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The scheduled airline air cargo industry does not need a revised business plan, it needs a completely new business model.
In this concluding white paper from SASI, re post Covid-19 recovery, I would like to start with a brief recap of some facts, some new, and some from previous papers. As a team, and me in particular, we have always been known for straight-forward honest viewpoints.
Not saying anything is a greater deceit that worrying about controversy.
We need to understand that the owners of vast fleets of aircraft sitting idle, the employees who have been let go due to circumstances beyond their control, and all the stakeholders such as airports, GHA and others, deserve our utmost attention. Most of what we are about to discuss can be implemented in a virtual way, meaning capex can be minimal and costs can be variable.
If eyes can be opened, the solutions are there and available in quick order.
On the need for a greater recognition of cargo in the airline and airport board rooms, the following information should be of interest for CEOs, board members and cargo VPs, but I doubt it is even common knowledge. Compiled by my good friend Des Vertannes, ex head of IATA Cargo, consider the following:
As a percentage of global airline revenue:
So, for global airlines in last decade, cargo produced three times first class revenues and very close to business class revenues.
Typical North American airlines report that only 3 to 5% of total revenue comes from cargo, but a huge chunk of that passenger revenue is derived by them from domestic or trans-border US Canada flights. Without that domestic factor, what would that cargo percentage be? Using European carriers as benchmarks, it is 10% plus, Middle East carriers are between 15 and 25%, and Asian carriers see well over 20% of total revenues originating from cargo.
One major European airline advises that prior Covid-19, 70% of all its international flights were not profitable without the cargo contribution, another major advises it is close to 60%.
How many carriers that fly transcontinental, longhaul widebodies realise that as passenger yields decline, cargo in the bellies will ensure the economic sustainability of intercontinental services now, and especially in the future?
It is obvious that their ability to put current widebody fleets back in profitable commercial service depends on cargo more than ever. Yet all the signs point to a pending crisis, when all the PPE required has flown. What remains of the previous volumes will be nowhere near pre-Covid levels.
Those airlines and airports that do start taking cargo as a core activity will benefit; those who don’t will continue to chase volume, not value, in air logistics products. While waiting for passenger traffic to return to 2019 levels, the airlines’ economic analyses, if based on the air cargo traffic results of the past, will result in widebodies remaining parked. For those airlines that decide to chase cargo based on price, it is the first step in a spiral of decline.
Some other industry comments to the SASI White papers, printed here with the permission of the author.
Yours is of course a fair and comprehensive summing up of what ails the industry. The industry has however never heeded any advice. On principle it does not heed anything that challenges its modus operandi. For over 40 years it has stuck to a model that has almost cost incumbents their livelihood. Which is strange: why do this to yourself? It gets even stranger if another model, the integrator-model, comes along that offers obvious advantages.
So, while your papers lay out clearly how the industry is going wrong, why it continues to go wrong almost wilfully so, over an extended period is quite another matter. It doesn’t lack a blueprint for improvements, just follow the integrator model for example and half the battle is already won.
But the industry does not. I have come across the reasoning for so long now it has become the stuff of my dreams:
It is the matter of bilateral rights; a construction which has become very solid for the support of international travel and no one wants to do things to it that might endanger its integrity. It is a lame argument that lost its lustre with deregulation in the early 80s.
It is the matter of the forwarding industry; an industry that brings the advantages of air transport from airports into the capillaries of markets and so unlocks opportunities that would otherwise not exist. That was once true, nowadays it is just squeezing airline yields.
It is the matter of airports; airports being a national exponent of travel and transport infrastructure, at some considerable costs to taxpayers and users, but they get connections with the larger world in return. Again that used to be a valid argument, but it has no national checks & balances. So, like many hubs, all that money disappears towards non-national travel and transport and adds nothing to the GDP.
Stan, whether you explain this in operational terms, like you do, or in business-positioning terms, like I do, it seems to go over the heads of those who would be able to do something about it. Even proposing new inventive models does not shake up the industry.
