208 | intermodal transportation: moving freight in a global economy

208 | Intermodal transportatIon: movIng FreIght In a global economy

7

7.1 Introduction

Air cargo is defined in North America as anything other than persons or per-sonal baggage traveling by air. Compared with other means of freight transpor-tation, such as ship, rail, and surface vehicles, air cargo is the newest addition to the freight sector. Since its start just after World War I, the air cargo industry has become an indispensible part of the world’s global economy, holding an important niche in the transport of lightweight, high-value commodities. Us-ing the infrastructure largely put in place by public agencies for air passenger travel, such as airports and air traffic control systems, air cargo services con-nect to almost all parts of the world.

This chapter examines the characteristics of the air cargo industry. Section 7.2 describes the historical development of air cargo services and the role they play in today’s world. Section 7.3 describes the major players and the different business models found in the air cargo industry. Section 7.4 presents key de-scriptors of the air freight network and service characteristics, such as the use of major hubs and different aircraft types. Section 7.5 discusses the economic importance of global trade to the industry, with Section 7.6 discussing the dif-ferent elements of successfully managing air cargo. Section 7.7 presents differ-ent global events that have shaped the industry. Section 7.8 identifies current challenges, and the final section identifies potential research topics on issues of importance to the air freight industry.

The Air Cargo Industryandreea popescu, pinar Keskinocak, and Issam al mutawaly

| 209 © 2010 Eno Transportation Foundation. www.enotrans.comReprinted from Intermodal Transportation: Moving Freight in a Global Economy.


7.2 History of Air Cargo

Although limited air freight services were tried prior to World War I, it was not until the end of the war that such services were first offered in any significant way. Primarily due to the availability of surplus airplanes and trained military pilots, most of those early commercial services were made possible by subsi-dies provided by national governments, most directly by postal services. Allaz (1) notes that four important lessons arose from these early years of air freight services, as follows:

• Militaryaircraftwerenotsuitableforcommercialairservice.Althoughthecost of purchasing surplus military aircraft was very low, the maintenance costs, especially for engines, were prohibitively high.

• Safeairtravelduringthisperiodneededinfrastructure—e.g.,airfields,traf-fic control systems, weather services, marshalling yards. Very little of this was in place.

• Thetransportofmailwasthemajor,ifnottheonly,sourceofincome.From1919 to 1939, post offices around the world provided commercial aviation companies with more than half of their revenues.

• Commercialaviationwasnotaprofitablebusinessunlessgovernmentsub-sidies or favorable postage rates were used to prop up the service.

Although there were similarities between how air cargo developed in Europe and the United States, there were also some important differences.

7.2.1 Europe

In Europe, civil aviation grew rapidly after the end of World War I, fueled pri-marily by demands from national postal services. The first cargo-only, sched-uledcommercialaircompanybeganservicebetweenParisandLille(France)in July 1919. Aircraft that transported passengers during the day were often used for mail and freight transport at night. Lufthansa, founded in 1926 in Ger-many, started dedicated air freight services in 1928.

Great Britain, France, and theNetherlands still had colonies during the1900s, which gave their governments a vested interest in maintaining reliable and relatively fast connections. However, a government study in Great Britain in 1923 concluded that a myriad of smaller companies were not economically suited to fulfill the national goal of linking all parts of the empire into one air transportation network. With the promise of major subsidies, many smaller airlines agreed to merge, forming Imperial Airways Limited. Imperial Airways soon operated in all corners of the British Empire, transporting mail and goods between London’s Croydon Airport and destinations such as Cairo, Sydney,

the aIr cargo Industry | 211

Delhi, and Basra. In 1939, after the outbreak of World War II, Imperial Airways was nationalized and merged with British Airways Limited to form a new air-line,BritishOverseasAirwaysCorporation(BOAC),apredecessoroftoday’sBritish Airways.

Because European governments considered air cargo a matter of national security and sovereignty, those airlines starting as private entities were eventu-ally nationalized. They would not be privatized until the 1980s, ushering in an era of alliances and mergers.

7.2.2 United States

In the United States, the first practical demonstration of air freight transporta-tion took place in 1910, when a department store shipped a bolt of silk by air from Dayton to Columbus, Ohio. (2) The first dedicated air postal service oper-ated by the US Army began in July 1918 with service between Washington, DC, Philadelphia, and New York City. In 1924, the US Postal Service inaugurated the firsttranscontinentalpostalservice,connectingNewYorkCitytoSanFrancis-co. The trip took 34 hours and 45 minutes in one direction, and 32 hours and 21 minutes in the other (by comparison, the fastest train serving the same cities took91hours).SimilartotheexperienceinEurope,postalservicewasthefoun-dation of air freight in those early years. The rapid growth in air mail service is evident in the number of letters carried by airplane; in 1918, 713,240 mail pieces were transported; by 1927, the number had skyrocketed to more than 22 million.

Between 1926 and 1934 the aviation network in the United States changed dramatically.Fromaservicealmostexclusivelyusedforthetransportofmail,the air network system evolved into the largest passenger and cargo network in the world, served by a few airline companies. The Air Commerce Act of 1926 is often considered the foundation for a continental air cargo system. This act established regulations concerning the licensure of pilots, standardized the rules for air traffic control, and specified the varying roles of airports in a na-tional system. By the start of World War II, the US air transport system was the largest in the world, handling more than half of all global passenger trips and just over one-third of mail traffic.

On December 23, 1940, United Airlines inaugurated what many historians consider the first all-cargo service in US history. United used a Douglas DC-4 aircraft to deliver mail between New York and Chicago for five months before cancelingtheroute.FreightwentbacktobeingasidelineoperationuntilMarch14,1941,whenAirCargo,Inc.,wasformedbythe“bigfour”airlines—United,American, TWA, and Eastern. By the end of the war, many airlines (including UnitedandTWA)hadbeguntheirowncommercialairfreightservices.

Realizing the likely importance of global aviation after World War II, President Roosevelt hosted in 1944 an international conference on civil avia-tion, the result being an internationally agreed upon set of principles and


rights for civil aviation in the post-war environment. This agreement, often referred to as the Chicago Convention, created the International Civil Avia-tionOrganization(ICAO),definedstandardapproachestointernationalairnavigation, and affirmed the rights of countries to protect their own interests in granting landing rights.

