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Planning for the post-Covid new normal | December 2020

Planning for the post-Covid new normal

In preparing for the post COVID-19 era, I must turn to what Winston Churchill said on March 1, 1943, over a year before D-Day. In an address to the people of Britain he laid out his postwar domestic aims. You might say that is a classic example of chutzpah. Or you might say that he was encouraging them in the depths of war to seek a bright, albeit much changed future. I suggest that it was both. I also suggest that this is time and the attitude that the worldwide air cargo logistics industry must embrace before the pandemic subsides and the ‘new normal’ whatever it might look like emerges.

The Time to be Proactive is Now…not Later

We all know that the worst time to buy a stock is when it is at or near its highest price. As air cargo rates soar above recent, i.e. pre-COVID-19, levels, one must ask, how long will the good times last? When the demand for personal protective equipment, PPE, becomes satiated, which is driving a lot of the air cargo traffic volumes, will passenger-cum freighters be returned to their original configurations? What will fill the aircraft or what traffic will move to other modes? Neil Shah, Flexport’s head of air operations, recently noted that a “hybrid modal strategy”  is the recommended approach.

There is a wide array of factors at play as we investigate the near future.

People still need and want products. The world’s population continues to rise and as more have disposable income the demand for goods will increase.

A recent survey suggested that up to 75% of sheltering-in-place people will continue to rely on online (e-Commerce) services. Business-to-business volumes outstrip the business-to-consumer volumes by at least two-fold and that volume is not changing back to the old way of procurement.

Air passenger traffic will take a long time to return constraining available capacity. Current forecasts expect that time frame will be three to five years. Recently, the U.S. Secretary of the Treasury said he did not expect much if any international air passenger travel in and out of the U.S. through the end of 2020. If the passenger terminals are empty how will airports generate revenues?

The rise of the major e-Commerce platforms, Alibaba, Amazon, JD.com, etc. have forced all members of supply chains, especially those they compete with, to carefully examine the intersection of total logistics costs and market capture based on reliable delivery. Who will carry all of those shipments?

Data sharing among firms which make, distribute, and sell products is a given. But are transport providers ready and more importantly willing to fully participate?

Air cargo has proven itself as a saviour during the first phase of COVID-19. But, as the supply chains fill with relatively low-cost PPE products, there will not be the same level of demand for this expensive mode of freight transport. Ocean and rail services will be the primary modes used to keep the supply chains filled once the inventory systems have returned to balance. Airfreight flows will always meet emergency needs and/or the movement of highly perishable items such as foodstuffs, flowers, pharmaceuticals, and high-end fashion items.

The true owners of the cargo, those that make or buy the goods, carried on main decks and in bellies of aircraft might be willing, for short periods of time, to pay high air cargo rates, but in the long run they are unwilling to pay the premium, which in normal times can be as much as 10 times that of ocean freight. A comparative cost analysis of different transport modes noted that the total logistics cost for a low time sensitive commodity should be about 1% of the value of the good per day of transit. In the case of a highly time-sensitive, high value product, the daily cost can double to 2% per day of transit.

Another study of freight transport determined that whenever goods have a low time sensitivity and cargo value of around 2.55 USD/kg, rail cost is almost equal to sea. At around 21.78 USD/kg of product value, air becomes cheaper than rail. If goods have a high time sensitivity, rail is already cheaper than sea for cargo values of higher than 1.23 USD/kg and air is then cheaper when the cargo’s value is higher than 10.89 USD/kg.

These fundamentals have led to the creation of sea-air products, rail services between China and Europe, and truck-only services in lieu of air for next day deliveries on lanes as long as 600 miles (960 kilometers) in North America.

Will the lack of air services at pre-COVID levels last for years to Come & is it time to look again at past solutions such as sea air?

So, let us look at the China-Europe freight rail system as an example of how other modes are capturing traffic.

One-way (westbound) China to Europe rail service began in 2012 with 50 trains. In 2018, 6,300 trains carried 370,000 TEU (Twenty Foot Equivalent Unit containers)  between 20 Chinese cities and over 30 European centers. Transit time between Yiwu and Hamburg has dropped from 17 days to 10-12 days . Beneficial cargo owners are taking notice of higher frequencies and transit times 4 days longer than traditional air cargo at a service charge 20% of traditional air cargo.

Beneficial cargo owners focus on the entire process known as the logistics distance.  The shorter the logistics distance, not just a matter of miles or kilometers, but time, number of steps, and cost, is the basis of reliability. Beneficial cargo owners demand reliability.

If the beneficial cargo owners demand reliability and a short logistical distance, can the worldwide air cargo logistics system continue to preserve the old system? Innovations like bulk loading on the main deck of seatless passenger aircraft or use of higher capacity drones in scheduled service exemplify the ability of managers to think ‘outside the box’, create and implement new projects in very short periods of time, without very little capital.

Conclusion

Some of the expected elements of the ‘new normal’ will be based on the continued use of online platforms for B2B (business-to-consumer), B2B (Business-to-business) and D2C (direct-to-consumer) sales. Many companies have scaled back their purchasing departments. Individual consumer shifts to online purchases is a similar trend. The major online platforms are committed to moving products from anywhere to anywhere in the world within 72 hours. That means many small packages.

  • These trends mean all members of the supply chain have to share data. There are numerous options. The backlogs seen at airports such as Pudong reflect the need to actively share data so that proactive planning can reduce delays, save money, and add value to the beneficial cargo owners.
  • Strategic selling, done collaboratively or individually is a must. While it is impossible to visit every customer, there are existing options which can ensure that the customer’s, individual or business, experience is optimized.
  • Hybrid modal systems have been and will continue to be the norm. Beneficial cargo owners demand this approach. It has been the foundation for freight forwarders to create added value for their clients.
  • The business models of airports will have to change from passenger-centric to cargo focused. Airports should promote and support air cargo traffic. There are numerous opportunities. Airports can consider partnerships which span modal divides. The most logical option is sea-air for those located on or near coasts – the point of intersection between the foreland and the hinterland.

So how do we plan for the period after the worst effects of the pandemic are past? The following is an outline of a recommended approach.

  • Accept. The volatility, uncertainty, complexity, and level of ambiguity of the world’s economy has increased, is not going away and can create an environment for innovative and evolutionary developments. The final form of the ‘new normal’ is unknown. That should not stop the process.
  • Recognize. The beneficial cargo owners, increasingly the consignee, are calling the tune. Their expectations must be the basis for creating the new programmes and systems.
  • Collaborate. All members of the worldwide air cargo logistics industry must work together.
  • Coordinate. Data sharing must be the basis for the planning.
  • Innovate. The expeditors developed systems based on a new customer-focused model. Alibaba, Amazon, and their competitors have continued that evolution. Cargo owners do not care about the model of the airplane. They care about the entire chain of supply and transport.

The challenge is before us. The opportunities are wide open. The competitors are nipping at our heels. What we need is a fresh perspective. We cannot wait.

 

ABOUT THE AUTHOR

Charles H. W. Edwards

Charles H.W. Edwards is a Vice President of Strategic Aviation Solutions International. He holds an appointment of Professor of Practice, Department of City and Regional Planning at the University of North Carolina at Chapel Hill. He is a member of advisory boards of national and regional logistics research centers and associations.

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