Air carriers: The urge to merge
Airlines, express carriers, and freight forwarders are joining forces to capture new business both domestically and globally. But there are plenty of other avenues to growth as well.
By -- Logistics Management, 7/1/2000
The airfreight industry clearly subscribes to the "bigger is better" philosophy that is driving mergers in many industries. In recent months, a number of alliances between both airlines and freight forwarders have been announced. Those mergers make economic sense for several reasons, and industry analysts say there are more to come.
But mergers aren't the only path to growth for the airfreight industry. Airlines, integrated carriers, and airfreight forwarders are stepping beyond their traditional boundaries and getting involved in electronic commerce, global sourcing, and supply chain management.
Many other important trends are likely to affect the shape of the airfreight industry over the next 12 to 18 months. These include rising fuel prices, changes in currency and regional demand, regulatory issues such as aircraft noise restrictions, and domestic market developments. Mergers and new growth strategies, though, will have a greater impact on the air industry's future direction than all of those issues combined.
Mergers and More Mergers
For airlines, mergers are the main route to expansion. They may have little choice: At many airports today, it's nearly impossible to get new landing and takeoff slots. Regulatory restrictions on noise and route authorities also stymie airlines' attempts to enter new markets. As a result, mergers become the only way to grow. Some recent examples include:
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United Airlines and USAirways. In May, United announced that it would purchase USAirways in a $4.3 billion deal that may not pass muster with U.S. regulators. If the merger does go ahead, it would create the largest domestic U.S. network and link United's Asian presence with USAirways' European routes.
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KLM Royal Dutch Airlines and British Airways. The airlines have confirmed that they are in discussions about a possible merger.
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Northwest Airlines and American Airlines. Unconfirmed reports say that American is in talks to buy Northwest. The effects of a Northwest-American merger and a KLM-British Airways merger could be far-reaching: KLM has a close alliance with Northwest, and British Airways' U.S. partner is American Airlines. The four carriers could conceivably form a global mega-airline.
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Air Canada and Canadian Airlines. Canada's two largest airlines have ended their battle for the Canadian market and have begun rationalizing routes, administration, infrastructure, and personnel.
A merger like the United-USAirways proposal could launch a series of mergers in a sort of domino effect, says Scott Flower, a transportation analyst with Salomon Smith Barney in New York. "Networked businesses like airlines are always focusing on yield and traffic flow," he observes. "When there's one new combination, the other participants reactively re-evaluate their own positions."
Airline mergers should be watched closely, but they wouldn't necessarily be a bad thing for forwarders and their shipper customers, says Mike Zolnierowicz, vice president of sales for Nippon Express USA and president of NEX Global Logistics, Nippon Express's contract logistics subsidiary. "In critical markets like Asia to Europe or Asia to the United States, a net reduction in capacity would be troubling for the marketplace. But an increase in capacity or improvements in service levels would be positive," he says. A merger of trans-Atlantic carriers, on the other hand, may be helpful in reducing that lane's chronic overcapacity.
Consolidation has hit the freight-forwarding segment of the airfreight industry as well. The German postal service, Deutsche Post, has bought many companies in the last two years, including such major international forwarders as Switzerland's Danzas, U.S.-based Air Express International, and ASG of Sweden. Another merger with global implications was that of MSAS Global Logistics' parent company, Ocean Group plc, with contract logistics firm Exel, both based in the United Kingdom.
These mergers were largely driven by customers' demands for a single global logistics service provider, as well as the growth of online business-to-consumer and business-to-business markets, Zolnierowicz says. Most of the forwarder mergers to date have brought together complementary services and geographic strengths. The trend toward freight forwarder/contract logistics mergers, industry observers agree, is certain to accelerate. "Although historically forwarders have been regionally focused..," says Flower, "in transport-focused businesses today, globalization and scale are what matter."
That may be true for the big publicly traded firms, but small and mid-sized forwarders will continue to have a place in the international supply chain, says Julian A. Keeling, president and CEO of Consolidators International, an airfreight wholesaler based in Los Angeles. "Despite all the technical advances, freight forwarding remains a people business, and shippers respond to the personal service of mid-sized forwarders," he said in a speech earlier this year. Mid-sized forwarders also have a flexible cost structure that allows them to keep their rates down, he added. The advent of the Internet, moreover, has helped to level the technology playing field between global giants and smaller competitors.