By the late 1940s, the air freight market was dominated by established pas-senger carriers. The airlines that formed Air Cargo were particularly worried thatsmall-timeoperatorssuchasSlickAirwaysandFlyingTigerLinewoulddestabilize the commercial aviation sector by offering irregular services at low rates. Through the late 1940s, the smaller operators, the established carriers, andthegovernment’sCivilAeronauticsBoard(CAB)debatedhowtoawardcontracts and set proper rates for freight transport. In August 1949, CAB gave permissionforfourall-freightairlinestooperate:Slick,FlyingTiger,USAir-lines, and Airnews. (2)

US Airlines quickly folded after a series of accidents and the threat of bank-ruptcy. Similar circumstances caused Airnews to go under in June 1951. Slick Airways sustained moderate growth for a time before shutting down due to the airline’s inability to compete with big passenger airlines that had introduced all-freight services. Slick Airways cited the government’s lack of support for all-freight airlines as a contributor to the company’sdownfall.FlyingTigerfaredincrediblywellcomparedwithitscompetitors;bythemid-1960sFlyingTigerwasearninga$20millionannualprofit.FlyingTiger’ssuccesswasat-tributed to its business model, which had diversified its market share, and to favorable CAB judgments. (2)

In the 1970s, a new airline revolutionized the air freight business. FredSmith,nowthechairman,CEO,andpresidentofFedEx,hadthevisionofanovernight delivery service. He was the first to recognize the opportunity pre-sented by an all-in-one cargo transportation service that would eliminate the need to combine freight with passenger traffic, which in his opinion slowed downcargodelivery.SmithsetuphisheadquartersinMemphis,Tennessee,and the Memphis International Airport became the hub for his exclusivefreight air delivery service. One of the most important selling points was his guaranteednext-daydelivery.FedExreportedrevenuesof$1billionin1983,anunheard of amount for a company that had existed for only 10 years. It is now the largest overnight express delivery company in the United States. (2)

Figure7-1summarizesthehistoricaltrendofscheduledairfreightactivityin freight ton-miles since 1954 in the United States. In 2002, air cargo account-ed for 7.4% of the value, 0.1% of the weight, and 0.3% of the ton-miles of com-mercial freight activity in the United States. (3) Although this percentage is relatively low, air freight plays a particularly important role in moving freight quickly over long distances. In fact, the majority of freight tons moved by air is transported 750 miles or more. Table 7-1 summarizes the value, tons, and ton-miles of air cargo moved by distance.


Due to the globalization of trade, the rise of e-commerce (transactions con-ductedovertheinternet),andtheincreasinguseofadvancedlogisticstech-niques, the air transportation of freight has become part of our day-to-day ac-tivities. Different business models have arisen to better address the growing demand for air cargo services, as will be discussed in the next section.

7.3 Major Players with Different Business Models

ThemajorplayersinthefreightvaluechainareshowninFigure7-2,whichincludes the integrated carriers and nonintegrated services (forwarders and airlines).Goodstransportstartswiththeshipper.Whentheshippercontractswith a freight forwarder, the forwarder arranges the entire transportation chain,fromdoor-to-door(shippertoconsignee).Thefreightforwardingcom-pany is responsible for arranging all transportation segments (air, road, sea, or rail),processingandpreparingthenecessarydocumentstoensurecompliancewith all legal and customs requirements, and advising shippers on, or arrang-ing,thepackagingoftransportedgoods.Freightforwardersaretypicallynon-asset-based and therefore rely on carriers for the physical movement of goods. Theymaycontractwithtruckingcompaniesforroadfeederservices(RFS)tomove the freight between the shipper and the airport.

Attheairport,theairline’shandlingprovider(in-houseoroutsourced)re-ceives the goods and documentation. After inspecting the freight and verifying that it is ready for air carriage, the handling company loads the containers and buildspallets(i.e.,consolidatesitemsontopallets),deliversthecontainersand

➤ Figure 7-1 trend in domestic scheduled air freight activity in the united states (ton-miles), 1954–2004

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pallets to the airplane, and loads them into the airplane. The air cargo carrier is responsible for the airport-to-airport transportation. Carriers may act as all-cargooperators(e.g.,Cargolux)ormaycarrybothpassengersandcargo(e.g.,DeltaAirlines,KLM).

At the destination, the carrier makes the air freight available to the forward-er’s representative for road feeder service to the consignee, the ultimate re-cipient of the goods. Once the package is successfully delivered to the con-signee, the supply chain process is complete. The role of intermediaries is very important in the air cargo supply chain since each step in the process depends on the successful completion of the previous step.

7.3.1 Cargo-Only Carriers

Cargo-only carriers often fly freighters, which are passenger aircraft that have beenalteredforcargooperations.Freightershavenoseatsorwindowsinthemain cabin. They have larger doors than aircraft configured for passenger ser-viceandreinforcedfloors.Manyarefittedwithrollerstofacilitatetheloadingofheavyitems.Manymodernfreightersalsohavehingedtailsornosesthatallow for straight-in loading of large items.

Cargo-only carriers generally operate widebody airplanes from one major airport to another. Approximately 10% to 15% of world air cargo traffic is moved by cargo-only carriers, primarily on long-haul international or trans-continental routes.

➤ Table 7-1 shipment characteristics by distance shipped for the united states (2007)

Value Tons Ton-miles

Number (million Number Number dollars) Percent (thousands) Percent (millions) Percent

air total (includes truck and air) 252,276 100.0 3,611 100.0 4,510 100.0

Less than 50 miles 23,608 9.4 150 4.2 70 1.6

50 to 99 miles 4,233 1.7 40 1.1 26 0.6

100 to 249 miles 19,394 7.7 589 16.3 208 4.6

250 to 499 miles 40,548 16.1 857 23.7 540 12.0

500 to 749 miles 24,797 9.8 259 7.2 217 4.8

750 to 999 miles 29,328 11.6 230 6.4 239 5.3

1000 to 1499 miles 40,178 15.9 443 12.3 687 15.2

1500 to 1999 miles 40,050 15.9 369 10.2 706 15.7

2000 miles or more 30,149 12.0 673 18.6 1,819 40.3

SOURCE: US Department of Transportation, Research and Innovative Technology Administration, Bureau of Transporta-tion Statistics and US Census Bureau, 2007 Commodity Flow Survey. Sector 00: CF0700A11: Geographic Area Series: Shipment Characteristics by Commodity by Mode by Distance Shipped for the Untied States: 2007. factfinder.census.gov/servlet/IBQTable?_bm=y&-fds_name=EC0700A1&-geo_id=&-_skip=100&-ds_name=CF0700A11&-_lang=en. Accessed December 20, 2010.


7.3.2 Combination Carriers

Domestic US carriers (e.g., United or Delta) focus primarily on passengertransportation,buttheyusethesparespaceinthehold(belly)oftheirplanesto transport cargo; hence, they are called combination carriers. The industry estimates that more than 50% of international air cargo is moved in the bellies of passenger aircraft, whereas only 10% to 30% of US domestic air cargo is car-ried on passenger planes.

Manyofthedomesticcombinationcarriersuseatraditionalairlinebusinessmodel, where the airline extends its operations with side services, such as en-gineering, cargo, or in-flight catering. Such airlines usually treat the cargo busi-ness as a byproduct of their main operation and thus management may pay only scant attention to it.

