A few big forwarders control nearly half of the air freight business. Now they are increasingly seeking to give that business only to a few selected airlines
One of the big differences between the passenger and cargo side of the airline business is that in the latter the customer base is much smaller and more concentrated - alarmingly so. While there are many thousands of IATA-registered freight forwarders in the world, purchasing power is concentrated in little more than a dozen top players.
The five biggest forwarders - Danzas, Nippon Express, Exel, Panalpina and Schenker - account for over 20% of air freight revenues, estimates air freight newspaper Air Cargo News. The next five - Kuehne & Nagel, Fritz (now part of UPS), BAXGlobal, Kintetsu and Expeditors - add another 15%. The top 17 forwarders, which includes all the remaining well-known global names, account for around 45%.
The big are also getting bigger. A gathering trend has seen the global players eating up smaller forwarders around the regions. In recent years Danzas, owned by Deutsche Post, the German post group, has bought leading Scandinavian forwarder ASG, as well as AEI, a top 10 forwarder based in the USA and a global player in its own right. Many other forwarders have also bought their former agents in developing countries. Only in Asia are local heroes still at all strong, and even there the big names are slowly gaining ground.
Forwarders present a dilemma for airlines because they control the ultimate customer - the manufacturer or distributor of the goods moved, known in air cargo as the shipper. They are also global, something airlines are not, and are in the door to door and logistics markets, which is where the added value is to be found in the cargo business.
Airlines often complain that it is they who take the asset risk, while forwarders make the profits. This charge is not baseless. Over the past couple of years, while carriers racked up huge losses, most of the big forwarders not only stayed in the black, but even increased their profits.
As the big forwarders get bigger and start to flex their muscles, there is a danger that this balance of power might tip further in their favour. One trend that could be worrying or positive for carriers depending on their point of view is the move by forwarders to concentrate on fewer partners.
In September, Danzas invited 30 airlines to London to convey just this message and to explain its vision to them. Most of its rivals are doing the same. Schenker is trying to focus on six to eight carriers, and Kuehne and Nagel says eight to 10. Exel wants to focus on 10-20.
Why are the big forwarders doing this? Thomas Mack, vice-president airfreight at German-headquartered Schenker, says it simply reflects what its customers are doing to them. "We are getting pushed by shippers to improve our performance and pricing," he says. Schenker's response is to centralise processes and concentrate buying power.
Elijio Serrano, chief financial officer of Houston-based EGL, puts it more bluntly. "One of our large shippers cut the number of forwarders they dealt with from 30 to five. They did this to get a better deal. We are one of the five, so when we get the volume, we go to the airline and say we need a better price."
Core carriers
Concentrating on core carriers is not just about money, however. A constant refrain from airlines at air cargo conferences is that their yields are declining because forwarders push them relentlessly on price. Forwarders always reply that price is important, but so is quality. In fact, the trend towards using fewer carriers is designed to address both issues.
A frustration for forwarders has long been lack of visibility and control of shipments once they hand them over to carriers. If there are weather problems or passengers turn up with too many bags, it is cargo that gets unloaded from aircraft. Airlines also have traditionally had no way to judge which piece of cargo is less urgent or low yielding (and so best to be offloaded), much less any way of judging if it might be more profitable to offload a passenger.
Worse, carriers have been bad at communicating with forwarders when offloads or other problems occur. "We often only find out that cargo is not loaded when the receiving station sends us a note," says Renato Chiavi, chief operating officer of Switzerland-based Danzas Air and Ocean.
As Mack suggests, working with core carriers is at least in part an attempt to get around that problem. "The criterion for choosing a core carrier is quality performance," he says. Seranno talks of "visibility and comfort that when cargo is booked it will fly". Shippers, he says, "ask for visibility and the consistency of cargo arriving when we say it will".
As a result, the drive towards core carriers is also driving industry change. One IATA-sponsored industry initiative, in progress since 1996, is Cargo 2000. As Geoff Corpe, regional managing director for technology and global freight for UK-based Exel points out, its very name illustrates how slow progress has been.
