- THE MAGAZINE
- INFO CENTER
Click directly to the subtopics of interest in this air cargo article
The value of air cargo is increasing, but the revenues carriers earn per ton is decreasing for both domestic and international flights, according to the Council of Supply Chain Management Professionals’ (CSCMP) 23rd Annual “State of Logistics Report,” released in June. A confluence of factors is contributing to this trend; not least among them is the economy.
The U.S. and international economies are among the first variables mentioned when the future of air cargo is broached. Anxiety over the EU banking crisis, the burgeoning U.S. debt and the Iranian fuel embargo are creating a ripple effect that is dampening consumer confidence and manufacturing. In Rasmussen polling for June, 53 percent of Americans rated the U.S. economy as “poor.” Meanwhile, air carriers are focusing on efficiency and cost reduction, as shippers reassess their options.
The CSCMP report notes that, “High inventories have curtailed spending on air freight for replenishment.” Overall, the International Air Transport Association (IATA) projects net post-tax profits for the whole industry to fall from $7.9 billion in 2011 to $3 billion in 2012.
Despite that dismal prediction, IATA also predicts a slight uptick in air freight volume, particularly among Middle Eastern airlines. Latin America also was pegged as a high growth market as American companies continue to near-shore production. Its infrastructure, however, remains challenging. “Entry in to South America and Africa continues to be a struggle,” according to Melissa Stephanou, sourcing manager at Echo Global Logistics. “Many of our partners simply won’t service those regions as it is just too unpredictable.” Consequently, traffic shifting to emerging regions should expect capacity issues and cost volatility.
UPS spokesman Mike Mangeot puts it: “We examine volume trends on a daily basis for our domestic and international customers and add or take down flights accordingly.”
China, in contrast, is rapidly improving its infrastructure as manufacturing moves inland. It has pledged to add 44 new airports to the 177 operating now. They will service China’s own industry as well some of the growth from Indonesia and Vietnam as manufacturing shifts west to even lower-cost markets.
As global manufacturing preferences shift, lift capacity and routes may be challenged. Cargo carriers, like UPS, may have greater flexibility than passenger planes. Because UPS manages its own fleet of planes, it can easily adjust its network to match customer demands. As UPS spokesman Mike Mangeot puts it: “We examine volume trends on a daily basis for our domestic and international customers and add or take down flights accordingly.”
“There are niche signs of hope, however,” says Brandon Fried, executive director of the Airforwarders Association (AfA). “Trade show shipping is increasing, and niche forwarders in the perishables markets, including food and pharmaceuticals, are gaining market share.”
Because small freight forwarders usually work with smaller margins and are nimble, increasing flexibility, they are gaining market share at the expense of some of the larger freight forwarders, Fried explains.
Time-sensitive industries also continue to rely upon air freight. As Ty Griess, of Echo’s expedited services, points out, many industries depend upon air cargo to meet their commitments to downstream manufacturers. For example, Griess says, “The auto industry has heavy fines and penalties for their suppliers if manufacturers must halt production because of the lack of raw materials or supplies. Fines could be tens of thousands of dollars for every day of delay.” A risk benefit analysis shows, “it may be cost-effective for suppliers to routinely ship components by air cargo. For large shipments, it may make sense to charter an entire plane.”
IATA’s June economic forecast predicted capacity will grow 3.3 percent globally, but only 0.1 percent in North America. In contrast, it is expected to grow 13 percent in the Middle East. Airlines in the rest of the world can expect capacity to increase between 3 and 7 percent. Cargo miles flown show comparable increases.
In the United States, airline consolidation is a frequently-mentioned constraint. “It’s a risk,” says John Costanzo, president of Purolator International. “I’ve been watching capacity diminish during the past 30 years.”
About one third of the air cargo entering the United States is carried on passenger planes. The remainder enters on dedicated cargo carriers, according to the Department of Transportation. Yet, according to the Airlines for America, the number of daily flights has dropped 21.5 percent between March 2001 and March 2012.
“Commercial carriers are concerned first with passengers, then with mail and finally with cargo,” Costanzo emphasizes. As corporations keep a close eye on business travel, “Passenger airlines are getting smaller planes, which reduces their cargo capacity,” Fried adds.
