The world has changed dramatically in its just over 100 year history and yet the air cargo industry is still applying the same business model that it has relied on for at least the last four decades – certainly since the advent of the widebody aircraft – notes IATA’s director, cargo distribution, Glyn Hughes.
“We know we have a mature business model and we believe the industry must reshape – we need to take stock of where we are and what we need to do to reshape ourselves for new realities and future trends,” he said.
These changing realities are manifold and diverse and throw up many challenges, with Hughes noting that the global economic turbulence that has persisted over the last few years is likely to be an ever-present challenge for the air cargo industry. “Traditionally air cargo has always been the barometer of where the rest of industry is going but clearly we can’t say that anymore,” he notes, adding there is also increasingly innovative competition from different transport modes.
There is also the problem of the changing nature of the commodities that the air cargo supply chain transports. “We know the mainstay of air cargo is technology based – and of course technology is the greatest area of innovation in terms of production and manufacturing. As the technology that we use on a day-to-day basis becomes smaller, we might be carrying more of it by air freight, but what we’re carrying aggregates to less and less volume. This is certainly a significant impact as we go forward.”
This is also exacerbated by the rapidly growing fleet size, particularly the widebodied aircraft – the B777s, B787s and A350s – which are effectively ‘mini-freighters’. Hughes notes this large number of aircraft coming onstream is an “alarming trend and again something industry needs to take stock of and look at the vision and look at the value proposition to see how can effect change in this area.”
An underinvested industry
He also noted that if one looks at the last four decades, the real cost of air transportation in terms of the unit cost and the actual cost of operation, both have come down significantly, “but what’s also evident is that the entire reduction has been passed on to the consumer and to the shipping public.
This effectively means the aviation industry has under invested in itself – we haven’t retained enough of that benefit and haven’t invested enough back into the industry to the extent that we are an underinvested industry today.”
He also points out that when you consider, apart from the modern technology flying around in the skies almost all the ancillary operations of the industry are still relying on legacy-based systems and manual systems, particularly in the cargo sector. “This gives significant concern going forward because if you don’t have funds available to invest then you’re not going to be in a position to reap the rewards in the future,” he says.
Another key problem with the supply chain is there is not, to date, a smooth way to get the cargo moving between each of the various parts of the supply chain. This leads to a high degree of complexity because there is a high number of interface points. “And when have lack of investment in an industry it means those complex interface points do not get addressed,” Hughes said, adding that from an industry perspective “we need to work collaboratively” to overcome this.
“Complexity equals delays and it equals cost. If air cargo really wants to position itself where it has always been – the fast efficient supply chain, we need to address these complexities.”
Another challenge facing the industry stems from the changes wrought by the Internet. A growing trend for people to shop online is clearly changing consumption patterns, with a recent survey revealing only 12 per cent of the consuming public now shop exclusively in ‘bricks-and-mortar’ stores. This trend alongside the increasing number of airline passengers from emerging economies who ‘self-shipping’ by flying as passengers with large quantities of goods for sale at home, means the industry must consider offering new types of services, Hughes said.
Industry collaboration
“We need, as an industry, to collaborate with the freight forwarding community and the airlines collectively and look at how the evolution of ‘click, buy and fly’ consumerism is going to impact traditional air cargo business models. We’re finding the new trend of shippers which are the home-based shippers.
“As such the industry needs to get together and collaboratively come up with solutions to address not just the B2B world, but the B2C and perhaps even the C2C world. Our solutions must align with consumer demands. We have to redefine our relationship with freight forwarders so we have the right bedrock,” said Hughes.
Indeed the need for collaboration is a reoccurring theme with Hughes noting that “we need to collaborate much more and we need to redefine relationships, particularly with forwarders to ensure we have the right bedrock upon which to springboard some of these items.”
“Like all industries we need to have a commitment, a promise as it were, of what we stand for as an industry. As an industry we certainly need to provide value to the entire supply chain – the consumer, the shipper whoever is actually looking at cargo supply chains we want them to look at air cargo as the transportation mode of choice,” and not just when something needs to be somewhere tomorrow.
“We need to be based on quality based supply chains, secure and all the other elements we need to have in place to meet and exceed customer demands. So our vision going forward, we have to strengthen industry relationships,” he says pointing to the ongoing work to makeover the IATA Agency Programme.
As Hughes notes the freight forwarders haven’t been agents of airlines for at least a decade in most cases, although the agency programme is still premised around that arrangement.
“We have to completely revolutionise, not just modernise the agency programme we have in place. We’re working very closely with FIATA to create a new structure, a new concept built around partnership. We need to ensure the programme really reflects the airlineforwarder model and the business relationship that exists between them.”
A further area for change is the need to collaborate with the ground handling partners to look at how to address not just the shipper to ground handling processes all on-ground processes. “If you look at the freight reception to on-aircraft loading situation today it hasn’t evolved over past decades,” he says. “We certainly need to work with partners to see how we can revolutionise that entire freight handling activity,” he adds.
Agenda for improvement
And in a clear sign that IATA is firmly bent on ushering in a new era IATA director general and CEO, Tony Tyler outlined the steps underway to ensure these goals are more than simply rhetoric.
“I’m just as passionate about cargo as I am about any other part of the aviation business,” said the former Cathay Pacific CEO, “and we’ve got a huge agenda for improvement.” Tyler went on to say that he is “bullish on air cargo,” particularly after all his years in Hong Kong, now the world’s biggest air cargo market. But he notes that even Hong Kong’s rise hasn’t been a steady climb, but rather a boom and bust ride. “Air cargo by its nature is volatile, particularly in comparison to passenger traffic. When passenger traffic weakens you drop the prices and more people travel. Cargo is not the same, you cannot stimulate the market to get more cargo traffic.”
Tyler went on to note some of the work being done by IATA’s cargo division under Des Vertannes’ leadership in modernising the Cargo Agency Programme. Tyler noted that a key aspect of it recognises the changing relationship between airlines and freight forwarders whereby today the freight forwarder is very much the customer of the airline.
“We have to take this into account to ensure the cargo agency programme is fit for purpose and has approproprate governance structure,” he said. Tyler added that for small and medium sized forwarders, of which many of them are in emerging markets, those who wish to remain as agents of the airline will be maintained and retain that status. The two-tiered structure will be implemented Jan 2014.
IATA has also commissioned and Oxford economics cargo study to help dive deeper into the well known headline figures that air cargo carriers 35 per cent of global cargo by value, which amounts to 48 million tonnes of cargo annually worth over US$5 trillion.
On e-freight Tyler said IATA and the Global Air Cargo Advisory Group (GACAG) still firmly believe it is the future of air cargo but acknowledged the current market downturn has caused carriers to slacken on efforts to roll it out. As such the IATA board of governors agreed to new revised targets which Tyler said he believes “shows we are still committed to make the e-AWB happen.”
The new targets of 20 per cent e-AWB penetration by end of next year, 30 per cent by end of 2014 and 100 per cent by end 2015 . “So, we’ve slipped a bit and its something I’m not happy about, it’s unsatisfactory, but it’s just the reality of the current market conditions.”
“The enthusiasm for people investing in using this new process or expanding it out has waned,” he said. “And there are of course regulatory obstacles to overcome as well. But meanwhile we will continue to push shove and drag and clear the regulatory hurdles out of the way so that when times are better the industry can invest and see quick results,” he added.
In the area of security IATA is continuing with its Secure Freight pilot programme, rolling it out to new locations in Mexico, Kenya and Chile after successfully piloting it in Malaysia. And with the US’ ACAS pilot now extended, Tyler also urged member carriers to take part in the ongoing pilot.
