the air cargo industry

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208 | INTERMODAL TRANSPORTATION: MOVING FREIGHT IN A GLOBAL ECONOMY


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7

7.1 Introduction

Air cargo is defined in North America as anything other than persons or per-

sonal baggage traveling by air. Compared with other means of freight transpor-

tation, such as ship, rail, and surface vehicles, air cargo is the newest addition

to the freight sector. Since its start just after World War I, the air cargo industry

has become an indispensible part of the worlds global economy, holding an

important niche in the transport of lightweight, high-value commodities. Us-ing the infrastructure largely put in place by public agencies for air passenger

travel, such as airports and air traffic control systems, air cargo services con-

nect to almost all parts of the world.

This chapter examines the characteristics of the air cargo industry. Section

7.2 describes the historical development of air cargo services and the role they

play in todays world. Section 7.3 describes the major players and the different

business models found in the air cargo industry. Section 7.4 presents key de-

scriptors of the air freight network and service characteristics, such as the use

of major hubs and different aircraft types. Section 7.5 discusses the economic

importance of global trade to the industry, with Section 7.6 discussing the dif-

ferent elements of successfully managing air cargo. Section 7.7 presents differ-

ent global events that have shaped the industry. Section 7.8 identifies current

challenges, and the final section identifies potential research topics on issues

of importance to the air freight industry.

The Air Cargo IndustryAndreea Popescu, Pinar Keskinocak, and Issam al Mutawaly

| 209 2010 Eno Transportation Foundation. www.enotrans.com

Reprinted from Intermodal Transportation: Moving Freight in a Global Economy.


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7.2 History of Air Cargo

Although limited air freight services were tried prior to World War I, it was not

until the end of the war that such services were first offered in any significant

way. Primarily due to the availability of surplus airplanes and trained militarypilots, most of those early commercial services were made possible by subsi-

dies provided by national governments, most directly by postal services. Allaz

(1)notes that four important lessons arose from these early years of air freight

services, as follows:

Military aircraft were not suitable for commercial air service. Although the

cost of purchasing surplus military aircraft was very low, the maintenance

costs, especially for engines, were prohibitively high.

Safe air travel during this period needed infrastructuree.g., airelds, traf-

fic control systems, weather services, marshalling yards. Very little of this

was in place.

The transport of mail was the major, if not the only, source of income. From

1919 to 1939, post offices around the world provided commercial aviation

companies with more than half of their revenues.

Commercial aviation was not a protable business unless government sub-

sidies or favorable postage rates were used to prop up the service.

Although there were similarities between how air cargo developed in Europe

and the United States, there were also some important differences.

7.2.1 Europe

In Europe, civil aviation grew rapidly after the end of World War I, fueled pri-

marily by demands from national postal services. The first cargo-only, sched-

uled commercial air company began service between Paris and Lille (France)

in July 1919. Aircraft that transported passengers during the day were often

used for mail and freight transport at night. Lufthansa, founded in 1926 in Ger-

many, started dedicated air freight services in 1928.

Great Britain, France, and the Netherlands still had colonies during the

1900s, which gave their governments a vested interest in maintaining reliable

and relatively fast connections. However, a government study in Great Britain

in 1923 concluded that a myriad of smaller companies were not economically

suited to fulfill the national goal of linking all parts of the empire into one air

transportation network. With the promise of major subsidies, many smaller

airlines agreed to merge, forming Imperial Airways Limited. Imperial Airways

soon operated in all corners of the British Empire, transporting mail and goods

between Londons Croydon Airport and destinations such as Cairo, Sydney,


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TH E A IR CA RGO I ND UST RY | 211

Delhi, and Basra. In 1939, after the outbreak of World War II, Imperial Airways

was nationalized and merged with British Airways Limited to form a new air-

line, British Overseas Airways Corporation (BOAC), a predecessor of todays

British Airways.

Because European governments considered air cargo a matter of nationalsecurity and sovereignty, those airlines starting as private entities were eventu-

ally nationalized. They would not be privatized until the 1980s, ushering in an

era of alliances and mergers.

7.2.2 United States

In the United States, the first practical demonstration of air freight transporta-

tion took place in 1910, when a department store shipped a bolt of silk by air

from Dayton to Columbus, Ohio. (2)The first dedicated air postal service oper-

ated by the US Army began in July 1918 with service between Washington, DC,

Philadelphia, and New York City. In 1924, the US Postal Service inaugurated the

rst transcontinental postal service, connecting New York City to San Francis-

co. The trip took 34 hours and 45 minutes in one direction, and 32 hours and 21

minutes in the other (by comparison, the fastest train serving the same cities

took 91 hours). Similar to the experience in Europe, postal service was the foun-

dation of air freight in those early years. The rapid growth in air mail service is

evident in the number of letters carried by airplane; in 1918, 713,240 mail pieces

were transported; by 1927, the number had skyrocketed to more than 22 million.

Between 1926 and 1934 the aviation network in the United States changed

dramatically. From a service almost exclusively used for the transport of mail,

the air network system evolved into the largest passenger and cargo network in

the world, served by a few airline companies. The Air Commerce Act of 1926 is

often considered the foundation for a continental air cargo system. This act

established regulations concerning the licensure of pilots, standardized the

rules for air traffic control, and specified the varying roles of airports in a na-

tional system. By the start of World War II, the US air transport system was the

largest in the world, handling more than half of all global passenger trips and

just over one-third of mail traffic.

On December 23, 1940, United Airlines inaugurated what many historiansconsider the first all-cargo service in US history. United used a Douglas DC-4

aircraft to deliver mail between New York and Chicago for five months before

canceling the route. Freight went back to being a sideline operation until March

14, 1941, when Air Cargo, Inc., was formed by the big four airlinesUnited,

American, TWA, and Eastern. By the end of the war, many airlines (including

United and TWA) had begun their own commercial air freight services.

