Air Cargo’s Future: Ready for Anything
Developing international markets and growing consumer confidence raise hopes for increased airfreight demand.
The airfreight industry added a new route in May 2012: from earth to space. The unmanned, privately owned SpaceX Falcon 9 rocket’s nine-day trip delivered a payload of 1,300 pounds of food, clothing, and scientific cargo to the space station—potentially the first of many commercial cargo transports into space. Closer to home, the outlook for the airfreight industry is mixed. Bright spots such as the rise of e-commerce—which frequently involves expedited shipments—combine with a still-faltering economy, increasingly onerous security requirements, and high fuel costs.
Overall, airfreight traffic declined about one percent from 2010 to 2011, according to Air Cargo Management Group (ACMG), and annual growth averaged just 2.6 percent from 2001 through 2011—less than half the historic rate.
The news, however, is not all bad. In 2011, international express shipment volumes grew 3.6 percent, reaching 2.3 million daily shipments. And in 2012 to date, the total airfreight market has grown four percent, according to the International Air Transport Association (IATA), with Middle Eastern airlines leading the pack.
Demand has picked up for Asia-to-United States air freight, and anticipated tech product launches could drive volume increases in the second half of 2012. Air cargo traffic between the United States and South America has also been heavy.
Areas of Concern
The global air cargo industry faces its share of challenges. These include:
- High fuel costs. Fuel costs continue to impact air freight, but most players view the price volatility as a cost of doing business over which they have little control. Fuel represents almost half the global expenses for air cargo carrier Cargolux, for example, and the first-quarter fuel bill at Southwest Airlines Cargo was $478 million higher in 2012 than in 2011.
- Europe’s economic woes. "The economic crisis is heavily impacting the European airfreight market, with the exception of Germany, which has a strong economy," says Michael Steen, chairman of The International Air Cargo Association (TIACA). As declining consumer confidence weakens demand, the implications for the global economy—and airfreight demand, specifically—are uncertain.
- Nearshoring. A nearshoring trend is bringing some U.S. brand manufacturing back to Mexico from China, leading to a mode shift from air to over-the-road.
Many of freight forwarder Mach 1 Global Services‘ customers have moved production from China to India or Vietnam. In the past two years, several companies have returned to Mexico based on current total landed cost calculations.
"Many companies actually spent more moving to China," says Rob Lively, chief operating officer, Mach 1 Global Services. An airfreight shipment from China to the United States that costs $20,000 might cost just $7,000 from Mexico.
While air cargo carriers face challenges, they also can seize opportunities. Developing markets are a particularly bright spot. As labor rates rise in coastal China, many manufacturers are shifting production to the country’s inland regions, Asian countries west of China, Africa, and South America, particularly Brazil. Interest is also growing in Russia.
Airfreight carriers are responding with new routes and services to these developing locations. Lufthansa, for example, operates a cool pharmaceutical hub in India to accommodate pharma shippers.
The outlook for domestic air cargo traffic is a mixed bag. North American carriers showed a 6.4-percent drop in demand with a 2.9-percent cut in capacity in April 2012, compared to April 2011, according to IATA. But growing U.S. consumer and business confidence has many experts optimistic about the balance of 2012.
For largely domestic air cargo carrier Southwest Airlines, 2012 is far surpassing the past few years, with stable vertical markets such as life sciences, pharmaceuticals, and diagnostic specimens—as well as the more volatile electronics, retail, and automotive industries—all doing well.
The airline is poised to introduce a GPS solution that enables shippers to track the location and condition of high-value, time-critical, or other important shipments. Air cargo users such as Quick International Courier, a Southwest customer, view GPS as adding even more visibility to a supply chain that has already benefitted from technology’s ability to transact and track shipments.
For example, life sciences customers will be able to ensure a package’s temperature and integrity are maintained. "We’ve always had to give up control at some point," says Robert Mitzman, president and CEO of Quick International Courier. "Eventually, we will have visibility into a shipment’s entire trip."
In the expedited domestic market, shippers and forwarders have faced capacity constraints in the past year. "We’re holding our own; supply is meeting demand," says Lively. But issues such as rising fuel costs, shrinking capacity, increasing regulations, and customers accepting longer transit times in exchange for lower costs concern him. "The long-term direction of the domestic airfreight market is uncertain," he adds.
Sometimes meeting airfreight challenges calls for creative solutions. One example is the use of regional airlines to avoid the congestion and delays that can occur at major airports. Regional airlines tend to use smaller airports and require less time for tendering. Shipments also need less robust packaging, because handling is often manual.
A less-congested airport can also mean more on-time flights and faster movement from plane to cargo facility. Southwest Airlines cut its teeth on this approach, and continues to use smaller airports such as Houston’s Hobby Airport, while also serving larger airports.
