It's been said globalization's first era was driven by money and its second era will be driven by time. If so, air freight, with its natural speed-to-market advantages, should be sitting pretty.
Yet that's far from the case. In fact, if the industry can't shake free from a self-imposed technology straitjacket, it could find itself a decade from now mourning the time passed as a gigantic lost opportunity.
The world is becoming rapidly digitized and increasingly reliant on e-commerce. Airfreight users and providers work in a mobile world with changing expectations for service levels and how to manage them. Yet communications in the air supply chain remain awash in paper. Each international shipment requires 30 or more paper documents to process and transmit, according to the International Air Transport Association (IATA), the Geneva-based global airline trade group. Robert Mellin, head of distribution logistics for Ericsson, the Swedish network and telecom giant and a big airfreight user, told a conference in April its annual logistics documentation could fill a Boeing 747 aircraft.
A typical international shipment booked by a freight forwarder and moved in the belly of a passenger aircraft can take up to six days to reach its consignee, even though it takes less than a day to fly it there. The shipment's remaining time is spent languishing in customs waiting to be processed and cleared, or stuck in a labyrinth that also includes the ground handling agent, the trucker, the importer, and the customs broker. The six-day window, which hasn't changed much over the years, gave rise to the maxim that 80 percent of an air shipment's time is actually spent on the ground.
Some of this might be sloughed off if air freight were the only global game in town. But it's not. In the past decade, less-than-containerload (LCL) ocean services have improved in speed and dependability, and have become an attractive alternative to air because goods can still move reasonably fast yet at a significant discount to pricey flights. This makes it easier for shippers to "trade down" in transit times and still offer a cost-effective service.
Atlanta-based shipping and logistics giant UPS Inc. is expanding an enhanced version of its LCL service that, depending on the traffic lanes, can be as much as 40 percent faster than UPS's standard LCL product while priced at a 40-percent discount to a comparable air movement. Somewhat ironically, the service piggybacks on UPS's airfreight network for moving heavier consignments.
Traditional ocean services can't compete with air to ship stuff like high-value or emergency shipments. However, another round of vicious price-cutting that has driven ocean container rates to lows not seen in 18 months could draw the interest of air shippers willing to reposition at least part of their supply chains to emphasize reliability and cost over speed.
In North America, the lure of lower energy prices has prompted producers in Asia and Europe to consider relocating their manufacturing nearer the end customer as a way to shorten time-to-market and reduce fuel costs. Asian companies once focused on selling into the U.S. and Europe are turning inward to support the growing consumption needs of their own middle class. Tougher global security measures require companies to provide more data to government authorities earlier in the shipping cycle than ever. This injects friction into the air system and compromises its most valuable asset. None of these developments augur favorably for the long-distance, fast-cycle distribution strategy that air freight supported so effectively in the 1980s and 1990s.
WEAK DEMAND
These factors have taken their toll on airfreight demand. According to IATA data, global tonnage has grown by just 1.4 million tons since 2010. IATA forecasts tonnage growth of only 1.5 percent in 2013, with yields falling by 2 percent and revenues of $62 billion, down $4 billion from 2010.
Des Vertannes, head of global cargo for IATA, told a conference in late June that "new processes and technology" are needed if air is to remain relevant. Vertannes' comments underscore the fact that progress has been agonizingly slow. In 1997, IATA launched "Cargo 2000" to standardize processes guiding the implementation of full shipment visibility from purchase order to final delivery. Cargo 2000's supporters said it created industrywide standards to measure service and performance, and that it continues to make progress. Others say that, 13 years on, the program is nowhere near attaining its lofty goal of end-to-end transparency.
In 2006, IATA began an industrywide initiative called "e-freight" to replace paper with the electronic exchange of data and messages. If successful, the program would cut cycle times by 24 hours and eliminate 7,800 tons of paper documents each year. The supply chain would benefit from the elimination of multiple data entries, while regulatory authorities concerned with security would have faster access to more accurate shipment information, IATA reckoned.
The next year, the group laid the groundwork for what would become an e-air waybill, or "e-AWB," replacing the paper air waybill—the most vital document in the chain—with an EDI-based digital agreement between forwarder and carrier.
In April, IATA unveiled a multilateral electronic airbill regime where a forwarder signs one master agreement that becomes valid for all IATA-member airlines. Though it will take some time to establish, it is seen as an improvement over the traditional bilateral setup because IATA represents about 240 airlines in 118 countries. Glyn Hughes, the group's director of cargo industry management, said in late June that a large number of airlines and forwarders have already signed up for the multilateral program.