While the whole world is going through the 5th cycle of digitisation, the air cargo industry still faces the enormity of a first cycle. And strangest of all, these are the people who in their private lives cannot do without a smartphone. Yet in their business life they don’t know what to do – or worse, do know and for their own interests avoid it.
My conclusion since a long time is: everything the industry needs to set itself right is available, in abundance. All that it lacks is people, not people who love aircraft: they will keep airlines in an operator role because they are not aware of how to build a market-oriented portfolio. No, people who love to make money, who understand shippers and consignees, who see switching roles and positions in the chain as a way forward.
Imagine what companies like Amazon and so on would have been now if they would have stuck to how they once started out.”
B Grin, ex-KLM head of cargo strategy, logistics expert
Airlines currently chase a share of the air cargo market from potential global revenues of approximately $55bn, and that is only airlines that report to IATA. If you add the express and mail sector, the total is approximately $85bn (pre the e-commerce boom). The shocking fact is that the overall air-related logistics market was worth over $250bn – all of that revenue was related in some way to air logistics, and available for airlines to participate in.
So, who has been making the money over the years?
a) Those with huge asset/ depreciation costs, manpower, technical and severe regulatory obligations who have been fighting over the $85bn? (Airlines, Airports, GHA etc.)
or b) Those without any assets or regulatory oversight chasing a share of the $165bn available, because they know what the Beneficial Cargo Owner (BCO) really wants in air logistics?
Through over 40 years of the broadest work experience possible in air cargo I can now safely say I now know what we did wrong as an industry, as well as having insight into how to correct those mistakes.
One of my colleagues, during a recent SASI project with a major airline to redevelop its airport hub facilities to cope with next-gen logistics, not just pallets, told the client “remember whatever you do now, you will have to live with it for 20 or 30 years, so take the time to get it right.” That was related to air cargo facilities and data capabilities on the ground at airports, because they will make or break an airport and the facility’s ability to serve the industry going forward. Data capability and processes in the facility and on the airport should be a marketing tool to attract business, not treated as real estate transactions.
Over the past 40 years airlines gave away the express and small package market to integrators who understood the customer’s product needs, and how to organise around that. The airlines did not react; they allowed it to happen.
Thirty years ago, through incompetence, we airlines, via IATA, gave away the rest of any possibility to retain yield through pallet pricing, allowing consolidations which have been the greatest source of revenue for forwarders ever gifted by IATA. Then at the same time we gave away all contact with the beneficial cargo owners (BCO) or the shipper and consignee customer base.
Direct customer relations, the only true source of information on the needs and demands of the market, were given away to forwarders as IATA “Agents” of the airlines. With the advent of consolidations, they ceased to be agents more than 30 years ago. Yet we still talk of “retaliation” if we seek, as asset owners, to leverage our massive investments. If e-commerce did not open eyes, what will it take?
Imagine what that decision to go to pallet pricing, which was totally driven by IATA looking at reducing handling costs at airports, has done to forwarders’ positive profit margins, at the expense of airlines’ ability to finance investments and support the high capital costs of running an airline. We still have generic rule books for minimum charges and volume calculations based on B707 and DC8 aircraft of the 60s, which have no place in today’s world!
Airlines continue to organise their sales forces based on export-flight only accountability, yet over 80% of the BCO are consignees, not shippers, and the benchmark is consignee satisfaction to ensure client retention and repeat sales. The consignee makes decisions, and the airlines don’t talk to them or shippers out of fear of retaliation from forwarders. Does this make any sense today?
Without control of airport handling, data transparency throughout and a simple-to-use dashboard through APIs, with a full knowledge of customer needs for products, we lost focus. That continues today, and is present in almost all current airline business plans. The consequence is a massive negative effect on all stakeholders such as airports, GHA, etc.
For years we have seen the revolution in global logistics driven by consumer expectations, where airfreight is but one of the tools for shipper and consignee satisfaction; ecommerce and all other verticals require speed, security, safety and most of all transparency.
