Air Cargo Navigates Uncertain Skies

When it’s imperative that freight arrives overnight, or even sooner, shippers of time-critical goods including donor organs, emergency airplane parts, or critical legal or financial documents often turn to Aeropoint Delivery Services, an Atlanta-based time-critical delivery courier.

That means Aeropoint is heavily impacted by air cargo trends: when a carrier downsizes a plane on a Boise-to-Chicago route, for example, that reduced capacity could send Aeropoint scrambling for a different way to transport a shipment.

Unfortunately, such aircraft downsizing has been one response to pressures faced by the $55-billion air cargo industry as carriers seek ways to cope with fuel cost uncertainty, increased regulation, financial struggles, trade imbalances resulting in unused backhaul, and competition among themselves as well as from expedited, time-definite ground services and ocean shipping.

Analysts place the international industry growth rate at a modest 2.3 percent year-over-year as of March 2007, according to the International Air Transport Association (IATA), but note high variability behind those numbers.

Some international routes, such as Asia to North America, are growing much faster than well-established routes such as North America to Europe, while domestic air cargo is slightly down overall.

“Three cargo trends are key right now: the concentration of growth in Asia, an increasing trade imbalance, and losing business to ocean shipping,” said Giovanni Bisignani, director general and CEO of IATA, at the recent IATA Cargo Symposium 2007, held in Mexico.

Dealing with Globalization

The globalization of manufacturing has strongly impacted air cargo. In concert with their customers, air cargo carriers and integrators continue to grapple with the right distribution of capacity and services to manage growing output from China and other Asian markets.

“The TransPacific market has been chaotic in the last year—supply outpaced demand, and the industry endured a weak peak season and significant capacity ramp-up,” says Brian Clancy, managing director of MergeGlobal, a Washington, D.C.-area consultancy. “Many carriers have eliminated frequency or pulled out of certain city markets entirely.”

By 2010, Intra-Asia will account for 26 percent of total international freight, according to IATA. But concerns are growing over how well the infrastructure can handle that volume, as well as possible bottlenecks at export gateways.

Despite these challenges, “transporting global freight via air still makes sense for many products—including apparel, footwear, high-value consumer electronics, and high-tech computer components—to offset demand variability,” says Clancy.

The shorter transit times more than offset the cost of air freight for these products because they are difficult to forecast over the long term, he notes.

“Long-term price deflation, however, is occurring across all consumer product segments,” Clancy says. “At some point, it will be a challenge for these companies to continue using air freight on a planned basis.”

That inflection point could arrive sooner rather than later due to rising fuel prices and a widening trade imbalance. For many shippers, ocean transportation is becoming a viable option.

“Companies currently transporting medium-value SKUs via air freight may switch to ocean to take advantage of new consolidated ocean/trucking services,” says Clancy.

“Direct sailings and expedited inbound options have increased and infrastructure at ports is improving,” adds Eric Bond, COO of Mach 1 Air Services, a freight forwarder based in Phoenix, Ariz. “Ocean carriers are filling capacity quickly and getting creative with inbound services.”

From 2000 to 2005, ocean container freight grew at twice the rate of air cargo and will grow at a 7.2-percent rate through 2010, compared with air freight’s 5.3 percent, according to IATA.

In addition to luring away scheduled air shipments, consolidated ocean offerings may even siphon off some last-minute shipments that typically go via air, in cases where certainty of delivery outweighs speed.

This trend away from air cargo isn’t limited to international freight movement; expedited trucking is making significant inroads in domestic shipping as well.

“The industry is undergoing a mode shift,” says Neel Shah, vice president of sales and marketing for United Air Cargo.

“Domestically, freight moving within 1,500 miles is usually shipped via truck. The domestic market for air cargo today is limited to transcontinental shipments and to states unreachable by truck.”

Domestic air carriers’ financial struggles have created uncertainty in the market, which has many freight forwarders engaging in contingency planning, and carriers seeking to secure their place in the industry.

“Air carriers are being tested now,” says Matt Buckley, senior director of cargo, Southwest Airlines Cargo. “Carriers that want to stay in business must invest in the resources to provide cargo customers high service levels.”

Cushioning themselves from such uncertainty is one reason shippers such as Avnet, a Phoenix electronics distributor, rely on freight forwarders for both domestic and international service. On any given morning, Avnet’s scheduled shipments account for only 20 percent of what it will ship that day.

“Being able to call a forwarder at 4 p.m. Saturday and arrange a shipment to Warsaw, Poland, is more commonplace now,” says Mike Madeleine, director of global transportation for Avnet. “To meet customer needs, we have to work with a flexible provider that offers a variety of services and can make the process seamless. We want to work with a known entity, not a partner of a partner of a partner.”