In contrast to US carriers, for the past 30 years, European carriers have con-centrated significantly on incorporating air freight into their overall business models. They have established elaborate hubs and have seriously examined

➤ Figure 7-2 door-to-door air freight value chain

Integrated carrier

Integrated carrier

Integrated carrier

Originterminaladmin

Destinationterminaladmin

Aircraftprep and

maintenance

Airport-to-airport

flying

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Shipper

Airline

Airport to airport value chain

Consignee

ACMIprovider

SOURCE: MergeGlobal Value Creation Initiative. End of an Era? American Shipper, Aug. 2008: 33-47. Reprinted with permission of MergeGlobal.


balancing the needs for passenger and cargo services. As national carriers, Luf-thansa,BritishAirways,AirFrance,andKLMhavegreatlycontributedtothegrowth of their national economies by providing air cargo services. To that end,theybuiltlogisticscentersattheirmajorairporthubs—Frankfurt,Lon-don–Heathrow, Paris–Charles de Gaulle, and Amsterdam–Schiphol. Conse-quently, cargo accounts for a significantly larger share of operating revenues for European carriers compared with US carriers, as shown in Table 7-2.

To support the above mentioned business model, European carriers main-tainadedicatedfleetofwidebodycargoaircrafts.Forinstance,LufthansaCar-gooperates19BoeingMD11freighterswhileAirFrance–KLMCargooperates13 Boeing 747-400 and 777-200 freighters. US carriers do not have dedicated widebody cargo aircraft. (Northwest Airlines did own and operate a dedicated fleetof10Boeing747freighters,buttheservicewasshutdownin2009.)

7.3.3 Integrators

As mentioned earlier, airlines typically market their freight transportation ser-vices—theairport-to-airport link—to freight forwarders. Integrators, incon-trast, market their logistics solutions directly to shippers, offering an integrat-ed transportation chain with door-to-door service. Integrators thus act both as forwarders and as carriers. They often have their own trucking and aircraft fleet and provide all the handling services themselves. There are four major air freightintegratorsintheworldtoday—FedEx,UPS,TNT,andDHL.

The integrators specialize in carrying express freight. During the past few years, integrators have moved towards carrying heavier freight as well. The four big integrators dominate the carriage of express freight by land, as well as the international air express market. They often operate their own fleet of air-craft through their intensive hub-and-spoke networks worldwide (except

➤ Table 7-2 operating revenue share for selected combination carriers

Cargo Revenue Share of Total Airline Total Revenue Cargo Revenue Revenue Year Reported

Lufthansa €15.9 billion €2.7 billion 17% 2007

Air France–KLM €24.1 billion €2.9 billion 12% 2007

British Airways £7.54 billion £616 million 8% 2007

Delta $17.5 billion $498 million 3% 2006

United $19.3 billion $750 million 4% 2006

Northwest* $12.6 billion $946 million 8% 2006

US Airways $11.7 billion $138 million 1% 2007

SOURCE: Airline annual reports. * Northwest merged with Delta in 2008; in 2010, the two airlines received approval to operate under a single operating

certificate (Delta).


TNT and other smaller express operators, who mainly use the worldwide car-gocapacityavailablefromothercarriers)

Integrators carry the majority of the market share of US freight, with DHL, FedEx,andUPSaccountingfor62%ofenplanedrevenue-tonsoffreight.(4) FedEx,oneofthefourmajorintegrators,isundoubtedlythelargestcargocar-rier in the world. However, although each cargo business model has its own strengths and weaknesses, it is apparent that cargo-only carriers, integrators, andcombinationcarriersallholdasignificantportionofthemarketshare.Fig-ure 7-3 provides the percentages of the market share that particular airlines holdbasedon thescheduled ton-kilogramsflown.Figure7-4showssimilarinformation for US carriers. Table 7-3, which is based on data collected by Air-ports Council International, illustrates the market force of the integrator traf-fic.FedEx’sMemphishubleadsallairportsintheworld,andUPS’sLouisvillehub ranks seventh in the world. It is striking to note the different growth rates

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➤ Figure 7-3 market share of cargo (2003)

➤ Figure 7-4 market share of major us carriers

SOURCE: Air Cargo World, Sept. 2010: 20-27.

SOURCE: Summary of Aircraft Departures and Enplaned Passengers, Freight, and Mail by Carrier Group, Air Carrier, and Type of Service. Washington, DC: Bureau of Transportation Statistics, 2000.


between North America and Asia. Where most major US airports have seen a decline in cargo traffic, China has seen increased growth in air cargo volumes, led by the Guangzhou and Beijing airports.

7.4 Network/Service Characteristics

Mostfreightistransportedinlowerlevelcargoholdsofwidebodypassengeraircraft (i.e., aircraft with two or more aisles running from the front to the back oftheaircraft).Theholdsaretypicallyaccessiblethroughoneormoreoutside

➤ Table 7-3 cargo traffic for top 30 airports (2009)

Rank City (Airport) Total Cargo % Change

1 Memphis TN, US (MEM) 3 697 054 0.0 2 Hong Kong, HK (HKG) 3 385 313 (7.5) 3 Shanghai, CN (PVG) 2 543 394 (2.3) 4 Incheon, KR (ICN) 2 313 001 (4.6) 5 Paris, FR (CDG) 2 054 515 (9.9) 6 Anchorage AK, US (ANC)* 1 994 629 (15.0) 7 Louisville KY, US (SDF) 1 949 528 (1.3) 8 Dubai, AE (DXB) 1 927 520 5.6 9 Frankfurt, DE (FRA) 1 887 686 (10.6) 10 Tokyo, JP (NRT) 1 851 972 (11.8) 11 Singapore, SG (SIN) 1 660 724 (11.9) 12 Miami FL, US (MIA) 1 557 401 (13.8) 13 Los Angeles CA, US (LAX) 1 509 236 (7.4) 14 Beijing, CN (PEK) 1 475 649 8.1 15 Taipei, TW (TPE) 1 358 304 (9.0) 16 London, GB (LHR) 1 349 571 (9.2) 17 Amsterdam, NL (AMS) 1 317 120 (17.8) 18 New York NY, US (JFK) 1 144 894 (21.2) 19 Chicago IL, US (ORD) 1 047 917 (17.1) 20 Bangkok, TH (BKK) 1 045 194 (10.9) 21 Guangzhou, CN (CAN) 955 270 39.3 22 Indianapolis IN, US (IND) 944 805 (9.2) 23 Newark NJ, US (EWR) 779 642 (12.1) 24 Tokyo, JP (HND) 779 118 (8.3) 25 Luxembourg, LU (LUX) 628 667 (20.2) 26 Osaka, JP (KIX) 608 876 (28.0) 27 ShenZhen, CN (SZX) 605 469 1.2 28 Kuala Lumpur, MY (KUL) 601 620 (9.9) 29 Dallas/Fort Worth TX, US (DFW) 578 906 (11.3) 30 Mumbai, IN (BOM) 566 368 1.3

Airports participating in the ACI Annual Traffic Statistics Collection.

Total Cargo: loaded and unloaded freight and mail in metric tonnes.

*ANC data includes transit freight.

SOURCE: Airports Council International. World Airport Traffic Report 2009. www.aci.aero/cda/aci_common/display/main/aci_content07_c.jsp?zn=aci&cp=1-5-54-4819_666_2__. Accessed Aug. 8, 2010. Reprinted with permission.


doors. Aircraft such as the Boeing 747, Boeing 767, Boeing 777, Airbus A300/A310, Airbus A330, Airbus A340, and Airbus A380 are used for international flights and offer significant cargo space. The growth in the size of the widebody fleet has mirrored the growth of air cargo.

