile service providers and authorities. There is not one CCS in North America; unbelievable!

2) GHAs and property developers need to work harder in meeting what airports and airlines are demanding − which is to build facilities that will attract and support the airlines who are there, or who want to be there, or do not bother bidding for access. Airline route development managers are telling airports that, on average, 20% of revenue on trans-border flights is now coming from cargo. At the same time passenger yields are declining, so awareness is definitely there of the potential. GHAs need the airline clients to forge a new relationship with them and confide and speak up on their business plans and product development objectives. Without that greater awareness, how can they facilitate that strategy through the entire network? As it stands now, GHAs are increasingly faced with requests for increased services, yet a ‘purchasing manager approach’ is taken re pricing and length of contracts.

Engaging systems suppliers
3) As an industry, we must engage the major suppliers of material handling systems (MHS and ASRS) that support e-commerce and express shipments of less than 300 kilos, plus larger consignments as well, in this strategy. These systems are expensive but necessary at airports, as the ‘old school’ way of engineering facilities on airport was based on ‘dwell time’ − meaning ensuring space and systems could cope with peak demand for storage. Today, the emphasis must change to how fast, in minutes or hours, can I move the cargo into and out of the airport facility. That will lead to common use ‘machine-cargo’ interface developments and solutions, we believe.

4) Airline CEOs and CFOs have to realise that what they are seeing today regarding the increasing value of air cargo contribution to their bottom line and the ever-lower passenger fare expectations at the same time means we are at a crossroads. I can guarantee you that on most long-haul passenger flights, cargo can produce a better result for the bottom line for airlines if they focus on a value-based product portfolio that meets the e-retailers’ needs. Yet not one airline revenue management system employed or offered by IT companies takes this into account, so they remain in total ignorance of the possibilities.

5) If airlines and airports still want to manage a multi-billion dollar industry through averages created by industry associations like IATA, FIATA, Airports Council International (ACI), TIACA etc., then it’s now time that they step up their game and decide how they can help create this new world, not just for the benefit of their individual members behind closed doors with so many differing objectives. Nothing will work without a common cause to improve; who will lead this? This is my
greatest concern.

‘Virtual integration’ of services
Last would be linking this together to allow a ‘virtual integration’ of services in the scheduled airline business where all parties in the chain will benefit. Ground capabilities in logistics are a first objective and a must to achieve. Airlines invest heavily in change at their home base, but any chain is only as strong as its weakest link; therefore they must actively support and lobby the airports they serve globally to improve and support their business plans and objectives − make your voice heard!

If we don’t do this, Amazon and large Asian entities such as Cainiao, JD.com, SF Express and the hundreds of others will continue to be forced to develop this capability in house in a closed-loop environment; they will do it themselves, as integrators were forced to do 25 years ago with express. This will drive freighters to regional airports more and more and away from existing hubs; I know they would prefer to avoid this.

Amazon, I am sure, would have preferred to tap into an existing operator’s system in the USA if its service requirements could have been met − but that did not exist, so they did it themselves. Domestic USA without borders is quite different and less complex than trans-border, and the e-commerce world is global not regional.

The opportunity for us all is there; will we miss the boat?

Stan Wraight is president and CEO of industry advisory firm Strategic Aviation Solutions International