Improving airline profitability is bringing investment into cargo that could finally transform the sector, American Airlines’ senior cargo executives Rick Elieson and Tristan Koch tell Will Waters.
Over the past 15 years, a series of airline mergers in the US has created a group of four mega-airlines that each feature among the top five airlines in the world by passenger numbers. And two years on since the completion of one of these mergers, of American Airlines (AA) and US Airways, this consolidation of the US market is bringing major benefits.
Tristan Koch, managing director of cargo sales for EMEA and Indian subcontinent, says the two airlines’ cargo units have “been welded together really successfully” over the last 18 months or two years “to a very established and mature cargo business”. But what has impressed him most is the airline’s recent investment in cargo.
“I think most people accept that investment in the cargo industry has been not as great as it could be,” he notes. But a greater interest in cargo now among senior leadership has manifested in money to spend, product development, greater resources, and improved infrastructure, such as “a massive, re-structured IT programme underway at the moment. So, we’re investing money, time, effort − which is hugely rewarding.”
What’s caused that change for cargo is the more stable profit environment among US airlines, says AA’s cargo president Rick Elieson. “The airline business historically has been very cyclical,” he notes. “If you go back 70 years, there was about an 11-year cycle of profitability and then 11-year cycle of famine.” And overall, airlines lost money.
“And then when airline deregulation occurred in 1978 in the US, a whole bunch more airlines showed up, a bunch of airlines went out of business, and that cycle became faster and more extreme,” he adds. “That was true until a few years ago when consolidation really took hold in the US market. And what’s happened is instead of being cyclical, it has flattened out at profitability. So there are still some ebbs and flows, but we believe the rules have changed − and a big part of the change is that you can expect the airline to be profitable year in, year out.
“That means we can invest in the future. And we are investing, faster than any prior year. That is true for the airline in terms of fleet renewal, product, and it’s true for cargo − on the technology side, through training, tools, infrastructure… all of those things.”
It provides “the freedom to do what we know to be the right thing: To give people the tools they need; to be able to go buy new tugs. That’s a big deal for someone who spends all day pulling containers around,” he says.
Although he does not wish to put a figure on the level of investment going into cargo, Elieson says “It’s a record-level investment for us.”
Koch says investment to some extent defines those airlines that are serious about cargo, and those who are not. “In the last two to three years, there has been some investment back into the cargo business because there’s been a bit more volume in the market. Some airlines have decided to be serious about cargo, which we are. Others have decided it’s a subsidiary part of business and it will be what it will be; they’ve commoditised what they do.”
Elieson says investments such as joining IATA’s CEIV Pharma programme are “clearly, years in planning and doing, and we have other projects that we’re similarly in the planning phases of”. And he says cargo has also “never had a bigger stage” within American. “Our president has a background in the cargo industry so he has an appreciation for the significance of cargo, what it means to the company, and a willingness to continue to invest.”
In terms of investment priorities, he says giving people the tools to do their jobs properly is key. “I’m embarrassed to tell you how long it’s been since we’ve done serious business-wide company training, but we’re investing in training,” he says. In the past, customer-service training “might have been viewed as luxuries”, he admits. “And when we talk about tools, we have a very significant technology effort. It’s getting underway now, which is reflected in both tools and product. That will manifest across the board but it’s an end-to-end replacement of all of our IT systems.”
Besides the investment in people, Koch says replacing the “spider web” of a legacy IT system that many major airlines still use − and which is not up to “the modern-day task of delivering efficiencies” − is “probably the single biggest thing”.
Elieson says: “That’s what happens when you can’t invest for the long-term: every project needs to have a one-year ROI, which means you take duct tape and bubble gum and rubber bands and whatever you can do to just append onto your existing systems”.
The replacement of the IT system is a two-year programme that began in April. “Not all those benefits have to wait two years,” he stresses, with the company working to identify “how we can break that up and deliver value to customers more quickly”.
Koch says that although legacy airlines may have modern-looking computer terminals, “if you dig beneath that, there’s still a green screen (system) behind it. It’s a huge leap to go to a more modern technology platform.” But the benefits will be enormous. “It brings you to another world,” he says.
For example, instead of still having to manually input everything, sensor data allows automatic inputs and updates, Elieson notes, adding: “And then it frees up your people to actually have a more personal interaction and deliver service as opposed to the functions.”
Koch recounts a recent meeting with one of the largest shippers in the world, “and their frustration was, if you boil it down, really about technology: ‘Why can’t you show me where that thing is at every given point in time’?”
