Protecting air cargo’s golden egg

posted on 27th May 2020
Protecting air cargo’s golden egg

Adapting to the challenges and opportunities cross-border e-commerce brings remains a work in progress that has been disrupted by the Covid-19 pandemic, reports Stuart Todd

Cross-border e-commerce has been described variously as air cargo’s ‘gift from heaven’ and its ‘golden egg’, ever since the watershed moment in the last quarter of 2017 when the online retail boom became an air freight e-commerce boom – ushering in a new normal for air freight following a prolonged passage in the doldrums.

But this renaissance has demanded a change of mindset on the part of the various stakeholders – shippers, airlines, forwarders, airports and handling companies – if the opportunities offered by this digital revolution in trade are to be fully capitalised on.

There have been signs of progress within the air freight sector in adapting to the challenges cross-border e-commerce poses, although the Covid-19 pandemic has disrupted this progress – as it has so many things – and added new layers of complexity and uncertainty. But to what extent does it threaten the longer-term glowing future mapped out for cross-border e-commerce and air cargo?

“Before the outbreak, the projected market growth rates for the cross border ‘click-to-door’ e-commerce market were between 20-25% annually. More than 80% of cross-border e-commerce volumes go via air freight and this demonstrates why it is such an important growth driver for air cargo and a critical element in cross-border e-commerce overall,” explains Tobias Wölfel, specialist and air cargo research lead at McKinsey & Company’s German office.

“Roughly 10% of air cargo volumes are accounted for by e-commerce and projections point to it growing to 20% by 2022. At the same time, the share of e-commerce in air cargo’s global revenue has been marginal, at 5%, because of lower yields and margins. But that could double over the same five-year timeframe to 2022.”

Growth drivers
Wölfel underlines that the growth drivers of cross-border e-commerce focus on strong consumer demand to buy goods from non-domestic sites due to the availability of goods and lower prices, better selection and better quality of goods.
Chinese online shoppers, in particular, are looking for product quality and attach importance to the brand. European and US consumers shopping for Chinese-origin goods put a premium on lower prices and product availability – mainly from smaller Chinese online merchants – and this has led to a massive rise in volumes needing to be shipped by air freight.

“Post-COVID-19, I think the underlying growth drivers will remain intact,” says Wölfel. “But there are factors that could potentially impact and influence these drivers. For example, delays in
deliveries during the crisis could generate a preference on the part of consumers to buy more domestically.

“Then there are the online marketplace sellers – a key component in the cross-border e-commerce space – many of them small merchants, who sell their goods via the major platforms, Amazon, Alibaba and e-Bay. Maybe there’s a question mark over how many of them will survive the crisis. If there was market ‘consolidation’, there would be a risk of product availability being more limited, making it less attractive for consumers to shop ‘cross-border’ in the future.”

He notes that supply chain shifts could also influence the cross-border e-commerce landscape as manufacturers and e-tailers seek to make them more resilient – through sourcing closer to the end-consumer – which could limit the volumes shipped by air.
“But if there are to be changes or shifts in supply chains, it won’t be overnight, and for that reason I expect the same structure of the market to remain in place,” says Wölfel. “And on the end-consumer side, one could argue that as a result of corona and lockdowns, people have become more familiar with on-line shopping through spending much more time at home and that such new-found habits are likely to perpetuate.”

Sebastian Tschackert, president for the Americas at e-commerce fulfilment, transport, and supply chain solutions provider Tigers, said that in the short-term, North American cross border e-commerce had been strongly negatively impacted by the pandemic.

“This has been due to e-retailers focusing on the domestic market and suspending export shipments as a result of domestic struggles – surge in demand, lack of labour due to the outbreaks, etc.; and secondly, significant rate increases due to the lack of capacity following the suspension of passenger flights, making cross-border e-commerce cost-prohibitive; as well as consumers holding on to their cash for essentials and purchasing fewer retail items, which would normally drive e-commerce.”

Demand decline
Although e-commerce has thrived in many areas during the pandemic, Tigers saw a drop in volumes in North American cross-border e-commerce of 85% in early April, although by mid-May it had recovered “a bit”, with Tschackert “hoping for a recovery to approximately 70% of 2019 volumes in Q3 and Q4”.

Timo Schamber, managing director of Lufthansa Cargo’s e-commerce logistics subsidiary, heyworld, says his company had also mostly been negatively impacted by the spread of the coronavirus.
“We worked closely with our clients to identify alternatives for their shipments,” he noted. “Unfortunately, we have seen a reduction in volumes because we had to introduce surcharges or increase lead times on some lanes. At the same time, the situation has presented us with opportunities. With disruptions affecting the entire logistics industry, many shippers are eager to expand their portfolio of shipping solutions and we have actually been able to onboard new clients.”

Arnaud Lambert, CEO of air cargo software specialist CHAMP Cargosystems, underlined that despite close to 90% of airlines’ passenger fleet being grounded, drastically reducing both the capacity to ship and consumer reachability, demand for e-commerce goods had resisted – albeit at lower levels than usual due to restricted economic activity.

“Aside from medical shipments that replaced industrial freight, confinement boosted e-commerce with existing customers ordering more and new customers discovering online shopping,” he notes. “These two factors will further accelerate growth in e-commerce and increase its share of air cargo. This, in turn, will accelerate the need of digitalisation in the air cargo industry as e-commerce sets new standards in terms of customer experience. The Covid-19 crisis could prove to have a positive effect.”

