Global Logistics—April 2016

Global Logistics—April 2016

Air Cargo Struggles to Find its Wings

Times are tough for the air cargo industry. Despite the fact that the rest of the world seems to be recovering from the global financial crisis, air freight just can’t seem to sustain any type of upward momentum. The industry has gone from a $67-billion annual profit in 2011 to just $50 billion in 2015, according to a report presented at the Air Cargo World Symposium in Berlin in March 2016.

Many factors are choking the air cargo sector and causing some cargo-only airlines to cease operations. These include:

  • The big shots. E-commerce retailers rely on the big three in logistics to handle most of their cargo. UPS, FedEx, and DHL operate with seemingly unlimited resources, making it hard for other providers to compete. Amazon’s recent moves toward its own air fleet will likely make competition even more difficult in years to come.
  • Belly up. Many airlines rely on selling extra belly space in passenger planes to move cargo. Increased passenger demand over the past several years has meant increased belly space as well, but this also means that some airlines are inadvertently using passenger planes to compete against their own cargo fleets. As such, air carriers are only using an average of 43.5 percent of their total capacity, according to The Economist.
  • Rate troubles. Sea-freight rates have fallen 75 percent since 2012, says The Economist. Because moving cargo by sea has traditionally been less expensive, those types of rate drops don’t make it any easier to convince shippers to move cargo by air. In response, air cargo carriers are forced to cut their own rates to remain competitive.

So what can the air cargo industry do? The International Air Transport Association (IATA) thinks the way forward lies in technological advancement. If the airfreight industry wants to stay in the clouds, changes will have to be made—and quickly.

"Developments such as e-tickets, barcoded boarding passes, airport self-check-in kiosks, and in-flight Wi-Fi have transformed the passenger experience. Is it a coincidence that after a decade of change, load factors are at record highs and airlines are finally rewarding their investors with adequate returns?" says Tony Tyler, IATA director and CEO. "We need similar breakthroughs on the cargo side of the business.

"There are lots of potential disruptors out there—data-sharing platforms, new market entrants, and e-commerce," he adds. "The challenge is to stay one step ahead in satisfying customer expectations."

This may be easier said than done, but with the IATA predicting another 5.5-percent drop in cargo yields in 2016, the industry may no longer have any choice but to implement new practices, make major technology and service investments, and then hope for the best.

U.S. Attracts Chinese Investors

Things don’t look good for economic growth in China, but that looks good for Chinese investment in the United States. Thanks to stock market problems and poor economic growth, Chinese companies have begun to diversify their assets by investing in the United States, according to law firm O’Melveny’s 2016 Foreign Direct Investment Report.

With limited opportunities for growth in China, nearly half of the strategic and financial investors responding to the survey are setting their sights across the ocean to the United States and its 47-percent economic growth potential.

"Companies that were accustomed to growing 15 percent to 20 percent just by relying on the Chinese economy to supply them demand can no longer grow like that," says Nima Amini, a partner in O’Melveny’s Hong Kong office. "Additionally, the competitive landscape in China is dramatically increasing."

The survey results also contradict themselves, with 38 percent of respondents viewing U.S. regulatory structure and laws as attractive, while 48 percent see the same legal structure as an investment barrier.

"The very attributes that make the United States the most attractive destination for investment in the world can also present challenges to investors," says Steve Olson, a partner in O’Melveny’s Los Angeles location.

"We are the largest fully developed consumer market in the world, but a highly competitive market," he adds. "We’re the most open economy in the world, but certain foreign investments will be reviewed for national security implications. We’re blessed with an effective and predictable legal system, but U.S. businesses face a high rate of litigation."

A fair share of the Chinese investment will come from the industrial and manufacturing sectors, with nine percent of respondents claiming that field as their line of business. Three percent of respondents claim transportation.

If the survey results prove accurate, the manufacturing and transportation sectors can expect significant investment offers from potential Chinese partners in the months to come.

Here are some additional key results of the O’Melveny report:

  • 84 percent of survey respondents say that their investment in the United States will be higher in 2016 than in previous years.
  • 62.5 percent rank the United States as one of their top 10 markets for investment; 13 percent rank it the No. 1 spot for investment.
  • 47 percent agree or strongly agree that the United States is the most attractive market for investment.
  • Two-thirds of respondents will target public or privately held companies for investment.
  • U.S. laws and regulations, while seen by some as an attractive factor, also ranks as the top reason for the greatest barrier to U.S. investment.
  • Respondents identify the frequency of litigation and industry-specific regulations as the biggest areas of concern regarding U.S. investment.
  • Respondents see economic growth potential as the most attractive factor for investment in the United States.

A Quiet Shark Attack

To address new airport noise regulations, Lufthansa is fitting its medium-haul Airbus A320 fleet with "sharklets," which are 7.8-foot wingtip extensions. The sharklets’ design is modeled after nature. Large birds, such as cranes and condors, bend their outer feathers upward and thus fly in a more energy-efficient way. Accordingly, sharklets reduce lift-dependent resistance and improve aerodynamics at the wingtips.

Depending on the length of the route, the sharklets offer approximately four percent in fuel savings, along with correspondingly low CO2 emissions. The sharklets improve the plane’s climbing performance, thereby reducing noise emissions during take-off.

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