Will the airlines and their critical partners like airports, GHAs, GSAs and IT companies now understand the opportunity this presents, or again fall back into load factor, FTKs, out-dated rules, regulations and cost reduction modes so typical of the past?
Where do we go from here, what is the new model?
It is an obvious fact but not a leveraged fact, that scheduled airlines, and freighter operators who operate nonstop intercontinental flights have the fastest possible way in the world to move goods from one point to another. Very expensive aircraft assets that fly, for example, Hong Kong (HKG) to London (LHR) or Chicago (ORD) to Shanghai (PVG) in effect can provide an overnight next day service for the air cargo in the bellies. Yet they literally give the space away at prices below costs in some cases. A B777/A350/B787 or whatever widebody aircraft is used, is for all intents and purposes the same no matter what airline flies it. Where the product differentiator can be realised is only on the ground, at both origin and destination airports.
Even if airlines that must operate via hubs due to antiquated bilateral agreements on high demand routes process cargo with the same speed as passenger baggage in transit, the worst-case scenario would still be the same transit times as integrators, who operate through multiple hubs to get to the same destinations.
If you think like an airline, you will fail. UPS, Fed Ex and the like spend approximately 85% on data and ground services and only 15% of their costs are on aircraft. Airlines reverse this spending with 85% of their money spent on airframes, and because of this antiquated thinking only 15% on the ground and precious little of that on cargo. Those services on the ground including data systems, can be easily replicated by scheduled airlines virtually and in most cases as a variable cost.
Three years ago, at the request of a major European airline I was asked to participate in a management information bulletin video where they highlighted the miniscule tonnage in high value verticals, “specialities”, which produced such a high percentage of the airline’s cargo revenue. The airline and airport industry as a whole have tried to address and expand this with committee after committee on a product silo approach. Associations like Cool Chain, Pharma Aero and the IATA CEIV programme are examples of this.
All these groups are doing the same thing in self-interest, while the pharmaceutical manufacturing industry had already embraced a perfect standard to adhere to, under the Good Distribution Practices (GDP) system, which the pharma industry accepts universally. They have now set up similar systems for live animals, so what’s next?
Standards for an individual airline’s product differentiation are its unique selling points, so why would you ever agree to a common approach, which will quickly turn a speciality into a commodity, with the consequential high handling costs, and diminishing yields as you lose your marketing advantage?
Adhering to this way of doing business, with committee and silo thinking, is the easy way out. Collaboration makes hard decisions easier to take – but does that really make your company great? Do you think Jeff Bezos of Amazon, Jack Ma of Ali Baba or Fred Smith of FedEx made their companies great by accepting common solutions? Or did they see a business opportunity, and leverage their skills to create unique selling points for their way of doing business?
People like Steve Jobs, Bezos, Ma, were all disrupters, and disrupters in the airline and airport air logistics world have a much clearer, simpler and easier path to economic sustainability for their companies than those individuals did at that time. Remember what Mr Grin stated in the above, “All that it lacks is people, not people who love aircraft: they will keep airlines in an operator role because they are not aware of how to build a market-oriented portfolio.”
Airlines and airports especially must be willing to move with the times, take the lead and adjust their operations and marketing approach in response to increased competition, technological innovation and advances, stakeholder expectations and other pressures. True business change is more than just a business plan update and shift. It’s the result of a structured and planned process to make the company more efficient and profitable. The new model I speak of is the act of moving the company from where it is now, to where it wants to be and, in our case, due to Covid 19, must be.
The change can be relatively quick, such as improving the company’s or airports data procedures, to utterly transformative, such as reformulating the entire product and service offerings in the light of the existing threat to scheduled airlines and airports’ future profitability. In some cases, the very survival of some companies is at stake due to the obvious failure of our current way of doing business in this competitive environment.