There are some exceptions however. “The Boeing 747-800 series is 17 percent larger than the 747 model. With its longer range (4,390 nautical miles), it is used mainly for intercontinental runs. So far, seven airlines throughout the world have accepted delivery on 22 of the new aircraft. Compared to the 747-400F, the new models is 16 percent more efficient per ton mile, and 11 percent more fuel efficient than the Airbus A380.
Fleet efficiency will become increasingly important, unless the European Union drops its controversial new Emissions Trading Scheme (ETS) for airlines. IATA Chairman Peter Hartman continues to urge the ETS to cancel implementation “to avoid an unnecessary trade war.”
Hartman’s not alone; 23 nations signed the Moscow Joint Declaration decrying the ETS. Its legality has been questioned by the FAA, the Airlines for America trade association and others throughout the world. China has forbidden its airlines to comply.
A summer 2012 compromise was suggested by Airbus, which stands to lose $14 billion in orders from China if the scheme is implemented. The European Union, however, maintains it is committed to taxing carriers for carbon emissions for the duration of all flights that either begin or end in the European Union.
“Airlines also are struggling with fuel costs,” explains Fried. Fuel efficiency is taking on greater importance as airlines downsize fleets and aircraft. Jet fuel prices rose throughout 2011, but dropped somewhat during the summer. Future prices may depend upon the outcome of the Iranian fuel embargo, with repercussions on costs, schedules and flight frequencies.
Last year, Iran provided 5 percent of the world’s liquid fuel supply. In June, just before the oil embargo took effect the global benchmark crude oil price was $92.94 per barrel. By July 3, the third day of the embargo, it had increased to $99.89.
Costanzo projects fuel costs to rise in response to the fuel embargo with Iran. “We’ll deal with it the same as everybody else: by offsetting the expense with fuel surcharges. When the cost decreases, the surcharge will decrease, too.” Purolator, which operates between the United States and Canada, also hedges its fuel purchases against price and exchange fluctuations, in an attempt to minimize costs.
UPS has taken the extra steps of computer-optimizing its flight routes to minimize fuel burn. “We have another system that minimizes taxi times to reduce fuel burn on the ground,” Mangeot says.
Concerns over increasing fuel costs are causing shippers to reassess their options, looking to other modes of transportation or bypassing freight forwarders to negotiate directly with carriers.
Even heavy-weight shippers are turning away from freight forwarders. “This is surprising in heavy-weight air,” Ryan says, but helps those shippers to get better pricing.
As Ryan explains, “Shippers had hoped forwarders were doing a good job managing fuel,” in terms of choosing air carriers for their clients. They learned, however, that fuel analyses for air transport were less detailed than those used by over-the-road haulers or ocean transport.
“For example,” Ryan says, “air transport typically used a formulaic approach that failed to account for the jet stream, or its fluctuations, among many other factors.”
Consequently, the price of shipping a package on an eight hour flight from Chicago to Paris is the same as the nine-hour return flight from Paris to Chicago, yet some additional 3,600 gallons of fuel were used. Then, when the new EU carbon taxes are factored in, the significance of efficiency further increases.
The regulatory constraints and mounting costs associated with air cargo are causing some shippers to rethink their decision to use air, Ryan continues.
“AfA members are also seeing the load shifting away from air,” Fried reports. “Domestically, shippers are shifting to trucks to cut costs and to reduce the hassles of U.S. security requirements.”
High-value or time-sensitive goods will continue to use air freight, but lower value items that have more flexibility are beginning to shift to other modes.
“For lower value goods, the decision is a customer service play,” Ryan says. “The average value of goods per kilo, shipped by ocean freight is $1. For air, the value is $116.”
Exact figures differ by source, with the constant of wide value gaps. In Australia, for example, air freight has an average value of $117.90 per kg, versus 36 cents per kg for sea cargo, according to a 2007 Booz & Company analysis. More modestly, a 2006 study for the International Air Cargo Association indicated the average value-to-weight ratio of air-shipped goods was 31 times higher than that of vessel-shipped goods. “So,” Ryan says,” having high end inventory tied up on water is unbearable.”