Air-express companies are likely to jump on the merger bandwagon before long. "Mergers among the integrators are taking longer to percolate," says Flower, who adds that there is room for future consolidation or alliances, particularly in the "crucible of competitive activity" in the trans-Atlantic market.
The strong-such as United Parcel Service (UPS), DHL Worldwide, FedEx, and TNT-are likely to get stronger. DHL is spending millions of dollars on building infrastructure and buying new aircraft in Asia, Latin America, and Europe; has concluded several alliances with national postal services; and is planning to go public sometime within the next three years. TNT, meanwhile, has quietly beefed up its European infrastructure to compete with Deutsche Post and maintain its lead position in intra-European express service in anticipation of European postal deregulation. FedEx right now is preoccupied with integrating the Caliber group of companies, including the former RPS, into its operations but will continue to expand in non-transportation areas like international trade. As for UPS, it's widely believed that the carrier's $1 billion public stock issue last year was designed to raise cash for acquisitions. "It's not going to be a tiny, bite-sized acquisition," Flower says. "UPS needs to be in a good position both offensively and defensively."
New Avenues to Growth
Mergers certainly are not the only way the airfreight industry is growing. Shippers can expect airlines, air-express carriers, and airfreight forwarders to actively pursue other avenues to growth that take them far from their roots.
Freight forwarders, for example, have long offered services such as warehousing and labeling to their international customers, but now they are aggressively expanding into the logistics arena. Logistics services have become a very significant source of growth and revenues for the largest forwarders, including Circle International, Fritz, MSAS, Danzas, Kuehne & Nagel, and Schenker, among others. Like Nippon Express, many have set up separate logistics subsidiaries that are not tied to existing airfreight business. "Global customers are looking for more than just transportation services," says Zolnierowicz. "They're looking at how they can link their suppliers and factories to the end users and reduce the amount of inventory in transit."
The airlines also are beginning to see logistics management as a necessary path to growth. The globalization of trade, together with shippers' demands for time-definite service and real-time tracking information, undoubtedly will lead many airlines to follow the example that has been set by Lufthansa, SAS, KLM, and SwissGlobalCargo (a joint venture of SwissAir and forwarder Panalpina). These carriers have launched an array of time-definite cargo services that are designed to compete with those offered by air-express carriers like FedEx and TNT. They also tie in with the carriers' move into integrated logistics services-a strategy that has become a primary focus for Lufthansa Cargo and provided the impetus for the SwissAir-Panalpina venture.
Airfreight forwarders, too, are stretching their traditional limits. More and more U.S.-based international forwarders now offer domestic services in order to maintain true door-to-door control over the delivery system. Domestic warehousing, distribution, and transportation services that connect to existing international business already are proving to be a highly profitable source of new revenues.
Like the airlines and forwarders, the integrated carriers are trying to put together end-to-end supply chain services. DHL, Airborne Express, UPS, Emery Worldwide, BAX Global, and FedEx have all established successful logistics-management divisions. Another direction is that taken by Federal Express, which launched FedEx Global Trade last year. The company will offer comprehensive international trade services through its Tower Group International subsidiary, a freight forwarder and customs broker with an extensive consulting practice. In the months since it acquired Tower, FedEx has added international trade software firm WorldTariff and has taken a stake in TradeCompass, an online provider of international trade data. Company officials have said that they expect to make further acquisitions this year.
Perhaps the biggest growth area for integrated carriers will be electronic commerce. Perennial rivals UPS and FedEx have been in the forefront of developing electronic information-management services. Several of the integrators also have developed home-delivery services specifically aimed at the burgeoning online business-to-consumer market. FedEx developed a separate subsidiary called FedEx Home Delivery that has its own corps of delivery drivers, and Airborne Express has launched a similar service called Airborne@Home, which uses the U.S. Postal Service for final delivery to the consumer.
Clearly, growth is high on the priority list for every segment of the airfreight industry. That quest for growth, particularly the trend toward development of non-traditional services by airlines, forwarders, and integrated carriers, will serve shippers well. But shippers will need to be vigilant about mergers. Although most mergers should result in better service, shippers should be wary of the potential loss of needed capacity and a resulting increase in prices.
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