Realizing the likely importance of global aviation after World War II,

President Roosevelt hosted in 1944 an international conference on civil avia-

tion, the result being an internationally agreed upon set of principles and


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rights for civil aviation in the post-war environment. This agreement, often

referred to as the Chicago Convention, created the International Civil Avia-

tion Organization (ICAO), dened standard approaches to international air

navigation, and affirmed the rights of countries to protect their own interests

in granting landing rights.By the late 1940s, the air freight market was dominated by established pas-

senger carriers. The airlines that formed Air Cargo were particularly worried

that small-time operators such as Slick Airways and Flying Tiger Line would

destabilize the commercial aviation sector by offering irregular services at low

rates. Through the late 1940s, the smaller operators, the established carriers,

and the governments Civil Aeronautics Board (CAB) debated how to award

contracts and set proper rates for freight transport. In August 1949, CAB gave

permission for four all-freight airlines to operate: Slick, Flying Tiger, US Air-

lines, and Airnews. (2)

US Airlines quickly folded after a series of accidents and the threat of bank-

ruptcy. Similar circumstances caused Airnews to go under in June 1951. Slick

Airways sustained moderate growth for a time before shutting down due to the

airlines inability to compete with big passenger airlines that had introduced

all-freight services. Slick Airways cited the governments lack of support for

all-freight airlines as a contributor to the companys downfall. Flying Tiger

fared incredibly well compared with its competitors; by the mid-1960s Flying

Tiger was earning a $20 million annual prot. Flying Tigers success was at-

tributed to its business model, which had diversified its market share, and to

favorable CAB judgments. (2)

In the 1970s, a new airline revolutionized the air freight business. Fred

Smith, now the chairman, CEO, and president of FedEx, had the vision of an

overnight delivery service. He was the first to recognize the opportunity pre-

sented by an all-in-one cargo transportation service that would eliminate the

need to combine freight with passenger traffic, which in his opinion slowed

down cargo delivery. Smith set up his headquarters in Memphis, Tennessee,

and the Memphis International Airport became the hub for his exclusive

freight air delivery service. One of the most important selling points was his

guaranteed next-day delivery. FedEx reported revenues of $1 billion in 1983, an

unheard of amount for a company that had existed for only 10 years. It is nowthe largest overnight express delivery company in the United States. (2)

Figure 7-1 summarizes the historical trend of scheduled air freight activity

in freight ton-miles since 1954 in the United States. In 2002, air cargo account-

ed for 7.4% of the value, 0.1% of the weight, and 0.3% of the ton-miles of com-

mercial freight activity in the United States. (3) Although this percentage is

relatively low, air freight plays a particularly important role in moving freight

quickly over long distances. In fact, the majority of freight tons moved by air is

transported 750 miles or more. Table 7-1 summarizes the value, tons, and ton-

miles of air cargo moved by distance.


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Due to the globalization of trade, the rise of e-commerce (transactions con-

ducted over the internet), and the increasing use of advanced logistics tech-

niques, the air transportation of freight has become part of our day-to-day ac-

tivities. Different business models have arisen to better address the growing

demand for air cargo services, as will be discussed in the next section.

7.3 Major Players with Different Business Models

The major players in the freight value chain are shown in Figure 7-2, which

includes the integrated carriers and nonintegrated services (forwarders and

airlines). Goods transport starts with the shipper. When the shipper contracts

with a freight forwarder, the forwarder arranges the entire transportation

chain, from door-to-door (shipper to consignee). The freight forwarding com-

pany is responsible for arranging all transportation segments (air, road, sea, or

rail), processing and preparing the necessary documents to ensure compliancewith all legal and customs requirements, and advising shippers on, or arrang-

ing, the packaging of transported goods. Freight forwarders are typically non-

asset-based and therefore rely on carriers for the physical movement of goods.

They may contract with trucking companies for road feeder services (RFS) to

move the freight between the shipper and the airport.

At the airport, the airlines handling provider (in-house or outsourced) re-

ceives the goods and documentation. After inspecting the freight and verifying

that it is ready for air carriage, the handling company loads the containers and

builds pallets (i.e., consolidates items onto pallets), delivers the containers and

Figure 7-1 Trend in domestic scheduled air freight activity in the United States

(ton-miles), 19542004

35,000,000

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0

1954 1960 1966 1972 1978 1984 1990 1996 2002 2004

Freightton-miles(000s)

Year

SOURCE:www.bts.gov/programs/airline_information/air_carrier_traffic_statistics


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pallets to the airplane, and loads them into the airplane. The air cargo carrier is

responsible for the airport-to-airport transportation. Carriers may act as all-

cargo operators (e.g., Cargolux) or may carry both passengers and cargo (e.g.,

Delta Airlines, KLM).At the destination, the carrier makes the air freight available to the forward-

ers representative for road feeder service to the consignee, the ultimate re-

cipient of the goods. Once the package is successfully delivered to the con-

signee, the supply chain process is complete. The role of intermediaries is very

important in the air cargo supply chain since each step in the process depends

on the successful completion of the previous step.

7.3.1 Cargo-Only Carriers

Cargo-only carriers often fly freighters, which are passenger aircraft that have

been altered for cargo operations. Freighters have no seats or windows in the

main cabin. They have larger doors than aircraft configured for passenger ser-

vice and reinforced oors. Many are tted with rollers to facilitate the loading

of heavy items. Many modern freighters also have hinged tails or noses that

allow for straight-in loading of large items.

Cargo-only carriers generally operate widebody airplanes from one major

airport to another. Approximately 10% to 15% of world air cargo traffic is

moved by cargo-only carriers, primarily on long-haul international or trans-

continental routes.

Table 7-1 Shipment characteristics by distance shipped for the United States (2007)

Value Tons Ton-miles

Number

(million Number Number

dollars) Percent (thousands) Percent (millions) PercentAir Total (includes

truck and air) 252,276 100.0 3,611 100.0 4,510 100.0

Less than 50 miles 23,608 9.4 150 4.2 70 1.6

50 to 99 miles 4,233 1.7 40 1.1 26 0.6

100 to 249 miles 19,394 7.7 589 16.3 208 4.6

250 to 499 miles 40,548 16.1 857 23.7 540 12.0

500 to 749 miles 24,797 9.8 259 7.2 217 4.8

750 to 999 miles 29,328 11.6 230 6.4 239 5.3

1000 to 1499 miles 40,178 15.9 443 12.3 687 15.2

1500 to 1999 miles 40,050 15.9 369 10.2 706 15.72000 miles or more 30,149 12.0 673 18.6 1,819 40.3

SOURCE: US Department of Transportation, Research and Innovative Technology Administration, Bureau of Transporta-

tion Statistics and US Census Bureau, 2007 Commodity Flow Survey. Sector 00: CF0700A11: Geographic Area Series:

Shipment Characteristics by Commodity by Mode by Distance Shipped for the Untied States: 2007. factfinder.census.gov/

servlet/IBQTable?_bm=y&-fds_name=EC0700A1&-geo_id=&-_skip=100&-ds_name=CF0700A11&-_lang=en. Accessed

December 20, 2010.


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7.3.2 Combination Carriers

Domestic US carriers (e.g., United or Delta) focus primarily on passenger

transportation, but they use the spare space in the hold (belly) of their planes

to transport cargo; hence, they are called combination carriers. The industry

estimates that more than 50% of international air cargo is moved in the bellies

of passenger aircraft, whereas only 10% to 30% of US domestic air cargo is car-

ried on passenger planes.

Many of the domestic combination carriers use a traditional airline business

model, where the airline extends its operations with side services, such as en-

gineering, cargo, or in-flight catering. Such airlines usually treat the cargo busi-

ness as a byproduct of their main operation and thus management may pay

only scant attention to it.