That need is accentuated as Avnet’s business continues to grow globally. To ensure its forwarders meet Avnet’s demands, the company rates its providers each month.

Express Cruises Ahead

Air express service, which MergeGlobal expects to account for 25 percent of the airfreight market in seven to 10 years, is less vulnerable to the industry’s troubles. International express volumes grew 9.5 percent from mid-2005 to mid-2006, dominated by integrated express companies, according to the most recent numbers from Air Cargo Management Group, Seattle.

Southwest Airlines Cargo, for example, reports its scheduled airfreight business is flat, but posts greater than 20-percent annual growth for its next-available-guaranteed and rush services.

This growth has enabled Southwest to invest in new POS/booking, capacity management, salesforce, and security technology, while kicking off international expansion—adding its own planes and forming targeted partnerships.

Couriers such as Aeropoint rely on express service to satisfy customers’ time-critical shipment needs.

“If we send a customer shipment to a location more than 200 to 250 miles away, we transport it by air,” explains Stephen Divine, president of corporate sales for the Atlanta courier. “Customers dictate their time parameters and we decide how best to ship.”

The company sends 95 percent of its shipments via air, largely through scheduled service with commercial airlines such as Southwest, though its own 17 aircraft are available for charter flights.

One issue even express providers are not immune to is fuel surcharges. With oil prices skirting $67 a barrel (as of press time), and the summer travel season looming, fuel surcharges are expected to continue, impacting all sectors of the air cargo industry.

“We now examine fuel surcharges weekly,” says Divine. “Two years ago, we checked them only once per quarter.”

Surcharges are currently at increased levels because carriers expect continued volatility and high prices for the remainder of the year, says United’s Shah. Hedging is one strategy to counter the impact.

“Ninety percent of Southwest’s fuel is hedged at $50 a barrel,” says Buckley. “We’re trying to hold firm.”

Shipping rates are similarly in flux. Some markets are experiencing strong price swings thanks to the ongoing dance between capacity and demand. Speculation ensues over whether rate increases and surcharges will start to box out some shippers. Companies importing and exporting with China may be in for a tough ride.

MergeGlobal’s Clancy expects overcapacity in China will result in a tightening of prices there this fall, while other Asian markets experience weaker pricing. “China grows at the expense of other markets in Asia,” he notes.

Like all shipping modes, air cargo businesses continue to absorb security measures imposed over the past few years and anticipate stringent requirements ahead.

The numerous—and ongoing—attempts to pass legislation requiring 100-percent screening of cargo on passenger flights poses the biggest threat. IATA opposes 100-percent screening because it believes the expense—an estimated $3.6 billion over 10 years—is prohibitive.

Also concerning the industry is a proposed pre-notification plan from U.S. Customs and Border Protection (CBP) that will require importers to provide 10 additional data elements about their shipments 24 hours prior to foreign lading. The plan would require two data sets from ocean carriers. CBP intends to expand the concept to other modes in the near future, a prospect that worries air cargo executives.

“Pre-notification will change all our procedures,” says Aeropoint’s Divine. “We’re very concerned.”

Bond of Mach 1 predicts both a cost and a time impact if pre-notification becomes a reality, delaying airfreight movement by as much as one day. “The information CBP is requesting is often not available until the time material ships,” he explains.

Increased security regulations are expected to have a significant effect on shippers such as Avnet. For electronics distributors, being able to commit to delivering orders first often means winning the sale, and overnight service is the norm.

Avnet is not waiting on the outcome of pending legislation to act, however; the company has already attained Customs-Trade Partnership Against Terrorism (C-TPAT) certification and supports Technology Asset Protection Association (TAPA), the group behind a set of freight security requirements in the high-tech industry.

Connecting a Disconnect

Security is also one of IATA’s top priorities. The organization has formed an Air Cargo Security Action Group to better convey to governments what it believes is a disconnect between the current direction of regulation and measures that would actually accomplish security goals.

Meanwhile, IATA’s e-freight program aims to ensure security and improve air cargo’s competitive position by eliminating the need to produce and transport paper documents for air cargo shipments. Its goal is to switch to an industry-wide, electronic shipping environment.

Despite the industry’s many challenges, air cargo executives are cautiously optimistic about the future. Carriers and integrators are continuing to invest in fleets and equipment, and are expanding service offerings.

All involved in the industry share a common goal: to retain customers and keep competition from other modes at bay.

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