Elieson adds: “They’re trying to modernise their business process and they view our process as an impediment to their modernisation efforts.”And so this kind of upgrade is not just about internal process. “There are products we would like to expand or build and it’s really, really hard in our current environment to do that,” explains Elieson. “And so I think it has an impact on the interaction, the way customers work, the information and how it flows across the journey − but also it has implications for the products that we can offer. Our segmentation today is rather limited.”
Elieson believes a lot of other top 20 airlines are in a similar position. “But I hear rumblings; there’s lots of people talking about investing. I don’t know if their investments are as significant as ours, I don’t know how they could be bigger − because we’re replacing everything.”
A handful of newer carriers, such as some in the Middle East, have more-recent technology, says Koch. “But if you take the European legacy carriers and the US legacy carriers, I think we’re more or less in the same position.”
This transition is clearly one of the fundamental barriers in terms of modernising air cargo, or “a key enabler”, as Elieson puts it, refusing to “saddle IT with the sole responsibility for transforming the business. We can’t sit on our hands for two years waiting for an IT department to deliver all our solutions,” he says. “Nor have we in the past just counted ourselves as a victim and waited for technology to catch up. But it is a game changer.”
Measures taken in the meantime include “a lot of effort into our ‘customer experience’ in the last 18 months”, says Koch, including appointing a director of customer experience. “We have very good customer experience, but it wasn’t replicated across the globe,” with “pockets” of good and less-good customer experience. “We have tried to standardise that and centralise it, which has been hugely successful,” Koch adds.
“What that team can do with the current IT infrastructure is very different to what it could do with the modern platform we’re talking about. It’s a bit clunky because the information isn’t seamless. So, they can give the customer an excellent experience despite all this manual work behind the scenes; whereas in the new world, in 18 months’ time, that’ll be much smoother, much quicker, more efficient, more accurate in terms of the information you get. Whether it’s customer experience or pricing decisions, the whole thing is fed by the data. And we do that very successfully now, but it will become much more efficient once we have the program to support it.”
Potentially these changes open up new opportunities in terms of presenting pricing or automating bookings and other transactions or interactions with customers, Koch agrees, although these processes have already been evolving over the last decade. “If you go back perhaps eight or nine years, we used to have winter schedule, summer schedule. You would go to the customer in February and say ‘Here’s the summer prices; we’ll see you in September to do the pricing for peak season’. That was the way until relatively recently, and now it’s becoming a hugely dynamic marketplace where the spot-price today for London-New York might be a $1, tomorrow it might be $1.20, or 80 cents. So we’ve already moved to a much more dynamic marketplace.”
And the way airlines communicate that to customers has been changing and will change further. “It’s one of those things where we deliver effectively but with a manual process underneath,” says Koch. “We’d like to get to the point where it’s a more intelligent system that’s feeding our sales people the right information so that we can give the customers the right offer at the right time.”
Currently, pricing may be based on a sales meeting every Monday morning, where someone asks: ‘What’s the market in Germany today? There’s more capacity coming in from Lufthansa, so the price is going to do this or that.’ Koch notes: “It’s still an intuitive thing rather than a data-driven thing; the data comes later. I think where we’re going is, it’s immediate: There’s the data; there’s the decision.”
But this is likely to still be informed by human information or analysis, Elieson believes.
“In one of my past careers, I spent a lot of time building forecasting models, building demand models,” he explains. “I had a research team of really bright PhDs who spent all day building data models and in the end, there’s still a lot of things that are hard to bake into a model. In terms of how demand is going to react, I can only look at so much historical data to predict the future. You’re still making phone calls, talking to your customers, understanding their needs, and then needing to reflect that in your pricing. It’s a very dynamic business, so I don’t think any amount of improvements in IT, technology, is going to eliminate the need to pick up the phone and have a relationship with your customers and then reflect that in your business. But it’ll certainly get much better, and hopefully much more transparent to those end customers.”
However, this does not mean that the business will necessarily become any more transparent through customers booking capacity well in advance of flights. Whereas an airline passenger may book holiday flights many months in advance, Koch says that because air freight is not planned and more than 50% is “accidental” – ocean freight that has been delayed or an emergency spare part – air freight generally only has a 10-day, or perhaps 14-day, booking window.
