#BigOpinion - Be fast and furious
Oil price, a key factor of air cargo, has been on the decline for over two years. However, the decline in yield too was equally sharp. The solution lies not just in rationalizing the capacity to reach demand-supply equilibrium but to rapidly embrace technology for cost optimisation.
Price of oil is an important factor in the air cargo industry. And it has been on a sharp decline. But any prediction about the direction of the oil price in the coming years is quite a challenge in the current scenario. Surprisingly, the decline of oil price has not positively impacted air cargo but on the contrary it had an adverse impact.
The biggest problem today is the average yield decline is about 5 to 7 percent year on year since 2012. This is quite acute. In the past high cost of fuel was offset by fuel surcharge. Now that has also disappeared. While the cost has been kept under control the returns are going down southwards sharper and sharper.
The unfortunate reality is that the air cargo market prices are fixed by operators and it is realistic to estimate that around 75 to 80 percent of operators have no clue about what their real costs are. Unfortunately the market prices are being dictated by them. This is putting an extremelycompetitive pressure on yields and rates.
On the other hand there is tremendous amount of extra capacity (belly-hold) added by the introduction of wide body passenger aircraft. Other factors that adversely impact include the slowdown in the Chinese economy, modal shift and to some extent insourcing and nearshoring, which has a heavy political intent to bring jobs back to countries. The advent of evolution in 3-D printing will also change sourcing and the fabric of manufacturing activities. The math is simple. Viability of converted wide-body main deck capacity is disappearing. The future main deck capacity is likely to be dominated by Airships and large drone freighters which can provide a lot cheaper flight costs.But it is high time for the air cargo industry to look at its peers. Technology adoption by air cargo industry to address its key challenges like supply chain visibility and transparency has been extremely slow. It’s reasonably right to assume that the changes in air cargo are not going to be driven by existing stakeholders but by outsiders like Google, Amazon, Alibaba and Uber. These are the guys who will force a change on the air cargo industry. They will drive the highest growth segment for air cargo. For instance Amazon partnering with Atlas Air and ATSG to launch a fleet of freighters to meet the demands of rapidly increasing e-retail volumes.
For Amazon, the reason to have its own fleet of freighter was that integrators have not been able provide flexible solutions to the global ecommerce leader. Atlas and ATSG deal with Amazon is outstanding. It is aimed at reducing the overall cost of logistics. It may appear the e-retail giant is taking the destiny into its own hands to reduce the last mile delivery cost. However, the reality is that once it begins to operate its own aircraft it may begin to lose some of the cost benefits it has right now.
Amazon-Atlas Air deal did not surprise me at all. In fact in one of the Air Cargo India conferences in Mumbai I had argued that those who control the last mile delivery will be the players of the future. I could see that happening years before. But there is a resistance from the industry to change and it is an ongoing challenge. The growth in traditional cargo is likely to be in low single digits, however, the growth in the segment driven by e-commerce will be growing in double digits. So overall, air cargo will remain a growth industry.
Today the difference between freight forwarders and integrators is that the former’s delivery schedule is job-based while it is schedule-based for the latter. But the new requirement by the e-commerce industry is a hybrid model that is flexible, transparent and measurable. They want to measure the service provider by the success of the first attempt delivery. Freight forwarders and airline cargo industry are not been able to keep pace with. Those who make those changes quickly are the ones who will go ahead.
The technology is there and it is not a constraint. The very fact that every stakeholder in the air cargo industry is trying to make a quick buck out of each other is creating lack of transparency. Going forward, there is no reason why the shippers cannot procure capacity directly from airlines. This is already happening in ocean and road freight. Therefore, there is no reason why it should not happen in the air cargo industry as well.
So what happens to the forwarders? They are not going to disappear. The airlines’ expertise lies in transportation and creating distribution networks whilst freight forwarders provide the logistics support on the ground. Shippers can procure capacity directly from airlines, and procure logistics services from forwarders and all these can happen online.
What has also got to change is the payment mechanism. It has to be similar to what happens in the ecommerce sector. Once you have such a scenario, industry will be placed in much better position among all other industries. Everybody is quite comfortable buying a passenger ticket and pay for it even before the travel commences, so why can’t this happen in the air cargo industry? This would help better flow of cash which would also encourage more investments in the industry.
What you are going to see in the years ahead will be the hybrid services. But an interesting thing that is likely to happen is in consolidator traffic where freight forwarders sit back waiting for volumes to build. This is going to disappear. Today cargo needs to move as they come to you. Speed has become extremely critical to the service you provide. Speed combined with last mile delivery is the key to success. Unless the industry starts reviewing the model of interaction and move into digitisation, things are going to be extremely difficult.
Ram Menen led the Emirates cargo arm from its launch in 1985, to it becoming the largest international cargo airline in the world, despite every global challenge – economic crises, wars, high fuel costs, security threats, while all the time building an airline’s cargo product based on unique principles. Menen is now retired and enjoying life travelling around the world spending time with his family and friends.