The air express veteran who has been with the US giant for over 30 years, 20 of which he has spent in Hong Kong, gave his take, at the recent Cargo Facts Asia conference in Hong Kong, on the changing nature of the air cargo industry and what it needs to do to become more sustainable.

It is an industry that has become a “tremendous value creator for the globe,” he highlights, noting that it has a global market size of US$78 billion, creates 32 million jobs and generates $3.5 trillion in economic activity. “And of course Asia is at the heart of it, with a 40 per cent share of that market,” he adds.

Looking back, Cunningham notes that while some of the core commodities shipped 30 years ago remain, they have fundamentally changed over the decades. Electronics were a key commodity back then, but not quite the same as today – they were big and they were expensive.

The high tech world was driven by Japanese manufacturers with some assembly in Southeast Asia. Over the last 15 to 20 years this has shifted to China, “which has really been the heart of the manufacturing,” during this time he says.

For the air cargo and express industry, the value proposition of the day was about speed, reliability, door-to-door service and customs clearance. The global economy of the 1970s was fueled by cheap labour, cheap fuel and productivity that the new technologies were creating. “And the best part – capacity couldn’t keep up with demand. It was a wonderful time to be in the air cargo and air express business,” he says with a grin.

“Today, it’s a different world. We’re still lifting a lot of electronics and they’re still important, but capacity far exceeds the demand out there.” And another key difference: The electronics are now much cheaper, “almost disposable consumer items” he says in reference to new products that come and go regularity, having shelf lives of only six months in many cases.

The customer base has changed as well: From large global multinational companies that produced goods and shipped them on a regular basis, to small and medium sized enterprises increasingly reliant on e-commerce, he says. These companies now represent 36 per cent of the global market, he adds.

The air cargo market has changed in other ways too. It’s now all about specialisation – healthcare, pharmaceuticals, medical devices, luxury consumer goods and in the case of FedEx, even the odd panda bear shipment. “But what’s intrinsic about this new environment, is that shipment size is shrinking – it’s getting a lot smaller, both in terms of consignment and shipment size,” something that has been going on for the last 15 -20 years and will likely continue into the future.

Fuel costs have also altered the air cargo landscape with Cunningham noting that as recent as 1999 fuel was only US$16 a barrel, a far cry from 2008’s record high of $147 and even today’s $80-100. “This has huge implications on our business moving forward,” he notes.

The equipment has also changed significantly with far more fuel efficient, longer range aircraft impacting global travel and the movement of cargo. They also have a lot more belly capacity than a B747 or other widebody aircraft of past, he adds, noting many of them have the capacity of a B737 freighter just in the belly. Customs and security issues have also dramatically changed, “making our world a much more difficult world to do business in.”

But it’s not just about what’s going on in the air that’s having an impact, he cautions. Looking at the larger cargo sector, Cunningham notes that over the period 1994-2004 ocean freight and air express have each gained five per cent market share over the period, while the general air cargo market share has shrunk by 10 per cent. And importantly, the growth rates of ocean and air express have been in the high single digit rates while general air cargo has remained virtually flat, particularly between 2004 and 2011.

And while a slowdown in the global economy helps boost the ocean sector, it’s more than that, he argues. “The ocean industry has gotten a lot more efficient and lot more reliable.” While the latest generation of aircraft are “great technology, fabulously reliable and much more fuel efficient, effectively when you think about it, that B777 or B747-8 compared to the B747 of the 1970s when it was first introduced, are about the same capacity.”

Meanwhile, he says, the ocean industry has dramatically increased its size and scale with Panamax, New Panamax and in the near future the fuel efficient, giant Triple E (18,000 twenty foot containers). A New Panamax is 6-7 times the capacity of the largest ship of the 1970s and burns only marginally more fuel. “It’s a thousand times more efficient on a fuel basis – and when you talk about fuel being at rates of $80-100 that’s significant, but of course ships don’t burn Jet A, they burn bunker fuel which is far cheaper.” And to make matters worse, in 2014 the Panama canal expansion will open up and when it does these big ships will begin operating not only to the US west coast but the east coast as well.

“So, the ships are larger and much more efficient and of course the ocean industry is also integrated with ground and rail transport and they’ve applied the same technology as we use – tracking and tracing with all the information visible. It’s all about having the right product, at the right time, in the right place, so in my view that’s one of the reasons why, beyond just the economy, that the ocean industry continues to grow,” says Cunningham.

“It’s clear looking forward that one of the things that’s changed is the economic outlook and with it, the air cargo market. In past 15-20 years we’ve seen strong single digit growth and even double digit in some cases. But look at the forecast of 2.7 per cent for 2013, on the back of very weak last couple of years. It’s a very different growth rate that we’ve historically seen and this has major implications for the business.”

But Cunningham is quick to point out that all of this doesn’t mean it’s the end for air cargo and particularly air express which has been growing and ultimately will continue to do so. “For air cargo there’s going to continue to be a relationship between value and total distribution cost and that means certain products, at certain times, need to move by air, but again my point is I don’t see the days of past being the days of the future in terms of the amount of demand that’s out there.”

