Air freight’s second chance

posted on 22nd October 2019
Air freight’s second chance

E-commerce presents cargo handlers and airlines with an opportunity to regain margin and improve their profitability – if only they can grasp it this time, after failing to 30 years ago when the integrators arrived, delegates and speakers at this year’s Air Cargo Handling and Logistics conference agree

Dozens of senior executives from across the airline cargo handling and operations fields, along with associated airport and technology players and suppliers, gathered in September in Paris for the 11th annual Air Cargo Handling and Logistics (ACHL) conference to share best practice and update their knowledge and connections.

Day one featured one-to-one meetings and workshop sessions on ‘Future-proofing your business’, ‘ULD developments’, and ‘Air cargo innovation’. Highlights on day two including the panel discussion ‘Air cargo in 2030’, as reported in this issue. A panel discussion called ‘Air freight’s young guns’ discussed the experiences, challenges, and ideas from the perspective of several up-and-coming young air cargo executives. Other discussions included the increasing role of data, and the pros and cons of technology and canines in the screening of air cargo.

Further topics included gender diversity, IATA’s FACE programme, ‘The modern and futuristic air cargo handler’, and developments in airport cargo infrastructure. And the event closed with discussions about the role of cargo drones and digital transformation in the air cargo sector. Highlights from some of these debates will be profiled in the next issue of CAAS.

E-commerce within air cargo
One topic that kept coming up, understandably, was the growing role of e-commerce within air cargo, and how airlines and their cargo handlers should respond to this. A key speaker on this topic was Olivier Bijaoui, former president and CEO of WFS and now chairman of independent cargo handling specialist network IAS and president of OB Invest.

In his presentation, ‘E-commerce: Friend or foe?’, he outlined how the rise of e-commerce represents a fundamental change within air cargo and a threat to many of its traditional players, including freight forwarders, integrators and cargo handlers. He stressed that the challenge for and from e-commerce retail operators is to move goods as fast as the integrators, but at the price of general air cargo. This, he said, meant that the integrators themselves were among the first to be challenged by the increasing moves by e-commerce operators such as Amazon and China’s Alibaba ever-deeper into the logistics sphere, including within air cargo.

Bijaoui said the core business model for integrators such as FedEx and UPS was to sell their express services, offering rapid end-to-end transport at a relatively high price. But this was under pressure now with the likes of Amazon offering to do so at a lower rate – noting that FedEx’s share price had fallen significantly recently, at least partly a reflection of this increasing competition.

At a recent visit to Rickenbacker Airport in Ohio, he noted a number of UPS aircraft there, apparently primarily serving a major local e-commerce shipper, who was now “filling up these aircraft for UPS at an airport that used to be a ghost airport”.

Winners and losers
On the whole, Bijaoui believes the integrators will be among the losers of the e-commerce growth trend, as the likes of Amazon push down prices for express delivery shipments, but that postal operators will be among the winners.

Airlines are also set to gain, carrying more and more e-commerce shipments. And certain cargo airports will also gain significantly – for example Liège Airport in Belgium, which has done a good job promoting its airport to e-commerce companies.

For airlines, one question is likely to be how much capacity they will devote to e-commerce, if e-commerce companies ask them to set aside significant amounts of space. He believes airlines are likely to accept these big blocked space agreements, as they have in the past from GSAs. But in the process, GSAs may miss out, and also freight forwarders. For freight forwarders, whether they become winners or losers will depend how they position themselves.

Bijaoui highlighted the recent partnership between Amazon and Dallas Fort Worth Alliance Airport, where Amazon has opened a 6 million sq ft warehouse (almost 600,000sqm) – “the kind of scale that dwarfs the warehouses of most cargo handling companies and underlines that it will be for the e-commerce companies to decide how they work with freight forwarders and the integrators”.

As for cargo handlers, he notes: “I think we have to ask ourselves how we can handle these companies and this traffic, and also will they be at our airports? I think we will be seeing freighters moving away from the big airports,” as they seek specialist airports that are able to move their cargo in and out quickly to large consolidation warehouses nearby, where they will build and break down cargo units.

Pass-through cargo
“When the e-commerce companies bring cargo through airports, it will be pass-through cargo, which will then go through to the big facility nearby of the likes of Amazon,” he noted. “Will we be paid the same for this BUP cargo? No.