In contrast to US carriers, for the past 30 years, European carriers have con-

centrated significantly on incorporating air freight into their overall business

models. They have established elaborate hubs and have seriously examined

Figure 7-2 Door-to-door air freight value chain

Integrated

carrier

Integrated

carrier

Integrated

carrier

Originterminal

admin

Destinationterminal

admin

Aircraftprep and

maintenance

Airport-to-airport

flying

Aircraftprep and

maintenance

Cargo

unload

Cargo

load

Origin Destination

Customer-

airport

interface

Airport-

to-airport

(A-T-A)

Airport-

customer

interface

Forwarder Forwarder

Shipper

Airline

Airport to airport value chain

Consignee

ACMI

provider

SOURCE: MergeGlobal Value Creation Initiative. End of an Era? American Shipper, Aug. 2008: 33-47. Reprinted with permission of

MergeGlobal.


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TNT and other smaller express operators, who mainly use the worldwide car-

go capacity available from other carriers)

Integrators carry the majority of the market share of US freight, with DHL,

FedEx, and UPS accounting for 62% of enplaned revenue-tons of freight. (4)

FedEx, one of the four major integrators, is undoubtedly the largest cargo car-rier in the world. However, although each cargo business model has its own

strengths and weaknesses, it is apparent that cargo-only carriers, integrators,

and combination carriers all hold a signicant portion of the market share. Fig-

ure 7-3 provides the percentages of the market share that particular airlines

hold based on the scheduled ton-kilograms own. Figure 7-4 shows similar

information for US carriers. Table 7-3, which is based on data collected by Air-

ports Council International, illustrates the market force of the integrator traf-

c. FedExs Memphis hub leads all airports in the world, and UPSs Louisville

hub ranks seventh in the world. It is striking to note the different growth rates

0

5

10

15

20

25

30

35

Rest

ofth

e

airlin

es FedE

x

Lufth

ansa KA

LUP

S SIA

Cath

ay

AirFran

ceCh

ina

Airlin

es EVA JA

L

Cargo

lux BA KLM

NWA

Emira

tes

Airline

Marketshare(%)

Freight(reven

ue-tons)

Carrier

5,000,000

4,500,000

4,000,000

3,500,000

3,000,0002,500,000

2,000,000

1,500,000

1,000,000

500,000

0

Alaska

AmericaWest

American

AmericanEagle

AmericanTransAir

Continental

Delta DH

L

FederalExpress

Northwest

Southw

est

TransWorld

United

UnitedParcel

USAir

Figure 7-3 Market share of cargo (2003)

Figure 7-4 Market share of major US carriers

SOURCE: Air Cargo World,Sept. 2010: 20-27.

SOURCE: Summary of Aircraft Departures and Enplaned Passengers, Freight, and Mail by Carrier Group, Air Carrier, and Type of Service.

Washington, DC: Bureau of Transportation Statistics, 2000.


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between North America and Asia. Where most major US airports have seen a

decline in cargo traffic, China has seen increased growth in air cargo volumes,

led by the Guangzhou and Beijing airports.

7.4 Network/Service Characteristics

Most freight is transported in lower level cargo holds of widebody passenger

aircraft (i.e., aircraft with two or more aisles running from the front to the back

of the aircraft). The holds are typically accessible through one or more outside

Table 7-3 Cargo traffic for top 30 airports (2009)

Rank City (Airport) Total Cargo % Change

1 Memphis TN, US (MEM) 3 697 054 0.0 2 Hong Kong, HK (HKG) 3 385 313 (7.5)

3 Shanghai, CN (PVG) 2 543 394 (2.3)

4 Incheon, KR (ICN) 2 313 001 (4.6)

5 Paris, FR (CDG) 2 054 515 (9.9)

6 Anchorage AK, US (ANC)* 1 994 629 (15.0)

7 Louisville KY, US (SDF) 1 949 528 (1.3)

8 Dubai, AE (DXB) 1 927 520 5.6

9 Frankfurt, DE (FRA) 1 887 686 (10.6)

10 Tokyo, JP (NRT) 1 851 972 (11.8)

11 Singapore, SG (SIN) 1 660 724 (11.9)

12 Miami FL, US (MIA) 1 557 401 (13.8) 13 Los Angeles CA, US (LAX) 1 509 236 (7.4)

14 Beijing, CN (PEK) 1 475 649 8.1

15 Taipei, TW (TPE) 1 358 304 (9.0)

16 London, GB (LHR) 1 349 571 (9.2)

17 Amsterdam, NL (AMS) 1 317 120 (17.8)

18 New York NY, US (JFK) 1 144 894 (21.2)

19 Chicago IL, US (ORD) 1 047 917 (17.1)

20 Bangkok, TH (BKK) 1 045 194 (10.9)

21 Guangzhou, CN (CAN) 955 270 39.3

22 Indianapolis IN, US (IND) 944 805 (9.2)

23 Newark NJ, US (EWR) 779 642 (12.1)

24 Tokyo, JP (HND) 779 118 (8.3)

25 Luxembourg, LU (LUX) 628 667 (20.2)

26 Osaka, JP (KIX) 608 876 (28.0)

27 ShenZhen, CN (SZX) 605 469 1.2

28 Kuala Lumpur, MY (KUL) 601 620 (9.9)

29 Dallas/Fort Worth TX, US (DFW) 578 906 (11.3)

30 Mumbai, IN (BOM) 566 368 1.3

Airports participating in the ACI Annual Traffic Statistics Collection.

Total Cargo: loaded and unloaded freight and mail in metric tonnes.

*ANC data includes transit freight.

SOURCE: Airports Council International. World Airport Traffic Report 2009.www.aci.aero/cda/aci_common/display/main/

aci_content07_c.jsp?zn=aci&cp=1-5-54-4819_666_2__. Accessed Aug. 8, 2010. Reprinted with permission.


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doors. Aircraft such as the Boeing 747, Boeing 767, Boeing 777, Airbus A300/

A310, Airbus A330, Airbus A340, and Airbus A380 are used for international

flights and offer significant cargo space. The growth in the size of the widebody

fleet has mirrored the growth of air cargo.

To reduce ground times, it is common practice to load all suitable freight onor in unit load devices (ULDs), which are typically either pallets or containers.

Pallets are aluminum sheets with rims that allow nets to be affixed to hold

loose packages in place. Containers are fully enclosed, portable aluminum

compartments of various shapes and sizes. To fully utilize the capacity of the

airplane, containers are shaped to fit the contours of an aircrafts doors and

frame. For some shipments, highly specialized containers are used to maintain

a specific temperature or absorb shock.

Specialized cargo carriers own and operate their own fleets of dedicated

cargo aircraft. Some of these airplanes are passenger aircraft that have been

permanently converted for cargo usage (as described in Section 7.3.1).The Boeing 747, in its various configurations, is the aircraft most commonly

used as a cargo plane. In the past, operational suitability and ease of mainte-

nance were the major factors in deciding which aircraft would be added to a

cargo fleet. Today, however, fuel economy, noise, and environmental concerns

are also factors in an operators decision.

