- Flying is the most fascinating mode of transportation for many and continues to hold secrets that consumers often take for granted.
- Cargo airlines generated revenues of $102 billion in 2019, moving goods worth $6 trillion which equated to 35% of world trade by value.
- In addition, air cargo can be literally life-saving at times: during the height of the early COVID-19 challenges, aircraft were crucial to securing the delivery of medical supplies and equipment around the world and will be essential in the future.
Maersk Growth has recently reassessed the air cargo market by working with the many internal and external ‘friends of Growth.’
Air cargo is inherently complex
Flying is dangerous: As seen with the Caproni Ca.60 (which crashed during its first flight at Lago Maggiore), a lot of things can go wrong when operating a plane. That is why air cargo is associated with big security concerns and bureaucratic barriers.
As a result, virtually all air cargo bookings are handled by IATA-licensed freight forwarders, and not by the BCO (e.g. shipper) as is more common in other transport modes. IATA-licensed forwarders are estimated to generate similar revenue figures as the air cargo airlines themselves.
Flying cargo is stressful: Air cargo is the by far the fastest and the most expensive transportation mode (12–16x up on ocean transport). As a result, it is primarily used for cargo that is of high urgency and/or sensitivity.
For operators, this can mean that a larger share of cargo is booked on the spot market (ad-hoc) and that the cargo is often complex to handle.
On top of that, it is more challenging to match supply with demand, as both sides of the market have a fragmented composition.
A tale of teddies-and-titanium: Aircraft have strict weight limitations which is why the pricing of air cargo is typically a function of both the weight and the volume of goods shipped, unlike other modes of transportation where weight is less important (e.g. ocean, rail, road).
Finding the right composition of cargo with different densities is consequently important to maximize efficiency. Therefore, it is all about consolidating goods to achieve the right teddy-to-titanium ratio. To achieve this, the name of the game is scale.
Air cargo is decentralized and a membership game
Decentralization as path dependence: The task of selling the available capacity has invariably been given to an airline’s local offices as this task is closely linked to the operations function and often requires swift ad-hoc adjustments to ensure the aircraft’s utilization is as high as possible.
These decentralized structures are still dominating virtually all airlines. Therefore, to book air cargo, good relations at origin are much more important than at the HQ level of an airline.
Wine and dine: It can be a tedious task for forwarders to ensure that their loads are getting on the right planes at the right price. Airlines greatly value reliability and continuity. As a result, forwarders must ensure strong relationships with the local sales staff of each airline.
Love and hate: To accomplish successful consolidation of cargo, forwarders are regularly incentivized to collaborate with one another. Like other modes of transportation, forwarders are often engaged in a ‘love-hate-relationship’ where they both compete over volumes and collaborate to increase profitability. It also means that for some shipments, several layers of middlemen are involved.
Structural inefficiencies are immense
Within the air cargo industry, there is a lot of room for improvement. This becomes apparent by focusing on the following three prevalent inefficiencies.
Favoritism: Giving all power to regional stakeholders bears the inherent risk of favouritism which creates unnecessary barriers to entry for new players and irrational preferential treatment of a few players — as a forwarder you must be ‘in the club’ of an airline to get capacity.
High transaction costs: Today’s air cargo booking process remains in large parts slow and inefficient. It simply does not make sense to book air cargo today with many business process and supporting technologies from the 1990s.
As seen in other industries, it is only logical to coordinate transactions digitally to allow for transparency and synchronous communication, to reduce the manual labour associated with a booking and consequent tracking of air cargo.
Untapped potential to increase utilization: Due to the missing transparency on who wants to move what cargo at what time, the industry misses out on the potential of centrally optimizing its utilization by leveraging modern technology.
It could all be so much easier
From the outset, air cargo looks like a perfect use case for the application of a smarter algorithmic approach to the process. Operators face the task of filling up limited but dynamic spaces whilst optimizing for multiple metrics (weight and volume).
This is done by composing the right mix of different cargo that goes on the plane, which can be achieved via price discrimination and previous consolidation of different cargo types that go well together. An increase in utilization could lower the prices for shippers while reframing margin capture and sharing among airlines and forwarders.
Times are Changing
There are various trends and developments which give reason to believe that change within air cargo is accelerating.
Corona has severe effects on the air cargo market. Both supply and demand for air cargo has dropped significantly since the start of 2020.
- Supply dropped more than 40% by end of March as passenger traffic evaporated over the course of a few days.
- Demand dropped slightly less (27%) which is in part due to the urgent demand for PPE and other emergency shipments
Strategic relevance increases: Even with passenger aircrafts being used temporarily as full or partial freighters, there will still be a severe cargo capacity shortage and air freight rates are likely to remain high for some time. Cargo is expected to represent a much larger share of airline revenue for years to come which is why there is momentum in the market to open up for change.
The rising tide of e-commerce changes the landscape
Integrators and e-commerce giants reap the fruits: To date, the primary air logistics beneficiaries of the e-commerce boom have been the integrated express carriers (such as FedEx, UPS, DHL) and e-commerce retailers’ own in-house air operations (e.g. Amazon Air)
Volume bundling on a new scale: Alibaba and Amazon are able to bundle huge volumes for both their captive business and the business they manage for third-party merchants.
Amazon continues insourcing efforts: Amazon Air is expected to grow their fleet of aircraft to >200 in the coming 7–8 years, catching up with the largest players such as UPS (275 aircraft) and FedEx (463 aircraft). Amazon Air now operates almost 100 flights per day via five contractors despite being still primarily confined to North America. To support these efforts, a $1.5 billion air hub built near the Cincinnati/Northern Kentucky International Airport is expected to open in 2021.
Airlines are expected to move closer to the shipper
Desire to reduce layers of involved middlemen: Cargo airlines are intent on moving closer to shippers and intermediaries such as forwarders, at least for parts of their business. (The Cargo IQ initiative is a good indicator of this trend.)
First step online booking: The websites of many leading companies have features for online quotes or bookings, so they are targeting some of the forwarders’ smaller customers directly. AFKL is the industry leader, claiming to manage 65–70% of its quotations and reservations online via its own online tool, MyCargo and SAS claim 80% of their customers book their shipments online.
Increase the percentage of direct booking: Some expect that carriers will increasingly be able to completely disintermediate forwarders, pushing direct shipper–carrier bookings up to 15 to 20% (from less than 5% today).
The heat is on
Change is happening but who will drive it?
We believe that incumbent stakeholders are increasingly waking up and opening up for change. Many are boosting their efforts to innovate from within but we are confident that a large part of the upcoming air cargo efficiency increases will be driven by startups.
Although the current landscape of ventures dedicated to this industry segment is still small-sized, we are hopeful that more entrepreneurs will address this sizeable market that is in need of a breath of fresh air and increasingly open to letting newcomers under their wings.
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Source: Maersk Growth
