What Does the Future Hold for Air Freight?

Stephen DeAngelis

October 23, 2012

“The U.S. airfreight market generated revenues of $28 billion in 2011,” writes blogger Kforsythe, “a 7.4 percent, year-over-year, increase.” While Forsythe admits that’s an impressive year-over-year increase during a repressed economic period, she notes, “This figure is on par with the revenues the industry recorded in the 2000-2001 financial year.” [“Study: Stagnation permeating U.S. airfreight market,” Air Cargo World, 26 September 2012] Forsythe continues:

“Such statistics show that the U.S. — despite the domination of integrators FedEx and UPS — isn’t immune to the sluggishness affecting the global airfreight market, a new study conducted by Air Cargo Management Group asserted. Overall, cargo traffic in the U.S. dipped 1.3 percent, year-over-year, to 12.117 billion tonne miles in 2011. Unfortunately, the same problems that plagued the domestic airfreight sector last year are likely to continue in 2012, according to the ACMG study.”

Highlighting what appears to be a lost decade for air freight providers (in terms of growth), ACMG Managing Director Robert Dahl stated, “The U.S. airfreight industry, once characterized by rapid double-digit growth, has gone through 10 to 15 years with no net expansion. Part-year data for 2012 shows flat traffic versus 2011, so the chance of any significant rebound this year in traffic volume appears remote.” As I noted in an earlier post, one glimmer of hope for the air freight industry comes from manufacturers like Apple which produce highly desired products, like the iPod 5, which must get to market as quickly as possible to satisfy customer demand. Only the air freight industry can deliver goods from overseas in a timely enough manner to keep hot-selling items hot. Unfortunately, there simply aren’t enough of those products to sustain significant industry growth. Forsythe continues:

“Even so, ACMG executives said some growth has occurred lately. For instance, the fourth quarter of 2011 saw the number of express shipments in the U.S. surge 0.5 percent, year-over-year, to 5.42 million shipments per day. But the study also showed that the revenue-tonne-mile traffic and express package volume metrics are on par with mid-’90s statistics. Also troubling is the fact that ACMG found that the U.S. airfreight sector is unlikely to grow any faster than the U.S. GDP. And legacy passenger carriers are certainly not helping to reverse this trend, ACMG officials asserted. The study found that U.S. cargo traffic among major combination carriers has stalled 67 percent since 2000. During that time, ACMG said, cargo volumes for these airlines dipped more than 55 percent and mail traffic plunged more than 80 percent.”

If, in fact, the growth of the U.S. air freight sector is tied to U.S. GDP growth (now predicted to be a weak 1.2%), it’s easy to see why the ACMG study concludes that the industry is stagnating. In order to maintain profit margins during a period of economic stagnation and high fuel costs, air freight providers are leaning on aircraft manufacturers to make their aircraft more efficient. Fortunately for aircraft manufacturers that has translated into lots of orders. Bob Ferrari reports, “Airline and aircraft leasing customers demanding more cost-efficient and innovative aircraft, coupled with breakthroughs in the development of lighter composite materials have resulted in the current unprecedented backlog of customer orders for OEM’s such as Airbus and Boeing.” [“New Paradigms of the Service Supply Chain within the Aerospace Industry,” Supply Chain Matters, 27 September 2012] He continues:

“These respective OEM’s continue to be challenged with large scale multi-year production ramp-up needs while continuing to deal with engineering and production challenges. Supply chain teams within aerospace are also fully aware that long-term maintenance and the service supply chain can be far more profitable and provide more opportunities for sustaining revenues than the product focused supply chain. Today’s more technology laden aircraft represent far larger potential capital expenditures for airlines and over the past few years, aerospace OEM’s and component providers have come-up with creative leasing, financing and ongoing maintenance plans that reduce up-front capital and long term operating cost burdens.”

Ferrari notes that fuel efficient engines are one component receiving a lot of attention. He writes, “Airbus was able to seize first mover market advantage and book over 800 aircraft orders in months because of its collaborative co-development efforts with Pratt & Whitney in the development of the geared turbofan Pure Power engine offered on the A3320neo aircraft.” Ferrari reports that other engine manufacturers were quick to respond. For example, “CFM International, the joint venture among General Electric and Snecma, whose Leap engine is offered as an option for the Boeing 787 Dreamliner, has amassed over 4100 orders.” He continues:

“Engine manufacturers are keen to provide customers with long-term leasing and ‘power by the hour’ maintenance programs where both airline customers and engine providers have incentives to insure that their engines provide reliable, continuous service at a lower overall cost.”