7.5 Economic Importance of Global Trade

Boeing reported that air cargo tonnage grew a robust 12% in 2004, but that was

followed by three very weak years (1.7% in 2005, 3.2% in 2006, and 5.1% in

2007) attributed to the high cost of jet fuel. Boeing projects that air cargo trac

will triple over the next 20 years (5), primarily due to an increase in world

trade in the increasingly globalized economy. The share of nondomestic trade

grew by nearly 14% between 2003 and 2009, as shown in Table 7-4.

Table 7-4 Cargo revenue tons (tons of revenue traffic) enplaned by region (in thousands)

Region Share of

Latin Other Non-Domestic

Year Domestic Atlantic America Pacific International Total Trade (%)

2003 12,723 1,429 756 2,327 5,455 22,691 43.9

2004 13,260 1,687 850 2,785 6,206 24,790 43.9

2005 12,923 1,717 924 2,671 6,800 25,035 46.5

2006 12,612 1,732 953 2,833 7,108 25,238 48.4

2007 12,415 1,700 1,111 2,777 7,178 25,182 50.0

2008 11,046 1,691 1,050 2,457 6,846 23,085 52.2

2009 10,357 1,693 878 1,986 5,809 20,723 50.0

SOURCE: Bureau of Transportation Statistics. Air Freight Summary Data (All US). www.transtats.bts.gov/freight.asp?pn=0&display=data2. Accessed June 12, 2010.


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Air cargo growth is also fueled in part by the rapidly expanding and

newly emerging economies in Asia. The economic boom in India and China

is expected to result in intra-Asian traffic having the largest share of the air

cargo market. Figure 7-5 illustrates the projected international air freight

shares in 2011. Figure 7-6 shows the primary intercontinental air freightflows in 2007.

Despite the financial crisis of 2009, the general midterm outlook for the

air cargo industry appears strong. Nonetheless, there are growing concerns

about factors that could hinder its growth. Rising oil prices, unrest in finan-

cial markets, and political uncertainty in many areas of the world have

slowed the overall development of the market. Many consumers in Europe

and North America are also concerned about the environmental impact of

plane trips. Air freight accounted for 0.4% of the ton-miles of domestic

freight in 2001, but was responsible for 23.2% of the fuel used in the domes-

tic freight sector. (6) Global companies may try to limit their carbon foot-print by looking for alternatives to shipping goods from one end of the

world to another. In addition, technological advancements that improve

the speed of goods movement by ship may make sea transport a viable solu-

tion for express shipments.

Asia Pacific - North America13%

Within Asia Pacific

26%

Europe - Asia Pacific

18%

Within Europe

6%

Europe -

North America12%

Within

North America

1%

North America -

Latin America

5%

Within Middle East

2%

Others

17%

Within Latin America

1%

Figure 7-5 Projected 2011 international air freight shares

SOURCE: International Air Transport Association Economic Briefing: Passenger and Freight Forecasts 2007 to 2011,

October 2007.


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Figure 7-6 International air freight flows in 2007

SOURCE: MergeGlobal Value Creation Initiative. End of an Era? American Shipper, August 2008: 33-47. Reprinted with permission of MergeGlobal.FEU-Kilometera 40-foot container transported one kilometer.

7.6 Managing Air Cargo Successfully

Even in a growing market, success does not come easy in the air freight indus-

try. Most airlines in the United States and Europe have shown poor returns on

the investment for their shareholders. Several major carriers in the United

States have been in bankruptcy proceedings at least once in the past several

years. Former market leaders, such as Pan Am and Eastern Airlines, have goneout of business. Rising fuel expenses and the cost of meeting new security re-

quirements have placed increased pressures on air cargo operators. At the

same time, an abundance of capacity and strengthening buying power fueled

by consolidation in the forwarder markets have put pressure on the revenue

side. Airline executives need skills in a variety of business disciplines in order

to achieve positive results for their shareholders.

7.6.1 Fleet Management and Network Planning

Managing a protable freighter airline begins with the selection of a eet thatmatches the airlines business model. Successful airlines invest in aircraft that

meet their operational needs while minimizing operating and maintenance

costs. Constrained resources in the market, such as the limited number of air-

craft available and the shortage of qualified pilots, in conjunction with the

massive financial resource commitments that have to be made up front, con-

tribute to the challenging task of fleet management.

When selecting routes, a carrier must decide if it wants to be a network car-

rier with a published schedule or if it wants to be a charter carrier with a flex-

ible schedule. Charter carriers market their air cargo capacity in conjunction


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with their operational capabilities and make routing and other operational de-

cisions after securing business. Network carriers publish a reliable schedule

and look for business for the routes in their network. The network can consist

of many point-to-point routes, although most carriers operate with a hub-and-

spoke network. In a hub-and-spoke network, freight is transported first to thehub, where it is reloaded on another aircraft that will bring it to its final desti-

nation. There are two advantages of the hub-and-spoke system. First, the con-

centration of the fleet in one place allows a company to make appropriate op-

eration decisions, such as which aircraft to use for which destination. Second,

the hub-and-spoke system provides the possibility of consolidating freight on

one flight. The disadvantages of hub-and-spoke are that most freight will not

take the most direct route to its destination and that the operational challenges

of managing all freight at one hub can be considerable. Regardless of the net-

work structure, trade imbalances often make it difficult for airlines to fill avail-

able cargo space. For example, the demand for cargo capacity from China tothe United States greatly exceeds the demand for capacity from the United

States to Chinaand this trend is expected to accelerate over the next few

years. (7) Some flights will, as a result, travel relatively empty in one direction.

Airlines need to obtain trac rights (called freedoms of the air) from for-

eign governments to operate internationally. There are a total of nine freedoms

that describe the right of one nations carrier to operate in another country.