Advice for the industry

Payload Asia asked Cunningham what, in his view does the general air cargo sector need to do to address this smorgasbord of challenges, including competition from his own sector.

One problem he notes is that the consumer electronic launches every six months or so, creates “massive episodic demand,” that traditionally has moved in freighters and “it’s one way traffic, then it’s gone. Then what do you do?

“Many of the flag carriers around the region over the last 15 to 20 years have identified the cargo sector as an important sector to grow in and then what they’ve done, is they’ve identified the right point of leverage between passenger and cargo operations at about 30-40 per cent of revenue contribution from cargo.

“But when you move from marginally costed belly space and a limited amount of main deck cargo capacity which was the old model, to an environment today where you’ve got a goal of 30-40 per cent of your revenue being generated by cargo, you’ve got a lot more main deck capacity than you need. You’re flying a lot more main deck capacity, your moving that main deck capacity from here to there, chasing whatever that episodic demand is and you’re hoping that’s going to work out.

“I think fundamentally that with the miniaturisation, with the long range, large belly capacity aircraft and this episodic demand there has to be a rebalancing of capacity.” Passenger carriers can still make money on a go-for basis, he says, “but you’ve got to use your marginally costed belly space and a limited amount of dedicated main deck space relative to the models that we’ve seen over the past ten years or so.

“You’ve got to have a lot less dedicated capacity because when you’ve got all that dedicated capacity you’ve got to fully burden it – you’ve got the pilots, you’ve got maintenance, the crews, you’ve got to fly somewhere and if you don’t you’ve got the ownership cost of it just sitting on the ground. And so I think over time there’s probably going to be a rebalancing of that model in the mixture of cargo capacity to passenger belly capacity.”

He also sees a continuing role for the maindeck and specialist carriers, but again feels there’s going to be a rebalancing. “The macroeconomic issues are not going to change and those long range, large belly capacity airplanes are just going to keep coming.”

FedEx not immune

But as successful as both the air express sector and FedEx Express has and continues to be, neither could escape the impact of the global downturn with the division reporting a sharp 13 per cent decline in international priority freight revenues, while international air freight revenues fell by 17 per cent year-on-year during the third quarter. For the first nine months of the fiscal year ending May 2013, these figures were down seven per cent and six per cent respectively.

“What we’ve seen is a reduction in demand for our fastest, highest yielding products and a growing demand in what we call our deferred product which is 24-48 hours slower, but customers still want the information – the tracking and tracing and the reliability that goes with it.”

FedEx has taken the same strategy as many on the general air cargo side and that is to reduce capacity. “We’re taking capacity down, but in concert with that reduction in capacity what we’re not doing, is we’re not reducing service and that’s a function of the way we built our network. We built our network so effectively there’s a redundancy in connectivity built in, so we can take units of capacity out and not affect the transit time,” he says. FedEx is also moving deferred and lower yielding products into other lower costs networks. “We are going to use other carriers and belly capacity and to some extent main deck capacity where it makes sense to do so. Up to the beginning of this year the express carrier was operating up to 10 wide body flights a day on the transpacific. “We can scale back that capacity quite a bit without affecting service and we operate three flights between Asia and Europe with basically a dozen or so flights a day connecting intra- Asia through our hub in Guangzhou.”

All change “One of the things that is really easy to do is to take analytical forecasting models, look at the history and say what the future will look like. But when you introduce significant macro economic factors of the magnitude I’m talking about I think you have a significantly different industry than the one we’ve seen in the past and that has significant implications as we go forward.”

Having been with FedEx for 30 of the company’s 40 year history, “I’ve seen our world change many times in that period and there is one constant that has made FedEx successful and that is, that we change when markets and the world change – that’s what successful businesses do.” He says this why the company has spent significant time and resources building out its freight forwarding capabilities, ocean forwarding businesses, ground businesses in the US, LTL (less than trailer load) business, as well as developing and growing its European business including ground capabilities there.

“I don’t have a crystal ball, but there are significant macro economic trends that are driving our business – long range aircraft, new ships, higher fuel cost, nearand on-shoring, demographic changes and of course use of technology and use of supply chain management – and I do believe that the vertical segments of healthcare, medical devices, pharma, e-commerce are all going to be value drivers in the future.”

“I’m also optimistic about China,” he says, despite what he identifies as a number of problems including bureaucratic hurdles, high domestic logistics costs and the need to transition the economy away from a focus on exports to domestic consumption. “China has been critical to all of our success and has certainly been critical to our success on a global basis, but it’s one that faces many different challenges in that environment.

“I’ve been in the region long enough to know that one of the advantages that the Chinese economy has in terms of being a state-led economy, is the ability to change – to recognise change, drive change and execute change. China has faced many daunting challenges in the past and successfully navigated them, so I’m confident that is going to happen, but that change is going to have to be to transition toward a domestic-led economy and I think it’s going to have to be about improving the software and making it easier to do business for Chinese citizens and effectively the world.”