The future of air cargo

The future of air cargo

The air cargo industry business model has, so far, proved resistant to change at the traditional scheduled carrier level. Scheduled carriers often operate their cargo divisions as a by-product of their passenger-focused businesses. These businesses are run using many labor-intensive handling operations and manual commercial processes, since their automation systems and operations processes are poorly

integrated. They also suffer from a lack of measurable process costs and process quality.

The evidence that their air cargo business model is broken is shown by two outcomes (1) a declining ability to control the pricing market for their cargo services and (2) their inability to demonstrate enough return to justify investments in better systems and processes.

While there are a number of emerging scenarios for how the air cargo business model will alter, we believe that structural change is now inevitable. The only question is the precise form that it will take.

The traditional, passenger-focused carriers are most at risk of being left behind. The integrators' presence in agile logistics is already a given, while all of the top 20 forwarders have already changed into another type of business -- the global 3PL. A third-party logistics provider, or 3PL, is a new entity combining the traditional freight forwarding role with the contract operation of warehousing, storage, stock control, trucking and distribution services. Their business model strategy is to provide contract logistics, on a third-party basis, for the global manufacturing and shipper communities. To win and keep this business, they must run it more efficiently than their customers can do it for themselves.

For the airlines, this is a significant change to the business base of their traditional customers, the forwarder. The "top 20" global forwarders / 3PLs now control over 50 percent of the global heavy air cargo market in terms of product, capacity utilization and pricing. They also control the door-to-door and distribution center segments for air cargo, which is where most of the added value lies. Their interest is increasingly with serving the shipper and not the carrier, although nominally they are the carriers' agent.

Many cargo management teams are still in denial over this power shift and it is not yet clear how the traditional cargo carriers will evolve and recover some agility and pricing power. Is the carrier now permanently restricted to the airport-airport segment? If they are, how should they adjust their future business model? If the forwarder is now the agent of the shipper and not the carrier, can they be brought back into a more balanced relationship where new added value is created and shared? What form should that future relationship take?

Wider global supply chain improvements are now the key market force driving the carriers' business case for change. Our summary title for this step-shift is: Global Visible Commerce (GVC). This will deliver a game-changing push to many players within the global air cargo industry. The key features of GVC are:

? Provably secure supply chain (full visibility of your value chain; item level tracking = visibility of stock speed through the air cargo delivery pipeline, + full visibility of warehouse inventories and stock turns)

? Safe commerce delivery (full security, on a provable basis; authorized handling verification and counterfeit prevention of goods, via electronic pedigree checks on each item, packing case, pallet, container and ULD).

The twin demands of better customer service and new security legislation will join together to push GVC into being. The strategic focus is now on process simplification, verification and audit, while also meeting increasing security demands. The key characteristics are agility, flexibility and adaptability, plus visibility, but the start point for the journey is the realization that the existing carrier air cargo business model is broken.

Excerpted from "Air Cargo Remade -- Change is coming: A more profitable business model for air cargo," by Unisys.