Moving towards ‘China plus one’
Originally Published at www.caasint.com
Geopolitics will play a bigger role in the next phase of shippers’ global sourcing plans, a process that began even pre-Covid-19, says Stan Wraight, president and CEO of Strategic Aviation Solutions International
Is a new normal emerging for the air freight sector, as some countries and their economies begin to emerge from the initial effects of the pandemic?
Covid 19 has made transparent the fragility of global supply chains, and governments and manufacturers – beneficial cargo owners (BCO) – do not want to be caught out again. What this means is while the next period may look somewhat the same as before, everyone will be looking at global supply chains and in particular JIT policies, lean manufacturing implications, and also, as a consequence, the use of air freight.
What does that ‘new normal’ look like – or do organisations now have to prepare for several ‘new normals’?
Our research has shown that the new normal will most likely be a ‘China plus one’ philosophy by the USA, Japan, Korea and others, especially in automotive, aerospace, medical, etc. – which have been hardest hit. Will it be a return to onshoring or near shoring, ‘just in case’ inventory stockpiling, or full regional distribution centres is still being debated. One thing is certain, geopolitics will play a big part of the planning for a new normal; and even pre-Covid-19, the trade wars and paranoia were already there. Globally, a vaccine is the best solution, but this is such a horrendous disease, which attacks the body without mercy, so passenger travel especially will take years and years to recover, and that widebody belly cargo capacity will be lost. Travel health insurance, legal liabilities towards staff will especially hurt international leisure and business travel and conventions, etc., meaning solutions for the next 5 years must be thought out now.
To what extent has your business or area of the air freight sector adapted to the emerging new normal and/or recovered from the challenges posed by the Covid-19 pandemic and measures taken to limit its spread?
For the past 8 years we have been advising our clients that the future is e-commerce, sata for e-freight and data and logistics corridors between airports. We recognised years ago that consumers were wanting in their personal life what Fed Ex and UPS have delivered for business for over 30 years. I still remember many years ago someone telling me if I can get a pizza in one hour delivered to my home, why does it take three days to get a part for my company in my own city?
We quickly realised that what happens in the belly of a pax aircraft or in the main deck of a freighter has nothing to do with what must be changed going forward. What is the difference of a Cathay Pacific B777 between HKG and LHR versus a BA B777? Nothing; it’s what they do with the cargo on the ground in HKG and in LHR that differentiates. Yet scheduled airlines have for the most part ignored this reality and placed their own handling or relationships with GHA down to who is the cheapest supplier. The relationship between airline and GHA based on the SGHA (Standard Ground handling agreement of IATA) is foolhardy at best for airlines that want to compete going forward.
The new normal will be what the BCO decides, and anyone in our industry who does not keep fully aware of what the person or entity decides is their supply chain ‘new normal’ will be doomed to being a low margin supplier of capacity to those who do.
Airlines need data systems, they need a new relationship with airports and GHAs, and most of all they need an own-controlled retail product portfolio that fits the BCO decisions. Carriers like Lufthansa, Air Canada, IAG, Emirates have started on that path; they must now speed up and move forward.
Planning: To what extent have approaches to planning had to change as the effects of the pandemic have progressed?
All the rules have been thrown out the window as to business as usual. Data is useless as soon as it’s printed; it’s the steepest learning curve ever, and a daily task. To what extent can companies or organisations meaningfully plan ahead at the current time? You have to be as close as you can to your clients. Nothing beats face-to-face meetings, but in the absence of that, pick up the phone, video chat, stay informed, and help. Nothing beats experience in global logistics right now, so you can advise on macro and micro trends and innovative solutions.
How sustainable is this situation?
For air cargo this is a very sustainable, perhaps once-in-a-career (or company’s lifetime) opportunity to adapt and place air cargo’s importance and relevance forward in your organisation, and change for the better. Cargo by air as before will never return; the distribution of air cargo is shifting to ever greater control of e-commerce service providers. Other than their own-controlled lift, these companies will certainly be looking for reliable and quality-driven air capacity; the trick here is do you have a business plan or strategy that will allow you to be more than a low-margin common carrier? We know you can do better, and we are geared to share that knowledge.