Organizations shipping lower cost goods may find that advance planning and the increasing capacity of ocean freight can substitute for air freight. “Cost pressures may cause people to rethink their historical decisions to get better pricing,” Ryan says. For example, even just-in-time manufacturing can use low-cost alternatives to air freight by scheduling orders earlier in the supply cycle.
Shippers are just awakening to these options. “Too often, they are oblivious to the service level they’ve been getting, even in terms of the time it takes to clear customs and have goods delivered,” Ryan observes. “Price isn’t the whole picture.”
BravoSolution is developing an initiative to help shippers and carriers see the whole picture through in-depth analyses that consolidate, rationalize and supplement spending data across the entire company, including shipment weight, packaging space, shipping modes, transit times and other factors. “Our technology isn’t based only upon historical usage,” Ryan says. It also includes a variety of factors that helps users gain a better sense of their options and visibility into their transportation choices.
UPS recently launched a new customer-facing technology for air and ground shipments, called My Choice. Customers who sign up for phone, email or text alerts will receive notification one day before shipments arrive, along with a four-hour delivery window. Customers may electronically authorize release of shipments requiring signatures or may reroute the package to another address.
At Echo, “We have seen increased enforcement of IAC requirements and the continued expansion of the Air Cargo Advance Screening initiative, as it adds more supply chain participants,” Stephanou says. “While tightening supply chain security is necessary to prevent further attacks on U.S. soil or airspace, each program, once implemented, requires that all supply chain participants must be prepared to expend additional resources and administrative costs to adhere to the new requirements.”
The most significant impending regulation is the requirement for 100 percent screening of all air cargo entering the United States in passenger plane by December 3. The Transportation Safety Administration, however, has no jurisdiction internationally. That leaves screening to the discretion of foreign governments, and reliant upon their manpower, equipment and willingness to comply with U.S. standards. “Therefore, if cargo is screened according to a foreign protocol, must it be re-screened to TSA’s standards?” Fried asks.
The National Country Security Program is an attempt at regulatory harmonization to minimize the need for re-screening. “There are 194 countries. We have agreements with approximately 25 of our major trading partners,” Fried says. Canada, the European Union and Switzerland signed agreements with the United States in summer 2012 so that each will recognize screenings by the other, saving millions of dollars in re-screening expenses.
In January 2013, the IATA will implement stricter regulations for shipping bulk lithium batteries. Key provisions limit the number of 2.7wH batteries in a package, and adding “hazardous” and “lithium battery” labeling requirements to the packaging. The IATA acknowledges that they need the cooperation of the battery supply chain. The FAA, the U.S. Pipeline and Hazardous Materials Safety Administration and the International Civil Aviation Organization have all been active in addressing the issue. International regulatory harmonization has not yet been achieved.
Another regulatory exercise limits duty time, similar to the duty time regulations for truckers. These regulations, issued by the FAA, currently apply only to the crews of passenger aircraft. “There have been efforts, largely driven by pilot labor groups, to extend the regulations to cargo carriers,” Mangeot says. However, he says, there have been no fatigue-related incidents in the past decade, and only two in the past three decades. “The new FAA passenger rules would not have prevented either.”
Acceptance of electronic documentation is growing internationally. After a spotty acceptance, electronic documentation is becoming normal in the United States. Many other countries, however, only accept hard copies of the paperwork. Shippers in those regions find themselves generating paper and electronic versions. “It’s a big issue,” Fried says.
As electronic documents become increasingly popular, the United States is advocating an automated commercial environment (ACE). As of Sept. 29, 2012, ACE becomes the only Customs and Border Protection-approved electronic data interface to handle advanced cargo information for ocean and rail shipments. Air manifests will continue to be supplied using the Automated Commercial System developed in the 1980s until they are folded into the ACE program under e-Manifest.
“International trade is one of the world’s strongest forces for job creation, prosperity, health and education,” says Mangeot. Yet, many airlines consider the current business environment unfriendly. The trade organization Airlines for America, as well as leading international carriers are becoming vocal in calling for a national airline policy that allows the free market to work.
The key points include a rational plan that mitigates fuel price volatility, relieves the heavy taxes that make U.S. airlines uncompetitive, and eliminates duplicative or nonsensical regulatory burdens. The objective is to develop a judicious plan that stimulates business (and hence, jobs) and positions carriers to compete effectively in their markets throughout the world. wt