That Sinking Feeling: Keeping shippers from running back to seafreight

With any broken relationship – whether it’s a romantic tryst or a freight consignment – there’s always the danger of the “rebound effect.”

“Unrewarding rebound relationships can actually lead people to feel more attached to their ex-partners, rather than less,” warned Samantha Joel, assistant professor at the University of Utah Psychology Department. With time, she explained in a Psychology Today article, we tend to focus on the good times, while unpleasant memories fade. That’s why such relationships have such a high failure rate.

But, spurned lovers aside, Joel’s observation could just as easily serve as a warning to airfreight companies, which welcomed shippers with open arms last year after a particularly nasty break up with the maritime freight business. Shippers might not be reconciling with Hanjin any time soon, but the modal shift (or swing) under way for air cargo isn’t “happily ever after” quite yet. As any marriage counselors worth their salt will stress, relationships require hard work.

With each subsequent month of growth, airfreight bosses are growing increasingly complacent. Volumes have risen to the point where they are finally pushing up yields, forcing some carriers to require block space agreements (BSAs) to guarantee delivery. But, at a recent conference in Munich, Hactl CEO Mark Whitehead warned that, “shifts in the market can be quite violent, and quite sudden.” In an industry that moves as fast as airfreight, complacency is the kiss of death.

The last time the market shifted like this was back in 2007, during the global economic crisis, and the industry took almost a decade to recover. The downturn spurred a period of soul-searching in the industry, and that vulnerability to alternate modes of transportation incentivized a rush to embrace high-value products, like pharmaceuticals, and growing services, such as e-commerce. These developments represent a massive step forward, but beyond that, where can airfreight look next to ensure that shippers stick around?

One thing is for sure: The law of diminishing returns is at play here, and simply throwing more money at the problem will only make air cargo a more expensive proposition. Whatever investments in technology carriers and forwarders make, they must be made with the customer in mind.

After the breakup

The Hanjin Bankruptcy is already ancient history in the fast-moving world of logistics, but it’s worth reconsidering how spooked shippers were as maritime traffic floundered on the high seas. Judging by current demand for airfreight, that sentiment is still at play. “The reliability aspect is what’s causing more concern than anything else,” explained Brandon Fried, executive director of the Airforwarders Association. Shippers, Fried stressed, not only demand reliability, they deserve it.

It’s no secret that maritime yields are in the dumps, or that shippers are wary of another supply chain disaster, but there are indicators that maritime is starting to recover. In its first-quarter results, Maersk said that, “Due to gradual improvement in container rates, Maersk Line continues to expect an improvement in excess of US$1 billion in profit compared [a loss of $384 million in] 2016. Global demand for seaborne container transportation is still expected to increase 2 to 4 percent.”

It’s also easy to sensationalize the impact of the Hanjin bankruptcy. Jeffrey van Haeften, vice president of global cargo sales for Emirates, proposed the following exercise to put things in perspective. “The largest cargo ships these days are able to carry around nineteen to twenty-thousand 20-foot containers,” he explained. “You literally need hundreds of freighters to carry the cargo that can be transported in one large container ship. The market for seafreight and airfreight normally tends to be very different – you do not see the same kind of products travelling both by air and by sea. However, any spillover from sea to air because of market conditions, time or capacity constraints can have a significant positive impact on air cargo volumes.”

Van Haeften also stressed that seafreight tends to become airfreight “only where there is an aspect of time-criticality involved.” He cited the fashion industry as the classic example, where product cycles are getting shorter, and new collections have to reach global stores and customers before trends evolve once more.

The rail mode is also emerging as a potential source of competition to airfreight, especially between China and Europe, where China’s “One Belt-One Road” policy is now a reality, moving freight between the two markets in well under two weeks. “China rail is investing $1 billion into rail,” explained Andrés Perez, Swiss WorldCargo’s head of business development and customer experience. “This could be a risk for air business.”

Thomas Blank, Kerry Logistics’ managing director for Europe, said that the Shanghai-based logistics company has already had customers shifting cargo from seafreight to the train, shortening the transit time. “It’s an acceptable price differential for them,” Blank said. “Ten years ago, people would have said [rail] was unreliable, but today, train schedules run like a clock and, on the other hand, customers have become more willing to try new modes.”

Finally, the airfreight market is cyclical. Right now, said Whitehead, airfreight is riding high. “But ultimately, the market is the market,” he explained. “You don’t set the market; the market is there, and you play your game in the market.”

