The prospects for an air cargo industry have been looking bright with the trend towards globalization capturing the world faster and faster with every ticking minute. The globe is now one big village where every accessory, whether it exists and is made in the other part of the world, can be made easily available and accessible to the user in the absolutely other end of the world. And with the domestic and international competition rising faster than it ever did, the time factor is so crucial and it now stands to differentiate between the successful and the unsuccessful.
Therefore, the air transport is the only transport which is the fastest of all other channels of transport, be it be the rail or the sea. The difference between using an air transport and that of the rail could mean the difference between whether a company gains that competitive advantage against its competitors or not. Therefore, this freedom has been more or less made possible by the air cargo industry.
The industry which has taken the responsibility of delivering cargo i. e. materials to and fro one place to the other, providing convenience and the saving of time to all the parties involved in the transaction.
As of now, these prospects are not proving them true, because the air cargo industry is in a grip of many challenges and problems, with survival being their next agenda. The air cargo industry is too important of an industry to let problems drive itself down. Come to think of what tasks it performs and the aims it holds, the air cargo industry should be flourishing in a world like ours. But things, in the past some years and as of the present, have been pretty stagnant for the industry.
Seeing the growth it could have reached, it was estimated that through the year 2025, Boeing and Airbus will incorporate such air freight movement which will increase their growth rate by approximately 6 percent, which is a whooping figure. But these estimates are now being seen as a story, far in sight and difficult to reach out to. It is not just the critics who believe that these are the bad days for the air cargo industry. Rather the companies who form the air cargo industry themselves, that is the players in the industry are themselves reporting that bad times have hit them and they can see many boulders ahead.
These problems are having direct impact on what the air carriers are charging their customers, their yield in terms of revenues and expenses and the capacity that they have to fulfill the demand of the air cargo. Let us now discuss each problem one by one. Rising Fuel Cost The biggest concern in the air cargo industry is none other than the rising fuel costs, which are sky rocketing and touching new altitudes with each passing day. Air cargoes are run by oil, which has become of very high cost and the sad thought is that oil comes as part of the fixed cost of the air cargo business.
A certain stipulated quantity has to be fed to the machine before it can run, irrespective of the ratio of capacity to tonnage that the cargo company is serving for that particular day. The figures are stunningly simple, robbing the air cargo companies of lots of finances: for every additional $1 of oil per barrel that an air cargo company uses, it is costing them around $50 million. This is a hefty sum, enough to collapse any major company. For further impact of how huge of a problem this is, the figure of the fuel bill of the BA cargo company needs to be presented: it was $3. 2 billion.
And the shocking part is that it will not be stagnant here and is expected to rise in the coming years. Therefore, this problem is not temporary or the result of any event or season. It is here to stay and is a major problem because if the air cargo companies will not be satisfied with the returns they are getting as compared to the amount of money they are spending on fuel only, then their being in the industry would be futile. (Seidman, 2005) The good news in this extremely ever-increasing problem is that they can be overcome to a certain extent by the usage of surcharges.
This means that the air carriers shift a certain percentage of their fuel costs to their customers and the customers have to pay a certain percentage more to have their cargo shifted from one place to another. This is a very disturbing process though because no air cargo company wants to charge more from their customers, even if it is for a valid reason and no customer would want to pay more because the fuel costs have risen and because the customers are already too cautious about how much they are spending on their logistics costs.
The customers of these air cargo companies are trade men themselves and they also have to keep their expenses in check so as to ensure highest revenues and profits, but with the rising fuel costs, customers have to spend more on the logistics than they planned to and hence, there comes a disturbing factor in the relationship shared by the air cargo company and the customers. And this can and is leading the customers to shift to other modes of transportation, irrespective of whether its time crucial or not.
The only factor now considered is that it should not be heavy on the pockets of the customers, a factor that the air cargo industry cannot provide. As for the time factor, the customer is intelligent enough to plan ahead and finish that time lag by doing the same work a little ahead so that the cargo can be sent by other means of transport and does not end up being expensive too. United Airlines reports that the sea is becoming a popular form of cargo transport nowadays and many products which were first preferably sent by air are now even considered to be sent by sea.