He continues: “That’s why it still has to be a people business, because of that short notice. Somebody has to talk to you that says: ‘The gearboxes failed to get to the car factory in the UK − we need to transport 20,000 from Chicago.’ You can’t automate that because it’s just too complicated.
“So, as much as you want to standardize our industry, I think we still come back to the fact that we need people talking to people; and that develops relationships, which creates value or difference between organisations. Which is why we heavily invest in people because as much as you want to make the company more efficient, we need good people doing the job; that’s the nature of our business.”
COMPLICATED TO AUTOMATE
One reason that shipment may be too complicated to automate is “because one of the variables is capacity, which is dependent upon the weather, and what other cargo you have”, Elieson says. “It’s not just impacted by what you have to ship, it’s impacted by what other people are shipping as well and how I can balance that load.”
As a newcomer to the cargo business, Elieson says the 10-day booking window was “one of the things that shocked me; I should say dismayed me − that we don’t have a longer planning horizon. But if you talk about all the variables that impact your capacity and demand from both sides of the equation, windows only happen really close to the moment.”
Koch says one key difference with passenger is that seven days before departure for a passenger airline, 95% of the revenue is already in the bank. “For cargo, nothing is in the bank until after a month after departure. In fact, the customer is not committed until the moment he brings that freight to the dock,” he notes. “I still think we need to get over that somehow. The way we do that is through committed business. So, actually 10 days out, I know the moment the flight opens up there’s probably 40% that’s going to be blocked out” by a handful of big shippers of automotive spare parts, industrial machinery, or the salmon business.
Elieson adds: “But you’re just shifting that risk to the forwarder”, who also doesn’t know in advance what cargo is coming.
Koch agrees, adding that “financially, the risk isn’t moved necessarily”. Instead, the forwarder will tend to overbook to get the capacity they feel they may need. “The commitment is very different sometimes to what’s actually delivered,” adds Koch. “There’s a huge waste in this industry.” The airline is then still left with a shortfall – causing them, in turn, to also overbook.
“There is some,” says Elieson. “And some customers don’t need it on that flight, but they need it there tomorrow or the next day, so it gives you some flexibility to optimise on the day with the volume you have on hand. Some customers need it on that flight.”
But he says airlines’ systems are not particularly well suited to that optimisation. “That’s still rather a manual process, to set stuff aside and shuffle it out.”
But getting more advance visibility of what freight is coming, from information further upstream, may help. “If air waybills were all digitized before the freight ever showed up to your door, you have a much better idea of the cards that you’ve been dealt, and how to accommodate it,” says Elieson.
Koch says this is something American has been exploring with its forwarding customers. “The industry has always been driven by flight-specific criteria. But they don’t actually need that precision. What their customer, the shipper, wants to know is: ‘If I give it to you Monday, I need it in the factory on Friday’. So, we’re having much more intelligent conversations with our forwarding customers, saying are we over-delivering in terms of expectation? And if we didn’t have to do that, is there efficiency we can build? The answer is very much ‘yes’.”
He continues: “So, if I have a piece of freight out of Munich today, and it needs to be in Philadelphia by Friday, if we fly it out of here now, it’ll be there this afternoon. But that’s over-delivering, in some respects. When my machine is intelligent enough, I can truck that to Frankfurt, fly it to New York, Chicago, or I can truck it to London. I can even give it to Lufthansa and pay them to carry it. There are a million different ways of moving that − all that satisfy the customer, but in terms of costs incurred, hugely different.”
At the moment, the process for optimizing the routing is “still a bit manual; people looking at flights”, although he stresses that American is “probably one of the best airlines, certainly in Europe”, in terms of being nimble with its capacity. “We will move stuff around gateways to optimise what we have, but it certainly isn’t the finished article, because it isn’t intelligent. But I think that’s the future.”
Although e-airway bill (e-AWB) penetration levels among the top four airlines in the US are picking up, heading towards 70%, there are few tangible benefits yet in terms of visibility. But it’s a necessary step, says Koch. “At some point, we have to take a leap of faith. And even if it doesn’t deliver immediate financial or other benefits, we’ll be at the front when it does.” And that’s inevitable, he is convinced, arguing that it is inconceivable that in 10 years’ time air freight will still travel with a pouch.
And so, we could be looking at a situation where in two or three years’ time, far more data will be coming in advance of shipments. And carriers that have replaced their legacy IT systems will be able to process and manage it effectively – “and through the notifications and other things that naturally flow from a digitised process”, says Elieson.
“The world is changing and we’re trying to be in the forefront of that.”