Juggling act

posted on 29th May 2019
Juggling act

Cargo handlers face a number of challenges in order to efficiently manage the growing volumes of e-commerce shipments, reports Will Waters

Air freight is already handling substantial volumes of e-commerce traffic, but doing so with sufficient speed, efficiency and cost-effectiveness is another matter, industry experts say.

In a discussion at this year’s Air Cargo News conference in London, Ross Marino, senior vice president for international airport operations at global cargo handler Dnata, pointed out that his company currently already operates 14 warehouses in the US for the US Postal Service (USPS), and most of that cargo is e-commerce traffic. But he says it is a very different kind of handling business and operation, and it is difficult to mix that with a general cargo facility.

He gives the example of a situation the company faced in Amsterdam, where it was handling at one time around 14 million parcels per year coming from e-commerce transactions on behalf of the Dutch state postal operator PostNL. “But we had to set aside an area for that,” he said. “It is a different model.”

Brendan Sullivan, head of e-commerce and cargo operations at IATA, stressed that air freight does already handle considerable volumes e-commerce business, but said it does need to evolve in order to have the capabilities to do this more efficiency and maximise the opportunity – with digitalisation a pre-requisite for that.

Asked whether the sector is equipped to respond to the needs of e-commerce customers or whether the business will be taken away by companies such as Amazon he responded: “We see these new models that create a very competitive environment for e-commerce.” Some of the investment issues are harder to answer on behalf of the industry as a whole because that is something for the individual companies to ask themselves, he said.

Marino said most of the facilities how are equipped, especially in the UK, for general cargo rather than e-commerce. “But where we (as cargo handlers) sit in the process is critical,” he added. “We play a pivotal role the moving the shipment in a process that starts long before we see that shipment. So, it is very important that we engage with the rest of the e-commerce logistics chain.”

Asked whether the ground handling agent gets squeezed by the demands from competitive customers and the handler’s airline principle, Marino says it depends on the environment. “In the US, we are set up for this. In Amsterdam, we started making an investment in the facility there costing hundreds of thousands of dollars for something that was here today and gone tomorrow – where the customer moved that traffic somewhere else. But we hope it will come back and we will be ready for that.“

Ask what airlines need to do to adapt to the needs of e-commerce, for example to cover issues such as security, Marino said the security issue is a serious one, noting: “A lot of the companies that sell these products are just looking for the cheapest solution. But these investments in security come at a cost.”

Sullivan said one of the problems with managing the security needs of e-commerce customers was that ‘fly by night operators’ that breach compliance requirements and security rules are often able to find another way of opening up their operations even after being shut down. But he said a recent survey by IATA of e-commerce operators revealed some positive attitudes towards shipping security and safety issues, with around 70% of e-commerce operators that replied saying they wanted to sign up to a code of conduct. He expected that this would start as a voluntary scheme, although it was possible later to look at getting regulators involved.

Investment risks
But another key issue for cargo handlers in relation to the e-commerce market is the risk of making investments in potentially volatile markets or traffic flows, highlighted Marino. He says the internal fit-out of facilities can cost in the millions of dollars, and the only variable costs that cargo handlers have is their staff. But with good staff often hard to replace, companies are reluctant to let go of them unless they have to. This means that there are risks, although he says his company is continuing to invest in infrastructure. “But when volumes are volatile, it hits us (cargo handlers) more than most because we charge on a per kilo basis,” he points out.

He likens the investment requirements for handling e-commerce to those for handling pharmaceuticals, but noted that the returns for handlers were not necessarily such that they can get a premium for handling e-commerce traffic. Nevertheless, he says cargo handlers can’t hope to handle e-commerce traffic sufficiently quickly using traditional air freight handling processes, presenting a dilemma in terms of whether they should make the investments in a particular facility. “It depends whether the volumes are there to justify it,” he says. “So, these are difficult things to juggle.”

Another issue is facing air freight carriers and intermediaries is educating e-commerce shippers about the need to package their shipments efficiently. And the fact that the average weight of shipment is going down while the size of the boxes the shipments are packaged in is remaining the same is another difficulty. Carriers also note that e-commerce shippers tend not to declare the volumetric size of their shipments, in part because they are used to using a postal system that predominantly charges by weight rather than volume.

Fatih Ciğal, senior VP for cargo marketing at Turkish Airlines, says his company is expecting to make some changes in this regard in order to adapt to this kind of business.

Lighter shipments
Marino says cargo handlers prefer to break down shipments and charge per piece. But he says if we are going to see a trend of growing volumes of lighter shipments, cargo handlers’ charges are going to have to reflect that.

Sullivan notes: “This is a huge challenge for the airlines. We are moving from a situation where e-commerce used to be carried mainly by the posts, but we are now in a hybrid situation. And the question is: are we going to inject it into the system as a single shipment? On the packaging side, we do need to educate e-commerce customers about the need to be aware of this. But packaging technology is improving rapidly, which means that they can get packaging that is closer to the shipment size. So, we need to continue a dialogue with the shippers.”

One representative of a major global freight forwarding company said the situation about handling lithium batteries had becoming rather confused, with her company no longer taking the risk of shipping any lithium batteries through some hubs because they get refused.

Off-airport trend
One questioner asked whether the growing e-commerce volumes, particularly volumetric shipments, meant we were moving towards a future where airports were having to process e-commerce shipments off airport to handle that traffic.

Marino responded: “In the US, 10 of our facilities are off airport for that reason”, where it is possible to find the appropriate size facility and where the cost base is also lower”, although he explained that the facilities were within a mile of the airport.

One delegate questioned whether the massive growth in e-commerce shipments was a bubble that was about to burst because the US has decided that it’s postal operator will no longer subsidise imports within its mail system coming from China taking advantage of cheaper International postal prices.

Another delegate highlighted that IAG Cargo had recently launched an e-commerce product, and questioned whether this was the way to go forward. Lufthansa Cargo said that it will soon launch its own e-commerce product.

Explaining in more detail the challenge of Dnata’s recent experience in Amsterdam, Marino said that the company went from handling 13 million e-commerce packages one year to almost zero. “That was coming in as cargo and going out as mail, traffic that disappeared overnight. And that volatility was because the originator was able to find faster and cheaper connectivity, so as a handler you are exposed,” he explained.

“We set up 3,000-4,000 sqm of warehouse specifically for that, we had staff fitted with finger scanners, with investments into that product line, and it vanished overnight because the lanes changed.”

He continued: “So, we recognise that our customers are very excited about the new potential of e-commerce, and we want to be there to provide a solution, but we have to work very closely with that customer to understand what that means, and the investment that it requires and the kind of exposure that we would have, because we could get caught out very quickly by scenarios like that.

Sharing risks

“In the US, where the warehouses are set up specifically for that kind of business, the way that those warehouse contracts are set up, if that business comes to an end, we would walk away from the warehouse as well, so there is a sharing of exposure so we are not left with a big empty warehouse after the project has gone. We work in partnership to create a model that works, and the fit out works that way as well.

“So there are models for us to work with our customers.”

Asked further about the specifics of that example, and whether the investment is then lost, or whether that space can then be re-used for general cargo, he says: “I guess it’s like any other commercial contract with an airline, where if that traffic is lost you have to keep pushing forward to try and fill that space. That space is now being used for general cargo handling, and the equipment within it has been relocated.

“That’s the challenge that we have: we set up an area within a warehouse specifically. We still have the contract to handle all the Post NL business that comes into the airport, but the volume connected with e-commerce just vanished, so the volume is much, much smaller now. So, we had to fill that space with business from our more traditional line of business, which is contracts with our airline customers.”