Welcome to the machine…

So, what exactly should the game plan for airfreight look like?

“Ironically, it’s automation,” says Brandon Fried, executive director of the Airforwarders Association. Fried garnered applause at this year’s CNS Partnership conference in Orlando, when he said that the forwarders he represents may have been slow to innovate, but they are not “technical Neanderthals.” Humor aside, the audience’s response spoke to a recognition that, despite its reputation, the airfreight business is listening to shippers’ demands for transparency and automation. That’s partly why shippers are more comfortable shifting volumes to air these days.

Deploying technology that makes life easier for shippers is especially important for larger shippers, said Swiss WorldCargo’s Perez. “For global companies, we are talking about a fully integrated supply chain. Every time somebody has to pick up a phone, it costs money, it increases the chance of making mistakes, and it costs time.” Perez explained that global companies manage their supply chains within enterprise resource management (ERP) systems, powered by the likes of Oracle or SAP.

“The whole supply chain is in there, and interdepartmental communication is fully automated,” explained Perez, noting that there is an interruption for transportation, meaning that paperwork needs to go to a forwarder, who then books a flight with a carrier. The carrier does manual work, and gets the final OK. For companies with thousands of transactions, this process needs to be automated. That’s something that carriers need to accommodate.

The ERP has all the information needed to order transportation. Nonetheless, in most cases, the forwarder is contacted via email to request transportation, and thereafter the forwarder contacts the airline/trucker. Even if there’s an electronic data interchange (EDI) connection, somebody often has to create the transport booking. Perez suggests that, if prices and conditions are agreed upon in advance, “all of this could be done automatically, the same as the internal processes in a company’s ERP.”

…But keep the human element

However, automation alone won’t cut it, Fried stressed, insisting that it goes hand in hand with personal relationships. “I’ve always said that forwarders are part of a customer’s business solution,” he said. “They are on staff, just like an accountant or any other service provider to the shipper. Forwarders understand the shipper’s business model, anticipate shipper needs well in advance, and they understand the impact of what they do on the shipper’s product.”

The emphasis on customer service is equally true for air cargo carriers. While Russians don’t have a reputation for congeniality, Sergey Lazarev, general director of AirBridgeCargo, attributed the Moscow-based carrier’s growth in the first quarter of 2017 to ensuring that ABC met its customers’ expectations.

“In order to be able to deliver it, we are also ensuring that our organizational structure and communications are aligned accordingly,” Lazarev explained. “We will continue to stay in close contact with our customers to provide the network services and product solutions they require, and this will be supported by further growth of our fleet and more focus on carrying special cargoes.”

Maintaining that contact is also a big part of what van Haeften does at Emirates. That means engaging in what he calls a “a tripartite discussion” to add value in the logistics process. In the case of high-value goods or a shipment of temperature- or time-sensitive pharmaceutical products, he has found that engaging in a transparent relationship with both the freight forwarder and the shipper “will help result in a flexible solution that works best for all parties concerned.”

This sounds similar to the agenda that Perez has been pushing at Swiss WorldCargo. The company’s strategy includes understanding shippers’ finances, especially their aversion to “bound capital,” which refers to the delay in payments over the transit and delivery time. The higher the value of the shipment, the more expensive maritime and overland becomes. Once sold to a customer, Perez explained, the shipments have to move quickly. For routes such as Europe to Asia, “it is actually more expensive to ship it by ocean than by air, because of bound capital.”

Perez says that Swiss WorldCargo can move fast to streamline these high-value deliveries because the carrier is small and agile. “We can adapt and innovate in time, understanding the customer, and quickly giving him what he needs, rather than just having a ‘take it or leave it’ portfolio,” he said. “When we select our partners, we have to make sure that they deliver the same quality that we deliver.”

Just as experts were talking about “tapering growth,” the airfreight market started putting up some of the most robust numbers in years this spring. With forwarders scrambling for capacity on busy routes, customers will be lining up to be friends with carriers, but that doesn’t negate Whitehead’s warning about violently shifting markets. When the surge inevitably subsides, it will be the carriers that established relationships with, and integrated their services into, shipper’s supply chains that benefit the most from the boom times.

Revisiting Dr. Joel’s observations on interpersonal relationships, steps that carriers and forwarders take now will distinguish them from alternatives of convenience, and instead make them reliable partners that carve out an indispensable place in their customers supply chains. That way, when the market cools, air freight will be in a stronger position, allowing it to capitalize on the next trend.

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