Fare's Fair: Making Air Cargo Count

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The traditional mold that combination carriers have operated in is crumbling as increased competition from low-fare carriers impacts the way they serve cargo customers. Putting back the pieces will require a more concerted effort, focusing attention and resources on the cargo side and making product attractive to shippers and consignees—regardless of how passenger volume waxes and wanes.

The traditional mold that combination carriers have operated in is crumbling as increased competition from low-fare carriers impacts the way they serve cargo customers. Putting back the pieces will require a more concerted effort, focusing attention and resources on the cargo side and making product attractive to shippers and consignees—regardless of how passenger volume waxes and wanes.

Low-fare airlines know how to attract attention—and for all the right reasons. If you've been hooked by their quirky, offbeat advertisements and marketing promotions then chances are you've also been reeled in by their hard-to-beat prices. Given the current economic malaise, their "less is more" appeal is readily apparent. But where air travelers have benefited, passenger airlines have found the growth of low-fare carriers anything but altruistic.

What is less obvious is how this competition for passengers has recast the U.S. domestic air cargo market. Less passenger demand has yielded less belly capacity as carriers have downsized their fleets. Similarly, diminished load factors and still smaller yields, coupled with rising fuel, insurance, and security costs continue to threaten profitability.

The question moving forward is how this penetration by low-fare carriers will impact major airlines and their capacity to serve cargo customers.

Low-Fare Carriers: What Are They Good For?

Operating smaller planes with more flights to select destinations has been a successful blueprint for low-cost carriers as most passengers today are more than willing to sacrifice amenities for price. But this model doesn't translate well to cargo.

"Generally, low-fare carriers operate small aircraft on tight schedules and are not cargo friendly," says David Hoppin, principal of Arlington, Va.-based MergeGlobal. Accordingly, the growth of low-fare carriers has had little direct impact on available and usable cargo capacity except where it is making it increasingly difficult for larger carriers to fly low-frequency widebody planes.

What is clear, however, "is that the passenger phenomenon is having an indirect impact on the domestic air cargo industry's use for capacity," acknowledges Hoppin. "The general growth of frequency-based scheduling—which has been a steady trend since deregulation—has led to fewer widebody flights in proportion to the total, and more narrowbody flights."

As a result, passenger airlines are flying smaller planes that may or may not be able to accommodate over-sized freight. In fact, a growing number of airlines are operating regional jets on shorter domestic routes to better match assets with actual usage.

Expedited trucking and express companies, in turn, are quickly and adeptly competing for this market share with technology-enhanced time-deferred services. Simply, a truck's ability to meet time-specified windows within a 1,000-mile-radius—from origin to destination—is a more economic and efficient alternative than air freight.

A Cargo Niche

While passenger airlines are being forced to scale back capacity and frequency because of economic constraints, established low-fare, low-cost carriers such as Southwest Airlines and Alaska Airlines have been more proactive in growing their cargo business, targeting expansion in lanes where they anticipate demand.

Seattle, Wash.-based Alaska Airlines, for example, is increasingly expanding its footprint into new markets beyond the West Coast and Canada, pushing southward into Mexico and eastward to Boston, New York, and Miami.

"Alaska Airlines is different from any other airline," notes Hoppin. "The reason is Alaska. It is true that the speed advantage of a plane compared to a truck is time significant over 1,500 miles, for example. So the new services Alaska Airlines is adding are in markets where there is enough of a time difference that even bulk-loaded narrowbody services are attractive."

Still, this demand represents only about 10 percent of the national total, acknowledges Hoppin, with truck services the predominant mode.

Regardless, the Southwest and Alaska Airlines of the world are becoming more opportunistic and aggressive about seeking out new markets where there is enough passenger and cargo demand to merit service.

"We've taken a somewhat different approach," says Keola Pang-Ching, director of cargo operations, Alaska Airlines. "On the West Coast to and from Alaska and Canada we have quite a bit of frequency. We've added some new aircraft to our fleet and have been shifting assets to enter new markets. We took our long-reach aircraft, for example, went to the East Coast, and put the larger aircraft on the Los Angeles route. We're not reducing seats, but rather shuffling planes and freeing up smaller long-range aircraft that can fly cross country more efficiently."

Despite economic repercussions following Sept. 11, Alaska Airlines has still managed to expand its service network to include eight new markets, in addition to the core lanes it serves along the West Coast to and from Alaska. Because there is limited manufacturing and agricultural production in Alaska, much of its traditional cargo operations have focused on inbound freight. With this flexibility in new markets, Alaska Airlines is mining outbound hauls as well, responding to seasonal demands such as the annual salmon run (see sidebar, below).