The first freedom, for example, is the right to fly across the territory of a for-

eign country without landing; the second freedom is the right to land in a for-

eign country to refuel or for other purposes. These freedoms are typically ex-

changed between countries, and a carrier must apply for the traffic right

referred to in these international agreements.(8)

In 2007, the United States and China signed an agreement that vastly ex-

panded a carriers right to fly to the destinations in the other country. (9) The

EU-US Open Skies Agreement of 2007 went even further by allowing carriers

to fly between any two cities within the two areas of jurisdiction. In addition to

traffic rights, airlines need to negotiate with airport operators to obtain landing

rights. Often landing rights become part of the intergovernmental traffic

right discussions, as limited gate capacity at airports can constitute a trade

barrier. As part of the negotiations between the United States and the Euro-pean Union, London-Heathrow Airport has been opened to more US carriers;

previously, only United Airlines and American Airlines had the privilege of op-

erating in and out of this lucrative gateway. (10)

All-cargo carriers may have different routing needs than passenger carriers

and thus require different sets of air traffic rights from those needed by pas-

senger carriers. But separating air cargo and passenger rights will be fraught

with difficulty in Asia because of the distinctive characteristics of its air cargo

market, where most passenger carriers have substantial cargo business and op-

erate combination fleets. (11)


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7.6.2 Operations Management

An important part of air cargo service quality occurs on the ground. Managing

the export acceptance, the import delivery, and timely transfer of millions of

single shipments each year is an operational challenge. Cargo handling and

aircraft handling are ways for airlines to dierentiate their services. For ex-

ample, after a period of outsourcing, Delta Airlines announced in 2008 that it

would once again begin to manage its own handling processes as part of a stra-

tegic push to grow its cargo revenue share. (12)

Aircraft handling or ramp handling is the process of loading and unloading

the aircraft. Skilled loading requires fast but safe operations so that neither

freight nor aircraft are damaged. Training of operators and the use of appropri-

ate loading equipment is required. Because the investment in such loading and

unloading equipment can only be amortized through frequent use, the airport

entity or dedicated companies typically provide this service to airlines thatmust load/unload outside of their hub.

Cargo handling or warehouse handling refers to the processes in the ware-

house where shipments on the export side are accepted from customers,

weighed and measured, and loaded into containers or onto pallets. Optimizing

these processes is a major operational challenge. Total quality management

and continuous process management techniques are often employed by air-

lines (or their selected subcontractors) to reduce the incident rate (loss of

freight due to damage or pilferage), optimize throughput in the warehouse,

and limit costs. Security screening has recently added complexity. Warehous-

ing technologies such as electronic transfer vehicles and automated stackersystems are often employed to optimize the workflow.

Shippers and forwarders select air transport over more economical means

of transportation only in cases of necessity. The customer expectation is that

air cargo services will usually be a flawless operation as any damage, loss, or

delay can have a major impact on the shippers business. Thus, ground quality

is a key factor for successful air cargo management. As an example of the type

of analysis that can examine such operations, Yan et al. combine two workforce

supply principles, two flexible management strategies, and the related operat-

ing constraints to assist an air cargo terminal to more efficiently manage its

workforce supply and set its shift schedule under stochastic demand. (13)

7.6.3 E-commerce

E-commerce has also brought new challenges and opportunities to the air

cargo industry. An important component is a third-party e-commerce com-

munity network. Leung et al. present a framework for such a network, which

extends the traditional business-to-business e-commerce exchanges to a

more broadly based e-commerce approach at the industry level. (14) The


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proposed infrastructure differs from traditional portals in that it features the

online integration of business transactions. It provides a virtual market for

agents of the air cargo industry, enabling them to develop and engage in lo-

gistics integration. It also facilitates tracking and tracing, and minimizes un-

necessary travel and inventory costs, thus achieving supply chain manage-ment at the industry level. Planning and cooperation among industry agents

using e-commerce as an enabler could transform the air cargo industry into

one that can provide customized services to individual shippers at the cost

level of mass production.

7.6.4 Marketing, Product Management, and Pricing

While integrators such as FedEx and UPS provide complete door-to-door ser-

vice, traditional cargo carriers provide service to only a segment of the trans-

portation chain. Airport-to-airport transportation is almost always preceded

and followed by other means of transportation, such as by road, rail, or water.

Most shippers that rely on the services of a nonintegrated air cargo carrier thus

find that they are in need of the services of an international air freight forward-

ing agent, that is, a freight forwarder. These companies are also often referred

to as third-party logistics providers (3PLs).

The forwarder is an agent that arranges, on behalf of the shipper, the entire

transportation chain and provides ancillary services related to the transport of

goods. Forwarders can apply to Cargo Network Services, a subsidiary of the

International Air Transport Association, for accreditation as a cargo agent.

Cargo airlines find most of their business is generated by freight forwarders,

making them the customer base for all airlines. The top 10 freight forwarders

are listed in Table 7-5.

Techniques to win customers encompass all typical business-to-business

sales and marketing practices. Cargo airlines employ sales representatives that

Table 7-5 Top 10 freight forwarders, 2006

Freight Annual Revenue (billions) Employees Warehouses/Offices

1 DHL Logistics $ 31.0 125,000 1,600 2 Kuehne & Nagel International $ 14.9 46,000 400

3 Schenker/Bax Global $ 14.0 53,700 1,500

4 UPS Supply Chain Solutions $ 8.0 37,000 936

5 Panalpina World Transport $ 6.33 14,300 240

6 C. H. Robinson Worldwide $ 6.6 5,700 100

7 Agility Logistics $ 4.9 20,000 n/a

8 Ceva Logistics $ 4.6 38,000 567

9 Expeditors International $ 4.6 10,600 110

10 NYK Logistics $ 4.2 17,000 260

SOURCE: Armstrong, Richard, and Thomas Foster. Moveable Feast of Top 25 Global Third Party Logistics Providers. Global Logistics & Supply Chain Strategies

Magazine,May 2007: 28-53. glscs.texterity.com/glscs/200705. Accessed June 12, 2010.


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call on customers. Trade fairs and business associations play an important role

in bringing customers and suppliers together. Building relationships is crucial

as airlines and freight forwarders engage in hundreds or thousands of indi-

vidual transactions every year.

Cargo airlines sell aircraft space that is constrained by both weight and vol-ume. A load of dense freight (e.g., boxes lled with lead) could exceed the air-

crafts take-off weight limit long before the space in the aircraft is exhausted.

Alternatively, low-density freight (e.g., boxes lled with feathers) would use up

all the space in the aircraft before the aircrafts weight limit is reached. Airlines

thus charge the higher of either the actual weight (measured by a scale) or the

volume weight (calculated assuming an average density). A load masters task

is to create the aerodynamically optimal load mix out of the total shipments

booked onto a flight. The volume weight in periods calculated by dividing the

volume of the shipment (in cubic inches) by 165.

Airlines charge their customers separately for additional services; the rate isassessed by pound, with a minimum charge for small shipments. In the past

few years, airlines have struggled to increase their rates. Despite strong de-

mand for air transportation, capacity exceeds demand on most routes, making

it a buyers market except for a few routes and during peak periods.

To optimize revenues, cargo airlines differentiate their services and prod-

ucts. Almost all cargo carriers offer an express shipment service that comes

with special features. One of the most noteworthy features allows the custom-

er to tender express shipments right up until the departure time, and the ex-

press freight is the first to be available for pick-up at the destination. Express

services often come with a performance guarantee, possibly including a refund

in case of a controllable delay. Other special services are often designed and

marketed for special handling needs, i.e., goods requiring refrigeration, live

animals, dangerous goods, and high-value items.

