It’s not the first time and not the last time,” said Emirates SkyCargo divisional Sr. VP, Ram Menen, of the industry challenges that range from rapid boom and bust cycles, sustained high fuel prices, flat demand, overcapacity exacerbated by a global surge of wide-body passenger aircraft, shifting manufacturing consumption patterns, new security challenges, modal shift and ongoing regulatory issues that have stalled efforts to modernise and move the industry forward.

“These are the market factors and the market factors are changing purely because old fundamentals of the global economy don’t apply and we’re trying to understand the new norm,” he says. “We don’t know yet if this is the new norm, the rules aren’t written, so we just have to learn as we go along,” he adds.

While a firm believer of globalisation and its permanent fixture underlying the global economy, Menen says the nature of globalisation is changing, impacted by emerging economies with their own nascent consumption, near-sourcing, in-sourcing and further down the road, 3D-printing. Importantly, he believes these changes will have a positive impact on air cargo because more components will move across borders.

And while these new movements are yet to really take hold, the industry is seeing some respite from the prolonged slide in cargo movements with the International Air Transport Association’s (IATA) most recent figures for February 2013 showing a “modest cargo improvement”. International economic indicators are suggesting that the global economy bottomed out in the third quarter of 2012 and industrial production and business confidence measures have been improving since then. Indeed, seasonally adjusted cargo volumes are 2.5 per cent above the October 2012 low point.

IATA points out that while comparisons with February 2012 performance show a 6.2 per cent decline, this is “severely skewed” as a result of the fact Chinese New Year – which is accompanied by many factory closings in Asia – occurred in January 2012, while in 2013 it shifted to February. After adjusting for these abnormalities, air cargo was actually up two per cent.

“February’s air cargo performance has sustained the weak recovery that began in the fourth quarter of 2012. This is welcome news after two consecutive years of contraction. It is even better news that this growth is expected to pick up moderately as the year progresses. But improvements cannot be taken for granted. Events in Cyprus have reminded us that the Eurozone crisis is far from over. Any resulting loss of business confidence could shift the outlook for the worse,” said Tony Tyler, IATA’s director general and CEO.

Air cargo volumes declined by 0.6 per cent in 2011 and a further 1.5 per cent in 2012. Markets stabilised and began a weak recovery trend in the last quarter of 2012. But after the rollercoaster ride since the crash of 2008, no one is popping champagne corks just yet.

“That is the kind of situation that we are in, but we are still not out of the woods because we are still not able to predict what is going to happen next month, but fact is that the wheels of commerce will still continue to turn and will not stop – it’s a question of ‘we need to survive this, but how do we survive this?’ We need a better endurance of the industry to make it work,” Menen emphasises.

Fears materialise

Adding to this air of uncertainty, the industry has seen at least two of its longheld phobias become reality. Significant modal shift of what has traditionally been the sole preserve of air cargo to ocean freight and perhaps more importantly, intensified competition within air cargo’s own house, from the integrators including DHL, UPS and FedEx.

While noting the modest air cargo recovery, IATA’s Tyler adds: “Demand for sea shipments already reflects the recovery in some parts of the world. But we are not yet seeing the positive impact of this in air cargo markets. While it remains to be seen if this is a long-term modal shift, it is clear that sea shipping is becoming a stronger competitor to air cargo,” he said.

Indeed, as Gert-Jan Jansen, executive director of Seabury Group warned at the World Cargo Symposium in March, modal shift has cost the air cargo industry 10 per cent of its volume, or 2.6 million tonnes. On transpacific routes especially, ocean transportation is showing much faster growth than air.

Similarly Robbie Anderson, president of United Cargo, said the key challenge was to make further reductions in transit time to avert further loss of volume, as all alternative transport modes were gaining ground at air’s expense. Shipping lines were developing “moving warehouses” so that perishables and other foodstuffs, for example, would continue growing in volume from Latin America to North America.

“We’ve really got to focus on what we can do to stay competitive,” Anderson urged. “Planes are not going to fly faster,” and he insisted the key is in better processes and linkages on the ground, as the integrators had achieved with much shorter transit times than the general air cargo sector.

And this where the second ‘fear’ of the air cargo industry has been realised. “When we think about traditional modal shift it’s air to ocean, but last year we saw a very interesting modal shift – the integrators took more business away from the general cargo business than ever before and they were the fastest growing,” highlighted Michael Steen chairman of The International Air Cargo Association (TIACA), the Global Air Cargo Advisory Group (GACAG) and EVP & chief commercial officer at Atlas Air.