Therefore, it can be said that because of rising fuel costs, a great chunk of the air cargo company business is being taken away by that of the sea cargoes. (Thuermer, 2006) Another factor for which customers and businesses are turning to ocean freighters is the fact that the U. S. dollar has become weak and the exchange rate associated with it is low. Many products in today’s businesses are fighting internationally and domestically on the basis of cost only. Whichever product is the most cost effective, sells the most.
And therefore, the companies who own these products have to make sure that they keep costs low. Spending unnecessarily on high air cargo company prices would rob them of this competitive advantage that they can gain if the price of the product had not gone too high. Therefore, companies keep logistics costs low and try to fight on the basis of price. But again, the good news is that not every business can adjust for the time lag that they get when they chose any other mode of transport but air freighters.
Air cargo still gets the special consignments or the cargo delivery of valuable goods, irrespective of the money that they charge. This is just because the crucial factor of time and the factor where the customers expect special treatment of their goods by the freighters. These two factors are only available with the air cargo freighters. Capacity More than Tonnage When any industry starts flourishing, the thumb rule is that new companies and groups invest in the industry so that they can get the high returns that have been set for the players of the industry.
The same happened for the air cargo industry. As soon as it was realized that the industry has a lot of potential to be one of the world’s largest industry in the upcoming years, new entrants started to pour in, thus increasing competition and increasing the choices that are available to the customers. The company, who wanted to transfer its goods from one part of the world to another, had more choices now. And the players of the air cargo industry had improved their services and polished their rates so that they would attract more customers than their competitors.
In an effort to outdo the others, many air carriers even increased the capacity of their air cargo carrier machines, but this led to the rise of another problem: the fact that capacity was rising way faster than the tonnage that is the amount of capacity which gets booked by the customer. This was saddening because the air cargo carriers were now using the same amount of fuel, which is already very expensive and a problem in itself, and were delivering less goods from one place to the other.
That is, their fixed costs of travelling were there but their variable revenues were diminishing. And this problem was having a direct impact on the yield of the air carriers and saw their prices decline. (Seidman, 2005) This problem of the air cargo industry is pretty recent. In 2006, if the door of some of the freighters would open, the eyes would witness the capacity as full. Its not that they are empty now, but there has come a certain pressure on the players of the air cargo industry to somehow fully utilize their capacity every time the freight is brought and sent.
A pressure which they have to go through many times a day, because each time the cargo is sent, their yield will get calculated. And declining yield is not what any company wants. The competition is coming not just from domestic competitors but that of international too. The carriers United Airlines Cargo have reported that their growth figures just cannot match with that of the industry’s growth and the reason is the existence and emergence of the China cargo industry.
UA complains that the capacity is ever-increasing with nothing to fill it with. And this problem is rising with every time the carrier runs. The Vice President for Sales and Marketing of the UA recalls that there was a time when China was a region full of opportunities for each cargo carrier and today, it is the biggest source of competition and that also fierce competition because it is threatening to bring the other players into losses. (Thuermer, 2006)
If china is the new and powerful player of the air cargo industry at this point in time, it would be expected that those who are located geographically close to china must be enjoying this position but Korean Air denies this fact and says that they are only taking advantage of this proximity on a temporary basis and they need to build an identity and backup of their own and not depend on China. They need to keep their yields in check so that they can survive even after the support from China’s nearness ends.
Economic Woes in the U. S. Economy The U. S. economy has been at a low, a factor which has negatively as well as positively affected the air cargo company. The downturn in the economy has negatively affected many air cargo companies by pushing their volumes to a minimum level while other companies have taken this slowing of economy very positively by responding to the environment and adapting to it by introducing many new services in their offerings so as to make the most of this low market.
The fact remains and was reinforced by the Forward Air Corp. that however positively we take this downturn and whatever optimistic steps we take to ensure our stability, we cannot remove the negativity that the downturn of the economy has given to our business. Some of the steps that the air cargo companies have taken in this alarming situation are that of either filing for protection under the Chapter 11 bankruptcy (Kitty Hawk) or have done their earnings downward (Forward Air Corp. )
As far as improving the services factor is concerned, many companies are indulging into providing better services; factors which the air cargo company believes will attract customers more. A company changed its very name to incorporate this factor within its title. The company Pilot Air Freight changed its name to Pilot Freight Services, thus conveying to the customers that it now is bent upon providing high quality of services along with carrying their precious freight. And many companies are now forming subsidiaries which are taking care of this service aspect in isolation.