One shipper applying this strategy is Clinical Pathology Laboratories Southeast (CPLSE), a division of Sonic Health Care, based in Sydney, Australia. When the company consolidated several labs it had acquired throughout the Southeast, it needed a fast, cost-effective way to move specimens into its main U.S. facility in Orlando, Fla. Ground transportation was not fast enough to accommodate the overnight results clients expect.
CPLSE tried buying a plane and hiring pilots, but ran into on-time issues and frequent cancellations. So the company approached both national and regional cargo airlines for a solution. Today, the bulk of CPLSE’s daily shipments move via AirNet Cargo Charter Services, a small-package express cargo airline based in Columbus, Ohio.
In addition to improved on-time performance and fewer cancellations compared with its own plane, CPLSE enjoys the service levels of a regional cargo carrier, says William Pesci, division president of CPLSE. AirNet’s management, for example, meets with CPLSE regularly to enhance service, and ensure that tendering daily loads runs smoothly.
"With national carriers, the service may not be as personal," Pesci notes.
AirNet moves critical small-parcel cargo, such as diagnostic samples, through its scheduled and on-demand services to secondary airports in North America, such as Teterboro, N.J. The company’s fleet of smaller aircraft, including Learjets and Cessnas, carries payloads up to 3,000 pounds, partnering with ground courier services to complete deliveries.
This approach minimizes security processes, while accommodating industry-specific requirements such as spill kits, radiation exposure placards, and Hepatitis B shots for pilots. AirNet screens cargo, but "we don’t have to go through the known-shipper process, or a two-hour lockout," says Frank DiMaria, senior vice president of sales and marketing for AirNet. "We can tender planeside."
Smaller forwarders are experiencing similar success. "Small niche carriers are able to grab market share from larger companies, particularly in pharma, trade shows, and perishables," says Brandon Fried, executive director of the Air Forwarders Association (AFA). "Companies are restocking their shelves; inventory is down and demand is up."
Moving goods safely and securely is a priority for airfreight carriers. But mounting regulation is challenging their ability to operate efficiently. Costs associated with security today are 10 times more than in 2001, reports Lufthansa.
"Security is a double-edged sword," says Lively. "Protecting the public is paramount, but it is hurting the industry, and poses a challenge for all air cargo carriers. We are collectively trying to find a middle ground."
In May 2012, the U.S. Transportation Security Agency (TSA) set a Dec. 3, 2012, deadline for passenger air carriers to begin conducting 100-percent cargo screening for explosives on international flights bound for the United States, as prescribed in the 9/11 Commission Act. Currently, about 80 percent of all incoming international cargo and 100 percent of high-risk international cargo is screened, according to the TSA.
The requirements build risk-based, intelligence-driven procedures into the prescreening process, with enhanced screening for high-risk shipments, and other physical screening protocols for lower-risk shipments.
Complying with this requirement has proved challenging for air cargo carriers. "TSA has no jurisdiction overseas," notes AFA’s Fried. "Carriers have to enter into agreements with other countries to screen cargo the way the United States does."
Efforts to harmonize requirements among countries are moving slower than hoped, and the AFA anticipates that if the United States can’t get other governments to cooperate, the burden will shift to carriers. "If that’s the case, airlines will probably not be totally prepared, leading to congestion, delays, and missed flights," Fried says. The organization advocates a program that differentiates screening requirements for frequent, known shippers from occasional shippers.
The Global Air Cargo Advisory Group (GACAG) is spearheading efforts to harmonize several aspects of international air freight, including security regulations. Currently, efforts to reconcile security processes among countries are piecemeal, although the agreement signed in May 2012 by the European Union and the United States to mutually recognize each other’s known shippers represents progress.
"Now that the United States and the European Union have signed a long-awaited accord to recognize each other’s airfreight security regulations, airlines are hoping for swift implementation to achieve efficiency gains," says Frank Reimen, president and CEO of Cargolux.
Changes are also afoot in the United States’ Air Cargo Advanced Screening Pilot Project, in which forwarders and carriers submit advanced electronic house bill of lading (BOL) data from shippers. Currently, the BOL must be filed four hours prior to the aircraft’s arrival in the United States; a proposed new rule would require it before departure.
"This is a paradigm shift," says Fried. "Many airlines hold on to this information and file it after departure," which gives them buffer time to compile data. If the rule passes, airlines will need to build extra time into their procedures—time that could endanger last-minute shipments, such as critical medical cargo.
Evolving U.S. cargo screening requirements are also challenging the air cargo supply chain. The voluntary Certified Cargo Screening Program is expanding from phases covering express and passenger air carriers and freight forwarders to include heavy all-cargo air carriers. To date, more than 55 percent of air cargo is screened prior to its arrival at the airport, according to the TSA.
Sustainability is also becoming an increasing concern, but it can be challenging for shippers to directly pressure carriers on sustainability issues. "We find it difficult to push freight forwarders to decrease carbon fuel use," says Bob Scribner, director of global logistics and trade compliance for manufacturer Fairchild Semiconductor. "They’re at the mercy of commercial airlines."
