Airfreight: Watching the clock

Shippers' demands for time-definite delivery are forcing airlines and forwarders to redesign their services.

By Toby B Gooley -- Logistics Management, 7/1/1998

The airfreight industry, which depends on speed and flexibility to attract customers, has always been a changeable business. Over the next five to 10 years, however, air freight may experience more substantive changes than it has in its entire history.

One major change will be a slowdown in the growth in aircargo volumes. Airfreight consulting firm MergeGlobal and Boeing's Commercial Airplane Group both predict growth of about 6.6 percent annually through 2002, a significant drop from an average growth rate of 9.8 percent from 1992 through 1997. Air carriers that have been banking on high growth--especially in Asia, where the current economic crisis has dashed expectations that the region would lead the world in aircargo volumes--will have to rethink their competitive strategies.

Perhaps the most important development is the customer-driven change in service standards. Shippers' demands for time-definite delivery, both on a domestic and global basis, are pushing airlines and airfreight forwarders into redesigning their operations and service offerings. Shippers want the same kind of reliability and speed for their heavyweight shipments as they are getting for their express shipments. Integrated carriers like Federal Express already have introduced that level of service to the heavy airfreight market; the airlines and forwarders are playing catch-up.

To address that need, international airlines and airfreight forwarders have formed a working group called Cargo 2000 under the auspices of the International Air Transport Association (IATA). Their aim is to enable airlines and forwarders to offer reliable, time-definite services that can compete with the express carriers' offerings.

The group has tested both traditional and modified shipment-handling processes, identifying bottlenecks and problems. Those studies demonstrated that the most significant roadblocks related to information management, says Cargo 2000 Project Manager John Hartnett. The solution is to create seamless operating procedures and a single information-management system that will link carriers, forwarders, and shippers, he believes.

Some airlines, though, are not waiting around for the Cargo 2000 project to bear fruit. Lufthansa Cargo, for example, has launched three guaranteed time-definite services the airline says offer shorter transit times, greater accuracy, and guaranteed access to capacity. To offer such a service means thinking in totally different terms than in the past, says Joachim Haas, senior vice president, Europe, Africa & Middle East. "When is the freight needed? That--not the flight schedule--is what now determines our delivery times. As a result, we are turning an entire industry upside down," he wrote in a letter to customers.

Partners in Time

Whether the airlines will be able to meet shippers' service expectations is an open question at this point. But some recent developments are likely to help their progress.

To expand their service capabilities without significant additional investments, many airlines are turning to alliances. These are agreements between airlines to coordinate services and operations. Airlines and their customers benefit from the sharing of complementary services. Most alliances involve carriers from different countries--the KLM/Northwest and Lufthansa/United agreements are just two examples. The U.S. carriers' domestic networks complement the European carriers' strengths overseas, allowing both sides to provide coverage that neither could offer on its own. The industry is just now starting to see domestic alliances, such as the new American/USAirways agreement, but these tend to focus more on consolidation and cost cutting than do their international counterparts.

Airline alliances have so far been most effective on the passenger side, but now they're looking at what they can do on the cargo side, says Howard Kass of GKMG Consulting in Washington, D.C. "The question is whether ... the airlines can come up with a handling system that's as efficient as the integrators'. As these airlines integrate on the cargo side, it increases their competitiveness across the entire alliance."

It's not all smooth sailing for airline alliances, though. Some are so far-reaching as to raise regulators' eyebrows. The proposed British Airways/American Airlines alliance, for example, is still undergoing scrutiny by the European Union's competition directorate.

Airline-to-airline alliances will help smooth transfers between carriers, something that's essential if they want to develop truly seamless service. But airlines and forwarders also realize that another key to reaching that goal is to improve their relationships with each other. As a result, some carriers and forwarders are concluding cooperative agreements on their own.

These arrangements are designed to provide forwarders with guaranteed capacity at low rates while guaranteeing the airlines specified freight volumes on particular lanes--a win-win situation for both sides, as well as for their customers, says Arnold Levine, managing director of GKMG Consulting. Examples include American Airlines/AEI; Lufthansa and AEI, Expeditors International, Hellmann Brothers, and Jet Speed Air Cargo Forwarders; and MSAS and Lufthansa, British Airways, American Airlines, Air France, and Air Canada.

Possible Roadblocks

Although airlines and forwarders are steaming ahead with plans for guaranteed time-definite services, there are a few developments that could place some roadblocks in their way. Progressive restrictions on aircraft noise levels are forcing carriers to purchase new aircraft, retrofit existing airplanes with quieter engines, or even relocate their operations. Growing opposition to noise by airport neighbors also spells trouble for time-definite services, which depend to a large extent on overnight movements.

Of concern to both forwarders and airlines is the Federal Aviation Administration's cargo-security program. The FAA has hired additional safety inspectors to make sure both airlines and forwarders comply with the agency's cargo-security directives. Although they were unwilling to discuss the details of the program, which is designed to prevent terrorist acts by screening shippers, consignees, and cargo consignments, some forwarders say they believe the requirements are so cumbersome and time-consuming that they delay shipments.

Despite these developments, the move toward time-definite service for aircargo shipments appears to be on track. Shippers will play an important role in making that service a reality. Only by partnering with both forwarders and airlines in operations and information systems will shippers be able to get the kind of service they have been asking for.

U.S. Air Carrier Financial Highlights -- 1997 vs. 1996

[Millions, Except Where Noted]

Category 1997 1996 % change

Freight and express revenues$10,464 $9,679 8.1%

Mail revenues 1,360 1,279 6.3

Total operating revenues 109,535 101,938 7.5

Total operating expenses 100,924 95,729 5.4

Operating profit 8,611 6,209 38.7*

Net profit 5,195 2,804 85.3*

Rate of return on investment (%)14.9 11.5 --

Operating profit margin (%) 7.9 6.1 --

Net profit margin (%) 4.7 2.8 --