In a June presentation, Scott Sangster and Jan Markill of Descartes Systems Group LLC, a Canadian firm that processes 40 percent of the world's airfreight messages, said e-freight would become a "great path forward" as long as it remains flexible, inclusive, and affordable enough to enable collaborative data management. One piece of good news is that the cost of technology continues to come down, they said.
Rich Zablocki, vice president of air products for Dutch multinational forwarder Ceva Logistics, said e-freight's value lies in forcing forwarders and airlines to sharpen the quality and accuracy of their information exchanges, and to build the architecture needed to execute legally binding transactions.
But it won't be a quick uptake. At the end of 2012, e-AWB had 6 percent global penetration on "feasible trade lanes," according to IATA, which doesn't define what makes a traffic lane feasible. The airlines are targeting 20 percent penetration by the end of 2013, the group said. IATA said the "vision" is to reach 100 percent compliance by 2015.
Paradoxically, the tightening security regimes that make life difficult today may get the industry where it ultimately needs to go. That's because directives with the force of law have a way of moving the needle that voluntary initiatives don't. "Security has made more things happen in the past seven years than the industry did on its own for the past 25 years," said Ted Braun, a long-time industry executive and principal in the consultancy Air Cargo Matters.
CULTURAL ROADBLOCKS
According to Hughes, cultural, not technological, issues have been responsible for the overall lack of progress. Digitization's benefits to the customer have not been adequately articulated, he said. The industry has fallen short in providing sufficient staff training and in convincing workers that digital conversion will make their jobs easier and more effective, rather than obsolete. Companies also need to do a better job of leveraging technology to re-engineer core processes instead of just automating functions now being performed manually, Hughes said.
The cause has not been helped by the insular attitudes of the players. Many airfreight truckers and ground-handlers are still uncomfortable with digital transmissions. Airlines have lost billions of dollars in the past 12 years and have spent billions more on aircraft, labor, and fuel. Investing in cargo IT systems might not seem a priority at this time. Small and mid-sized freight forwarders have an attitude of "what's-in-it-for-me," contending e-freight means more work for them and less work for the airlines receiving the information. The forwarders also complain about compliance costs.
Braun said the forwarders' selfishness is indicative of a long-running suspicion that airlines will one day sell directly to shippers behind the forwarders' backs. He also disputed their poverty pleas, arguing smaller forwarders are masters at lean-and-mean operations and profit handsomely on the arbitrage between what they pay for space and what they resell it for. "Many forwarders make a lot of money. They just don't want to spend it," he said. Hughes of IATA argued forwarders' myopia is becoming less of an issue as they to begin to recognize the value of digitizing the information flow.
No one is under any illusions that e-freight represents anything more than a good starting point for digital conversion. And it doesn't capture the holy grail of end-to-end shipment visibility demanded by many of today's multinational shippers. For that, Zablocki said, shippers must turn to integrated carriers like UPS, FedEx Corp., and DHL Express that operate closed-loop physical and information systems.
Experts said shippers expect their forwarders to achieve parity with the integrators across all metrics, including technology. That is an exceedingly difficult task. An international shipment passes through the hands of four of five different vendors, all with different IT systems. By contrast, a shipment moving via an integrator is handled by one vendor with one system. Integrators also spend billions of dollars a year to upgrade their systems to meet shippers' increasing demands. Many in the so-called nonintegrated segment lack the resources or the commitment to play at that level.
There's also a concern the industry's current efforts are responses to the past rather than a blueprint for the future. In their presentation, Messrs. Sangster and Markill of Descartes predicted the nature of information exchange would look radically different in five to 10 years. As global commerce and security regimes expand, more detailed shipment information will be required further up the pipeline, they said. It will no longer be enough for regulators to capture data just from forwarders and airlines; shippers will become more embedded in the process, they said.
In addition, the information requirements from digital consumers and retailers will put new demands on the air supply chain, both in terms of information exchange and the transparency of transport services, the Descartes duo said.
The cumulative effect, they predicted, will be to "cause a paradigm shift from messaging to synchronous communication." In this environment, "more collaborative business processes and technology will be required," they said.
Air freight is and will remain highly relevant on the world stage. IATA estimates that about $6.4 trillion of goods, about 35 percent of global commerce's value, moves by air. With so much riding on the airflow, Hughes recognizes the industry can no longer afford to watch the digital parade race by.
"These are commodities of high commercial and social importance," he said. "If we continue to rely on legacy processes and paper, then we risk getting out of step with market and customer demands and expectations."
