Cargo alliances - a way out of the crisis? November 2001
Even before September 11, the air cargo sector was moving into a serious downturn. But air cargo carriers have the opportunity of countering the recession through an innovative approach to freight alliances. Here consultants* from Roland Berger outline their ideas on air cargo alliances.
In Lufthansa Cargo’s case, the load factor fell from a profitable 67.5% in the first half of 2000 to 62% in the same period this year; as a result, profits collapsed from 82m to just 2m. Similarly, Cargolux has been experiencing negative growth through 2001; in July, revenues were 12% down on the same month in the previous year. This is a worldwide phenomenon, as profit warnings from virtually all the major cargo carriers show.
Cargo airlines have taken defensive action, for example, by reducing capacity (by mid–year Lufthansa Cargo had taken the equivalent of two 747Fs out of the market), by cost–cutting and, recently, by imposing security surcharges and general price increases.
Besides airlines taking action individually, however, potential can also be realised through working together in the form of alliances. The main aim in forming an alliance is to create a global logistics service and hence increase market share. When they form alliances, airlines should be focusing on optimising their route networks and schedules. This optimisation has three main aspects:
- Improving coordination of the existing O&D service;
- Making it possible to add new O&Ds and to open up new markets; for example, linking two existing point–to–point routes via a common hub quadruples the existing O&D offering. Cargo alliances can achieve this effect by setting up a turnaround hub, where freight is transferred between the partner airlines;
- Facilitating major cost savings through new options in network planning — it is quite conceivable that in the future the operation of individual routes will be assigned on the basis of partners' unit costs.
How do clients benefit? By getting a better and expanded product for the same price. It also cuts their administrative costs, as all the alliance’s routes are now available in a coordinated fashion. This "one stop shopping" reduces labour costs and speeds up the organisation of the transport.
These are the benefits of cargo alliances in principle: but whether they are achieved depends on whether alliances are designed with the appropriate success factors in mind.
Four success factors
There are four essential factors contributing to the success of cargo alliances: harmonising products, coordinating sales, optimising networks, and "enablers" such as processes, IT, or steering.
1) Harmonising products
Any alliance must be based on a common worldwide product range, offered by all partners, with the same quality and for the same price. Especially where shipment routings require the change of carriers, coordinated products are essential, so that the service sold can be supplied even when more than one partner is involved. This calls for enablers, as we will see below.
If the alliance is to be completely implemented so that clients no longer book their shipments with individual airlines but with the alliance, then only alliance products must be offered. This means that alliance members must abandon their individual products or amalgamate them into the alliance range.
2) Coordinating sales
By combining sales, the alliance becomes visible to the clients, who are now handled entirely by a joint alliance representative. To the airlines, this has the advantage that it cuts out intra–alliance competition and avoids duplication. This requires the alliance partners' sales organisations to be combined in different regions to create joint regional sales teams. The redundant staff can be put to work acquiring new clients instead, thus generating more sales.
To avoid classic integration problems, such joint sales organisations should be set up as independent companies ("Sales Inc."), with staff from partners' existing sales organisations transferring to them. These companies' task is to sell the total freight capacity of all the alliance members together. Organising the Sales Inc. as a profit centre that buys the partners' total capacity creates an incentive to sell as much capacity at the best possible price, whichever carrier produces it.
If the Sales Inc. is to succeed, it must access existing company databases and assume responsibility for revenue management. Revenue management can be decentralised thanks to the one–way nature of the cargo business: that is, capacity is marketed where it is provided. This is a significant difference to the passenger business. Another difference is in clients' brand loyalty, which is not as pronounced in the cargo world. Therefore, airline affiliation of the sales force is not that much of a selling proposition.
The success of an airfreight alliance depends on creating a global route network. Given that some 70% of all airfreight is flown between Europe, Asia, North America, and within those three continents, cargo alliance members should be selected strategically. A truly "global" network, adding on South America, Africa and Australia, should only be created in a second wave.
As the alliance partners adjust their all–cargo networks, capacity on existing routes is cut and the offering is expanded into new markets. Aircraft utilisation is improved, lowering unit costs and increasing revenues. Combining networks is particularly beneficial if the partners' existing networks overlap only at certain strategic points, such as common hubs. These are then used by the alliance as transfer points between different carriers.