How has your organisation been adapting to the new environment?
One adaptation will be the increased focus on data solutions via Cargo Community Systems, and the implementation of the SASI ‘Data and Logistics Corridor’ methodology for airports. This, coupled with our training programmes, will provide the answers and solutions that are needed today, to ensure immediate remedial actions and future planning.
Elephants in the room
We have not discussed the elephants in the room such as geopolitics, nearshoring, reshoring, the possible elimination of JIT and lean manufacturing techniques on high-value goods which are typically using airfreight. No one will repatriate toy manufacturing, but you can be sure every boardroom – especially those in high-value verticals such as aerospace, automotive, healthcare and electronics – is discussing how to make sure this will never happen to them again. The hardest hit will be scheduled airlines and the airports they serve, and all the stakeholder therein. SASI has many solutions to this new way of doing business. We have been teaching the techniques through our training activities to major airlines, airports, GSSA and GHA globally for years.
The obvious implication of the lost belly capacity is that freighters will play a more important role. How do you see that freighter market evolving in the next few years?
Freighters are more and more being tied up as they become available by operators associated with e-commerce majors. Examples are Atlas, with the majority of its fleet tied to either DHL (Polar) or Amazon through Titan dry leases combined with a CMI agreement with Atlas to fly them. Southern Air, owned by Atlas, flies for DHL as well, and has CMI agreements for DHL. Kalitta has 20+ aircraft operating for DHL; ATSG Miami the same, and now smaller low-cost regionals in USA, and I expect soon Europe will fly smaller-gauge 737Fs for Amazon.
Independent all cargo operators like ABC and Cargolux have to now reconsider their marketing strategy to survive, as it was always ‘forwarder friendly’ – in the case of Cargolux even naming freighters after forwarders. These same forwarders are facing huge challenges as the market leans more and more as a distribution channel for e-commerce service providers.
There are an estimated 100,000+ companies involved today in e-retailing and this is expanding daily through necessity to compete. The usual suspects are there, Amazon, Alibaba, etc., but many smaller e-retailers flock to the new e-commerce consolidators to deal with airlines. The reason is simple: scheduled airlines have not embraced the need to become a real player in air logistics, with only a few exceptions; that means providing at minimum an airport-to-door solution for B2B and B2C e-retailers.
If you think price pressure was hard pre Covid 19, just wait until megaliths like Amazon, Alibaba and the few large forwarders control most of the high-value air cargo and see what they are willing to pay going forward. Small and medium (SME) enterprises in both retail and the forwarding business are not the enemy – they are struggling and need solutions to compete. FedEx and UPS are changing a very expensive B2B product into a competitive B2B and B2C service provider, and the grief for them is all on the ground and costs. But they have the freighters, and are adding more.
Scheduled airlines that have a mix of passenger aircraft and freighters are the ones best positioned to optimise revenues longer term if they embrace a new business model.
Large e-commerce consolidators are no different than large forwarders, buy in bulk from airlines who only sell space, and sell high; the profits flow to them from the difference between buy and sell, and it will be huge.
So, freighters will dominate as a capacity provider for years to come as large e-commerce companies service providers control most capacity. But as pax lower deck comes slowly back into the market, smart airlines will understand they have a far superior capability with point-to-point direct capacity to make a big impact in the e-commerce field. But will they invest in becoming ‘virtual integrators’, or will they give it away? Any boardroom discussion where the cargo department is not promoting retail solutions to greatly improve cargo yields in the belly and contribution to getting widebodies profitable again is missing a great opportunity, one that has not come about in the past 30 years.
Any other comments?
The world of air logistics now revolves around three key elements:
1) Transparency throughout – only possible with data capability end to end, simple access to all on a handheld, for example through dashboards or apps.
2) Speed: overnight or two-day possibilities are there for scheduled airlines; make your airline and your airport partners ready to exploit that to your mutual benefit.
3) Quality: products that – due to your own airline’s capabilities, unique service elements, professional staff and above all a ‘delivered as promised’ mantra – must become the driver. Safe, secure and no damages. Hubs offering cargo products in transit with the speed of passenger transit luggage will succeed in attracting high value verticals that need it.