It’s been an interesting week for an air freight journalist, masquerading as a sea freight hack. Industrial espionage, you could call it.
The air cargo industry will be gratified to learn that its name did come up at the TOC Container Supply Chain event in Antwerp, despite its trifling market share (by volume). And even more pleased to know that it came up in relation to modal shift. Now that’s not something you hear every day.
There are more than a few challenges for shippers using sea freight at the moment. First and foremost seems to be slow-steaming, or super-slow steaming, which is the current fad. A perfect solution for the hard-pressed shipping lines, it absorbs excess vessel capacity while massively cutting fuel costs. An easy win.
But not for their customers, unfortunately, who haven’t seen rates correspondingly reduced for this more languid service. Notwithstanding the fact that the freight environment in shipping is extremely volatile, shippers are essentially paying the same for their goods to be stuck at sea for an extra week or three, which also means they have to deploy more working capital to cover the increased inventory costs due to the extra time without their goods.
Cas Pouderoyen, SVP global ocean freight at Agility, confirmed that he had seen some modal shift to air from shippers who simply couldn’t take the extra time to receive their products. “Lots of businesses that can’t live with a 40-day transit time, especially at the same cost, but can cope with 25 days, have gone to air freight.”
That extra 15 days presents a host of problems for shippers.
“We have a tolerance in our supply chain for about 10 to 15% delays from slow-steaming,” said Peter Best, Nike’s EMEA transportation and customs director. “But super-slow steaming with a 40-day cycle [as opposed to 22 days] could be a problem for us. It requires a re-set, and lots of internal changes. We have valuable products in the containers, so we need to look at our working capital. We also need to change our planning. We can do it, but it requires some work.”
Pouderoyen confirmed that some of his customers are willing to pay for a premium service with faster transit times – but the lines aren’t offering it. To the air freight sector, which thrives on premium products, (and apparently is far more customer-focused than the shipping lines) that is simply unimaginable.
Pouderoyen also added that his customers wanted different terms from those offered by carriers. “It has to be about more than basic ocean freight transport,” he said.
Shipping lines are suffering as much as airlines from volatile and low rates. Interestingly, they seem to be moaning louder about it than their more submissive airborne cousins. And they made the point that it was no good for their customers either, as low rates make the lines (even more) unreliable.
Jesper Praestensgaard, CCO for shipping line Hapag-Lloyd, showed how the cycle, in which overcapacity and low rates leads to pulled services, slow-steaming and unreliability in the short term, followed by orderbook delays and cancellations in the medium term, with tight capacity coming last – leading lines to over-commit and under-deliver – essentially just caused disruption to the supply chain. “Spot rates lead to unreliability. If you look at the savings made on freight rates versus the cost of disruption to the supply chain, it doesn’t make any sense,” he said.
(Shippers including Nestle, M&S and Exxon Mobil meanwhile, claimed that they were willing to pay sustainable rates, in return for pricing stability.)
Given air freight’s far higher cost, however, and far higher reliability, it’s not clear that the same argument would work on shippers. And air freight does have a significant disadvantage, as spelled out by Nike.
“In 2010, we had a spike in our air freight use for revenue reasons, because the market recovered more quickly than we’d planned,” Best explained. “We needed to save three or four weeks in our lead times.”
But, he pointed out, the heavy use of air freight played havoc with Nike’s carbon emissions strategy, with air freight creating 20 times more emissions than sea freight.
“We do have to make modal decisions,” he said. “Sometimes we need to shorten our supply chain and lead times. Slow-steaming can just take too long to get goods to the shelves. There is always sea-air, but that’s not always enough. But air freight is bad for emissions.”
So, that’s the competition. Unreliable, mired in volatile rates, and extraordinarily slow. But far more sustainable in an environmental way. It’s hard to believe, somehow, that there isn’t an effective middle ground – something in between 40 days and 48 hours, with better environmental credentials than air freight and better service levels than sea freight.
Whoever comes up with that product first will surely be on to a winning formula. Maybe Schiphol, or river-connected airports should see if they can encourage barge services for slow but emissions-friendly onward transport. Or perhaps airlines could offer a cheaper and less reliable product – a “We’ll-get-it-there-sometime-in-the-next-25-days” kind of offer.
Because right now, it seems as if both transport modes are failing in one way or another.
