Air cargo is facing a tough reality with rising numbers of passengers increasing capacity ahead of freight demand. Could a move towards specialist industries disrupt the static market? Alexandra Leonards reports.
Disparity between the low demand for air cargo and high capacity in the market is becoming a significant problem for the industry. International Air Transport Association (IATA) research found that in April, global air cargo demand grew by 3.2 per cent year-on-year. At the same time, capacity jumped by 6.6 per cent, putting great pressure on yields.
Although there was fairly strong demand growth in Europe (6.8 per cent), with IATA attributing the change to an increase in German export orders over the past few months; it’s barely a small victory. And, compared to mid-2011, demand is only 1.5 per cent higher.
“It has been well documented that capacity continues to outstrip demand,” says David Shepherd, head of commercial at IAG Cargo. “Growth that we have seen in the air cargo market has been sporadic, with any increases aligned to periodic issues.”
Unanticipated circumstances like the recalling of millions of American vehicles because of faulty air bags, and outbreaks of disease hitting Chilean salmon resulting in increased US imports of Scottish and Norwegian Salmon, are some of the reasons behind spikes in demand.
And air cargo is falling far behind the thriving passenger market – IATA attributes this to weak world trade.
“The biggest change I’ve seen in the last five years is so much more passenger traffic, with a lot of new competitors,” says Tristan Koch, managing director, cargo sales and marketing EMEA and ISC at American Airlines. “More supply puts pressure on pricing.”
The route air cargo takes doesn’t really matter, as long as it gets to the destination on time. This approach means prices can be kept low. But the movement of passengers is very different – they don’t want the hassle of multiple drop off points. And so the huge growth in passenger traffic has significantly compromised the flexibility of air cargo transport.
Airfreight rates are presenting a Catch-22 for the market. They are fairly stable, which is good for the cargo customer, but not for the carriers.
“The trends behind that are concerning,” says Alex Veitch, head of global policy at The Global Shippers Forum. “Big increase in capacity in long haul in passenger air craft has led to over capacity on certain routes, and a reduction on rates.
“This is putting a lot of pressure on the dedicated air freight market and air freight operators, several have gone out of business completely.”
Another problem for the industry is its unpredictable nature. American Airlines’ Koch says that roughly 40-50 per cent of flights are regular and fixed, while the other half are unplanned.
Perishable items like fruit, fish, flowers, and seasonal fashion products rely on the air cargo market. But for many industries, it’s too expensive to fly their goods. And if getting products transported particularly quickly isn’t a priority for a manufacturer, there is no reason to pay the extra cost.
“The air cargo market still handles more than 35 per cent of global trade by value,” says Robert Keen, director general, BIFA. “With growing populations around the world and increased consumption, the demand for efficient air cargo services to get products to their destinations in a timely manner, will continue.
“However, reports suggest that for some time that general air cargo has been flat-lining and has only been propped up by the pharmaceutical sector.”
A move to more specific sectors, like the pharmaceutical industry, is becoming increasingly apparent.
“The pharmaceutical business is growing, and continues to grow,” says American Airlines’ Koch.
BIFA’s Robert Keen thinks that freight forwarders handling niche markets play an extremely important role in raising the standards and reputation of the airfreight industry.
“These companies are prepared to offer specific services that meet the requirements of their customers and ensure that the required service levels are consistently met,” he says.
This is a trend that is quickly making its way throughout the market – competition is tough, so staying ahead of the game is key.
But pharmaceutical cargo has significantly different needs to other forms of freight, and it is important carriers approach the transport of these goods carefully and strategically.
“In the case of pharmaceuticals, temperature changes can be a serious threat to the integrity of the products and moving the goods by air requires specific equipment, storage facilities and handling procedures,” says Keen. “Having a specialised sector to handle such goods can ensure that the integrity of the products is maintained throughout the supply chain.”
