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Winging it
Changes on the radar for air cargo shipping
By Ken Mark
When dealing with air cargo, shippers worry about three things—rates, capacity and types of aircraft. In the coming year, despite a bump here and a tuck there, the direction appears to be “steady as she goes,” on all three fronts.
Depending on the lane and time of year, basic rate increases are likely to be modest. Forecasts range from just under the predicted inflation rate of two per cent, to a high of five per cent.
But when other unavoidable items are thrown in—NAV Canada fees, fuel- and security-related surcharges—total costs start to climb. Those charges account for the increased cost of air cargo since industry overcapacity has kept basic rates from rising.
A potential dark cloud on the horizon, however, is the uncertain direction of future air cargo security regulations. “The scenario everyone fears is to have all cargo inspected before loading and to make carriers responsible. All this will drive up costs and increase delays,” says George Kuhn, Toronto-based executive director of the Canadian International Freight Forwarders Association (CIFFA).
“In the late 1990s when the UK government introduced such requirements, carriers invested a lot of money in X-ray equipment. Then forwarders did the same thing without any acknowledgement from the government. In the end, the order was rescinded.”
Shipper confusion
One trend is for certain: the lack of transparency and accountability in air cargo charges has led to confusion for shippers and extra work for freight forwarders. Though most carriers quote a basic rate supplemented by an itemized list of charges, a few publish an all-inclusive amount. Consequently, shippers can’t easily compare the different costs from various carriers.
“Customers always resist rate increases and want to negotiate,” says Brian Russell, Mississauga, Ont.-based vice-president of sales with British Airways (Canada) World Cargo. “But they are more open to seeing surcharges since the costs are more transparent.”
Adding to the perplexity, there’s no standard industry-wide formula for calculating fuel or security surcharges. For the latter, Cathay Pacific charges $0.05 per kilo. And according to Stephen Wong, the airline’s Vancouver-based vice president of cargo (North America), that doesn’t cover all the extra expenses for complying with new regulations.
Such variability also forces freight forwarders to devote more resources to constantly tweaking back-office software systems to account for, and keep track of, the varying costs that different carriers charge.
On most international routes, there are few capacity restraints, especially since air cargo flies in the belly of passenger aircraft. And the worldwide passenger airline industry suffers from chronic overcapacity. Nevertheless, during high season and on certain routes, space can sometimes be tight.
“The West-coast fresh cherry season—May to July is our busiest time,” says Cathay Pacific’s Wong. “But we add an extra freighter to our normal three per week from Hong Kong to Vancouver schedule. In contrast, exporters of heavy industry and project equipment in central Canada usually move their products out in the fourth quarter.”
On trans-Atlantic lanes, besides the regular summer boost from increased passenger flights, capacity is less of an issue. That’s because this year there have been additional routes opening up as well as new entrants.
“When European carriers seek to increase passenger traffic,” says Russell, “they target major east-coast US cities such as Chicago, Washington, New York and Boston, which can attract Canadian cargo because of aggressive rates. And here in Canada, besides charter activity, we will also see the arrival of new players such as Air India and Etihad, the national airline of the United Arab Emirates.”
On top of that, the return of all-cargo freighters will add further capacity. Beginning in May, Air Canada plans to introduce thrice-weekly MD-11 freighter service between Canada and Shanghai, tripling the available cargo space to the burgeoning China market.
On the other side of the world, Air Canada has extended its lease agreement with Gemini Air Cargo to provide five times weekly, all-cargo service between Toronto and Frankfurt. The additional 85-ton cargo capacity from the MD-11 aircraft boosts weight capacity by 16 per cent from 2004 levels.
Domestic traffic has not been forgotten. Air Canada has increased freight capacity within Canada by providing an additional 18 tons of upper deck capacity four days per week in the Toronto-Calgary-Vancouver market, using leased Boeing 727 cargo aircraft.
There are other reasons for bringing back freighters, says Mark Soubry, Mississauga, Ont.-based vice-president of Panalpina. “Freighters don’t need to follow as tight a schedule as passenger planes. If an all-cargo plane is held up by an inspection, it wouldn’t necessarily disrupt a flight as much as if it were a passenger flight.”
Not sustainable
Still, international freighters have their doubters. “We believe they’re not sustainable in the Canadian market,” says British Airways’ Russell. “Most of the revenue has to come from the in-bound flight. The out-bound trip is very much catch-as-catch-can.”
Lending support to that view is the sharp rise in the value of the Canadian dollar. “Our back-haul traffic is down,” says Cathay Pacific’s Wong. “With the increased cost of Canadian goods, many Asian buyers are looking at alternative sources.”
Within North America, overall capacity is gently shrinking. Bowing to pressures from surging fuel prices, low fares and intense competition, many US carriers such as Northwest are cutting back service, causing minor headaches for shippers.
“For in-bound shipments from some smaller US centres, as a result of reduced service, we found that air cargo was sometimes slower than moving it by truck. Also with the trend to smaller regional jets, we sometimes have difficulty transporting large items such as mainframe computer racks,” says Lee Hottnick, Mississauga-based project manager, transportation, Ingram Micro Inc.
New technology
But change is coming to the air cargo business. Like carriers in all modes, airlines are trying to operate on more business-like terms. Many are aggressively introducing technology that will enable them to know in real time whether or not a contract is profitable.
“In the past, many of us thought it was better to accept a shipment at any price than fly empty,” says Russell. “But we now have software tools to help us calculate the contribution of each contract. Our goal is to cut back on spot pricing and move closer to our published market rates.”
Similarly, on the cost-cutting side, airlines want to get more customers to book space online. If they did, it would enable us to redeploy people to other tasks. But it could take time to break those habits,” says Russell.
However, in some parts of the world, e-booking is gaining ground. For example, the recent introduction of the Ezycargo portal involving Cathay Pacific, Singapore Airlines, Japan Airlines and Quantas facilitates online transactions and enquiries.
“Freight forwarders find it more efficient,” says Wong, “because they don’t have to call agents at specific times to book space or to track and trace shipments. They can do it any time they want over the Web. In our experience, e-booking is more common in Asia than Europe and North America.”
Closer to home, the ACI (advanced commercial information) initiative from the Canada Border Services Agency (CBSA) is driving change for in-bound shipments. When it comes on stream for air cargo at the end of 2005, shippers must transmit cargo data to the CBSA one hour before “wheels up.”
Many consignees are getting ready. “We’ll have to factor those requirements into our lead times,” says Ingram Micro’s Hottnick, “to ensure we have an accurate ETA (estimated time of arrival).”
Canadian exporters and their service suppliers have already cut their teeth on similar procedures for US-bound shipments required under the AMS (automatic manifest system) of US Customs & Border Protection.
The imminent arrival of the next generation of aircraft looms large on the horizon. The impact of the 800-passenger Airbus A-380 on air cargo remains unclear. Its size will require the overhaul if not the rebuilding of airport runways to support its tremendous weight. Reportedly, so far only Vancouver has publicly announced its willingness to make the necessary upgrades.
Besides facing the challenges of airline overcapacity, increased security regulation, rising costs and fierce competition, carriers and freight forwarders will continue to see global integrated couriers elbowing their way into the marketplace. “They are approaching us with offers of skid loads, logistics services and even LTL shipments,” says Hottnick.
Choice is not something shippers will have to worry about. b2b
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