The impact of cross border e-commerce on the air freight market has been remarkable. Air cargo industry is likely to rake in moolah in times to come but this should not procreate the sense of complacency in the minds of stakeholders, as the fickle nature of E-commerce and intrepid advancement in technology will always remain the key factors to consider with utmost alacrity.
Air cargo transportation drives economic and social growth and supports and accelerates global trade, with an estimated 35 per cent of the value of global trade carried by air, though it accounts for less than 1 per cent by volume. The role of air cargo is enormous in time-sensitive products such as agri-perishables, horticulture and floriculture, marine products, pharmaceuticals, electronics, fashion garments, etc. More recently, it has been supporting E-commerce with global majors like Amazon and Uber now taking up their own air freight operations while initiating plans to use the next-gen Vertical Take-Off and Landing (VTOL) aircraft for their aggregation and door-to-door distribution operations.
Domestic Ground report
Though the potential in the new markets needs to be explored with long-term infrastructure creation in order to sustain cargo growth in the next 10-15 years, the National Air Cargo Policy is going to pave way for the advancement of India in air freight markets. The domestic air freight demand is expected to touch 1.1 million tonne by the fiscal 2025 at a compounded annual growth rate (CAGR) of 7-9 per cent propelled by rapidly growing E-commerce activity, increasing capacity and improving airline connectivity to smaller cities.
However, the cargo capacity of airlines is expected to grow at a higher CAGR of 13-15 per cent, given the impending fleet expansions. The estimated Rs 600-700 crore domestic dedicated air freighter market stood at 0.8 million in 2019, logging a CAGR of 8 per cent in the last five fiscals, this will further the market towards airlines, says rating agency Crisil.
Shorter lead distances compared with global freighters, lack of significant niche cargo, and cutthroat competition from airlines which also carry cargo in aircraft belly are expected to continue restricting the growth of domestic dedicated freighters. Noting that the larger part of the cargo FY 2014- 2019 period was transported in aircraft belly, a 14 per cent CAGR spurt in domestic airline capacity provided adequate room to support its growth, marks the Crisil note.
E-commerce sector in Asia is highly competitive in contrast to that of Europe and the United States and consequently, the margin is also tight. Therefore retailers and E-commerce companies are inclined to strike the most cost-effective method with air freighters which in turn makes the competition among air freight market even more intense.
By 2020, global cross border E-commerce sales are expected to grow on average 25 per cent per year, reaching $900 billion, with the Asia Pacific as the dominant market.
According to Ingo Zimmer, CEO of ATC Aviation Services, “Asia is definitely the target for 2019, and we are looking at Japan and Korea, in addition to some other Asian countries. In India, we are looking for new customers. However, due to over-capacity and under-demand, rates are going to drop, especially to China. We will have to scratch a bit of our part of the market share.”
On the other hand, Stephen Dawkins, Chief Executive Officer, Air Logistics Group (ALG) believes that 2019 will be another challenging but very exciting year for the air cargo industry in Asia. “There are a number of factors on the short/medium-term horizon such as economic tension, trade wars, inflation, the instability of the fuel price, and currency volatility that are quite unpredictable but they will definitely bring opportunities for our industry,” reasons Dawkins.
Going forward, the air cargo industry faces many challenges like communication, security and tracking capabilities that can be overcome by digitization, however, there are certain deterrents which are circumstantial, some of them are enlisted below:
Fuel Costs: The cost of fuel is a major concern for airlines, and increases in fuel prices have a major impact on route profitability.
Security Filings: Security and safety in the air cargo industry refer to both concerns about malicious attacks as well as the challenges inherent in managing hazardous materials.
Trade Inhibitions: According to the February 2018 IATA Cargo Strategy report, trade restrictions are another major threat to the entire logistics industry, including air shippers.
Over-Capacity: Another major challenge in the air freight industry is over-capacity—planes are not traveling full.
Besides, payment collection is a major challenge from the unorganised markets. Cambodia and Myanmar could be considered as very tough markets when it comes to collections. Many cargo sales agents get stuck due to the pressure from airlines to achieve the targets vs working with customers who have a tendency to delay payments.
