22 Airline Cargo Management www.airlinecargomanagement.com ! September 2013

Modal shift

Shape up or ship outThere is a lot of talk about how air freight is losing volumes to sea freight as shippers try to cut costs, but the degree of modal shift and how long it will last is still very uncertain, as Tom Pleasant discovers

A seamless express service remains in demand, as shown by the integrators. But can the air cargo industry match those levels of efficiency? (photo: DHL)

Modal shift

Airline Cargo Management 23September 2013 ! www.airlinecargomanagement.com

No one can deny that shipping freight by air is the expensive option when compared with

other modes. Until the global recession hit, its many advantages for certain types of cargo made it the best choice for consumer electronics, fresh food and pharmaceuticals, to name a few, either due to time constraints or because of the shipment’s high value.

Over the last few years however, as a weak economy has become the new norm, shippers and forwarders have become more willing to consider any alternative that will reduce costs and still deliver the goods within an acceptable time frame.

For Robert Mellin, head of supply and logistics at Ericsson, the event that pushed the telecommunications giant into shifting modes was the Icelandic volcanic ash cloud in 2010.

“I loved that volcano,” he says. “We had to go from air to surface in one day. It forced us to think differently, to look for ways to go under the cloud. It forced us to find a new solution and forced the customer to have a dialogue with us about lead times. It worked. Then we realised we could swap between different modes without constraints and that gave us [the] flexibility to adapt to other situations.”

As the new practice began to spread so too did the worry among cargo-carrying airlines, handlers and cargo airports, many of which began to prophesise doom for the industry.

A grain of truthBut the nature of modal shift, and even its existence as anything more than a short-lived blip on a results’ graph, is still hotly debated.

Digging down into the reality of what is actually happening, there are at least some facts that cannot be denied.

As Mellin noted, Ericsson has made it a policy to dramatically reduce its air freight costs. Instead of the 20% of its products it sent by surface freight a decade ago, it had a target this year of increasing that to 80%, a goal it achieved, ahead of schedule, in April.

“Over 70% of Ericsson’s logistics spend is on air freight, despite it only accounting for 20% of its volumes. Those numbers speak to me,” he says. “As a shipper, you are suicidal if you do not get rid of air freight.”

Ericsson is not the only shipper to announce this change. The sports manufacturers Nike and Adidas, technology company Konica-Minolta, and UK retailer Marks & Spencer, to name just a few, have all made it a core target to move from air to ocean as much as possible.

The majority say the reason is solely environmental, but this is perhaps being a little economical with the truth. While no one is denying environmental considerations are increasingly important to shippers, it is unlikely that they are picking and choosing contracts solely on the basis of low emissions; the more significant cause is likely to be cost savings.

As far back as 2003, Nike decided to shift most of its cargo manufactured in Asia from air to sea, saving the company $8 million in 2009 alone and leading it to set a target of reducing emissions on inbound logistics by 30% by 2020 (no doubt, purely coincidentally of course, saving a great deal of money as well).

Another sports manufacturer, Adidas, did the same. “To reduce the environmental impact of our transport operations, over the past three years we have seen an increase in sea freight and a reduction in air freight... as a result of enhancements in production and logistics planning with factories,” the company said. “[Now] we typically ship most of our cargo by sea.”

Even small changes can make a huge difference for companies that ship vast volumes. Ikea packed bags of tea candles more efficiently onto a standard European pallet increasing the amount carried by 40%, thereby reducing carbon emissions by 21%, and, again, saving a lot of money.

Several companies have started to break up their products’ manufacturing process throughout the supply chain so that semi-finished goods are assembled at a regional distribution centre rather than the source factory.

Ericsson’s Mellin confirms the company has made similar changes. “We now have warehouses all over the world and buy hardware closer to our customers, so we transport products less distance,” he says. “For example, we used to fly batteries from Sweden to Brazil. That was really not smart. Now we buy them locally or put them on a boat.”

Ship’s timeThe growing use of sea freight is also thanks to the mode’s increasing reliability over the last few years. According to maritime consultancy firm Drewry, both ship-level and container-level key performance indicators for the fourth quarter of 2012 showed significant increases in reliability. Container vessels’ on-time arrivals rose 6.4% to a record 79.9%.

The sea freight industry has improved its reliability considerably in the past two years, and supply chain transparency now means shippers can deal with delays (photo: Hapag-Lloyd)

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Modal shift

“Surface transportation is [definitely] more reliable – boats are arriving on time,” says Mellin. “Combined with greater supply chain visibility, better transport management systems, and track and trace we know when the boat will arrive late and we can mitigate that.”

The effect on the air cargo industry has been significant: the air freight forwarding market fell by 4.2% to $62.6 billion in 2012 while the sea freight forwarding market grew 11.5% to $63.2 billion.

Combined with the massive numbers of Boeing 777s coming online with their generous belly cargo capacity, this has lead to overcapacity, and the grounding of many freighters. Last year FedEx began a $1.7 billion restructuring plan, which includes parking 86 of its oldest freighters and offering voluntary redundancies to its employees.

FedEx chief executive officer Fred Smith has admitted this is due to the modal shift and the resulting overcapacity for air freight: “Over several years now, it’s [been] very clear that the door-to-door express [and] the movement of goods on the water is growing [but]… air freight is not.”

David Vernon, formerly at DHL’s shipping unit and now logistics researcher for Bernstein adds: “The trade-downs are real, and they’re not likely to go away soon.”

