While economic woes have been felt throughout the entire transportation sector, the struggle has been especially difficult in the airfreight industry. While past slowdowns have been followed by a fairly rapid recovery, with the first sign being a sharp increase in airfreight, this one has been completely different. Although there are a few signs that the economy is on its way back, the air cargo industry has seen little indication that a strong recovery should be expected any time soon.

Data from the Air Cargo Management Group (ACMG) shows that U.S. domestic air traffic volumes for 2008 were down by nearly 10 percent, while revenues had fallen about 3 percent. ACMG’s 2009 report states that the revenue numbers don’t really tell the true story due to the fact the high fuel surcharges in 2008 offset declining revenue. Robert Dahl, managing director of ACMG, said that 2009 “gives little hope of any near term turnaround, as industry-wide ton mile totals were down about 18 percent for the first six months of 2009.”

On the international scene, the picture looks just as grim. Data from the International Air Transport Association (IATA) shows that world wide airfreight demand remains weak at 16 percent below that of April 2008 when demand began its steady decline. In a September briefing, Giovanni Bisignani, IATA director general, remarked, “This industry is in a massive crisis and our first look at 2010 shows that losses will continue. We forecast US$3.8 billion losses. This is based on oil at US$72 per barrel, approximately a 1 percent improvement in yields and 4.6 percent growth in revenues.”

Concern in the industry is focused on current inventory cycles. Current manufacturing inventory is more than sufficient to meet consumer demand, reducing the need for all transportation services, but particularly airfreight, which tends to be faster but more costly. Until this situation reverses and consumer spending increases, airfreight levels are expected to remain in the doldrums. But despite the grim numbers, there are companies that are surviving and finding new opportunities to grow in an extremely competitive market.

An opening in the clouds

While planes have been grounded throughout the industry and flight schedules cut, Dallas-based Southwest Airlines Cargo hasn’t been idle, hoping things will pick up. The airline has taken the opportunity to try new lanes. “We did cut our flight schedule about 5 percent, but that created opportunities to add new markets,” says Wally Devereaux, director of cargo sales and marketing, Southwest Airlines Cargo. “We had reduced trips flown, but we still had aircraft we wanted to use, so we tried some new markets.” Southwest recently added stops in Minnesota, Boston, New York’s LaGuardia, and Milwaukee. “The decline actually created opportunities for growth,” adds Devereaux.

Southwest also recently formed a cargo partnership with Canada’s Westjet, providing the company with wider North American coverage and their first foray into the international air cargo market. Initial coverage will allow only for the export of cargo from the U.S. to Calgary, Vancouver, Edmonton and Toronto, although the intent is to eventually expand the network. While it seems contradictory to expand into new markets while the economy is shrinking, Devereaux said that the time was just right. “We had been talking about interlining for awhile, and the opportunity arose with the passenger partnership we had already established with Westjet.” Devereaux thinks that the arrangement will likely expand to other partners and eventually beyond North America, an area in which Southwest Cargo is definitely interested.

The domestic carrier has also found room to expand their service offerings, covering a particular niche market. A recently introduced service, Southwest Support, offers the shipment of human remains, operating in a few key markets in the U.S.

New markets and services aside, Southwest has long been known for exceptional service, a fact Devereaux feels has been critical to the carrier’s success in a challenging marketplace. “The main thing for Southwest,” says Devereaux, “is that we do a very good job of moving from point A to point B. Our customers need the freight to move when we say it will.” Southwest offers customers access to company representatives at all times, something that is becoming more and more difficult to find as cost cuts are reducing staff levels across the board.

International carriers are finding the year a challenging one as well, with 2008 showing no peak season as consumer demand pulled back further and deeper than originally predicted. And 2009 is not looking much better, says Heinz Lange, vice president, international freight services, Pilot Freight Services, a transportation and logistics company. “Everyone’s levels are lower; across the industry carriers are re-arranging routes and cutting capacity.” Lange says that although rates have shown a recent increase, he believes that is due to the decreased capacity levels and not indicative of increased demand.

In such a tight market, Lange believes there are two tactics Pilot could take: either reduce the force or add to the force. Pilot is doing the latter.  “We are busier than ever because all businesses are looking to reduce costs and outsource more.” Businesses are looking for all possible ways to cut costs and become leaner, looking to shift transportation modes, creating different mode mixes, using better technology systems and looking for alternate sourcing options.

Pilot is taking advantage of this opportunity, helping businesses reduce not only their airfreight costs, but the operating costs of their entire supply chains. The company is doing more complete logistics solutions, rather than simply providing airfreight services. “Companies are looking to have 3PLs manage their entire supply chains. We are offering more solutions to help our customers achieve cost savings,” says Lange. As airfreight becomes more commoditized, offering a total suite of services can provide the edge needed to succeed.

This trend toward total solution selling is not new, but is coming back in vogue, a view that is shared by Diane Hofman, director of international operations for Schneider Logistics. According to Hofman, Schneider has strong capabilities across the full range of supply chain transportation services, both in the U.S. and internationally. Rather than simply selling air cargo services, the company is selling a complete solution. “We do bundle our services, customizing and tailoring solutions to our customers’ needs,” says Hofman.

While Hofman agrees that a full recovery is still a long way off, she said that she has seen a small, encouraging sign. “Just recently, we’ve seen a little more activity in the number of requests for quotations, and for larger amounts in the quotations.” Although Hofman says that this doesn’t necessarily mean more tonnage or shipping counts, it is a glimmer of hope.

What’s bad news for one carrier can provide an opportunity for another. It’s a sad fact that the current economic crisis has caused many smaller air cargo carriers to close their doors. Pilot’s Lange says that with inventory cycles longer and slower, businesses are looking for longer credit terms, something only the medium- to large-sized carriers can comfortably offer. “Smaller companies, such as the boutique forwarders and niche players, are going out of business. The smaller companies can’t handle the longer credit terms that are common in today’s market.”

Lange does see some specialized niches that have served Pilot well. The company is a service provider to the U.S. Government, including the Department of Defense, the Internal Revenue Services and NASA. The government tends to be somewhat of a recession-proof industry, comments Lange, and the ongoing war has provided the company with a unique opportunity to provide fast and secure air transportation services when most other industries are cutting back.

Other carriers have also found opportunities to gain an edge in extremely competitive times. JetBlue Airways, a New York-based carrier known for its low-cost, high value business model, is increasing its presence in international markets by forming partnerships with key players such as Aer Lingus and Deutsche Lufthansa AG. At home, the move by DHL to exit the U.S. domestic air market left a gap that was filled in by FedEx and UPS.

Meanwhile, American Airlines Cargo recently launched ExpediteTC, an express temperature-controlled service for customers worldwide. The service allows customers to designate a specific temperature range during transit. The shipment is monitored by AA personnel at various points during transit--including the maintenance of dry ice and batteries if needed. The airline also offers a 100 percent flown-as-booked guarantee, in addition to the specialized handling, monitoring, and tracking.

There appears to be agreement that it will be a long time before air cargo levels return to the peaks seen in the past. “We will see air cargo levels increase, but it will be a ‘new normal,’” commented Lange. wt



Andrea MacDonald is a long-time contributor to WT100, writing on various transportation and logistics topics.