The project, involving 15 airlines and 11 forwarders (including all those quoted in this article), aims to set milestones for freight shipments while under both forwarder and airline control. Each shipment is effectively given a timetable saying when it should reach certain points in the chain. Failure to reach those points triggers an automatic alert.
In the late 1990s, Cargo 2000 seemed mired in endless discussions and technical issues. Not any more. That is partly due to the appointment of a dynamic new project director, and partly because of big forwarder pressure. Danzas, Exel, Kuehne & Nagel and Schenker are all insisting their core carriers become Cargo 2000-certified. "It is a quality and a cost issue," says Chiavi. "Now we have to ask for every status report - with Cargo 2000, we will get five or six status reports automatically for every shipment."
E-booking is equally high up the agenda. Global Freight Exchange (GF-X) is a neutral booking portal that has struggled for acceptance in the industry. After its initial 10 or so pilot carriers, the portal has found it hard to sign up more. But the big forwarders have no doubts. Most are members and say that GF-X is either a must for partner airlines or something that they should be committed to working towards. Mack, for example, admits that not all of the eight carriers Schenker is negotiating with are in GF-X. "But we have made it very clear that we want them to commit in the future."
Exel and EGL take a softer line, saying GF-X is not the only e-booking solution, but there is no doubt that some kind of e-booking is wanted. "We expect them to be working towards a paperless environment," says Corpe. "We are not saying GF-X is the only way, but the more critical mass it can get, the better."
In all this, it is tempting to see the big forwarders as the drivers of change, and the airlines as reluctantly trailing behind, but this is not entirely accurate. This is a generalisation - carriers as diverse as Lufthansa, Emirates, Northwest Airlines and Air France have also in their own way been drivers of new technology and new processes. Lufthansa, for example, pioneered closer ties with forwarders in the late 1990s with its Partnership Programme and is a keen champion of Cargo 2000 and GF-X.
Asian absentees
In general, however, it is noticeable that while the majority of major forwarders are participating in both GF-X and Cargo 2000, the majority of airlines still do not. Glaringly absent from all these discussions are the Asian operators, with only Korean Air and Cathay Pacific members of Cargo 2000 and only Emirates of GF-X.
That begs the question as to whether forwarders will really be able to insist on either requirement from all their global partners. "Those who give us the best capacity and prices will also come into it too," Chiavi admits, but he adds: "We are trying to use the Air Frances and Lufthansas to get other carriers to join these initiatives."
What of carriers in all this? Can they expect benefits from closer relationships with forwarders? Forwarders insist they can, but they sometimes sound like weary parents trying to persuade children of the error of their ways. "Airlines need to build efficiency with IT, streamline booking processes, streamline billing, take advantage of technology to bring down costs," says Serrano. Reinhard Lange, chief operating officer of Switzerland-based Kuehne & Nagel insists that "in the long run, quality pays off. It improves yields." Mack stresses that partnerships with carriers are all about win-win. "It is in our own interests if carriers are profitable, so that they can invest in the future."
More concretely, core carrier programmes could help resolve one of the bugbears of airline-forwarder relationships, namely that forwarders are reluctant to share capacity risk. The problem is that though large forwarders make block bookings of cargo space, they don't expect to pay for space they do not use.
The justification, as Corpe points out, is that shippers are often unable to predict what they will ship either. "You often get a manufacturer who is not able to shift freight he has booked for quality reasons. Shippers are never going to be 100% reliable and so nor can we be expected to be."
Critical mass
The core carrier approach offers a way round this conundrum, however, provided it is combined with another technique - the concentration of as much freight as possible into a few key hubs. Past master at this is Swiss-based Panalpina, which has spent the last 30 years focusing cargo at key points. As a result, it has had the critical mass of air cargo on key lanes and organisational discipline to commit in advance to buying space. The trade-off is reliability of uplift and an influence on route creation.
This model is something that its rivals were loath to copy until recently, but there are signs of change. All the forwarders quoted here say that they are increasingly prepared to share capacity risk, and several are also openly trying to rationalise their air cargo flows. Schenker, for example, is in the process of creating a global system of key hubs, starting with Frankfurt, and Exel also has a "global gateway" programme. Not surprisingly, the selection of core carriers and key hubs is often closely interlinked.
