Making the Internet work for airfreight November 1999
Current airfreight marketing practices look remarkably as they did at the beginning of the 1990s. Techniques pioneered by the integrators — notably door–to–door seamless services, advanced tracking and tracing techniques, and differentiated time–definite products — remain the standards to which heavy freight forwarders and carriers aspire. Space on aircraft is assigned mostly on the basis of allocations without take–or–pay penalties. Most marketing activities remain based in longstanding relationships between forwarders and carriers. The overwhelming majority of heavy airfreight shipments are managed by forwarders, with little dis–intermediation having been pursued by shippers or consignees on the one side, and carriers on the other. By and large, the substantial strides made in establishing and integrating the global passenger alliances have not been replicated in freight transport.
The marketing paradox
Most technical innovation has focussed on establishing and enhancing electronic data interchange (EDI) links among forwarders and carriers, the best–publicised example being Cargo 2000. Although some progress has been made with EDI, it is fair to say that a truly seamless, global network remains an unrealised objective Set against this background of limited innovation, the airfreight industry faces a paradox as it continues to struggle with its traditional frustrations. On the positive side, annual airfreight growth consistently falls in the 6–8% range. Airfreight remains a large and exciting business, generating some $45bn in annual revenues for the carriers.
Yet yields on heavy airfreight are dropping 10- 20% year over year as shippers and consignees continue to put pressure on rates. If one believes Boeing’s estimates of effective worldwide airfreight capacity in the 200–250bn RTK range, the industry barely enjoys an overall load factor of 50%, fully 20 points below recent passenger figures.
Operationally, transit times reflect a failure of the industry to streamline airport, ground and load–planning practices in a way that widens the positive service gap between air and ocean freight.
Conventional wisdom places the blame for this situation on by–product business economics, uncertainty over commitments to move as booked, directionally unbalanced markets, and spoilers dumping capacity at low prices on economically fragile routes.
Fingering these culprits alone, however, ignores a major opportunity area for airfreight: that of using emerging technology to create new and exciting markets for airfreight. Airfreight accounts for only 4%t of containerised world freight shipments by weight, while ocean freight makes up the remaining 96%. Airfreight, however, is used to transport almost half of containerised shipments by value.
This indicates what anyone in the industry knows to be true anecdotally — that, last minute emergencies aside, airfreight is used only to transport the highest value–to–weight ratio commodities.
In theory, shifting the next 2–4% of ocean shipment weights on the value–to–weight curve to air would fill available airfreight capacity in most lanes, even those with dismal rate levels. Such a shift, accomplished gradually, would barely catch the notice of the ocean carriers, and would be unlikely to inspire a disciplined, effective competitive response. Why, then, hasn’t the shift occurred?
The answer, quite simply, is that airfreight marketing practices remain tradition–bound and monumentally inefficient. Even beyond large consolidations, where one expects reliance on personal relationships and high touch sales and service techniques, most marketing activity is very labour–intensive.
Forwarders seeking space or, less frequently, carriers seeking last–minute shipments, rely heavily on telephone and fax machines to identify supply and create demand.
Imperfect information and inefficient transactions
Inefficiencies inherent to disjointed marketing techniques create operational frustration and confusion, distort pricing, and leave carriers with low load factors, forwarders with low margins, and customers with low quality service and limited choice. Coping as industry sales forces do with these relentless, daily pressures, it is little wonder that limited attention can be given to strategic opportunities. The Internet has the highest potential to improve commerce in markets exhibiting at least one of two conditions.
The first condition is that the market is characterised by highly imperfect information. Certainly this is the case in the airfreight market. All concerned market participants do not have a common understanding of the amount and types of space available on particular routes, on particular days, after allocations are considered. Unused inventory expires each time an aircraft takes off with empty slots. Buyers might have existed at a given origin for a departing slot, yet the lack of any freight equivalent to passenger global distribution systems (GDSs) means that in all likelihood, buyer and seller will not have known about each other.
Often, participants in the market appear to believe that imperfect information is advantageous. For example, forwarders do not perceive it to be in their interest for shippers and consignees to understand market rates in full detail. Likewise, carriers often prefer that forwarders and shippers not understand actual space availability in detail. The common fear of both carriers and forwarders is that more perfect market knowledge would inspire a precipitous fall in rates.
The second condition under which the Internet is a high potential resource is when transactions are very inefficient. The airfreight market meets this criterion as well. As described above, the actual process of selling requires extensive human intervention even for routine sales, yet the transactional inefficiency in the airfreight market extends far beyond this narrow observation. In the current environment, it is virtually impossible to price marginal inventory (in the form of slots that are only available sometimes, that may not move as booked, etc.) on a marginal basis. In most airfreight environments, there is no effective spot market. Airfreight transactions, therefore, are inefficient both mechanically and economically.
The Internet airfreight opportunity
An Internet–based venue for the purchase and sale of excess airfreight is an idea whose time has come. The particular mechanics of such a venue exist on a spectrum defined by simple message boards or postings on one end and sophisticated auctions on the other.
The common objective, however, should be two–fold: to make more perfect information available more broadly, and to increase the transactional efficiency of the market. Simply put, rates for excess space should be allowed to find their natural levels, and so long as sales and marketing costs for the excess space are dramatically reduced through the use of the Internet, these rates may be attractive to carriers and forwarders as well as shippers.
Currently, there are no fully functional Internet sites that accomplish these dual objectives in the airfreight market. Of the several sites that intend to focus on airfreight, or extend a model from another mode to airfreight, none is operational. The essential questions to be asked about all of these sites are:
- Will they improve the availability of accurate market information? and
- Will they make transactions in the airfreight market more efficient?
There is some doubt that the answer will be affirmative. Driven by fear of further rate erosion, disruption of customer relationships, and/or a shift of power to shippers and consignees, many industry participants would oppose greater availability of market information. To be fair, some drop in rates might follow routine publication of more perfect information, and individual forwarders or carriers would likely find themselves on the losing, rather than winning, side of the ledger, at least temporarily.
Despite these risks, the availability of better information is essential to increasing transactional efficiency. The core problems identified at the beginning of this discussion — low overall load factors, directional imbalances, unreliable service, etc. — are unlikely to improve markedly without a significant blast of glasnost, and the long term health of the industry may depend upon it.
Airfreight holds tremendous potential for carriers, intermediaries and shippers — an impressive and steady growth rate, a steady source of further primary market growth from high value ocean shipments, and a favourable international trade environment.
The Internet offers new possibilities for realising this potential, but only if participants in the market are prepared to trade short–term rate stability for permanent economic and operational improvement.