If the alliance is to endure, optimising networks must produce a win–win situation for all the partners involved. One obstacle on the way to achieving this situation might be the difference in the fleets of the partners. The synergies are the biggest when all the partners own all–cargo planes. However, it might be valuable to include a pure passenger carrier, if this carrier brings in market expertise or feeding capacity for a market that is not sufficiently covered by the all–cargo carriers.
Just as important as the success factors above are the "enablers" which allow the realisation of the alliance’s services on a global scale in the first place. This means harmonising processes, adapting IT systems, and deciding on a steering process.
Airlines must standardise handling processes, which requires standard labels and names, for example. This alone ensures consistent process quality and fault–free tracking & tracing between partners. Revenue management needs to know current load factors in order to know how much weight and what volume there is still to be sold; this also includes capacity on the alliance’s passenger flights, of course.
For all these aspects, a common IT system is essential. This should not mean linking up existing systems, but if possible introducing a single, unified system covering all partners.
Another important enabler is the steering process. So far the disregard for this issue has caused serious problems for alliances when the airlines were not willing to give the necessary autonomy to the joint sales force. An alliance sales force should no longer serve the individual airlines but the alliance as a whole. Therefore, a mechanism has to be found for the airlines to place confidence in the joint sales team.
When setting up the Sales Inc., for example, it is essential to decide on the allocation of votes, joint sales targets, and the distribution of profits ('benefit distribution model'). As a pragmatic solution it is recommended to use the partners' regional market shares as guidelines. Using the proposed profit centre model, a mechanism for steering the sales company’s day to day business is only necessary to a limited extent. More important for the success of the Sales Inc. are conflict resolution guidelines, which regulate the settlement of disputes.
Becoming global airfreight providers
There are two air cargo alliance systems at present, which are quite different.
SkyTeam Cargo is the SkyTeam passenger alliance’s cargo side, involving Aeromexico, Air France, CSA Czech Airlines, Delta Air Lines, Korean Air and, since August 2001, Alitalia. SkyTeam Cargo was founded in September 2000, and currently offers 6,840 flights daily to nearly 420 destinations in over 100 countries. Via its main hubs Atlanta, Paris, Milan, Seoul, and Mexico City, it offers a global network covering virtually all important economic regions.
While SkyTeam Cargo will be offering a joint product portfolio in the future, the individual airlines will also retain their existing products. The new product line, to be launched worldwide, will be made up of what were originally Air France products: Equation (Express Cargo, launch date: end 2001), Dimension, Cohesion, and Variation (all to be launched in 2002).
On the handling side, SkyTeam Cargo is in a process of simplification. Under the "one roof" policy, the alliance partners will share the same terminal, and sign joint handling contracts. There are already plans to integrate the IT environment, which will be achieved through developing interfaces between proprietary systems.
In the US, a joint venture between Air France, Delta, and Korean Air is due to start work in January 2002, with the aim of promoting joint cargo operations and marketing SkyTeam Cargo’s product range for international shipments through a joint sales team.
The capital for this joint venture ($2.5 m) has been raised by all the partners involved. To begin with the company will act as a GSA. SkyTeam Cargo has completed the first steps on the way to implementing a successful strategy..
First, the partners have agreed on harmonising their products: their joint product range should be available worldwide by the end of 2002. In the medium term, the partners need to consider what the benefits of continuing their own products are.
Second, the proposed North American joint venture marks a major step towards coordinating sales. It can be expected that the experience gained in the US will help boosting worldwide sales efficiency very quickly. However, complete success depends on merging client databases and revenue management systems — neither of which is planned at present.
The partners have also recognised the potential synergies to be achieved by optimising their network. On the relevant continents, SkyTeam Cargo has found good partners: the only gap left to be filled is in Southeast Asia. The overlaps between the networks of Air France Cargo and Alitalia Cargo are not so serious, as this means routes to North America and Asia can be divided up. This helps to make up for Korean Air’s weakness in Europe.
