Forwarders on the rebound
The world's airfreight forwarders are gaining market share from integrated carriers. Now they have to keep it.
By Staff -- Logistics Management, 7/1/1999
For most of this decade, integrators--carriers that operate their own aircraft and ground equipment--have owned the domestic airfreight market. They've also gobbled up international airfreight market share faster than their freight forwarder competitors could. In the last year or two, however, this trend has been reversing."Not only are the multinational forwarders no longer losing existing business on a widespread scale, but many are actually gaining new market share," says Ted Scherck, president of the Colography Group, an Atlanta-based consulting and research firm that specializes in the express and airfreight markets.
Three developments currently are working in the freight forwarders' favor, Scherck says. First is their ability to manage costs. Forwarders are variable-cost operators because they do not own or operate fixed transportation assets like aircraft or steamships. As a result, they can react more nimbly to changing market conditions, adjusting to a cutback in customer orders, for example, simply by purchasing less space from their carrier partners. "Transportation assets are costly investments that are tough to recoup during difficult periods. Just ask carriers with exposure in Asia," Scherck says.
Second is their flexibility when it comes to service offerings. Because freight forwarders do business with many carriers, they can offer their customers a wide range of transport modes and service options within each mode. As a result, forwarders can be more flexible than the integrators in the services and solutions they offer multinational businesses.
Finally, technology is helping freight forwarders compete with integrated carriers that have invested billions of dollars in proprietary information systems. The emergence of Internet-based technologies now allows even smaller forwarders to offer comparable value at relatively little cost.
Integrators are very aware of the increasing competition from the forwarders. FDX Corp., the parent company of integrator FedEx, apparently sees the need to compete directly as a forwarder. FDX is currently in acquisition discussions with GeoLogistics, the $1.7 billion third-party logistics provider that primarily consists of the former LEP forwarding business.
By the same token, the major freight forwarders need to provide the same high level of service that has made the integrators so successful. The integrators' closed-loop systems allow for total control over a shipment from start to finish. Forwarders, on the other hand, depend on scheduled airlines--a situation that prevents them from having the same level of control over shipments as the competition.
That lack of total control can compromise on-time delivery reliability, Scherck observes. "With time-definite deliveries the dominant theme in today's global marketplace," he says, "the imperative for forwarders to shore up the reliability of their delivery service quickly cannot be overstated."
The Global Imperative
Unlike other segments of the transportation industry in which a handful of companies dominate specific markets, the freight-forwarding industry is made up of thousands of operators around the globe that range from small family businesses to multibillion dollar corporations. The world's top 10 freight forwarders by revenue account for only about 5 percent of the airfreight market. The largest U.S.-based forwarder, Air Express International, generates about $290 million in net airfreight revenue, which equates to only one-half of 1 percent of the estimated $46 billion worldwide airfreight market.
As their shipper customers become more global in their approaches to sourcing and logistics management, freight forwarders are finding that they, too, need to create global networks. "It is becoming increasingly difficult for a forwarder to compete without a worldwide network of company-owned stations, globally linked information systems, and a complete range of supply chain services that allow one-stop shopping," says industry analyst Ed Wolfe of the investment firm BT Alex. Brown. "The large forwarders with access to public investment will continue to pull away from the pack, leaving the smaller players behind."
The many small forwarders that do not have the most modern technology, extensive ground systems, and clout with the airlines face difficult times. "The need to compete globally leaves many forwarders confronted with a difficult choice," says Colography's Scherck. "To gain size and scope, intra-regional forwarders may want to merge with their counterparts on other continents. But such combinations, if they grow too big, could rob regional forwarders of the agility and flexibility that made them unique in the first place."
Recent merger and acquisition activity involving forwarders and carriers indicates how forwarders may seek to solve this integration issue. Germany's Deutsche Post, which has an extensive ground network, recently purchased the Swiss forwarder Danzas, for example. And SAirLogistics, a division of Swissair, is taking a 10-percent stake in Panalpina as part of a deal to create SwissGlobalCargo, a company that intends to offer door-to-door time-definite airfreight service.
The good news for all airfreight competitors is that 1999 should present growth opportunities for both forwarders and integrators. According to the Colography Group's most recent airfreight projections, more than 59 billion pounds of global transborder freight will move by air in 1999, an 11.5-percent increase over year-ago levels. That will translate into a 17-percent increase worth $57 billion in the value of goods shipped by air.
David Hoppin, a principal of MergeGlobal, an Arlington, Va.-based airfreight database and consulting firm, says that airfreight growth is being driven by booming sales for products that require the speed, global reach, and handling characteristics of air transport. For example, the largest single airfreight commodity will continue to be electronics and computers. In 1992, this industry sector accounted for 15 percent of total tonnage; by 2002, MergeGlobal projects, it will reach 20 percent.
Airfreight shipments in and out of the United States have accounted for more than half of world airfreight tonnage since 1997, but MergeGlobal predicts that in the future, the fastest airfreight growth will be outside the United States. Other emerging economies are likely to grow faster than the mature U.S. market. Despite the Asian crisis, Hoppin expects the intra-Asia airfreight market to increase its share of world traffic slightly as it maintains an above-average growth rate over the next five years. "We expect that seven of the 10 fastest-growing markets in the world will involve Asia, even assuming slower economic growth in that region," he says.
Given these rosy growth predictions, capacity is likely to be a problem in the near future. Boeing Commercial Airplane Group's World Air Cargo Forecast projects that airfreight volume is growing at a 20-year combined average rate of 6.4 percent, more than twice the passenger growth rate of 2.9 percent. At the same time, passenger planes are getting smaller and aging cargo planes, such as 727s and DC8s, are likely to be phased out in the near future.
Although half of the world's airfreight moved in passenger-aircraft bellies in 1998, the scheduled airlines are not likely to add fixed capacity to their fleets to accommodate more air cargo, believes Ed Wolfe, a transportation analyst with the investment firm of BT Alex. Brown. The scheduled airlines, especially U.S. airlines, see themselves as being in the passenger business, so there's little incentive for them to acquire cargo-dedicated equipment, he says. "If and when the airlines need capacity, they will use wet leases, which include aircraft, crew, maintenance, and insurance for adding freighter capacity."
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