“As the industry slowly emerges from the worst-ever demand crisis, key lessons learned are that faster response, added financial flexibility, more conservative capacity planning, and diversification of risk across markets and products are key elements to successfully manage in a downturn,” said Oliver Wyman partner, Niko Herrmann in presenting the findings of the 2010 Global Air Cargo CEO Survey at the IATA World Cargo Symposium in Vancouver.
The survey revealed that while 55 per cent believe 2010 will offer no significant growth, it will not see further declines and 66 per cent of respondents believe that 2010 will be the start of a lasting upswing. Almost all foresee a return to 2007 peak levels within one to three years and the majority of growth is expected to come from China and North Asia, followed by the rest of Asia-Pacific. Accordingly, air cargo providers plan to focus sales attention in these regions. A full 70 per cent indicated they believed yields would continue to improve and 80 per cent believed costs would also improve.
There are still “substantial risks” noted Herrmann who said the risk that capacity is put back into the market too quickly is the biggest issue. There are other reasons for substantial cautiousness too, because despite the projected recovery, customerbuying preferences and patterns have experienced a permanent shift, accordingto Herrmann.”Customers will continueto be highly price-sensitive and willkeenly evaluate alternative transportmodes to meet their shipping needsfor segments with slower supply chainrequirements.”
In terms of investment, the most immediate CEO priority is e-freight; others include security improvements, cold chain capabilities, and lightweight containers. Carriers in the future will also require financial and network strength as well as enhanced organizational and management capabilities to get the most out of their cargo capacity, he added.
High-yield niches
The survey also revealed that temperature-controlled and pharmaceutical shipping are widely expected to lead the recovery in terms of growth rates. But Herrmann noted that yields for this segment will inevitably come down as more and more carriers have begun moving into this specialist sector in a bid to offset their still struggling yields that were savaged last year. The appropriate strategy for carriers here will be to “clearly differentiate their offering and forge closely integrated relationships with customers around these products.”
“Interestingly, mail is no longer seen as a growth area,” Herrmann said, adding that consumer electronics and IT are expected to grow at about the same rate as general cargo. “The search continues for lasting high-yield niches,” he added.
The survey also found that continued economic and competitive pressures may drive increased consolidation of the sector. More than half of the CEOs expect significant M&A activity in the air cargoindustry in the near term and many are actively evaluatingalliances and joint ventures leading togreater vertical integration.
Herrmann adds: “The CEOs are signaling that, in the future there will be less room for smaller carriers, especially in the all-freighter segment.” In fact the survey indicated that 81 per cent felt the dedicated freighter segment of the business would revolve around only a few players.
“Few expect that more belly carriers will enter into the freighter business ” and even for dedicated niche players, the scope is believed to be limited as cyclical volatility poses a high risk.
Comprehensive product and service offerings from large global players will be required to meet customer needs and fend off the continued commoditisation.”
Competition from other modal sources, in particular from ocean shipping will also continue to heighten. The slow down of the supply chain has shown a niche opportunity for customers and this is a trend not expected to reverse, according to the survey.
Environmental imperatives are also a key area for airline CEOs with 90 per cent believing they will benefit from having green fleets.
Lessons to be learned
Overall, the survey revealed three key lessons to be learned from the crisis. These include the need for increased financial flexibility; more conservative capacity planning; and the need for further diversifying of risk. But there are a number of obstacles that challenge the ability of carriers to adopt these strategies, Herrmann notes. These include the commoditisation of air freight; competitive pressures; and the cost burden of regulation.
There is a cautious optimism that the industry will return to normal, but “clearly the air cargo business will become tougher and those who dabble will die. It is a constant business challenge as more and more products look the same,” he concluded.