7.6.5 Margin Steering and Revenue Management

Generally, airlines offer cargo space in two stages. In the first stage, a few

months prior to a season, freight forwarders bid for cargo space over the next

season; the cargo capacity committed during this bidding process is called al-lotted capacity. Out of the remaining cargo space, airlines allocate specific

amounts to contracts, which reserve space for large customers at a fixed price.

In the second state, the remaining spacethe capacity available for free sale

is then available for booking within four weeks of the flight departure.

Airlines typically do not know how much allotted capacity will be unused in

advance of the flight departure. In addition, on planes carrying both cargo and

passengers (combination carriers), the cargo space contains passengers baggage,

cargo, and mail (which always gets high priority). The amount of fuel that is load-

ed onboard the aircraft varies with weather and other factors, and the weight of


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the fuel influences how much cargo capacity is available for free sale. Airlines do

not know how much capacity they will have available for free sale until close to

the departure date. Freight forwarders often intentionally book more capacity

than they actually need to ensure space on constrained flights, since most airlines

do not charge a penalty for returned capacity. The airlines add the released spaceto the pool of capacity available for free sale.

To hedge against the variability in the amount of cargo actually handed in at

departure (cargo tendered) and customers cancellations, airlines commonly

overbook their capacitythat is, they sell more capacity than physically avail-

able in order to compensate for cargo that does not show up prior to departure.

Two considerations important in overbooking are spoilage (demand turned

away because the overbooking level was too low, leaving excess capacity at de-

parture) and off-loads(booked demand that the airline cannot accommodate at

departure because the overbooking level was too high). Spoilage tends to be

more costly for the airlines, as off-loads can usually be rerouted at no extra cost.In the passenger sector, the common practice is to formulate the overbook-

ing problem (inventory) as a newsvendor problem (15),with the overbooking

level selected to minimize the total expected costs of spoilage and off-loads.

New approaches designed specifically for cargo overbooking are described by

Luo and Cakanyildirim. (16)

The allocation of the capacity available for free sale to the demand that ar-

rives over time constitutes an important problem in the airline industry. This

problem is very similar to the seat inventory control problem in the passenger

revenue management literature (17)namely, how to allocate a nite seat in-

ventory to demand that occurs over time, such that at departure the plane is

filled with the most profitable mix of passengers.

The fundamental decision in revenue management is whether to sell capac-

ity when a request comes in, or to save it for a potential later sale at a higher

price. For example, a seat on an airplane can be sold at dierent prices, depend-

ing on the capacity already sold and the time remaining until the departure of

the aircraft. While revenue management practices have been widely used in

the passenger segment of the airline industry, they have only recently received

increased attention in the cargo segment.

Cargo capacity has all the features for revenue management techniques tobe successful: it is lost after the plane takes off, it is limited, and it can be offered

at different rates depending on the service offered (e.g., critical and specialty

cargo, expedited, standard). The decision of whether to accept or to reject an

incoming booking request (for a seat on the plane or for cargo capacity) can be

based on different strategies. The most important types of control in the pas-

senger segment are booking limits, protection levels, and bid prices.(18)Book-

ing limits allocate a fixed amount of capacity to each fare class. Protection lev-

els specify an amount of capacity to be reserved for a fare class or a set of fare

classes. Bid prices are threshold values used to accept/deny incoming booking


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requeststhat is, the decision maker accepts the request if the sum of the bid

prices along the itinerary is lower than the proposed fare.

There are two commonly used mathematical programming models in the

passenger revenue management literature for computing bid prices on a flight

network. The rst, the deterministic linear programming (DLP) model, makesthe assumption that the demand is deterministic and equal to its mean. The

second, the probabilistic nonlinear programming (PNLP) model, maximizes

the expected revenue assuming a randomly distributed demand.

The deterministic solutions have been observed in several studies to give

better bid prices than the probabilistic solution. (19)However, the studies usu-

ally assumed Poisson distributed demands, which ignore bookings with more

than one passenger (which occurs very commonly in practice); as a conse-

quence, the resulting variation in demand used in the studies was much lower

than that observed in actual practice.

When applied to the air cargo industry, the bid prices derived from the DLP

model have proven to be almost nonrestrictive (20)they reect a rst-come,

rst-served (FCFS) capacity allocation policy. Clearly, allocating the capacity

in a FCFS basis is, in general, not very protable and goes against the funda-

mental premise of revenue management, in which some capacity is reserved

for high-margin customers. The research on developing efficient solutions for

the PNLP model has been very limited. Besides the specialized algorithm pro-

posed by Ciancimino et al. (21)for the railway yield management problem and

the algorithm proposed by Rao(22) to solve a slightly different formulation,

there is an approach with application for air cargo that has been developed by

Popescu et al.(23)

While the capacity allocation problems from the passenger and cargo seg-

ments have similarities, there are also some significant differences:

For passengers, the unit capacity is dened by a single dimension (seat); for

cargo, capacity has two dimensions (weight and volume).

Cargo capacity is often uncertain due to allotments, no-shows, and passen-

ger luggage on combination carriers.

Most passengers demand a specic itinerary, whereas for cargo shipments

customers often specify an origin and destination and accept any itineraryas long as the shipment arrives at the destination by the requested delivery

time (itinerary-specic versus origin-destination-specic demand); hence,

in cargo there is flexibility in routing.

Most passengers demand one unit of capacity (seat) whereas customers re-

quest multiple units of capacity for a cargo shipment (specified by weight

and volume). Hence, cargo demand has a wide range of quantities and can

be lumpy, which complicates matching demand to capacity.

The trac is imbalanced. The greatest part of air cargo ies only in one di-

rection; passengers, in contrast, mainly make round trips. On major freight


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routes it is common to find that the traffic in the densest direction is twice

or almost three times as great as in the reverse direction, as in the case on

the Hong Kong to Frankfurt route.

All these differences make the already existing techniques from the passen-

gers business model unsuitable for the cargo operation model. Several new

techniques that address specific differences have been developed in recent

years. Xiao and Yang (24)and Pak and Dekker (20) address theoretical aspects

of revenue management under multidimensional capacity. Xiao and Yang

model the problem as a continuous time stochastic control model, and derive

structural properties for the case where the remaining capacities in two di-

mensions are equal or differ. When they are equal, they show that the optimal

policy is not characterized by a nested price structure (if a fare class is open,

then all classes with higher fares should also be open) as in the one-dimension-

al case. Pak and Dekker model the problem as a multidimensional online knap-

sack problem and propose a heuristic to determine the bid prices based on a

greedy algorithm proposed by Rinnooy et al. (25) A test case shows that the bid

prices perform better than the traditional deterministic model used in the pas-

senger business model. Demand lumpiness has been addressed by Popescu et

al.(23), who proposed splitting the cargo bookings into two categories, small

and big cargo, and treating each category differently. The large bookings tend

to be made close to the departure date of the airplane, and usually only a few

bookings fill up the capacity dedicated to big cargo, whereas the small book-

ings are made throughout the booking period.