Ferrari states, “The sophisticated engines being introduced by aircraft engine manufacturers are breaking new ground in technological capability.” As with many new technologies, there have been bumps along the road in the form of engine failures and corrosion. Ferrari provides the details. Nevertheless, he is impressed with the new technologies. He writes:

“They are akin to the breakthrough introduction of direct fuel injection systems over carburetors in automobiles so many years ago. Over time, engine manufacturers will eventually reach stated goals for performance, long-term reliability and uptime. But as this occurs, the paradigm of the service supply chain shifts towards early warning predictability maximized uptime and needs for precise synchronization of service events. This includes on-board and self-communicating diagnostics providing early warning to operating issues, more responsive networks of service parts and service depot suppliers as well as highly networked maintenance facilities.”

As engine manufacturers get more deeply involved in lifecycle service and maintenance, Ferrari insists that they “need to consider increased investments in their service supply chain capabilities including deeper product lifecycle management integration and supply chain intelligence, collaborative execution and supply chain control tower concepts.” He concludes:

“The service supply chain will no longer take a back seat to the product-driven supply chain, and for aerospace specifically, it will be instrumental in fulfilling long-term revenue and profitability business objectives.”

While most analysts focusing on the air freight sector continue to look at traditional aircraft, “Barry Prentice, a professor of supply chain management at the University of Manitoba, believes that airships will play a key role in the movement of cargo in the years ahead.” [“A New Generation of Airships for Cargo Transport,” SupplyChainBrain, 4 September 2012] Prentice explained to the SCB editorial staff why he sees a bright future for airships.

“Get ready for a new generation of cargo-carrying airships, says Prentice. The development ‘is actually much closer than people think. It’s going to burst upon the market fairly soon.’ Construction has been held back over the years due to a dramatic post-World War II increase in airplane development, funded by the military. Prentice believes the time is right for a reevaluation of vessels that were seen as too slow to be efficient movers of goods. On the contrary, he says, ‘they can travel 80 miles an hour. That’s faster than a truck.’ As for capacity, the old zeppelins could carry 80 tons of cargo. ‘Modern airships would be much bigger than that.’ Development is focused in the U.S., which has been a leader in airship development, as well as the U.K., Russia, China, Brazil and Canada. Prentice says the U.S. military has invested around $1bn over the previous 18 months, and is ‘getting very close to trial flights.'”

While airship capacity may be large enough for international trade, 80 mph is really too slow for many high demand or perishable items. Nevertheless, Prentice believes “the use of modern airships will have a significant impact on international trade. The article explains:

“‘[Airship development is] going to be a disruptive technology. Every 50 years since the industrial revolution, we’ve seen a new mode of transportation.’ Advantages include low energy costs and a small carbon footprint. Airships will be especially well-suited to cargo that doesn’t require expedited transport, but is too delicate or perishable to travel by ocean. Fruits and vegetables will be among the best candidates. Transit time from the China to the U.S. will be around five days, and two days to Europe, with minimal vibration, Prentice says.”

It is hard to call airships “a new mode of transportation.” What’s really new is the size of some of the proposed airships and their carrying capacity. Regardless, the ubiquitous use of airships is not likely to occur any time soon. When and if they do become prevalent, it wouldn’t surprise me if airship operators became combination carriers. Airships could reinvigorate the regional airport business.

 

Something that air freight providers can do to improve the efficiency of their operations more quickly is move faster “towards automated documentation exchanges between air carriers, customers, ground-handling agents, truckers and customs authorities.” [“E-freight’s slow assent,” by Eric Kulisch and Chris Gillis, American Shipper, 8 April 2011] Kulisch and Gillis note, “The average shipment generates up to 30 different paper documents, according to industry experts.” If these documents are exchanged electronically, the benefits are significant. They explain:

“When documents arrive ahead of the cargo, customs clearance and airline processing time can be cut by an average of 24 hours. Delays associated with lost documents are eliminated and accuracy is improved because there is no need to rekey data into various information technology systems along the way.”

Since air freight is primarily used because it moves goods quickly, an improvement of 24 hours in processing time is significant. The bottom line is that the air freight industry is going to have to get creative to maintain profitability over the next few years as the world tries to claw its way out of the current economic morass.