CSCMP's Supply Chain Quarterly
December 16, 2018
Forward Thinking

Air cargo IT improvements translate into increased trade activity, study finds

IATA-commissioned report seen as first to quantify link between better IT connectivity, trade growth.

A 1-percent increase in a country's air cargo connectivity with the rest of the world is associated with a 6.3-percent increase in total trade by value. That statistic comes from a report issued today by the International Air Transport Association (IATA). The study is the first to quantify the impact that improved air cargo IT connections can have on world trade growth.

The IATA-commissioned study, conducted by consultancy Developing Trade Consultants, could give renewed impetus to efforts by the international airfreight industry to improve the speed and consistency of data exchanges. One of the industry's biggest challenges has been to wean itself off of paper documentation and make greater use of digital platforms. In 2006, the group began an industrywide initiative called "e-freight" to replace paper with the electronic exchange of data and messages. The next year, it began laying the groundwork for an e-air waybill, which would replace the paper air waybill with an electronic data interchange (EDI)-based digital agreement between an airline and a freight forwarder tendering the goods.

By the end of 2016, e-air waybills will be used on 56 percent of what IATA classifies as "legally feasible trade lanes," the group forecast.

Only 1 percent of global trade tonnage moves by air. However, air transports 35 percent of world trade's value, equivalent to US$5.6 trillion a year, according to IATA. Many high-value international goods move by air because the mode's swift transit times are necessary to get expensive products to market as fast as possible. But the lack of connectivity between supply chain stakeholders can slow down the end-delivery cycle, neutralizing air's natural time-in-transit benefits.

"We now have quantitative evidence of the important link between air cargo connectivity and trade competitiveness. It is in the economic interest for governments to promote and implement policies for the efficient facilitation of air cargo," Brian Pearce, IATA's chief economist, said in a statement.

Air shipping can be important in supporting what the researchers call "Global Value Chains" (GVC), which has become a relatively new model in global trade. Rather than centralizing all product-development and manufacturing tasks in one location, companies can perform individual and narrowly defined tasks in different countries. The efforts are then combined into a network of trade and investment links to provide the finished products. The World Trade Organization (WTO) estimates that almost half of global trade now takes place within a GVC framework, according to the consultancy.

"Cross-border movements of component parts are a key element of the business model. These components are often relatively small, but high value. This characteristic makes them well suited to air transport," the researchers wrote. Air freight's speed and reliability "enable GVC participants to keep inventories low, and rapidly bring together components for final assembly," they wrote.

A 1-percentage-point increase in the connectivity is associated with a 2.9-percentage-point increase in GVC participation, according to the report.

In a related development, IATA reported today that October airfreight volumes rose 8.2 percent year over year, the fastest growth rate in 18 months. Freight capacity, measured in available freight ton kilometers (AFTKs), increased 3.6 percent over the same period, one of those rare instances when demand has dramatically exceeded supply.

Though IATA traditionally takes a dour view of airfreight's prospects, its new Director-General and CEO, Alexandre de Juniac, waxed almost ecstatic when compared to the downbeat verbiage from his predecessor, Tony Tyler. "It remains to be seen how long this growth trend will endure after the year-end peak period, and we still face headwinds from weak global trade. But there are some encouraging signs. The peak has been stronger than expected. And purchasing managers are reporting a pickup in new export orders. So we will enter 2017 propelled by some much-needed positive momentum," de Juniac said in a statement.

The Aug. 31 bankruptcy of South Korean liner firm Hanjin Shipping Co. may have led to some modal shift to air cargo in October, de Juniac said. He added that there might have been some "last-minute reliance" on air transport as businesses planning for the holiday season may have exercised undue caution in their ordering patterns earlier in the year.

However, air cargo may benefit from such secular trends as growth in cross-border e-commerce and pharmaceutical flows, de Juniac said. This should light a fire under airfreight providers to accelerate the shift to digital platforms so they can accommodate a potential surge in time-critical traffic, he said.

Whether it is e-commerce or the trade in pharmaceuticals, shippers are demanding more than current paper processes can support. The shift to e-freight is more critical than ever," de Juniac said.

Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly.

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