The real need for action is on the side of the enablers: SkyTeam Cargo has not yet taken any real steps towards harmonising processes and IT. Most handling contracts state that Air France will provide handling services for the partners. On the IT side, interfaces will be introduced to link existing systems, which will lead to interface problems.
New Global Cargo
New Global Cargo is the airfreight alliance of the Star Alliance members Lufthansa Cargo, SAS Cargo, and Singapore Airlines Cargo, created on April 26, 2000. The aim of the alliance is to establish the leading worldwide airfreight logistics system. The alliance serves a network of 493 destinations in 103 countries, with 31 freight–only and 612 passenger aircraft providing 21.5 bn FTKs a year.
The partners plan to harmonise their individual products and IT infrastructure and merge their sales and handling operations. Four 'business integration teams' have been set up for this purpose (BIT Product, Sales, Handling, and IT).
Although all the founding members belong to the Star Alliance, New Global Cargo will also be accessible for other airlines. The essential factors are the compatibility with Alliance standards and the independence of the cargo airlines. The cargo divisions of Singapore Airlines and SAS had taken this step by mid–2001 — in a similar way to when LH Cargo was established
Even before the alliance was announced, Lufthansa Cargo and SAS Cargo were already working together closely on longhaul routes (to Asia, for example). LH Cargo and Singapore Cargo also cooperate on the Frankfurt–Singapore route and on transports to Australia.
Progress the of the cargo alliances
Since the beginning of October, New Global Cargo has been offering harmonised express products — this explicitly does not embody a new alliance product — and is planning to do the same with standard airfreight in the first half of 2002. Harmonised time–definite products are planned on a worldwide scale.
New Global Cargo is already familiar with sales coordination due to the sales cooperation of LH Cargo and SAS Cargo. Even before the alliance was announced, the two carriers had merged their sales operations in Scandinavia, Finland and the Baltic states. However, apart from a "one roof" policy, which bundles both sales and handling units under one roof, there is no evidence of any actual measures being taken to realise sales synergies.
New Global Cargo’s network is based primarily on the existing networks of LH Cargo and Singapore Cargo, two of the largest providers in the air cargo market. SAS Cargo’s role seems to consist mainly of bringing in the Scandinavian market which, with its leading global IT manufacturers, generates valuable freight for the alliance. Despite these strengths, partners must be found in North America and the East Asia (Japan or Korea) if these important economic regions are to be served better.
In terms of enablers, New Global Cargo is also aiming to harmonise its existing IT systems rather than standardising the systems landscape. It has also announced that it will be harmonising its handling operations. However, the business integration teams have not completed their work yet, so no tangible results have been achieved so far.
In addition to these alliances, there are large numbers of code sharing agreements, but we are not aware of any concrete plans for any further alliances. Among existing passenger alliances, the KLM–Northwest alliance is moving toward working together in the freight business. Together with Nippon Cargo Airlines, MAS Cargo, and Braathens Cargo around 400 destinations are offers and mutual GSA agreements have been signed. However, they have not yet formally become an alliance. The members of the Oneworld alliance do not see airfreight as one of their core competencies, and so have little interest in a freight alliance.
Cargo alliances may be a way of coping with the current crisis and may help companies to participate disproportionately in the still expected growth of the industry over the coming years. Alliances help cut unit costs and offer clients better products — and thereby give profits a sustained boost.
The existing alliances have already taken major steps in the right direction. However, the airlines still have some way to go to meet all the identified success factors and thus achieve maximum synergies. SkyTeam Cargo should in particular be looking for a carrier in Southeast Asia to fill this last major gap in its network. It must also ensure that the joint sales operations take full advantage of their favourable operational starting position.
New Global Cargo must also push ahead actively on extending its network, which still has some gaps in its geographical coverage. The alliance also needs to concentrate on turning plans into action quickly and successfully, especially when it comes to harmonising products and integrating sales.
Both alliances need to be careful when drawing on their experience from the passenger side. Passenger alliances are driven primarily by marketing aspects, which are largely irrelevant on the cargo side. Instead, cargo alliances should concentrate on meeting the success factors above and push ahead to implement them.