“Also, if it is going to be pass-through cargo, handlers won’t need as much space on airport as they do currently, which has implications for airports.”

Bijaoui continued: “I’m not saying that general cargo will disappear, but because e-commerce cargo will keep growing and growing, the way it is going to be handled is going to be different. But everybody is going to be impacted – not just the handlers.”

Another possible challenge is the emergence of increasingly fast and efficient rail services from China to Europe, which was one of the reasons Liège Airport was attractive to Chinese shippers. If those services can speed up to transit times of seven days or eight days, that will make them extremely attractive, Bijaoui said, noting: “It is much cheaper, 10 times cheaper, and they can carry a lot more cargo than an aircraft – and not much slower.”

Asked whether air cargo handlers can adapt to this evolving situation, he responded: “We have to look at our processes and how things work in our sheds. But part of the answer does not lie with us – it will be decided by the retailer how they work with us.

“Maybe we have to talk to the new retailers and say: ‘how do we improve our speed on the ground in order to win your business’? But to be able to talk to these companies is not easy.”

So, should GHAs and airlines work together to make an offering to e-commerce companies?

“They’re already part of the same offering,” said Bijaoui. “The e-commerce companies are going to decide how they want to use the airlines; and the airline is going to then talk to us about how to deliver that.”

Handling challenge
Stan Wraight, president and CEO of consultancy Strategic Aviation Solutions International (SASI), observed that there are an estimated 110,000 e-commerce retailers, which “leaves a tremendous potential for us to work with” outside of giants like Amazon, Alibaba, and JD. “And while airlines across the world are seeing consolidations drop, the number of individual, back-to-back shipments of less than 300 kg is growing rapidly,” he noted, highlighting one Middle Eastern carrier reporting its volumes of these kinds of shipments had grown to 30% already.

But the problem, according to one airline he spoke with, is that “if I had to rely on independent ground handling agents to implement the products that I rely on, I would be not able to sell my products”. Wraight noted: “That means there is demand, but there’s no supply from the ground handling agent and the airport to do what the airline would like to do.”

He said that is a big opportunity for a cargo handling company – to change the partnership with an airline, “so that airline can support the 109,997 companies that would like to stay in business and not be swallowed by Amazon, Alibaba, and JD.com, to succeed.

“And for small and regional forwarders, their manufacturers want to participate also in the e-commerce business. But to get something out of China if you’re a small forwarder, you have to go through an association or A+ forwarder, and then all the margin is gone. Wouldn’t they love it if an airline was able to offer them a product, in combination with a handling company, that included all the processing and last-mile delivery and transparency and quality?”

Wraight concluded: “I see the bottle of wine for handlers and airlines as three-quarters fall. So, what can you do as a handler to take advantage of that?”

Bijaoui agreed that there could be an opportunity for a combined effort to present something attractive to e-retailers, adding: “What that is exactly is another question.”

Wraight said: “This is our greatest chance ever, for cargo handlers and airlines, to regain margin and make this business profitable.”

Déjà vu
Conference chairman and moderator Des Vertannes, former head of cargo at IATA, commented: “The ground handlers had an opportunity when companies like FedEx and UPS came to the party, to talk to these new guys and see if they can redesign our terminals to accommodate integrator traffic. But we decided not to go down that road, and so they built their own, and they built good properties on airports, bonds, and the next thing you know they got concessions from customs, and then started to steal everybody else’s lunch.

“Forward 30 years, we have these new players coming along, and we have got the same conversations: can we adapt now to work with Amazon and Alibaba when we didn’t do this with FedEx and UPS, TNT and DHL?”

He continued: “For me, if you want to take this seriously, start the dialogue. You have truly got an opportunity of business that is going to grow at double digits for the foreseeable future; instead of looking at a terminal that is only half full – or three-quarters full, if you are lucky – and saying ‘I am going to try and gain another 5% of volume next month’.

“To me, a lot of things you can do are within your own gift. We are the players that can shape and influence and accelerate the ground handling performance. And if we don’t tackle it, there will be new entrants.”

He proposed to assemble key representatives from across the air logistics chain – including freight forwarding and customs representatives – to run a working group prior to next year’s conference to identify one or two key issues “to drive this industry forward”, and then “debate it for two days”, and “go forward with an objective we are all tasked to achieve. And the following year, let’s track progress.”