Equipping air cargo to respond to demands
As the whole world is a marketplace in the age of online businesses, air cargo should be well-positioned to serve their needs and deliver their goods globally with speed, efficiency, and reliability.
As markets evolve and customer demands change, airlines must constantly review and update their operations and product offerings to ensure that they continue to meet the market needs. One important part of this story is the evolution in business models and market structures observed in the industry, notably the rise of the so-called Low-Cost Carrier (LCC) business model.
Air cargo industry continues to facilitate the E-commerce business in so many ways:
Strengthening safety for cargo and airmail– Implementing Mail Safety Guidelines developed by IATA and the Universal Postal Union for airlines and global posts offices to ensure that no dangerous goods and prohibited items are accepted in airmail.
Digitalisation– Cargo and mail IT systems mapping the two different systems for mail and cargo to allow visibility through bookings and allocations, planning through volumetric information, tracking through compatible messages.
Stakeholder Engagement- Promoting the use of existing trusted trader programs to recognise and differentiate the E-commerce players who are educated, trained, and compliant in the areas of safety and security.
Custom Clearances- Developing and implementing flexible solutions for pre-departure and pre-arrival risk assessments by customs for cargo and mail to comply with regulatory requirements.
Sustainability- Developing a certification mechanism or a code of good practice for E-commerce platforms that sell lithium battery products to identify the trained ones complying with agreed sets of standards and safety programs.
Cargo IQ and/ or Cargo Service Quality- Assess the use of industry safety and performance through a system of shipment planning and performance monitoring for air cargo based on common business processes and milestones.
How to bear the ultimatum?
The international express market has already proven its mettle with an impressive growth record. And the E-commerce disruption of traditional supply chains has been forcing the air cargo sector to respond, and fast. Among the notable names, Atlas Air Worldwide Holdings, which has made inroads into the express market, currently has signed deals with DHL, UPS, FedEx, China Post and other express firms.
The optimum utilisation of airport land will prove crucial if there is plenty of lands available to an airport and is in a better position to attract fulfilment centers for E-commerce businesses. Investment in infrastructure to create an integrator hub or secondary airport for air cargo traffic will have the volume for the freighters.
Counting on such prospects of capacity expansion, Vancouver International Airport’s (YVR) International terminal will enhance the airport’s position as a world-class connecting hub. “The focus will be on expanding the terminal’s ability to help meet the demands of air freighters. The expansion will allow for an additional eight wide-body gates, including four bridged gates and four remote stand operation gates. There is a fin-to-fin cargo facility as part of the project,” explains Jason Tse, Manager, Commercial Leasing– Cargo, Vancouver International Airport.
“There are a few near term opportunities including the continued growth of E-commerce. In Canada, only about 8 per cent of retail is done via E-commerce. Emerging industries that support the 5G revolution and the progression of IoT technology could be game-changers,” says Jason.
It is not news anymore that E-commerce is causing a transitional shift in the supply chain market, and the air express market is at the very crux of it. As geographic boundaries do not inhibit online retailers, shipping products by air will result in swift deliveries. Therefore, the use of air transport in moving goods from one location to another is resulting in increased popularity among end-users. With an increase in the movement of parcels, there will certainly be the requirement of more low-cost carriers that can deliver the assignment to the destination in a most financially viable manner. In such a scenario, air freighters and cargo airports need to buckle up with their infrastructure and security provisions to capitalise on the upcoming opportunities.
Talking about India, the Government long conceived the idea of creating shipment hubs at major airports by 2015 will pan out to propel the international air cargo trade further. We can draw inspiration from western air freighters, what FedEx has done in the US by creating a hub and operating under strict timelines for sorting and delivery, especially for domestic cargo and express cargo including mail.
One can use an international operator for a joint venture. It will be interesting to design a system by which a country’s Department of Posts can be brought in as a partner and new models are created around this function. In this case, the last-mile and first-mile can be handled by the Department of Posts.
Establishment of agreements between national carriers/ freighters and integrators to improve domestic connectivity is also of utmost importance. In the absence of the same, effective utilisation of air space may not be possible as domestic connectivity is one of the major reasons for major air cargo terminals to grow in the world.