GSAs offer options for air cargo challenges

Despite the challenging air cargo market that has seen slowing volumes and excess capacity once again putting heavy downward pressure on yields, GSAs remain upbeat that a good business model will enable them to ride out the ebbs and flows of the market as they help their airline customers cut costs. By Karen E. Thuermer

The Council of Supply Chain Management Professionals (CSCMP) released its State of Logistics Report for 2010 last month which detailed what many had already observed first hand – that despite the robust market in the first half of 2010, the air cargo industry hit a wall in the second half. In essence, the study found that despite the fact air freight revenues rose 11.2 per cent in 2010, precipitated by a robust first half of 2010, air cargo hit a wall during the second half of 2010 after many firms, facing disappointing sales projections, turned back to moving shipments via ocean. “Not unexpected, air carriers continued to see their business dwindle during the first half of 2011 as their customers continued to face higher transportation costs and opted to go with cheaper options whenever they could,” the report stated. Consequently, the report projects that air cargo operators do not have plans to add much more capacity in 2011 and demand for air cargo is expected to be slow in the remainder of 2011. The report is pertinent for global transportation providers, including General Service Agents (GSA) who represent air cargo carriers in most markets of the world. Bad news and silver linings In this environment, GSAs may face some advantages and many challenges. Most of their challenges are related to the state of the air cargo industry as outlined above. “These are difficult times for airlines, depending upon the market that you are in,” states Joe Lawrence, president, Airline Services International, Inc. (ASI), a GSA that has offices in the US and Canada. “Yields are still a challenge, and the high cost of fuel is having an impact.” Yields have always been an issue between North America and Asia, given the trade imbalances the US and Canada have with China, and there is never enough cargo to fill flights westbound back to Asia. “This puts pressure on yields and in order for airlines to gain revenue, they need to raise prices,” Lawrence says. “It’s having an impact on all of the airlines.” Add to this the fact scheduled and low cost carriers on the Atlantic trades going to Europe continue to experience excess capacity. “This capacity is driving prices down further,” he says. ASI, which operates in markets throughout the US, Canada, Asia, and the Indian subcontinent, and has partnerships with more than 10 airlines, sees all airlines experiencing these pressures. The GSA represents large international, regional and national airlines, and currently has a customer database of over 700 forwarders and agents. ASI also has commercial agreements in China, Hong Kong, India, Sri- Lanka, Pakistan, and Bangladesh, which has enabled the company to service airlines on a global basis and expand its service offerings to airlines looking for new revenue systems, a factor that is increasingly important. In order to manage its global operation, ASI continues to develop its in-house IT system that has enabled ASI to provide airlines comprehensive solutions, from sales to administration and all of the services required to provide an efficient service. Nevertheless, even when an aircraft can be filled with cargo, Lawrence questions whether or not enough revenue can be generated. “That is the where the challenge is today,” he says. “Costs have been going up, but pricing has not been going up accordingly. In fact, pricing has been going down.” Jens Tubbesing, CEO of Airline Network Services (ANS), headquartered in New York, has the same observations. He also observes that today’s environment has resulted in airlines looking increasingly at GSAs either to supplement or support their infrastructure in markets where they do not operate to or from, thereby allowing them to have a sales presence in a country at lower cost than opening their own offices. “They are also looking at GSAs to outsource their infrastructure completely to external parties,” he says. “The outsourcing model that is taking place on the handling side and other areas is also growing and developing.” One of the biggest advantages GSAs offer, Tubbesing points out, is their cost advantage. “GSAs are able to provide a cost advantage for fixed verses variable costs, and legacy costs of carriers in terms of personnel and overhead,” he says. “These are all more significant than any outside company would be able to deliver.” In addition, GSAs are able to create coverage that is deeper than what an airline can do on its own. “By using a GSA you can spread your costs across multiple carriers,” Tubbesing states. “Airlines can add more depth in territories in ways they would not necessarily be able to do on their own.” Individual circumstances The issue for carriers then becomes what kind of business arrangement and expectations can be negotiated and how much commitment or revenue can the GSA produce. “It certainly depends on the situation in each individual case,” Tubbesing remarks. “But there is an opportunity where GSAs can produce significant revenues with a competitive cost structure and a compelling business model for an airline.” GSAs can also act as a business partner with forwarders across multiple geographies, create a structure arrangement with multiple airlines and add value for freight forwarders. While Tubbesing admits the industry is currently challenged by the ebb and flow of economic conditions around the world, he is generally optimistic for these and other reasons. “Our industry has proven that it can be resilient in working through these ups and downs,” he states. “Air cargo is always the first to suffer and first to recover, and it is always on front end of the trends.” While Tubbesing is concerned about the current pressure on capacity and rates, he finds conditions uneven depending upon the trade lane. “Latin America, Australia, South Africa and even Europe are in high demand – regardless of economic conditions there,” he says. His firm, which operates 11 offices in North America, focuses on building a good carrier portfolio that is strong on the transpacific toward Latin America as well as Europe. Among ANS’s airline partners are jetBlue Cargo, Hainan Airlines, bmi, China Southern, Air Berlin, Aeroexpress, SAS Cargo, Airmax Cargo, Air Europa, Virgin Atlantic Cargo, V Australia, Singapore Airlines Cargo. Despite the global recession, Tubbesing sees opportunities for growth, primarily because ANS has customers that are Asia-based. “We see a lot of demand between Asia and Latin America,” he says. “There are a lot of bottlenecks because there are no direct flights between China and Brazil.” Consequently, most cargo is flown to North America via Miami or Los Angeles where it is transhipped onto southbound carriers. “This is just one key growth area,” Tubbesing remarks. He expects the BRIC (Brazil, Russia, India and China) countries to also fuel global growth. “We see that right now between Brazil and China where there is clearly is more demand than supply,” he says. Also key are the commitments from sophisticated companies that are able to have their supply chains under control from a demand, planning and production perspective. “These are subsequently able to manage their supply chain in a more structured way and not in a last minute panic or ad hoc,” he states. Among them are some companies in high tech industries and big box retailers. “Those companies in the consumer products and the big box retailers are sophisticated when it comes to managing their inbound support chain and how they use and switch between modes,” he says. The exception is for items such as iPods and iPads where demand has outstretched supply. “So out goes the model,” he says. “But this is where charters come into play. The increased sales may be good for Apple, but it creates pressure on the supply chain and the suppliers, and ultimately the forwarders and the airlines.” By end of the day, Tubbesing sees GSAs and the air cargo industry as still very robust. “They will withstand any challenges being thrown at them,” he states. “Companies that have a good business model, are innovative, have a handle on costs, are able to recognise trends have success stories to tell.”