For instance, Air T. Inc. has opened the Global Aviation Services, which is responsible for any sort of maintenance services for the business sector of the economy. Other companies are launching packages like premium products handling which are just for the purpose of providing better services to products that the customers claim are premium. In these packages, products will be handled with utmost care, keeping the climatic changes in consideration, prioritizing their delivery and special care of the air mail products will be taken.
Looming Security Threats Air transport security has become a major issue since the event of September 11. The unpredictability of events has become so high that it is never known when the terrorists would hit and things would go all haywire. After 9/11, there was a high rate of drop of passenger as well as cargo air transport and the reason was the new surge of fear that was felt among all regarding their precious lives and their important business goods. Therefore, people stopped using the airlines.
Following this trend, the authorities and the regulators had to come up with new rules and regulations, and new security measures so that the public can be ensured that things are back in control and are stricter from now onwards. But then again, this started another issue, that of perceived security. Many delays for cargo were being made by the airlines by which the air cargo company which the customers perceived in a manner that the company was trying to show that they are really concerned about the cargo and would rather spend hours to ensure that it was secure before it was sent for transport.
An effort taken in good spirit by the company was ultimately ironically responsible for what ticked the customers off. Customers name air cargo as being slower, has been made complicated with all the perceived security measures that the companies are taken and is even more costly than other modes of transport, thanks to the high prices of fuel. There have been many suspensions made of numerous rules like that of the “known shipper” rule, which increases the costs of security to the companies. Therefore, increasing the security is not the ultimate solution but there can be other solutions. (Thuermer, 2006)
Firstly, there should be put a halt to all the various regulations that are being sent to the airports on a daily basis and that also from different sources. The airport authorities and staff is getting confused as to the number of regulations they have to abide by and are getting mixed in their synonymy. Very less is achieved by putting these regulations and mostly each one has a deficiency to it, therefore, decreasing the efficiency that it is meant to achieve. Secondly, measures should be taken which would improve security on a tangible level.
The industry has invested more than 50 billion U. S. dollars just to eradicate the noise that the aircraft makes. Then why can it not invest in true security measures? Building Global Links With the rise of competition, as discussed in “capacity more than tonnage”, it can be said that new methods need to be found which will keep a cargo company going and at least give him a place in the top cargo service providers of the country. For this, many owners of the cargo companies have suggested that it is important to position your aircraft on the right trade lanes. This means that most of the air cargo is used for the purpose of doing trade.
Now it is up to the air cargo company to identify which route they should set up their air cargo for which will get them the utmost business. At this point in time, this factor is not a problem; rather it is an opportunity and a challenge because setting up routes and links which will connect the most customers to the company is no less than a challenge. This task of building global links lies in long term planning and is sure to generate long term revenues for the company. Nowadays, many air cargo companies are using tactics which will generate short term cash and revenues, and therefore, this would not keep them going on for long.
Companies should be intelligent when they are making these links. Sometimes, many networks have to be set to ensure sufficient amount of customers. At other instances, the businesses within a single route can be so much that serving to a single to and fro simple link could do wonders for any air cargo company. Companies like American Airlines have set the single link between Shanghai-San Paolo and they claim that no other air cargo company can match the service they provide in this single link. This is because they have focused all their energies on this simple link. It is like niche marketing.
Seeing an opportunity and serving it so well that no other company can even think of entering it. But that does not mean that covering many routes and making numerous networks and global links does not work. We have the fine example of United Airlines which is successful thanks to the business that Intel gives them. Intel has this business where it takes many raw materials from China and then for the final compilation of its one component, it moves many microprocessors to Brazil and therefore, their usage of UA helps them in quickly doing all this moving of goods for the high-tech business that they are involved in.
Moreover, a company should not remain stagnant to the global links that it has created when it once started. Rather it should keep on building their networks so that the cargo company keeps on improving itself and serving to new customers which are always a good thing. For instance, Emirates Airlines recently started serving South America by going through to Brazil. Conclusion The air cargo industry still has a lot of potential and all it needs is to build and maintain that confidence in itself once again.
The good news is that the industry is still growing, even at a minimal rate. The industry should focus on building links and networks globally as well as expanding the horizon of its services. Performance on the North Atlantic has come as strong. However, the U. S. domestic freight market presents a mixed bag of results, something that can be easily improved on if the right measures are taken and if quality of service remains top notch.