Adapting to e-commerce
Turning to how successful the air cargo industry has been so far in meeting the demands of cross-border e-commerce, Andre Majeres, manager for cargo, mail and e-commerce operations and standards at the International Air Transport Association (IATA), says that growth in the segment in the last three years had been “very sudden and exponential, and airlines and cargo handlers did not anticipate the tsunami of parcels coming their way”, or didn’t read the warning signs.

“Therefore, it’s been a slow start and carriers have developed individual initiatives to serve their own objectives. The industry needs to come up with common approaches to solve common problems.”
He continues: “The opportunities are clear: as e-commerce is a global trend, small businesses can now export their goods and reach worldwide markets, diversifying the competition and creating new jobs.

“However, this comes with a set of challenges like adapting cargo handlers’ and airlines’ daily operations to deal with growing volumes of cargo and ensuring that the new players comply with international rules, particularly on safety and security, and carry out their business in an ethical way.”

He notes that e-commerce players, particularly the marketplaces, are a new set of stakeholders for airlines. IATA, together with the consulting firm PwC, has launched a global engagement plan to facilitate “comprehensive dialogue to allow us to get directly to their pain points and challenges”.

Majeres adds: “This is a very consumer-centric business and as e-commerce players are adapting to their requirements, so the logistics industry also needs to step up in terms of safety and security (in terms of knowing ‘what’s in the parcel?’); digitization of the supply chain, sharing data and
allowing for planning; tracking and tracing for consumers and flexibility in deliveries; cross-border timing, reducing border blockage; and seamless operations by using automated equipment due to the ‘tsunami’ of parcels” at peak times.

Work in progress
For McKinsey’s Wölfel, airlines’ understanding of cross-border e-commerce remains a work in progress.

“Airlines focus is largely on a range of high-margin industrial verticals and they work largely with freight forwarders who provide the bulk of the cargo volumes, mostly in the B2B space,” he highlights. “B2C has a different dynamic, with different operational approaches – speeded up processes, a door-to-door perspective, and the need of track and trace for end customers.

“Airlines’ business model is not set up to accommodate e-commerce volumes, nor are they at a stage where they can work cohesively with e-commerce shippers. Processes are still complex, even for e-tailers – but especially for those participants who have not reached a certain level of digitisation which e-commerce demands.
“So, airlines need to up their game. The same goes for the whole aviation ecosystem – including airports, forwarders, cargo handling companies and customs authorities.

“Overall, I think it is important for airlines to get into e-commerce, but the challenge is they don’t know the industry and secondly, e-commerce is only one vertical and not the most lucrative one. But it’s a growth driver all the same, and they cannot neglect it.”

According to Tigers’ Tschackert, airlines and the air cargo industry “have struggled substantially with this new flow of (e-commerce) cargo and adapted only very slowly and in pockets”.

Challenges for the industry include adapting to volume surges at the beginning of the week, when the traditional peak (for standard air freight) is usually at the end of the week; seeing the (e-commerce) product as a commodity and a price-sensitive one and abandoning the perception of previous years that it was an express product, he says.

Volumetric challenge
Among the other issues is making provision for the fact that air cargo is becoming much bulkier, with cross border e-commerce adding to the quantity of goods moving as B2B shipments – overall

lifting the volume ratio of air cargo globally; and addressing the absence of an ‘industry standard’, aligned with government authorities, for e-commerce, in terms of compliance requirements, which differ greatly between carriers.

Champ Cargosystems’ Lambert says the integrators are “ahead of the game” as far as e-commerce is concerned, mainly due to their integrated end-to-end customer experience, while Amazon’s creation of Prime Air and the further expansion of its fleet confirms that the ‘traditional’ carriers have not yet embraced the segment in the right way.

“Pharma, DGR and perishable products have been the focus of all the initiatives and efforts (in the industry) so far, leaving e-commerce second,” he notes. “This is a big mistake, but it is not too late. Collaboration, information exchange, transparency – all digital – with the end-customer experience in mind, are what are required for e-commerce, areas the industry has tended to drag its feet in adopting.

“Market drivers for digitalisation in air cargo – notably efficiency and customer experience – have not changed, and this much-needed transformation is set to be boosted by the Covid-19 crisis, which has ushered in an indefinite period where human contact will need to be minimized.”

As for where airports stand on e-commerce, Wölfel notes that as with the airlines, “their primary concern is the uncertainty over how much money they can make from it. The fear is that large volumes of e-commerce cargo will only yield low margins and that another drawback is handling complexity.”

How good a fit e-commerce is for an airport depends on the kind of cargo flows it’s handling and where it is located, he explains.

“A case could be made for the major passenger traffic hub airports being the best environment for e-commerce to thrive,” Wölfel notes. “They have the advantage of global connections, making it a very attractive selling point to e-tailers because of the single entry point for goods.

“But all-cargo airports offering a broad range of scheduled freighter services on intercontinental routes can also fit the bill, as Alibaba’s choice of Liège as a hub testifies.

“In either case, the airport ecosystem, with its handling capabilities for imports and also exports, represents a significant value proposition to e-tailers. There is a lot of demand in Asia for high-

quality Europe-origin goods. However, a lot of the smaller online merchants don’t know how to sell in these markets yet because the logistics capability is missing.”