Reliability may be one attraction of committing to space, but forwarders taking that approach also want other quid pro quos, which carriers are less keen on. Chiavi says Danzas is looking for guaranteed pricing over six to nine months. One of the big forwarder bugbears is fuel or, more recently, security surcharges, which they claim they often cannot pass on to their customers. Chiavi is trying to get no surcharge clauses into deals. "Some carriers are receptive, some are not," he says.
Corpe, meanwhile, thinks that if Exel commits to pay for space, airlines should pay compensation for offloads. "It has to be a two-way street," he insists. "We have proposed this to carriers, but not one has taken us up on it."
One leading forwarder that has a very unusual approach to this area is EGL, which has an extensive trucking network in the USA, something it is also trying to duplicate in China and in Europe. Serrano says it will give airlines commitments on space if they commit to using its trucking network for US distribution. It remains to be seen how enthusiastic airlines will be, but DHL Airways, the US air operation of DHL, seems keen: EGL now takes regular space on its domestic US flights, and DHL in turn uses EGL's trucking routes.
One question about all these trends - the concentration of capacity into hubs, the desire to work with fewer partners and the desire for tighter control - is whether it might lead forwarders one day to operate their own cargo airlines. Forwarders all insist not, but the idea is an intriguing one.
An interesting example is Panalpina, whose virtual in-house carrier, ASB-Air, now handles over 50% of its air freight volumes, a figure expected to rise to 75% in a few years. ASB mostly manages block bookings and influences freighter operators to start new routes, but it also has gone further and created what in effect are its own scheduled freighter routes. One, from Luxembourg to Huntsville, Alabama, boasts daily Boeing 747 flights in a aircraft leased from Atlas Air and painted in a Panalpina livery.
Once again, Panalpina stands way ahead of its rivals in this respect, but Kuehne & Nagel and Schenker have started sharing a weekly Lufthansa 747 freighter across the Atlantic, and Danzas has an active programme called Starbroker which is looking at similar operations. Even Exel, which insists it is not interested in regular freighter routes of its own, admits that it charters freighters almost daily.
Danzas is in many ways the most interesting of the lot. It is being merged by parent Deutsche Post into the express operator DHL. Chiavi insists that Starbroker is as much about block bookings and working with partner carriers as chartering freighters, and that it will remain separate from DHL's similar operation, DHL Aviation, which uses its own freighters and space on other carriers to create a global network.
But he does not rule out closer co-operation in the future with DHL on longhaul freighter routes, if DHL wishes it, and there is no denying the mix of express cargo and heavier freight would be a powerful one for a freighter network. It is also interesting that as part of the merger DHL aircraft will be painted yellow, the Danzas colour.
Risk sharing
It is important not to get too carried away on this theme, however, at least for now. All forwarders - even Panalpina - stress that bellyhold is up to half their global capacity and not something they are likely to dispense with. It is also a big step from a few charter flights or sharing capacity risk on a few pallet positions to creating a whole air network.
EGL's experience is instructive here. It built its reputation flying freighters point to point within the USA for leading shippers, and at its height in the late 1990s, this approach produced a dense web of routes. Changed circumstances - a drop in the market, say critics, a maturing strategy, according to Serrano - means EGL now picks from a wider portfolio.
It trucks, it moves pallets on the DHL Airways network, it uses space on US cargo operator Kitty Hawk, and also still operates a few US flights of its own with aircraft leased on a per-hour basis. Internationally, it has no plans to use its own aircraft, however, saying commercially available lift is enough.
And this is the essence of forwarder thinking. Even Panalpina says it prefers to work with airlines when it can: it only creates its own freighter routes when it can't get what it wants in the market.
"If we can create a partnership with the airline which improves performance on both sides, which delivers on time and flies as booked, there is less interest in chartering freighters," says Kuehne & Nagel's Lange. "Our focus is to have much closer co-operation with airlines, not to switch to our own freighters." n
REPORT BY PETER CONWAY IN LONDON
Source: Airline Business