To reduce ground times, it is common practice to load all suitable freight on orinunitloaddevices(ULDs),whicharetypicallyeitherpalletsorcontainers.Pallets are aluminum sheets with rims that allow nets to be affixed to hold loose packages in place. Containers are fully enclosed, portable aluminum compartments of various shapes and sizes. To fully utilize the capacity of the airplane, containers are shaped to fit the contours of an aircraft’s doors and frame.Forsomeshipments,highlyspecializedcontainersareusedtomaintaina specific temperature or absorb shock.

Specialized cargo carriers own and operate their own fleets of dedicated cargo aircraft. Some of these airplanes are passenger aircraft that have been permanentlyconvertedforcargousage(asdescribedinSection7.3.1).

The Boeing 747, in its various configurations, is the aircraft most commonly used as a cargo plane. In the past, operational suitability and ease of mainte-nance were the major factors in deciding which aircraft would be added to a cargo fleet. Today, however, fuel economy, noise, and environmental concerns are also factors in an operator’s decision.

7.5 Economic Importance of Global Trade

Boeing reported that air cargo tonnage grew a robust 12% in 2004, but that was followed by three very weak years (1.7% in 2005, 3.2% in 2006, and 5.1% in 2007)attributedtothehighcostofjetfuel.Boeingprojectsthataircargotrafficwill triple over the next 20 years (5), primarily due to an increase in world trade in the increasingly globalized economy. The share of nondomestic trade grew by nearly 14% between 2003 and 2009, as shown in Table 7-4.

➤ Table 7-4 cargo revenue tons (tons of revenue traffic) enplaned by region (in thousands)

Region Share of

Latin Other Non-Domestic Year Domestic Atlantic America Pacific International Total Trade (%)

2003 12,723 1,429 756 2,327 5,455 22,691 43.9

2004 13,260 1,687 850 2,785 6,206 24,790 43.9

2005 12,923 1,717 924 2,671 6,800 25,035 46.5

2006 12,612 1,732 953 2,833 7,108 25,238 48.4

2007 12,415 1,700 1,111 2,777 7,178 25,182 50.0

2008 11,046 1,691 1,050 2,457 6,846 23,085 52.2

2009 10,357 1,693 878 1,986 5,809 20,723 50.0

SOURCE: Bureau of Transportation Statistics. Air Freight Summary Data (All US). www.transtats.bts.gov/freight.asp?pn=0&display=data2. Accessed June 12, 2010.


Air cargo growth is also fueled in part by the rapidly expanding and newly emerging economies in Asia. The economic boom in India and China is expected to result in intra-Asian traffic having the largest share of the air cargomarket.Figure7-5illustratestheprojectedinternationalairfreightshares in2011.Figure 7-6 shows theprimary intercontinental air freightflows in 2007.

Despite the financial crisis of 2009, the general midterm outlook for the air cargo industry appears strong. Nonetheless, there are growing concerns about factors that could hinder its growth. Rising oil prices, unrest in finan-cial markets, and political uncertainty in many areas of the world have slowedtheoveralldevelopmentofthemarket.ManyconsumersinEuropeand North America are also concerned about the environmental impact of plane trips. Air freight accounted for 0.4% of the ton-miles of domestic freight in 2001, but was responsible for 23.2% of the fuel used in the domes-tic freight sector. (6) Global companies may try to limit their carbon foot-print by looking for alternatives to shipping goods from one end of the world to another. In addition, technological advancements that improve the speed of goods movement by ship may make sea transport a viable solu-tion for express shipments.

Asia Pacific - North America13%

Within Asia Pacific26%

Europe - Asia Pacific18%

Within Europe6%

Europe -North America

12%

WithinNorth America

1%

North America -Latin America

5%

Within Middle East2%

Others17%

Within Latin America1%

➤ Figure 7-5 projected 2011 international air freight shares

SOURCE: International Air Transport Association Economic Briefing: Passenger and Freight Forecasts 2007 to 2011, October 2007.


➤ Figure 7-6 International air freight flows in 2007

SOURCE: MergeGlobal Value Creation Initiative. End of an Era? American Shipper, August 2008: 33-47. Reprinted with permission of MergeGlobal.FEU-Kilometer—a 40-foot container transported one kilometer.

7.6 Managing Air Cargo Successfully

Even in a growing market, success does not come easy in the air freight indus-try.MostairlinesintheUnitedStatesandEuropehaveshownpoorreturnsonthe investment for their shareholders. Several major carriers in the United States have been in bankruptcy proceedings at least once in the past several years.Formermarketleaders,suchasPanAmandEasternAirlines,havegoneout of business. Rising fuel expenses and the cost of meeting new security re-quirements have placed increased pressures on air cargo operators. At the same time, an abundance of capacity and strengthening buying power fueled by consolidation in the forwarder markets have put pressure on the revenue side. Airline executives need skills in a variety of business disciplines in order to achieve positive results for their shareholders.

7.6.1 Fleet Management and Network Planning

Managingaprofitablefreighterairlinebeginswiththeselectionofafleetthatmatches the airline’s business model. Successful airlines invest in aircraft that meet their operational needs while minimizing operating and maintenance costs. Constrained resources in the market, such as the limited number of air-craft available and the shortage of qualified pilots, in conjunction with the massive financial resource commitments that have to be made up front, con-tribute to the challenging task of fleet management.

When selecting routes, a carrier must decide if it wants to be a network car-rier with a published schedule or if it wants to be a charter carrier with a flex-ible schedule. Charter carriers market their air cargo capacity in conjunction


with their operational capabilities and make routing and other operational de-cisions after securing business. Network carriers publish a reliable schedule and look for business for the routes in their network. The network can consist of many point-to-point routes, although most carriers operate with a hub-and-spoke network. In a hub-and-spoke network, freight is transported first to the hub, where it is reloaded on another aircraft that will bring it to its final desti-nation.Therearetwoadvantagesofthehub-and-spokesystem.First,thecon-centration of the fleet in one place allows a company to make appropriate op-eration decisions, such as which aircraft to use for which destination. Second, the hub-and-spoke system provides the possibility of consolidating freight on one flight. The disadvantages of hub-and-spoke are that most freight will not take the most direct route to its destination and that the operational challenges of managing all freight at one hub can be considerable. Regardless of the net-work structure, trade imbalances often make it difficult for airlines to fill avail-ablecargospace.Forexample,thedemandforcargocapacityfromChinatothe United States greatly exceeds the demand for capacity from the United States toChina—and this trend is expected to accelerateover thenext fewyears. (7) Some flights will, as a result, travel relatively empty in one direction.

Airlinesneedtoobtaintrafficrights(called“freedomsoftheair”)fromfor-eign governments to operate internationally. There are a total of nine freedoms that describe the right of one nation’s carrier to operate in another country. The first freedom, for example, is the right to fly across the territory of a for-eign country without landing; the second freedom is the right to land in a for-eign country to refuel or for other purposes. These freedoms are typically ex-changed between countries, and a carrier must apply for the traffic right referred to in these international agreements. (8)

In 2007, the United States and China signed an agreement that vastly ex-panded a carrier’s right to fly to the destinations in the other country. (9) The EU-US Open Skies Agreement of 2007 went even further by allowing carriers to fly between any two cities within the two areas of jurisdiction. In addition to traffic rights, airlines need to negotiate with airport operators to obtain landing rights. Often landing rights become part of the “intergovernmental traffic right” discussions, as limited gate capacity at airports can constitute a trade barrier. As part of the negotiations between the United States and the Euro-pean Union, London-Heathrow Airport has been opened to more US carriers; previously, only United Airlines and American Airlines had the privilege of op-erating in and out of this lucrative gateway. (10)

All-cargo carriers may have different routing needs than passenger carriers and thus require different sets of air traffic rights from those needed by pas-senger carriers. But separating air cargo and passenger rights will be fraught with difficulty in Asia because of the distinctive characteristics of its air cargo market, where most passenger carriers have substantial cargo business and op-erate combination fleets. (11)


7.6.2 Operations Management

Animportantpartofaircargoservicequalityoccursontheground.Managingthe export acceptance, the import delivery, and timely transfer of millions of single shipments each year is an operational challenge. Cargo handling and aircrafthandlingarewaysforairlinestodifferentiatetheirservices.Forex-ample, after a period of outsourcing, Delta Airlines announced in 2008 that it would once again begin to manage its own handling processes as part of a stra-tegic push to grow its cargo revenue share. (12)

Aircraft handling or ramp handling is the process of loading and unloading the aircraft. Skilled loading requires fast but safe operations so that neither freight nor aircraft are damaged. Training of operators and the use of appropri-ate loading equipment is required. Because the investment in such loading and unloading equipment can only be amortized through frequent use, the airport entity or dedicated companies typically provide this service to airlines that must load/unload outside of their hub.

Cargo handling or warehouse handling refers to the processes in the ware-house where shipments on the export side are accepted from customers, weighed and measured, and loaded into containers or onto pallets. Optimizing these processes is a major operational challenge. Total quality management and continuous process management techniques are often employed by air-lines (or their selected subcontractors) to reduce the incident rate (loss offreightdue todamageorpilferage),optimize throughput in thewarehouse,and limit costs. Security screening has recently added complexity. Warehous-ing technologies such as electronic transfer vehicles and automated stacker systems are often employed to optimize the workflow.

Shippers and forwarders select air transport over more economical means of transportation only in cases of necessity. The customer expectation is that air cargo services will usually be a flawless operation as any damage, loss, or delay can have a major impact on the shipper’s business. Thus, ground quality is a key factor for successful air cargo management. As an example of the type of analysis that can examine such operations, Yan et al. combine two workforce supply principles, two flexible management strategies, and the related operat-ing constraints to assist an air cargo terminal to more efficiently manage its workforce supply and set its shift schedule under stochastic demand. (13)

7.6.3 E-commerce

E-commerce has also brought new challenges and opportunities to the air cargo industry. An important component is a third-party e-commerce com-munity network. Leung et al. present a framework for such a network, which extends the traditional business-to-business e-commerce exchanges to a more broadly based e-commerce approach at the industry level. (14) The


proposed infrastructure differs from traditional portals in that it features the online integration of business transactions. It provides a virtual market for agents of the air cargo industry, enabling them to develop and engage in lo-gistics integration. It also facilitates tracking and tracing, and minimizes un-necessary travel and inventory costs, thus achieving supply chain manage-ment at the industry level. Planning and cooperation among industry agents using e-commerce as an enabler could transform the air cargo industry into one that can provide customized services to individual shippers at the cost level of mass production.

7.6.4 Marketing, Product Management, and Pricing

WhileintegratorssuchasFedExandUPSprovidecompletedoor-to-doorser-vice, traditional cargo carriers provide service to only a segment of the trans-portation chain. Airport-to-airport transportation is almost always preceded and followed by other means of transportation, such as by road, rail, or water. Mostshippersthatrelyontheservicesofanonintegratedaircargocarrierthusfind that they are in need of the services of an international air freight forward-ing agent, that is, a freight forwarder. These companies are also often referred toasthird-partylogisticsproviders(3PLs).

The forwarder is an agent that arranges, on behalf of the shipper, the entire transportation chain and provides ancillary services related to the transport of goods.ForwarderscanapplytoCargoNetworkServices,asubsidiaryoftheInternational Air Transport Association, for accreditation as a cargo agent. Cargo airlines find most of their business is generated by freight forwarders, making them the customer base for all airlines. The top 10 freight forwarders are listed in Table 7-5.

Techniques to win customers encompass all typical business-to-business sales and marketing practices. Cargo airlines employ sales representatives that

➤ Table 7-5 top 10 freight forwarders, 2006

Freight Annual Revenue (billions) Employees Warehouses/Offices

1 DHL Logistics $ 31.0 125,000 1,600 2 Kuehne & Nagel International $ 14.9 46,000 400 3 Schenker/Bax Global $ 14.0 53,700 1,500 4 UPS Supply Chain Solutions $ 8.0 37,000 936 5 Panalpina World Transport $ 6.33 14,300 240 6 C. H. Robinson Worldwide $ 6.6 5,700 100 7 Agility Logistics $ 4.9 20,000 n/a 8 Ceva Logistics $ 4.6 38,000 567 9 Expeditors International $ 4.6 10,600 110 10 NYK Logistics $ 4.2 17,000 260SOURCE: Armstrong, Richard, and Thomas Foster. Moveable Feast of Top 25 Global Third Party Logistics Providers. Global Logistics & Supply Chain Strategies Magazine, May 2007: 28-53. glscs.texterity.com/glscs/200705. Accessed June 12, 2010.


call on customers. Trade fairs and business associations play an important role in bringing customers and suppliers together. Building relationships is crucial as airlines and freight forwarders engage in hundreds or thousands of indi-vidual transactions every year.

Cargo airlines sell aircraft space that is constrained by both weight and vol-ume.Aloadofdensefreight(e.g.,boxesfilledwithlead)couldexceedtheair-craft’s take-off weight limit long before the space in the aircraft is exhausted. Alternatively,low-densityfreight(e.g.,boxesfilledwithfeathers)woulduseupall the space in the aircraft before the aircraft’s weight limit is reached. Airlines thuschargethehigherofeithertheactualweight(measuredbyascale)orthevolumeweight(calculatedassuminganaveragedensity).Aloadmaster’staskis to create the aerodynamically optimal load mix out of the total shipments booked onto a flight. The volume weight in periods calculated by dividing the volumeoftheshipment(incubicinches)by165.

Airlines charge their customers separately for additional services; the rate is assessed by pound, with a minimum charge for small shipments. In the past few years, airlines have struggled to increase their rates. Despite strong de-mand for air transportation, capacity exceeds demand on most routes, making it a buyer’s market except for a few routes and during peak periods.

To optimize revenues, cargo airlines differentiate their services and prod-ucts. Almost all cargo carriers offer an express shipment service that comes with special features. One of the most noteworthy features allows the custom-er to tender express shipments right up until the departure time, and the ex-press freight is the first to be available for pick-up at the destination. Express services often come with a performance guarantee, possibly including a refund in case of a controllable delay. Other special services are often designed and marketed for special handling needs, i.e., goods requiring refrigeration, live animals, dangerous goods, and high-value items.

7.6.5 Margin Steering and Revenue Management

Generally, airlines offer cargo space in two stages. In the first stage, a few months prior to a season, freight forwarders bid for cargo space over the next season; the cargo capacity committed during this bidding process is called al-lotted capacity. Out of the remaining cargo space, airlines allocate specific amounts to contracts, which reserve space for large customers at a fixed price. Inthesecondstate,theremainingspace—thecapacityavailableforfreesale—is then available for booking within four weeks of the flight departure.

Airlines typically do not know how much allotted capacity will be unused in advance of the flight departure. In addition, on planes carrying both cargo and passengers(combinationcarriers),thecargospacecontainspassengers’baggage,cargo,andmail(whichalwaysgetshighpriority).Theamountoffuelthatisload-ed onboard the aircraft varies with weather and other factors, and the weight of


the fuel influences how much cargo capacity is available for free sale. Airlines do not know how much capacity they will have available for free sale until close to thedeparturedate.Freightforwardersoftenintentionallybookmorecapacitythan they actually need to ensure space on constrained flights, since most airlines do not charge a penalty for returned capacity. The airlines add the released space to the pool of capacity available for free sale.

To hedge against the variability in the amount of cargo actually handed in at departure (cargo tendered) and customers’ cancellations, airlines commonlyoverbooktheircapacity—thatis,theysellmorecapacitythanphysicallyavail-able in order to compensate for cargo that does not show up prior to departure. Two considerations important in overbooking are spoilage (demand turned away because the overbooking level was too low, leaving excess capacity at de-parture)andoff-loads (booked demand that the airline cannot accommodate at departurebecause theoverbooking levelwas toohigh).Spoilage tends tobemore costly for the airlines, as off-loads can usually be rerouted at no extra cost.

In the passenger sector, the common practice is to formulate the overbook-ingproblem(inventory)asanewsvendorproblem(15), with the overbooking level selected to minimize the total expected costs of spoilage and off-loads. New approaches designed specifically for cargo overbooking are described by Luo and Cakanyildirim. (16)

The allocation of the capacity available for free sale to the demand that ar-rives over time constitutes an important problem in the airline industry. This problem is very similar to the seat inventory control problem in the passenger revenue management literature (17)—namely,howtoallocateafiniteseatin-ventory to demand that occurs over time, such that at departure the plane is filled with the most profitable mix of passengers.

The fundamental decision in revenue management is whether to sell capac-ity when a request comes in, or to save it for a potential later sale at a higher price.Forexample,aseatonanairplanecanbesoldatdifferentprices,depend-ing on the capacity already sold and the time remaining until the departure of the aircraft. While revenue management practices have been widely used in the passenger segment of the airline industry, they have only recently received increased attention in the cargo segment.

Cargo capacity has all the features for revenue management techniques to be successful: it is lost after the plane takes off, it is limited, and it can be offered at different rates depending on the service offered (e.g., critical and specialty cargo,expedited,standard).Thedecisionofwhethertoacceptortorejectanincomingbookingrequest(foraseatontheplaneorforcargocapacity)canbebased on different strategies. The most important types of control in the pas-senger segment are booking limits, protection levels, and bid prices. (18) Book-ing limits allocate a fixed amount of capacity to each fare class. Protection lev-els specify an amount of capacity to be reserved for a fare class or a set of fare classes. Bid prices are threshold values used to accept/deny incoming booking


requests—thatis,thedecisionmakeracceptstherequestifthesumofthebidprices along the itinerary is lower than the proposed fare.

There are two commonly used mathematical programming models in the passenger revenue management literature for computing bid prices on a flight network.Thefirst,thedeterministiclinearprogramming(DLP)model,makesthe assumption that the demand is deterministic and equal to its mean. The second, theprobabilisticnonlinearprogramming(PNLP)model,maximizesthe expected revenue assuming a randomly distributed demand.

The deterministic solutions have been observed in several studies to give better bid prices than the probabilistic solution. (19) However, the studies usu-ally assumed Poisson distributed demands, which ignore bookings with more thanonepassenger (whichoccurs very commonly in practice); as a conse-quence, the resulting variation in demand used in the studies was much lower than that observed in actual practice.

When applied to the air cargo industry, the bid prices derived from the DLP model have proven to be almost nonrestrictive (20)—theyreflectafirst-come,first-served(FCFS)capacityallocationpolicy.Clearly,allocatingthecapacityinaFCFSbasisis,ingeneral,notveryprofitableandgoesagainstthefunda-mental premise of revenue management, in which some capacity is reserved for high-margin customers. The research on developing efficient solutions for the PNLP model has been very limited. Besides the specialized algorithm pro-posed by Ciancimino et al. (21) for the railway yield management problem and the algorithm proposed by Rao (22) to solve a slightly different formulation, there is an approach with application for air cargo that has been developed by Popescu et al. (23)

While the capacity allocation problems from the passenger and cargo seg-ments have similarities, there are also some significant differences:

• Forpassengers,theunitcapacityisdefinedbyasingledimension(seat);forcargo,capacityhastwodimensions(weightandvolume).

• Cargocapacityisoftenuncertainduetoallotments,no-shows,andpassen-ger luggage on combination carriers.

• Mostpassengersdemandaspecificitinerary,whereasforcargoshipmentscustomers often specify an origin and destination and accept any itinerary as long as the shipment arrives at the destination by the requested delivery time(itinerary-specificversusorigin-destination-specificdemand);hence,in cargo there is flexibility in routing.

• Mostpassengersdemandoneunitofcapacity(seat)whereascustomersre-quest multiple units of capacity for a cargo shipment (specified by weight andvolume).Hence,cargodemandhasawiderangeofquantitiesandcanbe lumpy, which complicates matching demand to capacity.

• Thetrafficisimbalanced.Thegreatestpartofaircargofliesonlyinonedi-rection; passengers, in contrast, mainly make round trips. On major freight


routes it is common to find that the traffic in the densest direction is twice or almost three times as great as in the reverse direction, as in the case on theHongKongtoFrankfurtroute.

All these differences make the already existing techniques from the passen-ger’s business model unsuitable for the cargo operation model. Several new techniques that address specific differences have been developed in recent years. Xiao and Yang (24) and Pak and Dekker (20) address theoretical aspects of revenue management under multidimensional capacity. Xiao and Yang model the problem as a continuous time stochastic control model, and derive structural properties for the case where the remaining capacities in two di-mensions are equal or differ. When they are equal, they show that the optimal policy is not characterized by a nested price structure (if a fare class is open, thenallclasseswithhigherfaresshouldalsobeopen)asintheone-dimension-al case. Pak and Dekker model the problem as a multidimensional online knap-sack problem and propose a heuristic to determine the bid prices based on a greedy algorithm proposed by Rinnooy et al. (25) A test case shows that the bid prices perform better than the traditional deterministic model used in the pas-senger business model. Demand lumpiness has been addressed by Popescu et al. (23), who proposed splitting the cargo bookings into two categories, small and big cargo, and treating each category differently. The large bookings tend to be made close to the departure date of the airplane, and usually only a few bookings fill up the capacity dedicated to big cargo, whereas the small book-ings are made throughout the booking period.

Another problem studied in the air cargo literature concerns the optimal ordering policies for freight forwarders when acquiring cargo capacity from airlines to satisfy demand from shippers. The freight forwarders have to con-firm(outoftheallottedcapacity)thecapacityneededafewdaysbeforetheaircraft departs; however, shippers’ demands materialize between when the order is placed and the actual departure time. That is, freight forwarders have to place their order such that they minimize the cost of ordering too much ca-pacity and not using it versus the cost of ordering too little capacity and back-ordering demand for next flights.

Generally, there has been very limited research done in capacity planning models for air cargo, despite its importance in the air cargo supply chain. Chew et al. (26) analyze the capacity management problem for air cargo; however, the analysis is restricted to a six-period horizon and there are no results re-garding the structure of the optimal policy. The problem is solved by recur-sively calculating the space to order for each of the six periods of the planning model. Popescu (27) formulates the capacity management problem as a perish-able inventory problem, with the perishable commodity being the aircraft’s capacity, which is lost after departure. She defines the time between capacity confirmation and flight departure as lead time. Although there is vast research on perishable inventory management, when there is lead time most of the re-


searchers propose either myopic heuristics or numerical solution approaches for a short planning horizon. (28) Popescu finds the optimal policy under vari-able ordering cost, backorder, and linear perishing cost, and shows that the optimal expected cost function is a convex function with respect to the avail-able and future capacity ordered L periods in advance, for L being one or two periods.Furthermore,sheshowsthattheoptimalpolicyisastationarypolicywhen far enough from the end of the horizon.

7.7 Global Events Shaping the Industry

Several recent events have had significant effects on the air cargo industry. It remains to be seen if these events will have a long-term effect on the profitabil-ity of the industry.

7.7.1 Safety and Security in the Post 9/11 Era

FollowingtheterroristattacksonSeptember11,2001,theentireaviationin-dustry had to undergo major changes. In the United States, the Department of Homeland Security was established on November 25, 2002, by the Homeland SecurityActof2002(PublicLaw107-296).TheTransportationSecurityAd-ministration (TSA), formed in 2002 and initiallypart of theDepartmentofTransportation, is responsible for all aviation security measures; in March2003, TSA become a part of the Department of Homeland Security.

The Implementing Recommendations of the 9/11 Commission Act of 2007 (PublicLaw11-053)require100%screeningofcargotransportedonpassengeraircraftwithinthreeyearsofthelaw’spassage—i.e.,August2010.TheEuro-pean Union and other government entities have imposed similar security di-rectives to improve aviation security. (29)

These security demands have brought additional operational costs for in-ternational air carriers. Investments in security personnel, video surveillance systems, and screening devices have strained the resources of most carriers. In response, most airlines have introduced a security surcharge to recoup some of theirinvestmentandoperationalcosts.Forexample,inAugust2008,SASCar-go reported on its website that it would impose a security surcharge of €0.15 per kilogram. Such security mandates not only add costs, but also slow down the handling process, which leads to an increase in total transportation times.

7.7.2 Oil Prices and Currency Volatility

The increase in oil prices over the past five years has brought many airlines to the brink of bankruptcy. Oil prices and consequently kerosene prices have in-creasedsevenfoldsince2002,asillustratedinFigure7-7.


Airlineshaverespondedbyfuelhedging—lockingintherateoffuelsome-times years in advance. However, in times of price increases that exceeded most expectations, many carriers have found themselves very vulnerable to cost in-creases. As their ability to raise rates has been limited, airlines have introduced adifferentmethodtogeneraterevenuetooffsettheseescalatingcosts—namely,surcharges. Though each carrier employs its own model of surcharge calcula-tion, the basic model is similar. The carrier monitors the development of fuel costs and imposes a specific surcharge amount per kilogram of cargo, which is tied to the fuel price level. Whenever the fuel price increases above or decreases below a certain threshold, the surcharge is adjusted upward or downward.

Carriers argue that the surcharge model allows full transparency. In times of volatility, surcharges reduce transaction costs as base rates do not need to be adjusted. Base rates are often set in contracts and are valid for several months or a year. Having a steady component in the rate and a fluctuating piece in the surcharge allows carriers and forwarders to negotiate long-term rates without fear of locking themselves into an unfavorable situation should fuel costs change. Critics argue that fuel costs are a cost of doing business and the airlines shouldbuildthesecostsintotheirregularrates.Makingtheirsurchargespub-licinformation(by,forexample,postingthemontheirwebsites)ledcompeti-tors to match surcharge levels rather than compete for business by, for exam-ple, investing into a more fuel efficient fleet. Some critics consider this illegal and anticompetitive price signaling.

➤ Figure 7-7 oil prices between 2002 and 2008

Crude Oil Prices

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SOURCE: US Energy Information Administration. tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm. Accessed June 12, 2010.


7.7.3 Alliances and Antitrust Challenges

InFebruary2006,severalnewsoutletsreportedthatEuropeanandAmericanauthorities had begun to investigate an alleged price-fixing conspiracy related to the imposing of fuel surcharges. (30) The European Commission and the US Department of Justice initiated searches at the offices of many major interna-tional airlines. (31) The investigations apparently were not limited to cargo pricing practices, but also extended to passenger ticket surcharges.

Since then many international carriers have announced that they have been fined by the authorities. In August 2007, British Airways confirmed that it had receivedafineof$550millionfromBritain’sOfficeofFairTradingandtheUSDepartment of Justice. Korean Air Lines Co. Ltd. was fined $300 million by the Department of Justice after pleading guilty to colluding with competitors to fix fuel surcharges on cargo and fixing passenger fares between the United States and Korea. In January 2008, Qantas Airways pleaded guilty and agreed to pay a $61 million criminal fine for conspiring to fix cargo rates in the United States andelsewhere.InMay2008,JapanAirlineswassentencedtopaya$110mil-lion penalty for price fixing on international cargo shipments. (32)

InJune2008,furtherfinesweremadepublic.AirFrance-KLM,CathayPa-cific,MartinairHolland,andSASCargopleadedguiltytoconspiracychargestofixaircargorates.TheDepartmentofJusticeannouncedthatAirFrance-KLMwasfined$350million.Cathayagreedtopayafineof$60million,Mar-tinair $42 million, and SAS $52 million.

The fines levied against the air cargo carriers to date far exceed $1 billion. Furthermore, high-ranking cargo executives from Qantas and SAS Cargowere sentenced to jail time. Alleged damages to shippers are still subject to civil lawsuits.