Airlines stand to make the largest sustainability gains by replacing aging aircraft with new, more fuel-efficient models. Aircraft currently in use are 70 percent more fuel-efficient than the first generation of jets, emitting proportionally less carbon dioxide (CO2), according to IATA.
The newest generation of airplanes offers an additional 15- to 20-percent improvement in fuel usage and CO2 emissions, as well as reduced footprints.
The industry’s planned transition to biofuels has the potential to make aircraft carbon-neutral, because burning the fuel only releases the carbon absorbed by the feedstock plants that make up the fuel.
Airlines have also pushed for more efficient air traffic control systems, which TIACA says could improve fuel efficiency and CO2 emissions by up to 12 percent. In the United States, the FAA Modernization and Reform Act of 2012 includes $11 billion toward modernizing the air traffic control system, including switching from radar tracking to GPS. Efforts to improve coordination among air traffic control authorities in Europe, however, continue to languish.
Another ongoing issue is Europe’s Emissions Trading Scheme for aviation, a tax on airlines intended to fund environmental efforts. TIACA contends that the money is better spent enabling airlines to purchase new, more energy-efficient aircraft, an investment many cargo carriers are making. An extensive backlog exists for widebody freighters following a record year for freighter orders in 2011, which could mean excess capacity in the airfreight market in 2012.
Enthusiasm is also widespread for advancing the use of electronic documentation, which promises to enhance the industry’s security, efficiency, and sustainability by replacing paper documentation with online transactions. Interest in IATA’s electronic air waybill (e-AWB) project is particularly high. GACAG is currently reviewing the project—which promotes electronic, harmonized Customs procedures as well as other initiatives—to recommend an industry roadmap.
The e-AWB is intended to replace the 30 different paper documents an airfreight shipment generates with electronic communication. It removes the requirement for a paper waybill, and promises to enable more accurate information, deliver confidentiality and efficiency, reduce paper handling costs, and expedite delivery times. IATA has set a goal for 15 percent e-AWB usage by the end of 2012, 70 percent by the end of 2013, and 100 percent usage the year after.
But questions remain as to how to resolve multiple e-commerce platforms, who will fund the required infrastructure, and how to ensure pervasive government support of paperless Customs clearances. "We need to make sure the value proposition is shared," says AFA’s Fried.
The airfreight industry is depending on the efficiencies promised by new freighters, electronic documentation, harmonized standards, and updated air traffic control systems.
Despite economic uncertainties and regulatory requirements, air cargo carriers are ready for anything.
Shippers Remain High on Air Freight
Current airfreight market conditions have shippers such as Fairchild Semiconductor, a leading global provider of semiconductor technologies, feeling confident. Despite its considerable use of airfreight lanes, primarily in the Pacific Rim, the company’s well-negotiated, long-term contracts mean “we have not felt the effects of shrinking capacity,” says Bob Scribner, director of global logistics and trade compliance. “I don’t expect a price increase in this year’s contract renegotiations; in fact, I expect to save a little bit, because Fairchild is a steady user and fair to vendors.”
For Fairchild Semiconductor, tight cycle times and a short inventory pipeline mean at least 90 percent of its cargo moves by air, including packaged and consolidated air express, and standard freight forwarder-type pallet loads.
The company makes smart use of intermodal transport. China remains a major location, but to reach countries such as Thailand and Malaysia without the cutoffs and delays that can occur with air shipments, Fairchild has shifted some cargo to long-haul trucking for distances of less than 1,000 miles.
“The journey takes about 24 hours longer, but it comes at significantly lower costs,” says Scribner.
Lights Out on Night Flights
Air cargo carriers and shippers are decrying the recent upholding of a night-time flight ban at Germany’s Frankfurt Airport. The ban prohibits flights between 11 p.m. and 5 a.m., and restricts flights just before and after that time period.
The International Air Cargo Association (TIACA) predicts economic fallout, including reduced future investment by companies at the airport, job losses, increased trucking, and higher consumer prices for products such as perishables.
The ban has cost Lufthansa more than $32 million in lost revenue and less-productive aircraft use, as well as schedule restructuring.
“Our Chicago-to-Frankfurt flight used to depart at 2 a.m. or 3 a.m.; now it leaves 12 hours later,” says Michael Göntgens, spokesman for air carrier Lufthansa Cargo AG, whose main hub is in Frankfurt. “That’s a less-attractive schedule for customers.”
Air cargo carrier Cargolux, whose main hub in Luxembourg has long banned night flights, advocates tying the level of some landing fees to the noise emissions of the aircraft, as is the practice in Luxembourg and Amsterdam.
Many airfreight industry experts question the ban’s validity. Brandon Fried, executive director of the Air Forwarders Association, notes that the ruling is based on vague scientific evidence, and cites the dramatically reduced noise levels emitted by today’s aircraft. They are 90 percent—about 30 decibels—quieter than the first jets introduced nearly 40 years ago, according to TIACA.