Other low-fare carriers moving cargo have followed similar paths, adding new cities where necessary and keeping revenue in their own pockets. Pang-Ching similarly sees opportunity for Alaska Airlines to partner with other smaller carriers, where it can feed their systems, as well as benefit from their regional arms. Even traditionally all-passenger low-cost carriers are moving small packages and mail, he says, as they recognize new revenue opportunities on the cargo side.

Cargo Conundrum

While cost may be the most important driver in what carrier a passenger chooses, the same is less true for cargo customers. The complex dynamics of the airfreight industry and the stringent service demands expected by shippers and consignees have placed a premium on air cargo services that add value to their businesses.

Air cargo buyers are increasingly considering the total cost of services, looking beyond just the transportation leg, report Brian Clancy and David Hoppin in the 2003 MergeGlobal World Air Freight Forecast. "Different types of shippers use air freight for different reasons. However, all air shippers have one thing in common: they do not focus on minimizing transportation costs, but rather concentrate on minimizing total distribution costs (TDC) and maximizing economic value-added (EVA)."

TDC reflects all the expenditures incurred in a product shipment lifecycle, from manufacturing, warehousing, distribution, through to delivery; EVA accordingly captures the benefits of a properly-functioning supply chain. What this reveals is that air cargo customers are looking for more complete solutions that can facilitate cargo movement from origin to destination, and not just airport to airport.

Too Much Space

With worldwide demand for air cargo growing at a faster pace than passenger demand, according to the MergeGlobal report, air freight is becoming an increasingly important revenue source for air transporters. Despite this gap, freight yields have been in long-term decline.

Declining mail volume is one obvious explanation for this phenomenon, and increased competition from ground expedited companies has similarly usurped business from air carriers. Another reason for this discrepancy is that passenger airlines are simply not carrying much freight.

Freight load factors for U.S. domestic passenger airlines, which measure the potential capacity of a system relative to the actual performance, fell sharply in 2002. "Air cargo RTMs (revenue ton-miles) transported by passenger carriers declined 10 percent in 2002, down 13.6 percent in domestic markets," reports a 2003 FAA Aviation Forecast. "The greater decline in cargo carried by passenger carriers was due, in part, to the stringent security restrictions placed on the carriage of cargo on passenger aircraft after Sept. 11. It also reflects the large cutbacks in passenger carrier schedules in 2002."

Though cargo RTMs for all-cargo carriers declined 2.8 percent in domestic markets in 2002, there was marked growth in international markets (3.8 percent), reflecting the penetration of expeditors in the global air cargo industry.

The FAA similarly predicts growth in demand for domestic cargo services will occur among all-cargo carriers because of stricter security restrictions for moving cargo on passenger aircraft and the faster growth of freight/express relative to mail.

The fact that cargo load factors are hovering around 30 percent on passenger airlines is nothing new, says Hoppin. "Domestic narrowbody bellies are empty today, they were empty 10 years ago, and they'll probably be empty 10 years from now."

Herein lies the problem facing passenger airlines: cargo needs to command more attention and become a core business rather than a secondary revenue producer. It's a matter of economic utility, says Hoppin. "Their product isn't that interesting, which is to say there is no speed advantage to putting oversized freight on an airplane compared to a truck that goes straight from origin to destination."

Giving Cargo Importance

The challenge for combination carriers is making their services more attractive to potential customers by leveraging the depth and breadth of their networks and services.

"Combination carriers have moved toward developing more time-definite products—products with more guarantees—to try and match what express companies are offering, as well as to improve their yields," says Christopher Reanier, research director for the Air Cargo Management Group, a Seattle, Wash.-based air cargo consultancy. "They can also charge more if they can guarantee time delivery or available capacity."

American Airlines Cargo, by example, retooled its customer service functionality with the launch of its Expeditefs solution last spring. The service puts a new spin on time-definite, offering flight-specific products to cargo customers with precise routings and availability times, notes Spencer Dickinson, managing director cargo marketing, American Airlines.

With full shipment tracking, tail-to-tail hub connections, and improved transit time, Expeditefs moves larger shipments faster than traditional cargo throughout American's U.S. cargo network, giving shippers with bulk freight an added incentive to use its services.

"What we are really homing in on with our customer base is the idea of flight-specific," Dickinson says. "We are going to work with our customers to map out the best way to provide a good service, which might include using trucks to get a shipment to its domestic flight leg."

American also recently expanded its Expeditefs service to benefit international shippers and inbound specifiers who are controlling shipments from South American origins into the United States. The expanded capability provides an express, flight-specific, and guaranteed service for freight throughout American's worldwide cargo network so that it can make faster transfers at U.S. gateway facilities.

Tailoring services and technology to facilitate freight movement is one way carriers are revamping their cargo business to be more things to more customers. But without addressing internal initiatives to better match supply to demand, maximize capacity, and improve yields, the technological and service enhancements will be cosmetic at best.

