More air forwarders are finding that building up their own pallets is a fast route to lower costs, better service
n air cargo industry pressed to meet the contradictory demands of service and efficiency increasingly is finding the answer in the basic building blocks of shipping. Industry experts say more forwarders are enhancing services by building up completed containers and pallets.
The action is changing the way forwarders and airlines are handling cargo and could have far reaching ramifications for carriers and airports.
Buffeted by financial pressure, carriers have whittled down their cargo activities to core functions in recent years. In the process, many airlines have outsourced functions such as ground handling to third-party providers.
On top of this, carriers are facing an encroachment from the other side - their customers.
Some forwarders are pushing for further reduction in the airlines' activities, as they see advantages in building and breaking down pallets and containers themselves.
"Building ULDs is a main task of our gateway system," said Rick Whitaker, vice president for U.S. gateways and international services at BAX Global. "Probably half the weight of what we move out of the United States moves in ULDs."
A study produced this spring by Aviainform indicates that many cargo agents, especially large forwarders, expect to see further growth in the volume of built-up pallets, or BUPs, they turn over to airlines. Between April and May, the Frankfurt-based air cargo research and consulting firm interviewed decision makers at 56 forwarders, including 28 large multinational players, which account for some 50.6 percent of the global air cargo volume.
For the cargo industry, this means larger forwarders can grow further, going beyond the power of buying up large volumes of space into an area where they can lower the airline's own handling costs and smooth the flow of goods through networks.
Kuehne + Nagel uses commercial lift mainly, supplemented by long-term arrangements for dedicated capacity.
Still, building its own units is a regular focus. "BUPs are definitely a firmly integrated part of our dealings with carriers," says Rainer Wunn, senior vice president for the United States at the Switzerland-based forwarder. "I think it's definitely the way to go."
The concept goes hand in hand with a forwarder's gateway strategy, typically.
Dirk Steiger, managing director of Aviainform, says he first became aware of the rise in BUP traffic as he saw changes in the gateway policy of large forwarders at Frankfurt, which had led to an increase in consolidated traffic from the airport.
"It wouldn't make sense to operate a gateway and still hand loose cargo to the airline," said Donna Letterio, country manager for Canada of DHL Global Forwarding.
Aviainform projects a significant rise in global BUP volumes because of the anticipated extension of road feeder services around major gateways. Today, the majority of shipments are collected on average within 125 miles (200 kilometers) of a gateway, according to the BUP study.
"However, when asking what's going to happen in only five years from today, the numbers will increase up to a radius of approximately 498 miles (800 kilometers) from the forwarder's centralized gateway," the study says. In Europe, this means an operator will be able to reach nearly any industrial center in Western Europe from Luxembourg or production sites in Poland or the Czech Republic from Frankfurt with overnight truck service.
"If you apply these numbers to intra-US distribution, it becomes very clear why cities such as New York, Chicago or Los Angeles have stronger than market growth rates in in- and outbound freight," Aviainform said.
Today, building-up full pallets is more common in the Asia-North America sector, where the practice accounts for 48.6 percent of total volume, followed by European exports to Asia (43.5 percent).
On the return sector between Asia and Europe, BUPs account for 41 percent of the total traffic, while they account for 38.3 percent of U.S. air shipments to Asia.
According to Aviainform, the world's top BUP route in terms of tonnage is Hong Kong-Los Angeles, followed by Tokyo to Chicago and Seoul to Los Angeles.
One chief benefit of the build-up for forwarders is the time saved. For an industry where delivery measurements can be based on hours, any time saved offers forwarders a competitive advantage.
Giving complete ULDs to the airlines means that they can deliver their cargo closer to departure times. They also can get their freight faster to the consignee, thanks to reduced waiting times at the airline terminal at destination. They do not have to wait for the airline to break down the ULD first to get the individual shipments for delivery.
Control is another key advantage, according to forwarders. "We control the cargo, since we load the container at the gateway station and break it down at the other end," Wunn said.
Steiger added containers are less likely to be left behind if an airline faces capacity issues at departure. So the chances of flying as booked are higher.
Whitaker said consolidating traffic in BUPs also yields more attractive rates. But most forwarders that participated in the Aviainform study played down that point. "Nobody wanted to say much on this one. Better price-service mix was among the top five responses, but it was nowhere in the top spot," said Steiger.
Steiger noted forwarders can cut costs further because airlines cannot levy charges for containerization when they receive BUPs. In addition, the agents save at origin, where they use a trucking service to the gateway instead of slotting their cargo through the local airport system. This means all they need at origin is a trucking station, which, typically, costs a fraction of the costs associated with a presence on an airport.
For large forwarders with sufficiently high shipment counts, this trucking service approach provides considerable cost savings, Steiger said.
Still, it is not all positive for the forwarder.
Reducing the use of the local airport system may diminish the role of the forwarder's local sales manager, who is primarily funneling traffic to the gateway under a BUP approach. This could lead to an exodus of qualified staff at the local level, Steiger said.
The forwarder's company culture comes into play there to support the gateway strategy. "Nine out of ten kilos that BAX exports (from the U.S.) go through the gateway system," Whitaker said.
Airlines welcome the rise in BUP traffic. "If they (the forwarders) have enough volume to do it, we're always for it. There is no downside. It saves us labor. It's very efficient for us as well," said Claude Morin, president of Air Canada Cargo.
U.S. freighter operators Polar Air Cargo and Northwest Airlines move customer-built ULDs mostly on their 747 freighter flights between Asia and North America.
Lufthansa Cargo has a special BUP certification process for forwarders and has improved its offerings to BUP customers. As part of this endeavor, handling times for BUPs were reduced by 35 percent on average. At New York's Kennedy airport, the handling speed improved 75 percent, and the import procedure at Frankfurt now takes half as long as before, the airline says.
Not everybody loves the concept, however.
"Not all carriers want you to do that. If they have one flight a day out of a station, they want to control the mix," said DHL's Letterio.
Morin said trying to maximize his loads makes sense in markets characterized by light volumes. "We sometimes have 100 tons plus on a flight out of Germany. We couldn't do that without built-up pallets," he said.
An airline may not be able to optimize its loads when leaving the ULD building process to its customers, but life becomes a lot easier, Steiger said. "You get one shipment with one air waybill, for example, from Schenker Germany to Schenker Bensenville, and they distribute in North America.
"That means less work and lower costs for the airline," he said.
There is other less-positive ramifications. Forwarders that expand their BUP traffic may concentrate more of their business with specified carriers. That means less spot market business, which sounds like good news unless you're the carrier with the extra capacity on a given day. "BUP is primarily with our preferred carriers," Whitaker said.
And airports may feel the impact as well.
An airline or handing agent that gets more cargo boxed ready for shipment has less need for roomy warehouses for building or breaking down pallets and containers. An airline's needs shift more towards flow-through facilities, which could bring down on-airport costs significantly, Steiger said.
The practice spurs more growth at today's large hubs while impacting expansion plans of smaller airports at the edges of the cargo market. "Europe, Frankfurt, Amsterdam, Paris and Luxembourg will grow faster than the general air freight market. Airports in the periphery that have so far grown in step with the market will grow slower," said Steiger.
By the time the primary hubs like Los Angeles reach capacity, the question will be which of the aspiring alternative cargo gateways can establish themselves. For those that do not succeed, the odds of eking out a living on air cargo traffic will be rather bleak, concluded Steiger.