Product portfolios, dashboards through API solutions to all “principles” (and I mean all), self-handling and GHA, if used, having one common operational system geared to each airline’s needs – not the herd solutions that exist today. All must be managed throughout with KPI/SLA by product type for operational processes. Accept finally that cargo is a core business and separate key personnel from any passenger management aspirations whatsoever, because in your airline logistics can and must be shown to be a rewarding career. Logistics as an airline career deserves respect and attention from the CEO and board of directors, and will be if they understand airline economics.
Together with the airport authorities, airlines must lobby local, federal and global authorities to allow the new business model to seamlessly work as it will enhance economic progress for everyone. Operational processes must be equal or better than the integrators, and this can be done in a virtual way, and can also be at a variable cost.
Invest in your people and give truth to the fact that air logistics is an honorable career in your airline, and not a stepping stone to get ahead. Provide training on strategic selling, and scrap all current ways of doing business; renumeration should be based on products sold and clients gained and retained, not on filling export aircraft capacity in their station, which is totally ridiculous and out-of-date. Last, operations must be separate from sales as it’s a strict discipline based on your “product portfolio” specifications as to time, quality and transparency. The operations interface, if not fully data-based dashboards, is solely for operational-only customer service located at airports, and only for exception handling. The product definition as to speed, quality and transparency is what is sold and delivered.
If you utilise their services, change the engagement with GHA/GSSAs to that of strategic partners, with a menu-based system for products, and not an outdated kilo-price mentality. They serve as your shopfronts to deliver your airline’s product portfolio strategy. It should not be your purchasing department that is holding negotiations.
The model for change, is an air logistics strategic plan that’s agreed with the CEO and board, business plan agreement with board and senior management, action and accountability planning with senior and middle management, shop floor processes and procedures dictated by the agreed product portfolio operational needs, with an overall strategy towards transparency, speed – and above all, quality.
Within airport management, your facilities have to become a tool to assist your airline clients. You have to understand that they are marketing tools for your airport to ensure profitable air logistics solutions by your airline client base; they should not be relegated to simple real estate transactions. Developers and GHA lessors must be made to understand that weight will of course be given to rent, concession fees and so on, but equal weight will be given to the economic sustainability of airlines who serve the airport. Examples such as full data, ecommerce capability and paperless operations, as well as full capability to handle any verticals that the airlines wish to develop. In the RFP for developers, airports must ensure these criteria can be implemented by tenants as a pre-condition.
Airports must work with the GHA community to isolate pain points, and allow them to upgrade their capabilities, especially if they are an existing client. If the airlines are presented with a menu of operational capabilities to handle a product portfolio, GHAs can and will invest, and airlines will have the ability to pay. Economics for GHAs are severely restrained as airlines claim the margins will not allow anything else. That is a ridiculously short-sighted, and a major part of the circle of decline for both parties.
And for the GHA management, please question the airlines when they approach you with requests triggered by the “herd mentality” of these ‘product verticals’ committees and associations. How many of them built expensive pharma handling capabilities on airport, only to see pallets completely bypass them and be immediately picked up by the consignee?
With developments in passive lithium battery-powered containers, that last over 11 hours currently and are improving, these facilities will no longer be required to the scale they were envisaged. Do you need racks with power adaptors instead? Engage with your airline clients and become a strategic partner with whom, thorough trust and if needed legally binding agreement, they share their business plan and product development ambitions with you. Build specific handling capabilities based on that, not what the press finds the flavour of the day.
Cargo community systems, stakeholder associations chaired by the airport are a must to ensure standards are met. Facilitate an ongoing interface with local authorities to ensure they are engaged in this new approach and they are providing assistance to all airport stakeholders on pain points, so that airlines can maximize the revenue potential in air logistics.
Data and logistics corridors
A digital air logistics corridor between two airports enhances shipment visibility and optimises the flow of cargo data. The collaboratively created digital corridor facilitates the flow of information within the complete stakeholder chain, and optimises cargo visibility across the entire stakeholder network. These digital data corridors can evolve from connecting one cargo network airport community platform in one country, to the airport community platform in another country. These hubs can connect multiple countries, using the simple principle of data federation and trust.
