On Air Cargo

Introduction

Strong demand for faster delivery of goods by shippers is creating numerous challenges for the air cargo industry. Specifically, volume growth is expected to remain on a steady and strong growth path of 6% for the next 20 years . This burgeoning increase significantly outpaces any other modes of transportation. Despite this strong projected growth, the air cargo world is, and will continue to be an industry in transition.

Air cargo is challenging, complex and plagued by many factors. First, lack of governmental regulations coupled with a fluctuating petroleum index has put noteworthy pressure on the carriers. Shipper demands are on the increase and are expected to become more demanding. Intermediaries or "middlemen" have created a new marketplace in the eWorld. Shipments continuously changing hands still make tracking very difficult. Other issues such as ongoing merger activity and migration of integrators have also created a threat to shareholder value. Unfortunately, the fact still remains that:
" Investor confidence is weak
" The industry suffers from competing with very thin margins
" Integrators are coming on strong and making their mark to provide a wide array of different services.

Current Situation

Shippers are largely providing the same product to their end customers as they always have. The big difference is there is growing demand for "build to order" products, driven mainly from their clients' need to keep less inventory on the shelf. This shift in requirements is straining the supply chain. Shippers are no longer "pushing" product, end customers are now "pulling" product through the supply chain.

Very few forwarders, integrated carriers or brokers can provide efficient service due to constraints by today's infrastructure. For freight forwarders and conventional brokers, booking, processing, documentation, delivery information, and types of services provided remain largely the same. There have been some modest improvements regarding tracking, tracing and time definite offerings, however multiple handoffs to carriers and agents still make these functions labor intensive. Despite these limitations, forwarders are trying to provide more value-added services. In the logistics arena larger shippers have been given more flexibility with contract terms in return for higher volumes. Still, the lack of sufficient control of lift with air carriers inhibit their ability to properly serve their customers.

There are a small number of air carriers today that offer anything that could be described as global service. Airlines such as Southwest, America West, and AirTran are predominantly domestic carriers which coordinate transfers to international carriers to supplement service they cannot offer. A similar situation occurs for international carriers that primarily run international segments. They will coordinate transfers to U.S. destinations with domestic carriers.

Additionally, air carriers have difficulty managing small shipper to shipper relationships because larger forwarders drive high volumes of cargo giving them first priority. As a consequence, smaller shipper accounts are often overlooked or even lost to competitors with better service. Air carriers have been making strides to offer more information to their customers through technology and are trying to escape commoditization by offering new service features and strong branding. Nevertheless, they still remain challenged with managing belly space pertaining to balancing passenger loads and mail in an effort to accommodate their customers.

A new key player, integrators, have really been the main difference in shaping the air cargo industry. Commonly known as intermediaries, these companies have been able to take the best from all of the different segments of the supply chain and roll it up into a neat package. They are able to centralize large amounts of information to create trouble-free tracking of shipments through all handoffs on a real-time basis. Websites such as Logistics.com and Logisticsworld.com have created a new presence, taking market share away from an already "thin margin" industry.

Solutions
So getting back to the original issue; what will create significant shareholder value for carriers, forwarders and integrators?

There are only two distinct areas where real shareholder value can be created.
" Well pioneered offerings for shippers and consignees that are difficult to duplicate.
" Matchless operational efficiency within forwarder/carrier relations.

Specific areas where these improvements can take place are:
" A strong reliable operations network that provides good scheduling.
" Better handling through technology and process improvement; smooth hand-offs that are fast, accurate, without delays and without split shipments.
" Customer Relationship Management - responsive and personalized with accommodations for small and medium shippers.
" Revenue management - maximize revenue through customer prioritization.
" Range of Service - A true single source of tracking all the way through the supply chain.

The best value for shippers will occur by carriers and integrators creating alliances and investing in technology systems. Some change is already taking place in the industry right now. Both air carriers and forwarders will attempt to grow their existing alliances and partnerships with integrated carriers (airlines using the ACI network and forwarders using big 10 carriers such as Landstar Logistics, Schnieder, and Yellow Freight). Forwarders and carriers will continue to make modest improvements within their individual confines. Some successful companies already have this vision in mind and have taken action. United Parcel Service has acquired Fritz Companies and Sonic Air, while FedEx has acquired Caliper Logistics and RPS. Eventually we will begin to see a development of alliances that share similar relationships to these acquisitions.

Conclusions

As with deregulation, weak airlines were unable to compete with the major air carriers causing fallout of small carriers. In time, we will see a comparable transition in the air cargo industry. Air carriers and forwarders alike will realize the benefit in their collective strength. They will begin to formulate strong partnerships to capitalize on their own networks. Once these alliances are formulated, services for shippers and consignees will become unmatched. Major developments are going to be that forwarders' interactions with shippers will become much more automated, leading to more web-based solutions to provide real time order information and better customer relationship management across the entire supply chain. Air carriers will be motivated to align with forwarding groups to better manage shipper to shipper relationships, allowing them to enhance customer interaction and provide a larger base of services. Eventually, other carriers and forwarders will follow suit. Those who fail to do so will most likely not survive.

Ultimately, successful companies will make the right decisions and investments to overcome these strategic hurdles. Carriers will be more focused on creating alliances with their best customers, which are freight forwarders. Freight forwarders will be eager to align with the air carriers, so they can gain more control over available belly space to move product for shippers. Major benefits realized by all including the shippers (air carriers, forwarders, integrators, trucking companies) will be the sharing of supply chain information. Advances in IT solutions will make tracking, tracing and hand-offs much more seamless than it is today. It will be the flawless sharing of all information that will transform the air cargo industry as it is known today.

Factoid

Six major airlines have announced their intention to form a new powerful Internet business-to-business marketplace that will handle approximately $32 billion of their supply chain business annually. The initial founding airlines are: