Several key themes that have characterized the airfreight industry in recent years reappeared in 2014 as the cargo sector confronted the challenges posed by the combination of growing capacity and shrinking demand.
Air carriers and freight forwarders did get a temporary respite from those difficulties at the end of the year, when they were able to pass along rate increases during the peak season. These increases were supported not only by traditional seasonal demand, but also, at least in the United States, by unexpected demand from importers and exporters that had been negatively impacted when U.S. West Coast ports experienced congestion and work slowdowns.
Since the recession began nearly a decade ago, many shippers have taken great pains to reduce or even eliminate their spending on air transportation—undoubtedly one reason air cargo's share of trade has dropped. (See Figure 1.) Does this mean we are about to see a new chapter in the use of air freight, in which volumes decline significantly and permanently? Probably not. In fact, now that the West Coast port situation is returning to normal, shippers are taking a fresh look at the role air freight plays in their global supply chains, and many have rediscovered the strategic value of air shipments.
Here are three factors that are leading some shippers to reconsider their use of air transportation:
Inventory reduction. The opportunity to reduce inventory and related holding costs is an obvious benefit of the shorter lead times and increased service reliability that air freight offers. For example, when inventory costs are taken into consideration, air freight can actually be the low-cost decision for perishable or high-value products.
More shippers are recognizing this opportunity and are factoring it into their mode-selection decisions. Unfortunately, many still optimize their transportation costs within the silo of a transportation budget, without having visibility of the total cost of ownership of their products. As a result, they often base their decision on freight costs alone and overlook the true total cost of using air rather than surface modes.
Flexibility. Shippers want more flexibility because it allows them to position their products in the right location from the beginning, a capability that is key to promoting inventory reduction. Moreover, as demand data become more granular and real-time, having the ability to defer decisions about inventory quantity and physical placement until closer to the time of consumption creates a business advantage. Air freight's flexibility, speed, and shorter lead times help to make all this possible. This has many shippers rethinking mode-selection strategies that predate the arrival of social media.
Networks in place, just in case. A third aspect of air transportation that shippers are rediscovering is the value of having an air network in place for contingencies. Many shippers that had a "zero-tolerance" policy that forbade air shipments on the grounds that they were too expensive had to scramble to get air capacity in the fourth quarter of last year, when capacity was unusually tight and their usual modes of transportation were unavailable or insufficient. Some of those shippers are now rebuilding their relationships with air carriers and freight forwarders—something they'll need if they're to be prepared with alternative transportation options when faced with another disruption to their global supply chains.
Analytics support more informed choices
Advanced modeling tools have been used for decades to identify the best location for supply chain nodes. Now similar tools are available to help shippers develop an optimized logistics strategy. This includes factoring the total cost of ownership into selection strategies for air and surface modes.
Shippers are becoming more sophisticated about using such analytics to influence their mode-selection strategies and execute them in real time. Indeed, analytics has changed the way many shippers view the way they manage their relationships with transportation service providers. Rather than relying on simple lane-rate negotiations every few years, for instance, they are now leveraging their freight forwarders' abilities to find synergies across modes. For example, some that are using global air forwarders also use the same providers for ocean forwarding and warehousing services within the same geographical theaters. In doing so, they are able to work with their freight forwarders to optimize their supply chains through complex strategies like merge-in-transit, deferring ownership of components later in the value chain, and so forth. Shippers are also using optimization technology to collaboratively identify mode-shift opportunities with their carrier and forwarder base. Negotiating multiple modes simultaneously increases the complexity of negotiations, but it also creates opportunities for step-change reductions in total cost.
Leaders in transportation execution are applying analytics in their day-to-day management of global freight flows. Many have designed more advanced metrics dashboards that enable real-time decision making across their supply chains. These metrics are more and more often cross-functional, and they allow decision makers to see the total impact of those metrics on cost and capital. In addition, transportation management systems (TMS) increasingly are being used across modes and geographies. When set up properly, this automates decision making and ensures greater adoption of proper mode-selection strategies.
These trends are unlikely to shake up the fundamental misalignment between supply and demand in the air transportation industry, as air freight will always be multiple times as expensive as the alternative modes. However, as more shippers evaluate total cost impacts across the supply chain, they are seeing value in air freight that they may have overlooked in the past. This trend will drive incremental demand for air cargo services while increasing the efficiency of supply chains.