As a result, passenger airlines such as American are giving cargo more voice in terms of how assets and schedules are used. "We have a capacity management component in our cargo division that is consistently comparing our load history to our booking history," says Dickinson. "This way we can manage the booking process in and of itself, while reviewing what our capabilities have been in post-analysis.

"We also have an individual who works for cargo who is embedded in our scheduling department, so that not only are we reviewing our lower-deck capacities in the schedule but also influencing where we see specific need for air capacity. This may often mean the difference in upgrading from a Super 80 aircraft to a 757, or from a 757 to a 767, or, in fact, making scheduling changes."

What it really comes down to, says Dickinson, is managing the information in the logistics chain. "Clearly there is a set of objectives that shippers have in meeting their needs. The shipper will work with a logistics provider or forwarder to meet those needs. At the end of the day, it is our responsibility to monitor that solution to make sure the customer's demand is met."

Ripple Effect

The ability to offer cargo transportation buyers a total logistics solution, as Dickinson notes, is what separates passenger carriers from their low-fare competitors. Mature low-cost carriers such as Southwest and Alaska Airlines have successfully molded their business model to fill in gaps where they see potential for more business, both in terms of passengers and cargo.

But, by and large, they are exceptions. Realistically, given the asset-lean low-fare model, this cargo dynamic will not change. Passenger airlines will face more pressures from both dedicated freight carriers and trucking for domestic cargo business.

Still, the traction low-fare carriers have gained in the U.S. domestic passenger market is compelling in its impact on how major airlines are reshifting their cargo operations. ACMG's Chris Reanier also speculates how the continued growth of low-fare carriers in the United States and abroad, coupled with anticipated changes in aircraft capacity, will impact feeds to major gateways for international cargo transportation.

"Downsizing capacity too much will impact your ability to haul to the major gateways for freight forwarder consolidation," he says.

Realistically, the traditional mold combination carriers have operated in has crumbled. Low-fare carriers aside, encroaching competition from expeditors and expedited trucking companies, declining mail volume, and security restrictions have forced carriers to be reactive rather than proactive.

Putting back the pieces will require a more concerted effort focusing attention and resources on the cargo side and making product attractive to shippers and consignees.

The Price of Low-fare Fare

Seafood connoisseurs have Alaska Airlines to thank for keeping their plates and freezers stock full of succulent Copper River king salmon this summer. The Seattle-based carrier recently added 18 non-stop cargo flights to Cordova to accommodate an anticipated spike in demand for open season on the Copper River after a record haul of nearly 400,000 pounds of salmon in 2002.

Copper River salmon are the first salmon of the season to return to Alaska and can fetch as much as $20 a pound at market price. Each of Alaska's Boeing 737-200 aircraft can carry about 30,000 pounds of the fish.

Getting them to market as fast as possible is of utmost concern to Alaska Airlines and its food retailer customers, as well as the restaurants that count on early-season demand for fresh salmon to spice up their fare.

"Our goal is to get these fish to market in hours," says Keola Pang-Ching, Alaska Airlines' director of cargo, noting that the first fish of the season can be available in supermarkets and restaurants in Washington and elsewhere the day the season opens.

Since it has begun operating non-stop services from its Seattle hub to East Coast markets including New York, Boston, and Miami, Alaska Airlines can ship salmon at a cheaper price and in faster time windows to customers.

"Now we can take seafood from anywhere in Alaska and with one price-per-pound make it a lot more cost-effective for someone trying to ship 10,000 pounds of Copper River salmon to Boston," says Pang-Ching. "Prior to our non-stop service, we had to transfer that cargo and revenue to other carriers. Now we can keep that revenue on line and it's a lot more cost-effective for the customer."

Alaska Airlines has also been able to leverage its new routes to fill lucrative backhaul capacity. For example, Boston Lobster Co., a Boston, Mass.-based lobster fishery, began shipping lobster to the West Coast when Alaska Airlines began flying the Boston-to-Seattle lane.

"I can drop shipments here in Boston at 3 in the afternoon for a 7:30 flight, which gets to Seattle at 11 Pacific Time. Then the customer picks it up first thing the next morning," says Lee Smith of Boston Lobster. Prior to this arrangement, Boston Lobster would move product through Chicago, Denver, or other transitional hubs.

And seafood isn't the only perishable commodity that lends itself well to Alaska's direct flights. Hassett Air Express, a Chicago-based airfreight forwarder that specializes in transporting time-sensitive published goods, has similarly partnered with the carrier to move shipments from the West Coast into Alaska, and most recently from the East Coast to Seattle.

"We consider all the printed material we carry to be perishable, because all the material has an issue date. If it arrives late it's pretty much fish wrap," says Don Prentice, national director of customer service, Hassett Air Express. Alaska Airlines is willing to step outside the box to get things done."

Whether it means going outside the box or inside the continental 48, operating non-stop flights is an added quality control incentive for Alaska Airlines' customers.

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