“Why? Because they have very simple processes, they’re transparent as well and they are delivering what the customers are asking for and I think that’s where the general cargo industry has a challenge, certainly going forward, to improve standards and offer a more complete solution and deliver what customers are asking for.”

Noting that there are “tremendous” examples of best practices within the industry, Steen also cautioned that there are ample areas in need of improvement within the industry. “Some are difficult, some will take more time, but some of them are very simple and are right in front of our noses,” he said.

While neither situation is a happy one for the beleaguered air cargo sector, it is the raging success of the integrators, even in bad times, that sends a clear signal that things need to change and change fast within the general air cargo industry.

As far as Menen sees it there are three areas that need to be addressed: Regulatory issues, capacity issues and the current business model in terms of the supply side. “There is no simple answer,” cautions IATA’s global head of cargo, Des Vertannes, “the solutions lie in how quickly we can adapt. The world has evolved, look at the fast adapting demands of the global consumer today.

To me it’s about how quickly the airlines that play in this game can adapt and the agility of the industry to sustain itself.”

Carriers to integrators?

These observations of the integrator model beg the obvious question: Should the general air cargo sector adopt or at least move towards the integrator model? “The reason why airlines have not picked up more from integrator model, according to Menen, is because of the relationship between the freight forwarder and the airline themselves.

“They still tend to operate in a different dimension, airlines are basically catering to forwarders by selling capacity and forwarders are the integrators,” he notes. “If you want to become an integrator it’s a bit difficult because your eye is off the ball and that ball is the capital intensive assets you are operating.” Integrators, on the other hand, are more forwarders he says, because they are the ones actually providing the cargo.

In an integrated model they have the capacity as well, whereas in the traditional freight forwarding model it’s à la carte capacity that is brought in from an outsourced supplier and so in fact, for this whole package to become bigger and more integrated, it’s the freight forwarders that have to step up.”

A lot of the stumbling blocks Menen says, have to do with the traditional relationship between airlines and forwarders which he says are “based on the old rules”. This is where the new Cargo Agency Program with its emphasis on integration enters the picture.

Two fixes

The new programme to change the agency rules so that the relationship will shift from being agent-to-principal, to principal-to-principal – so Seimens or Apple, anybody can be the principal and that “will bring in the change and that will allow forwarders to act as a proper integrator”. The traditional airlines will just provide line-haul capacity as they provide even to integrators.

“I think it’s a big step forward and will change this relationship by starting to give the status of principal to freight forwarders,” adds Vertannes. To which Tyler adds: “These will help the program to reflect the reality of the principal-toprincipal relationship that exists in over 70 per cent of transactions performed between airlines and their forwarding partners. And it reflects the changing rules and obligations linked to liabilities between the partners.”

Extensive work between IATA and the International Federation of Freight Forwarders Associations (FIATA) is making good progress, according to Tyler with a series of proposals to be submitted to the Cargo Agency Conference later in the year.

But for Vertannes there is still a great deal of frustration around the other key component needed to raise efficiency within the industry – frustration because “everybody knows the solution” he says in reference to e-Freight which would clearly go a long way in easing some of the problems in the industry. The problem he highlights is that for varying reasons – a key one being the circumstances of the last two years where the focus has been on survival rather than building for the future.

“Those who are building for the future – and if you look at who they are, they are of course the integrators – therefore where does the prosperity go and if the market doesn’t grow and stays the same, grabbing a bigger junk is going to go to someone that is absolutely giving the customer what they want.”

“If you’re going to use a mode of transport that is the most expensive mode, consistency of delivery, efficiency and commitment to the delivery is fundamental and if we can do that as an industry – and I think we can – then this industry today doesn’t have to do much to sustain itself.”

And like the movement on the Cargo Agency Program, e-Freight has been given a major boost through the approval of the new Multilateral e-AWB by IATA’s Cargo Services Conference after a yearlong development involving both IATA and FIATA, along with three months of trials that involved 15 carriers and eight forwarders.

IATA’s head of cargo business process and standards, Frederic Leger, described the recent agreement on a new multilateral electronic air waybill as “the biggest achievement in standard-setting in air freight in 20 years.”

The Multilateral e-AWB is important because it avoids the need for bilateral e-AWB agreements between airlines and freight forwarders. Before this, Leger says, carriers were confronted with signing hundreds or even thousands of separate bilateral agreements with individual forwarders.

“This new agreement will play a major role in increasing take-up of the e-AWB to reach the industry target of 100 per cent utilisation by 2015, said Tyler.