Forwarders themselves have taken to targeting higher-margin commodities, such as pharmaceuticals and other temperature-controlled goods. For example, in 2012, Kuehne + Nagel bought two specialised freight forwarders within the perishables industry and DHL Global Forwarding expanded its global network of Life Science Competence Centres.

Mellin confirms Ericsson, for one, will continue its policy of favouring sea over air. “Surface transport is part of our culture now and will remain so. All regions have seen and felt the positive cost impact of the shift and we would all be very surprised if this changes again.”

At this year’s IATA CNS conference in the US, Tom Shepherd, head of supply chain at the berry producer Driscoll’s, said: “If you’re trying to compete with ocean carriers, you’ve already lost the battle.”

Down but not outBut the argument that sea freight will reign supreme is challenged by many. Cathy Roberson, lead author of a Transport Intelligence report on the shift, says: “Despite double-digit growth in 2012, the sea freight forwarding market is still vulnerable to long-term overcapacity and erratic rates. Forwarders have benefited from the modal shifts experienced in 2012, but there could be serious problems if these issues are not addressed.

“Although the air freight market was weaker in 2012, airlines are removing capacity across the world. [And while] we expect the sea freight forwarding market to develop more rapidly, we also anticipate that the air freight forwarding market will recover over the next five years as shifting trade lanes result in new opportunities in emerging markets,” she adds. “If it wishes to continue its impressive growth, the sea freight sector should not continue to ignore these problems.”

Marvin Schlanger, chief executive officer of Netherlands-based CEVA Logistics, added that he believes the trend will reverse once interest rates rise and consumer demand grows.

“Some people talk about this being a permanent, secular shift; I’m not convinced,” he says.

“With low interest rates they can afford to have more goods on the water... and they also have flexibility in their supply chain and manufacturing operations.”

Michael Steen, chief commercial officer at Atlas Air, is also dismissive of sea freight’s long-term threat to air.

“Yes, there have been modal shifts, but high-value, time-sensitive products, which include spare parts and new product launches, will always need air cargo. There are also massive geographical differences in infrastructure, for example in China and throughout Africa, that make the challenge of getting a product from a seaport to its end destination almost impossible.

“Even in well-developed infrastructures shipping cargo by sea involves several weeks journey, trucking it from the seaport and storing it for longer in warehouses. With air freight you can not only fly it more directly but also in response to immediate need, maximising just-in-time inventory control.”

Steen acknowledges that air freight will still have to fight for its crown as shippers are becoming more sophisticated at managing their supply chains and sending their shipments via multiple modes. But there is a group of companies that already do that and so can be ideal sources of inspiration.

“For all their recent problems, the integrators have grown year-on-year while general air freight has reduced. What does that tell you? That someone who can control the entire supply chain and who can provide services at the right cost and at the right speed will thrive.

Mellin: Ericsson now sends 80% of its products by sea. 10 years ago, 80% went by air (photo: IATA)

Over 70% of Ericsson’s logistics spend is on air freight, despite it only accounting for 20% of its volumes. Those numbers speak to me. As a shipper, you are suicidal if you do not get rid of air freight ” Robert Mellin, Ericsson

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26 Airline Cargo Management www.airlinecargomanagement.com ! September 2013

Modal shift

“Air freight has to learn from the integrators. We have to speed up customs time and align agents, airlines, handlers and truckers to deliver time and cost savings to the customer. We need to create strong partnerships and new opportunities. That hasn’t been delivered so far but we are working on it.”

There is still a long way to go. Along with Tom Blake Bowlin, global transportation procurement manager at Caterpillar Logistics, Driscoll’s Shepherd told delegates at IATA’s CNS conference that air cargo was still lagging behind other modes in responding to their needs .

“Every piece of fruit starts as a seed in our lab,” he says. “The transport to the consumer is kind of the last step. If we mess up the last step before it gets to the hands of the consumer, it’s a big deal.”

Bowlin added: “We want to see milestones from the time it’s picked up to the time it’s delivered. That’s crucial. We’ve got to automate this.”

“This industry is still very manual,” Shepherd added. “We’ve got to modernise it.”

Robbie Anderson, president of cargo at United Airlines, agrees with Steen that the

air freight industry should be learning from the integrators and improving transfers by working closer with handlers and truckers: “Innovation will be our key challenge in the short term...to accelerate our transit times,” he says.

Even Mellin does not rule out using air freight altogether: “We will continue to transport by air; [it is] extremely important to us, but air freight needs to make itself more attractive, more sexy, for us to want to continue to use it. Otherwise, we will have to reduce its use even more and use more sea freight.”

As well as scrapping surcharges, which he describes as “not professional”, he advocates rapid adoption of e-freight. “Ericsson flies one full Boeing 747-worth of documents every year,” he says. “Think of the savings we could make if that was all digital.”

Yes, sea freight has stolen some of air cargo’s business of late, but one thing is clear: it hasn’t pulled air freight beneath the waves. With the future supply chain looking to remain a more complex and sophisticated beast than it was in the past, air freight has to innovate and listen to shippers more if it wants to stay a viable choice for general cargo.

Steen: Integrators have shown that there is demand for priority freight (photo: Atlas Air)

Yes, there have been modal shifts, but High-value, time-sensitive products, which include spare parts and new product launches, will always need air cargo ” Michael Steen, Atlas Air

“

While sea freight is the preferred shipment method for most shippers, it also relies on trucking to get the goods nearer the destination, which is a problem for land-locked countries and many parts of the developing world, such as Africa (photo: Hapag-Lloyd)