It facilitates real-time visibility of shipment exchange from one stakeholder to another, and subsequently to the trading partner country. The shipment details, multiple e-certificates and supporting digital documents are saved on a secured and reliable platform. The destination country can access all the information before the arrival of a shipment. On arrival of the shipment at the destination, the origin country gets all the status updates and other details until delivery.
If airports adopt these systems, and there are multiple available today, it immediately starts to create a global capacity to handle all products in a product portfolio approach, with a plug and play capability for stakeholders throughout. SASI has embraced this concept for years and airports are starting to implement, realising that collaboration, especially in operational efficiencies, have great potential for revenue enhancement for both airports and airlines, and all stakeholders who join. Examples are last and first mile providers, pharma specialists, e-retailers, customs and security, all of whom will benefit.
These systems and the option of corridors between multiple airports – and hopefully one day the majority of airports – will allow this new business model to rapidly accelerate. For every exporter, there is an importer who cares and wants information on the consignment. E-retailers judge the success of a sale on the consignee’s satisfaction, and work hard to gain that information as repeat buyers are key. How many airlines and airports understand that simple fact?
Despite the length of this whitepaper, we have only touched on basic solutions and insight into a new business model for airlines, airports and the various stakeholders. We need to first and foremost get those widebody aircraft flying again, and it’s painfully obvious that we are three to five years away from doing that profitably for existing fleets, if we only depend on passenger revenues. Cargo yields and volumes of the past will not do it, and there is little chance of passenger traffic returning for years in sufficient numbers.
Most of the changes can be done without massive capital expenditures (Capex), and in some cases none at all. It takes courage to admit we have been ignoring the obvious, airlines especially, and not embracing the needed change in both mindset and operational capability.
But for those who are willing to do so, the economic rewards are substantial.
We showed in a previous paper how a simple overnight express product, using existing non-stop passenger transcontinental belly capacity for 1000 kilos only, could give a net margin of $45,000.00. Apply that same logic to your marketing to e-retailers and present them with an alternative to Amazon and Ali Baba, and watch the flood gates open. Engage, collaborate in service elements, embrace technology and heed the obvious competitive threats that are there. Future implementation of the Single Window Initiative of the World Customs Organisation has been embraced by all major economies, but without action, scheduled airlines and airports will be uncompetitive, unless you embrace technological solutions.
The world of air logistics now revolves around three key elements:
If companies do not recognise the need for change, and embrace it like never before, widebody aircraft will not return profitable results for years to come. Jeff Bezos and Amazon, Jack Ma and Ali Baba have shown what can be done. So will you allow your company to continue with the easy way out, or take the challenge and lead the way? If you think price pressure was hard pre-Covid19, just wait until the mammoths like Amazon, Ali Baba and the few large forwarders control most of the high value air cargo, and see what they are willing to pay going forward. Small and medium enterprises (SMEs) in both retail and the forwarding business are not the enemy, they are struggling and need solutions to compete.
We have not discussed the elephants in the room, such as geo-politics, near-shoring, reshoring, the possible elimination of JIT and lean-manufacturing techniques on high value goods which typically use airfreight. No one will repatriate toy manufacturing, but you can be sure every boardroom – especially those in high value verticals such as aerospace, automotive, health care and electronics – is discussing how to make sure this will never happen to them again. The hardest hit will be scheduled airlines and the airports they serve, and all the stakeholders therein.
SASI has many solutions to this new way of doing business because it is not new to us. We have been teaching the techniques through our training activities to major airlines, airports, GSSAs and GHAs globally for years. Our advisors are highly experienced, and well prepared to react quickly, and give advice that is fast to implement, and in most cases can produce immediate results.
My suggestion to those CEOs, board members and cargo managers who choose not to embrace change, and not to become a disruptor, you have no choice but to subscribe to cutting costs to the bone, as the revenue will not cover costs for years to come.
President/CEO, Strategic Aviation Solutions International