If you pay peanuts, you get monkeys...

By Alex Lennanehttp://www.blogger.com/profile/[email protected]

19/07/2011

The market is looking fragile. As the results of Airline Cargo Management’s industry-wide survey start to come in, a cloud of fear is forming.

Although there is a general acceptance that the industry is naturally volatile and cyclical, and that overcapacity is something carriers simply need to cope with, there are also loud complaints about large carriers dumping cheap capacity on the market – as well as a growing clamour about unfair subsidies.

Margins are already low. Capacity is growing. Volumes are uncertain. Smaller carriers are facing some testing times as we seem to be approaching the “largest pocket wins” point of the market.

Now of course, you may say, that is normal, healthy competition. It has always been a cyclical industry, players come and go.

Subsidies, however, are not part of a healthy, fair market. The Loadstar knows of at least one carrier that enjoys astonishingly significant cost savings through state support that seriously tips the market balance. Carriers which receive this kind of support have no incentive to be efficient, no incentive to compete on anything other than price, no incentive to create a healthy marketplace.

(While we are at it, let’s just point out that the much-maligned – and envied – Emirates was recently exonerated by an Oxford Economics report showing that its success was a result of an effective model, not of unfair competition or state support.)

But it’s the suspicion that some carriers are receiving subsidies, at the same time as the market is being flooded with capacity, that is causing upset. No one knows what is true competition and what is not. And the dumping of cheap capacity could result in the market being controlled by a few, large players, which, claim survey participants, will lead to inefficiencies, monopolistic behaviour and, ultimately, rising prices that could damage the industry.

But a quick look at the forwarding industry might suggest otherwise. (Admittedly, it looks from the outside like a better game to be in. The one spot in logistics where the money seems to settle.) A handful of huge companies get the majority of the volumes. But contrary to some previous expectations, the smaller and medium-sized forwarders also continue to thrive.

And, particularly in the dark days of 2008 and 2009, smaller players reported that shippers – who had deserted them in favour of cheaper, larger companies – came back pretty quickly when they realised that the quality, service and product offering of some of the bigger boys was low. This was particularly true of specialised forwarders, who had relevant skills and experience, rather than just a convincing sales team.

If you can’t compete on price, then all you have left is quality. And with customers becoming ever more demanding, according to the survey, quality is no bad thing to base a competition on. Everyone knows that if you pay peanuts, you get monkeys. There are some false economies in this world. Perhaps the only way for smaller carriers to survive this assault is to sharpen up, and ensure the quality is simply better.