Another problem studied in the air cargo literature concerns the optimalordering policies for freight forwarders when acquiring cargo capacity from

airlines to satisfy demand from shippers. The freight forwarders have to con-

rm (out of the allotted capacity) the capacity needed a few days before the

aircraft departs; however, shippers demands materialize between when the

order is placed and the actual departure time. That is, freight forwarders have

to place their order such that they minimize the cost of ordering too much ca-

pacity and not using it versus the cost of ordering too little capacity and back-

ordering demand for next flights.

Generally, there has been very limited research done in capacity planning

models for air cargo, despite its importance in the air cargo supply chain. Chew

et al. (26)analyze the capacity management problem for air cargo; however,

the analysis is restricted to a six-period horizon and there are no results re-

garding the structure of the optimal policy. The problem is solved by recur-

sively calculating the space to order for each of the six periods of the planning

model. Popescu (27) formulates the capacity management problem as a perish-

able inventory problem, with the perishable commodity being the aircrafts

capacity, which is lost after departure. She defines the time between capacity

confirmation and flight departure as lead time. Although there is vast research

on perishable inventory management, when there is lead time most of the re-


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searchers propose either myopic heuristics or numerical solution approaches

for a short planning horizon. (28) Popescu finds the optimal policy under vari-

able ordering cost, backorder, and linear perishing cost, and shows that the

optimal expected cost function is a convex function with respect to the avail-

able and future capacity orderedLperiods in advance, forLbeing one or twoperiods. Furthermore, she shows that the optimal policy is a stationary policy

when far enough from the end of the horizon.

7.7 Global Events Shaping the Industry

Several recent events have had significant effects on the air cargo industry. It

remains to be seen if these events will have a long-term effect on the profitabil-

ity of the industry.

7.7.1 Safety and Security in the Post 9/11 Era

Following the terrorist attacks on September 11, 2001, the entire aviation in-

dustry had to undergo major changes. In the United States, the Department of

Homeland Security was established on November 25, 2002, by the Homeland

Security Act of 2002 (Public Law 107-296). The Transportation Security Ad-

ministration (TSA), formed in 2002 and initially part of the Department of

Transportation, is responsible for all aviation security measures; in March

2003, TSA become a part of the Department of Homeland Security.

The Implementing Recommendations of the 9/11 Commission Act of 2007

(Public Law 11-053) require 100% screening of cargo transported on passenger

aircraft within three years of the laws passagei.e., August 2010. The Euro -

pean Union and other government entities have imposed similar security di-

rectives to improve aviation security. (29)

These security demands have brought additional operational costs for in-

ternational air carriers. Investments in security personnel, video surveillance

systems, and screening devices have strained the resources of most carriers. In

response, most airlines have introduced a security surcharge to recoup some of

their investment and operational costs. For example, in August 2008, SAS Car-go reported on its website that it would impose a security surcharge of 0.15

per kilogram. Such security mandates not only add costs, but also slow down

the handling process, which leads to an increase in total transportation times.

7.7.2 Oil Prices and Currency Volatility

The increase in oil prices over the past five years has brought many airlines to

the brink of bankruptcy. Oil prices and consequently kerosene prices have in-

creased sevenfold since 2002, as illustrated in Figure 7-7.


23/30


Airlines have responded by fuel hedginglocking in the rate of fuel some-

times years in advance. However, in times of price increases that exceeded most

expectations, many carriers have found themselves very vulnerable to cost in-

creases. As their ability to raise rates has been limited, airlines have introduced

a dierent method to generate revenue to oset these escalating costsnamely,surcharges. Though each carrier employs its own model of surcharge calcula-

tion, the basic model is similar. The carrier monitors the development of fuel

costs and imposes a specific surcharge amount per kilogram of cargo, which is

tied to the fuel price level. Whenever the fuel price increases above or decreases

below a certain threshold, the surcharge is adjusted upward or downward.

Carriers argue that the surcharge model allows full transparency. In times

of volatility, surcharges reduce transaction costs as base rates do not need to be

adjusted. Base rates are often set in contracts and are valid for several months

or a year. Having a steady component in the rate and a fluctuating piece in the

surcharge allows carriers and forwarders to negotiate long-term rates withoutfear of locking themselves into an unfavorable situation should fuel costs

change. Critics argue that fuel costs are a cost of doing business and the airlines

should build these costs into their regular rates. Making their surcharges pub-

lic information (by, for example, posting them on their websites) led competi-

tors to match surcharge levels rather than compete for business by, for exam-

ple, investing into a more fuel efficient fleet. Some critics consider this illegal

and anticompetitive price signaling.

Figure 7-7 Oil prices between 2002 and 2008

Crude Oil Prices

0

20

40

60

80

100

120

140

160

2002-Jan

2002-Jul

2003-Jan

2003-Jul

2004-Jan

2004-Jul

2005-Jan

2005-Jul

2006-Jan

2006-Jul

2007-Jan

2007-Jul

2008-Jan

2008-Jul

Month

Price

inUSDollars

SOURCE: US Energy Information Administration. tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm. Accessed June 12, 2010.


24/30


7.7.3 Alliances and Antitrust Challenges

In February 2006, several news outlets reported that European and American

authorities had begun to investigate an alleged price-fixing conspiracy related

to the imposing of fuel surcharges. (30)The European Commission and the US

Department of Justice initiated searches at the offices of many major interna-

tional airlines. (31) The investigations apparently were not limited to cargo

pricing practices, but also extended to passenger ticket surcharges.

Since then many international carriers have announced that they have been

fined by the authorities. In August 2007, British Airways confirmed that it had

received a ne of $550 million from Britains Oce of Fair Trading and the US

Department of Justice. Korean Air Lines Co. Ltd. was fined $300 million by the

Department of Justice after pleading guilty to colluding with competitors to fix

fuel surcharges on cargo and fixing passenger fares between the United States

and Korea. In January 2008, Qantas Airways pleaded guilty and agreed to paya $61 million criminal fine for conspiring to fix cargo rates in the United States

and elsewhere. In May 2008, Japan Airlines was sentenced to pay a $110 mil-

lion penalty for price fixing on international cargo shipments. (32)

In June 2008, further nes were made public. Air France-KLM, Cathay Pa-

cic, Martinair Holland, and SAS Cargo pleaded guilty to conspiracy charges

to x air cargo rates. The Department of Justice announced that Air France-

KLM was ned $350 million. Cathay agreed to pay a ne of $60 million, Mar-

tinair $42 million, and SAS $52 million.

The fines levied against the air cargo carriers to date far exceed $1 billion.

Furthermore, high-ranking cargo executives from Qantas and SAS Cargowere sentenced to jail time. Alleged damages to shippers are still subject to

civil lawsuits.