Veitch says that the move towards niche markets is as much about airports as it is about individual airlines. Amsterdam Airport Schiphol already has a prevalent pharmaceutical market. Frankfurt Airport plans to be the biggest European hub for pharmaceuticals. And earlier this year, Miami International Airport partnered up with Brussels Airport to form an ‘international pharmaceutical air hub alliance’.
When it comes to the pharmaceutical market, IAG Cargo sees big value in providing specialist products, like its temperature sensitive pharmaceutical product ‘Constant Climate’.
“Shippers and forwarders in this sector demand the highest standards and servicing this requirement demands significant investment in a carrier’s product, network and infrastructure,” says IAG’ Cargo’s David Shepherd.
“Independent accreditation, covering not just the airline but all handling partners should be considered very much part of this investment.”
Consolidation of companies appears to be a big trend in the passenger air market. But Koch says that it hasn’t really made its way to the cargo side of things – he identifies legal issues as one potential hindrance.
“I think it’s inevitable cargo will form more of those relationships, when you have such a glut and supply is low,” he says. “Whether that looks exactly like a passenger arrangement, probably not.”
Shepherd says that collaboration on the passenger side of the business is a long-established trend. “From our own point of view, we have always been very open about the development of sensible partnerships and capacity deals and we will continue to explore new opportunities where we see value,” he says.
Keen thinks that the long-term success of air cargo will depend upon the ability to adapt to digitalisation and provide a more consistent end-to-end transit time. He says that collaboration between different air cargo forwarders is also key in growing and improving the industry’s presence.
“Mergers and acquisitions among forwarders will also play a part in bringing real synergy and cost savings to the market,” he says. He identifies the purchase of OHL by Geodis, and DSV’s acquisition of UTI as some of the important acquisitions in forwarding.
“The need to reduce end-to-end shipping times and provide more certainty for customers is a challenge for the industry, along with the need to modernise and replace paper documents with electronic versions and provide visibility of the entire supply chain,” says Keen. “This digitalisation is a matter for all parties to embrace, including shippers, forwarders, ground handlers and airlines.”
Earlier this year, the House of Commons Transport Committee accused the government of ‘dithering’ over the decision about where the UK’s new airport expansion should be located. BIFA has publicly supported this criticism.
“BIFA has supported expansion at London Heathrow because an additional runway will provide an opportunity for up to 40 more long haul destinations across the globe,” says BIFA’s Robert Keen. “The belly hold capacity on those routes and extra capacity on existing routes will be important for the development of new UK business and will also benefit the air cargo industry.”
BIFA believes that any further delays will mean other European hubs will snap up new routes.
Alex Veitch, head of global policy at The Global Shippers’ Forum agrees: “The FTA has been calling for a quick decision for some time. From the freight point of view, if you’re talking about expansion in terms of promoting a hub, Heathrow is the best choice because it really has a lot of freight.
“It’s important to get to a decision not only for the industry but for people in the area, so they know what’s in store.“
Regardless of what the government decides, it still won’t be a short process after the decision is made. “It’s not going to be the end of the story,” says Veitch.
However Tristan Koch, American Airlines, says that there have been positive steps made in the last six months. “Heathrow has finally appointed a head of cargo, Nick Platts,” says Koch. “We have now been given a voice.
“I’m pleased we have an opportunity to put our case across. We’ll see who steps up, and try and get the best cargo we can.”
Cool plan for pharma
Last year, American Airlines Cargo launched ExpediteTC°, a new pharmaceutical cold chain facility in Philadelphia. The facility is able to handle temperature-sensitive, life science and healthcare cargo.
The launch is a continuation of American Airlines’ support for the ExpediteTC° time- and temperature-sensitive program.
“With our quickly growing network at American, we see a great importance in investing in our infrastructure and people,” says Cargo’s president, Jim Butler. “We will continue to evolve our products and services as needed to ensure these sensitive shipments remain just as safe and potent for the end user as designed by the manufacturer.”
The company’s global training programme gives employees working on site the knowledge and skills to correctly and effectively handle these types of delicate shipments.