The scandal shook the industry to its core. Even though surcharges for fuel and security costs continue to be imposed, airlines have made changes to the way they communicate internally and externally. The scandal also affected the collaboration between air cargo carriers. Cargo carriers seem to have scaled back their alliance activities in response to the antitrust investigations. At this time,thereisonlyonelargecargoallianceoperating—SkyTeamCargo.

Air cargo alliances have been subject to academic research as well. Zhang et al. (33) developed an oligopoly model to investigate the effect of an air cargo alliance on competition in passenger markets. They consider a model in which the partners, while continuing to offer their respective passenger services, jointly offer a new integrated cargo service by utilizing their pas-senger aircraft and routes. Their findings show that such an alliance will likely increase the partners’ own outputs, while simultaneously decreasing their rivals’ outputs, not only in the cargo market but also in the secondary passengermarket. Furthermore, the alliance is likely to reduce passengerprices and increase total surplus.


Houghtalen et al. (34) address the operational issues that arise when cargo car-riers form an alliance, taking into account the technical and legal challenges as-sociated with integrating information systems of autonomous carriers and how to best manage alliances to ensure sustainability. In summary, operational and legal obstacles have limited the development and importance of air cargo alliances.

7.7.4 Emerging Markets and Players in India, China, and the Middle East

China has attracted a variety of foreign direct investment by offering cheap and skilled labor coupled with the world’s largest domestic market. As more corpo-rations shift their manufacturing capacity toward Asia, air cargo carriers have become very aggressive in obtaining air service rights and developing infra-structure to prepare for the expected large increase in air freight demand.

According to Air Cargo World, China’s domestic air cargo market grew 20% every year since 1990, and revenues were expected to total $3.35 billion in 2010. Airports in China were expected to process 11.8 million metric tons in 2010, with an average annual growth rate of almost 14%. To address this rapid growth pace, China will need 130 new freighters over the next two decades, according to Airbus, which predicts that China’s domestic market will grow an average of 10.5% annually, while its international market will grow 8.5% per year. According to Boeing, China’s domestic air cargo sector will grow 10.8% a year over the next two decades. (35)

As also reported in Air Cargo World, India has long served as a useful stop-over for cargo carriers operating between Europe and Asia, and it now serves as a refueling stop for freighters on their way to China and other parts of Asia. FuturegrowthanddiversificationofIndia’seconomywill triggercontinuedgrowth of the air cargo industry. New aviation trade deals have spurred in-creasedpassengertrafficonMiddleEasternairlinesoperatinginIndia.(36)

Registering nearly 20% growth in the past three years (both domestic and international)andnotably34%growth indomesticcargo inoneyear, Indiacould become a key growth market for air cargo.

DespitetheeconomicandpoliticalinstabilityintheMiddleEast,theregionhas been growing rapidly. As the United Arab Emirates vies to diversify its economy, it is making massive investments to shift traffic hubs for cargo and passengersawayfromEuropetotheMiddleEast.Makinguseofliberatedmar-kets, it is gaining market share from the European carriers. Countries such as United Arab Emirates and Qatar are investing billions of dollars in major infra-structure developments. Among the ambitious projects currently underway is Dubai World Central, which is expected to become the biggest air freight hub in the world, capable of handling a massive 12 million tons of cargo annually. AccordingtotheInternationalAirTransportAssociation’s(IATA)chiefecon-omist,BrianPearce,theMiddleEast’sgrowthtrendissignificantlyhigherthan


projected, with the robust oil-based economies contributing to an increase in both passenger and cargo transport. (37)

These market changes will probably cause cargo traffic to lean toward those emerging markets. New cargo hubs and a stronger fleet will position the new carriers to take advantage of a strong regional and international cargo market.

7.7.5 Open Sky Agreements and Free Trade Zones

China has agreed to substantially reduce trade barriers that have plagued US exports for decades. The Bilateral World Trade Agreement of 1999 led to Chi-na’sentryintotheWorldTradeOrganization(WTO),whichisanimportantand positive step in expanding freight trade. The EU-US Open Skies Agree-ment allows any airline of the European Union and any airline of the United States to fly between any point in the European Union and any point in the United States.

These agreements will spur growth, but they will also fuel further competi-tion in a market that is already oversaturated with capacity. However, IATA reported the EU-US Open Skies Agreement increased transatlantic capacity by 10% in April 2008, which might mean that more capacity and flexibility com-ing from more competition can yield positive development. (38)

One industry analyst has identified the following three major trends in the industry:

• Aircargowillgrowatafasterratethanpassengersideofthebusiness.• Continuingconsolidationamongfreightforwarderswilltriggermoreglob-

ally integrated solutions from the airlines.• Thebusinessofcarryingfreightwill increasinglymovetowarddedicated

carriers as opposed to a combination passengers and cargo. (39)

7.8 Air Cargo Research Areas

There are considerable challenges facing the industry, which provide up a va-riety of research opportunities:

Air cargo operations at airports• Moreefficientmaterial,informationflowsinairfreightterminals.

• Moreefficientwarehouseandgroundhandlingsystems:manystationsarereporting insufficient capacities to accompany the growth in the volume of air cargo. An example is Los Angeles International Airport, where storage facilities to temporarily store cargo have had to be located off-site.

• Appropriateperformancemetricstoevaluateaircargohubs.


Pricing and revenue management• Betterpricingmethodology: ingeneral,contractpricing isoftenstatic.To

adjust rates in response to daily changing supply and demand, forwarders and airlines depend on call centers to negotiate ad hoc pricing. However, technological advancements have made pricing more dynamic in the air freight industry. With market segmentation, pricing is an extremely compli-cated and highly-dimensional problem. This problem is of extreme impor-tance and needs to be studied in greater detail.

• Revenuemanagement:theaircargorevenuemanagementproblemisaverycomplex problem. There are several areas of open research in this direction, such as addressing the multidimensionality of cargo, forecasting the capacity available for free sale, and embedding origin-destination demand into the revenue management systems.

• Moreresearchisneededforguidingthefreightforwarderswhenconfirmingtheir ordered capacity with the airlines. A better capacity management on the freight forwarders’ side will translate into a better service level to the shippers and a more reliable relationship between the airlines and the freight forwarders. It will also impact the accuracy of the available capacity at de-parture for the airlines.

Air cargo flight networkWhile alliances can help expand individual flight networks, air cargo has an importantfeaturethatisnotpresenttothisextentinthepassengerbusiness—namely, traffic imbalance. A more thorough understanding of the impact of the traffic imbalance on network design is needed.

SecurityAs a result of the events of 9/11, security procedures for cargo shipments have significantly increased. However, as Petersen points out in a white paper on the air freight industry (40), it is not realistic to expect 100% of cargo to be inspect-ed, as it would slow down its movement beyond acceptable margins. The op-portunity in this sector is to develop models to address the trade-off between shipping cargo securely and efficiently.

Acknowledgments

The authors would like to acknowledge Brittany Luken, a graduate student in civil engineering at Georgia Tech, for her contributions to this chapter.


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