The scandal shook the industry to its core. Even though surcharges for fuel

and security costs continue to be imposed, airlines have made changes to the

way they communicate internally and externally. The scandal also affected the

collaboration between air cargo carriers. Cargo carriers seem to have scaled

back their alliance activities in response to the antitrust investigations. At this

time, there is only one large cargo alliance operatingSkyTeam Cargo.

Air cargo alliances have been subject to academic research as well. Zhang

et al. (33) developed an oligopoly model to investigate the effect of an air

cargo alliance on competition in passenger markets. They consider a model

in which the partners, while continuing to offer their respective passenger

services, jointly offer a new integrated cargo service by utilizing their pas-

senger aircraft and routes. Their findings show that such an alliance will

likely increase the partners own outputs, while simultaneously decreasing

their rivals outputs, not only in the cargo market but also in the secondary

passenger market. Furthermore, the alliance is likely to reduce passenger

prices and increase total surplus.


25/30


Houghtalen et al. (34) address the operational issues that arise when cargo car-

riers form an alliance, taking into account the technical and legal challenges as-

sociated with integrating information systems of autonomous carriers and how to

best manage alliances to ensure sustainability. In summary, operational and legal

obstacles have limited the development and importance of air cargo alliances.

7.7.4 Emerging Markets and Players in India, China, and the Middle East

China has attracted a variety of foreign direct investment by offering cheap and

skilled labor coupled with the worlds largest domestic market. As more corpo-

rations shift their manufacturing capacity toward Asia, air cargo carriers have

become very aggressive in obtaining air service rights and developing infra-

structure to prepare for the expected large increase in air freight demand.

According toAir Cargo World,Chinas domestic air cargo market grew 20%

every year since 1990, and revenues were expected to total $3.35 billion in

2010. Airports in China were expected to process 11.8 million metric tons in

2010, with an average annual growth rate of almost 14%. To address this rapid

growth pace, China will need 130 new freighters over the next two decades,

according to Airbus, which predicts that Chinas domestic market will grow an

average of 10.5% annually, while its international market will grow 8.5% per

year. According to Boeing, Chinas domestic air cargo sector will grow 10.8% a

year over the next two decades. (35)

As also reported inAir Cargo World, India has long served as a useful stop-

over for cargo carriers operating between Europe and Asia, and it now serves

as a refueling stop for freighters on their way to China and other parts of Asia.

Future growth and diversication of Indias economy will trigger continued

growth of the air cargo industry. New aviation trade deals have spurred in-

creased passenger trac on Middle Eastern airlines operating in India. (36)

Registering nearly 20% growth in the past three years (both domestic and

international) and notably 34% growth in domestic cargo in one year, India

could become a key growth market for air cargo.

Despite the economic and political instability in the Middle East, the region

has been growing rapidly. As the United Arab Emirates vies to diversify its

economy, it is making massive investments to shift traffic hubs for cargo andpassengers away from Europe to the Middle East. Making use of liberated mar-

kets, it is gaining market share from the European carriers. Countries such as

United Arab Emirates and Qatar are investing billions of dollars in major infra-

structure developments. Among the ambitious projects currently underway is

Dubai World Central, which is expected to become the biggest air freight hub

in the world, capable of handling a massive 12 million tons of cargo annually.

According to the International Air Transport Associations (IATA) chief econ-

omist, Brian Pearce, the Middle Easts growth trend is signicantly higher than


26/30


projected, with the robust oil-based economies contributing to an increase in

both passenger and cargo transport. (37)

These market changes will probably cause cargo traffic to lean toward those

emerging markets. New cargo hubs and a stronger fleet will position the new

carriers to take advantage of a strong regional and international cargo market.

7.7.5 Open Sky Agreements and Free Trade Zones

China has agreed to substantially reduce trade barriers that have plagued US

exports for decades. The Bilateral World Trade Agreement of 1999 led to Chi-

nas entry into the World Trade Organization (WTO), which is an important

and positive step in expanding freight trade. The EU-US Open Skies Agree-

ment allows any airline of the European Union and any airline of the United

States to fly between any point in the European Union and any point in the

United States.

These agreements will spur growth, but they will also fuel further competi-

tion in a market that is already oversaturated with capacity. However, IATA

reported the EU-US Open Skies Agreement increased transatlantic capacity by

10% in April 2008, which might mean that more capacity and flexibility com-

ing from more competition can yield positive development. (38)

One industry analyst has identified the following three major trends in the

industry:

Air cargo will grow at a faster rate than passenger side of the business.

Continuing consolidation among freight forwarders will trigger more glob-ally integrated solutions from the airlines.

The business of carrying freight will increasingly move toward dedicated

carriers as opposed to a combination passengers and cargo. (39)

7.8 Air Cargo Research Areas

There are considerable challenges facing the industry, which provide up a va-

riety of research opportunities:

Air cargo operations at airports

More ecient material, information ows in air freight terminals.

More ecient warehouse and ground handling systems: many stations are

reporting insufficient capacities to accompany the growth in the volume of

air cargo. An example is Los Angeles International Airport, where storage

facilities to temporarily store cargo have had to be located off-site.

Appropriate performance metrics to evaluate air cargo hubs.


27/30


Pricing and revenue management

Better pricing methodology: in general, contract pricing is often static. To

adjust rates in response to daily changing supply and demand, forwarders

and airlines depend on call centers to negotiate ad hoc pricing. However,

technological advancements have made pricing more dynamic in the airfreight industry. With market segmentation, pricing is an extremely compli-

cated and highly-dimensional problem. This problem is of extreme impor-

tance and needs to be studied in greater detail.

Revenue management: the air cargo revenue management problem is a very

complex problem. There are several areas of open research in this direction,

such as addressing the multidimensionality of cargo, forecasting the capacity

available for free sale, and embedding origin-destination demand into the

revenue management systems.

More research is needed for guiding the freight forwarders when conrmingtheir ordered capacity with the airlines. A better capacity management on

the freight forwarders side will translate into a better service level to the

shippers and a more reliable relationship between the airlines and the freight

forwarders. It will also impact the accuracy of the available capacity at de-

parture for the airlines.

Air cargo flight network

While alliances can help expand individual flight networks, air cargo has an

important feature that is not present to this extent in the passenger business

namely, traffic imbalance. A more thorough understanding of the impact of the

traffic imbalance on network design is needed.

Security

As a result of the events of 9/11, security procedures for cargo shipments have

significantly increased. However, as Petersen points out in a white paper on the

air freight industry (40), it is not realistic to expect 100% of cargo to be inspect-

ed, as it would slow down its movement beyond acceptable margins. The op-

portunity in this sector is to develop models to address the trade-off between

shipping cargo securely and efficiently.

Acknowledgments

The authors would like to acknowledge Brittany Luken, a graduate student in

civil engineering at Georgia Tech, for her contributions to this chapter.


28/30


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