Three challenges for airfreight

Three challenges for airfreight

An airfreight executive went flat on his back at a recent cargo conference. He was illustrating how low rates have fallen. Perhaps cargo executives should follow his example the next time they enter negotiations with customers.

The reduction of what used to be premium rates for premium services to near-commodity levels is one of three major challenges facing the airfreight industry. The others are overdependence on China trade, and the lack of new business by shippers who use surface transportation for many or all of their shipments.

Carriers have turned their business into one huge commodity. This kind of sub-par pricing by airlines erodes their brands and customer loyalty. In the not-too-distant past, each major airline had a distinct aura. American was the glamorous trans-con carrier. United was the solid workhorse. TWA was the adventuresome airline. Passengers responded to these distinctions. Today all airlines offer the same coach service with a few, overhyped differences in their international first-class and business-class sections. What was once an industry proud of its high service standards now offers only one inducement - price.

Logistics providers cannot afford to allow commodity pricing to dominate our industry. We offer unique and special skills in the intricate process of moving a shipment across oceans or continents. Let's not undersell these efforts. Competitive pricing, yes. Commodity pricing, no.

Regarding what I believe is our industry's overdependence on the China market: I bow to no one in my admiration of the Chinese people. Within a few generations, they have transformed a primarily rural, backward nation of more than 1 billion people into the world's manufacturing center. It is an accomplishment without parallel in human industry.

Legacy carriers and new all-cargo airlines are treating China as a never-ending growth market. The result has been overcapacity that has left many cargo rates lower than fuel surcharges. Yet both the U.S. and Chinese governments are adding to this "freedom of the skies" by authorizing even more flights between the two nations. An "open skies" agreement is planned for 2010 with greatly added flights over currently high levels.

Nothing is cast in stone. Twenty years ago, it was the maquiladora plants in Mexico that became the "offshore" haven along the Rio Grande for hundreds of U.S. manufacturers. Then came the great sucking sound from China. Today many of the once-flourishing maquiladoras have been shuttered or have reduced operations significantly.

Can the same, drastic manufacturing slowdown occur in China? No, because China is financially far stronger (it holds $1 trillion in U.S. securities) and its manufacturing capacity is 100 times larger than Mexico's. However, I believe that within the next few years, some retrenchment in manufacturing will occur as costs rise. China now faces a restive labor force no longer content to work for 25 cents per hour. It is paying considerably higher prices for raw materials, ironically because of China's own great demand for them. Its currency, long undervalued, will almost certainly rise, making Chinese products more expensive. These factors inevitably will make China less competitive with other, less developed nations eager to fill the Chinese vacuum.

The third and perhaps most serious problem facing airfreight, in my opinion, is lack of new business - not from existing customers, but from shippers who do not use airfreight or use it on a limited basis. Statistics paint a disturbing picture. Domestic airfreight shipments are down most months of the year, and less-than-truckload motor carriers are capturing more of what once was airfreight. International volume is in better shape, but even its growth averages little more than 2 to 3 percent. Of the $1 trillion spent annually on global transportation, airfreight's share is only about 4 percent, or $4 billion. This percentage has remained at the same low level for nearly 30 years.

Our industry is overly occupied competing for customers already using airfreight. That is a zero-sum game that no one wins. We must find fresh sources of business to convince shippers that in an increasingly global economy, air is the most productive, efficient and ultimately the most profitable method of transportation.

Our industry has overcome challenges before. We will do so again. Airfreight is too dynamic, too vital for global growth to be nothing less than a full partner in the world's economy.