Forwarders fight against the tide

  • April 29, 2014

The airfreight market continues to move at a lethargic pace, with modal shift and overcapacity threatening forwarders around the world. As these pressures close in, forwarders must constantly react in order to make a profit.

Air Cargo World spoke with the forwarders who move the most air cargo in the world. Supply chain consultant Armstrong & Associates, Inc., ranked the top 25 forwarders for 2013 according to their air tonnage, sea tonnage and gross revenues. Air Cargo World has taken the original ranking and listed these companies according to airfreight tonnage.

Tim Scharwath, vice president air logistics for Kuehne + Nagel (No. 2 forwarder), says capacity entering into the market has outstripped air cargo growth for most years during the past decade. A lot of this is due to the development of Middle Eastern carriers.

“We as people travel more, so we travel with our families into more destinations,” Scharwath says. “In order for the airline to be able to move us and make profits on the passenger side, they have to invest in newest technology, newest airplane.”

The newest aircraft have more cargo capacity than older planes, so with more planes coming on the market, capacity keeps growing, he says. That causes rates to fall, and customers come to expect these lowered prices.

“This will have an impact one day on your margins,” Scharwath says.

Ingo Rahn, head of global airfreight for DHL Global Forwarding (No. 1 forwarder), says with more wide-body passenger planes, airlines are grounding freighters in favor of using passenger bellies.

“These flights show strong passenger demand, but less demand for air cargo,” Rahn says. “Carrier load factors are stagnating, and rates, particularly on important trade lanes, are increasing.”

He says DHL expects airlines to continue reducing capacity in order to increase pressure on rates.

“Just as they did in 2013, airfreight forwarders will try to counter this development by making last-minute purchases,” Rahn says.

In order to offset modal shift, Kuehne + Nagel invested in recession-proof volumes, such as perishables, which helps the company maintain a certain volume. Scharwath says Kuehne + Nagel also invested in value-added freight such as pharmaceuticals.

Modal shift is also an issue for many forwarders. Rahn says over the last 13 years, DHL’s air weight share has decreased from 3.1 percent of total air and ocean weight to just 1.7 percent.

“There’s no doubt that mode shift is a concern for anyone in the air cargo industry,” says Richard Zablocki, vice president air products, Americas for CEVA Logistics (No. 11 forwarder). “Shippers want lower costs for transportation without sacrificing reliability within their supply chain. It is in the hands of the forwarder to be innovative and develop economical solutions for our shippers while at the same time supporting airlines to maintain their interest in moving cargo.”

Because planning and supply chains have improved, more time is left for the actual transportation of cargo, says Raoul Wintjes, global head of airfreight product management for Panalpina (No. 5 forwarder). That means more cargo can go by boat than their faster flying counterparts.

Ocean has also become more reliable.

“You don’t have that much congested ports anymore. You see investments in infrastructure also on the ocean side,” Wintjes says. “All of that of course is eroding a little bit the fundamentals of airfreight, so it’s not what it used to be.”

A new generation of smartphones may bring airfreight volumes up one year, but it’s no longer a predictable trend, he says.

Scharwath says high-tech cargo used to fly; now half of it goes by sea. Some high-tech freight even uses trains to reach Europe from Asia, he says.

Most freight forwarders interviewed say they are focusing on air cargo business in Asia, especially China, going to the Americas and Europe.

Panalpina also has a budding intra-Asia business.

“Airfreight is growing there because technology is still the biggest industry vertical or industry sector which uses airfreight,” Wintjes says. “A lot of products come from there still.”

A burgeoning middle class in Asia contributes to the import side. Wintjes says Asian countries now have a hunger for European goods.

“Now the emerging countries, which used to be poorer in the past and did not have the buying power, now they have the buying power, and they go shopping around the world,” he explains.

Top freight forwarders talked about products they’re chasing. Kuehne + Nagel is rolling out KN EngineChain more heavily in 2014. Because the engine is a plane’s most expensive part, the company is investing in an organization that manages plane engines using the KN EngineChain product, Scharwath says.

In addition to the health care market, DHL is interested in the automotive sector. Hellmann Worldwide Logistics (No. 9 forwarder) is targeting health care, chemicals, perishables and fashion, says Peter George, vice president airfreight.

CEVA Logistics is focusing on the oil and gas exploration industry, high-tech and automotive, Zablocki says. CEVA is the world’s largest automotive 3PL, according to Armstrong & Associates.

Zablocki says pharma is CEVA’s fastest growing sector.

“2014 looks like it is shaping up to be a good year for air cargo, and we might even see a return for the charter market,” he says.

Panalpina is interested in technology and fashion, which is Asia’s second biggest product, Wintjes says.

A trend in airfreight now is investing in the health care market. But Wintjes – who says some think of pharma as “the El Dorado” – questions the viability of this for forwarders, even though he agrees that pharma is growing.

“The pharmaceutical industry is very demanding in terms of [good distribution practice] compliance, for example, but not necessarily willing to pay for the complexity which they bring into our production,” he says. “Forwarders and carriers invest, and then typically not seeing much better airfreight rates for that because very often, the customer’s taking that for granted and pricing it in a way very similar to standard airfreight.”

Meanwhile, in manufacturing, there is a near-shoring trend that is leading to less international trade, and therefore less air cargo, Wintjes says.

Though Zablocki says the cost of jet fuel has remained relatively stable, Rahn of DHL says airlines are switching from fuel surcharges on actual weight to chargeable weight – which results in increasing fuel surcharges for forwarders.

Wintjes says more general airfreight is now going by express because if customers send cargo by air, they want it faster than the industry standard.

“You don’t have the time for having cargo hanging around in a gateway for a long time,” he says. “That’s gone. That’s not possible anymore.”

Panalpina also sees that intermodal is gaining in popularity.

Zablocki glosses over the trends happening in the air forwarding industry.

“Airlines are aggressively pricing to protect their markets, carriers with excess aircraft are looking for new markets, and both passenger and freighter aircraft operators are all hoping for margin improvements by chasing higher yielding business in time-sensitive and perishable commodities like the pharmaceutical sector,” he says.

Top forwarders see that the airfreight industry isn’t easy to navigate.

“It’s in turmoil,” Wintjes says. “It’s not an industry where you would say, ‘Rest assured.’”

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