Kuehne + Nagel: Simplicity is the solution
20 / 03 / 2015
For airlines worried about the shift of cargo from air to sea, Tim Scharwath, executive vice president air logistics for Kuehne + Nagel, has both good and bad news. The bad news is that yes, air freight is playing a smaller role in the logistics of some key industries than it used to. The good news is that the majority of modal shift has probably now taken place.
Take consumer electronics, long a bedrock of the air freight business. As late as the early 2000s air cargo warehouses used to be full of big brown boxes containing personal computers. Nowadays, laptops and tablets are not only much smaller in size: they are also cheaper, lower margin products.
New products still get flown, but companies quickly shift from air to sea after the initial launch. "Once the RFQs used to be for 10,000 sea containers: now they are 40-50,000," Scharwath says. "On lower margin products how to reduce the cost of transport is a much bigger issue."
Remember too how personal computers used to be customised – this was the business that made Dell rich. Components would be air freighted in from across the world and assembled in the destination country into a PC that perfectly matched the customers need. But now notebooks are standardised and can be shipped direct by sea.
Set against this Scharwath does see a trend towards more use of air freight from some big industrial conglomerates. "They used to have a lot of local inventory but are now reducing it," he says.
Meanwhile other shippers may plan only to use air freight in exceptional circumstances, but are finding that with slow steaming sea freight is becoming less reliable than they need. Exceptional circumstances – the supply chain disruptions caused by the Fukishima disaster in 2011, automotive recalls when a component is found faulty – also seem to be becoming more common.
Even these increases in demand are not unalloyed good news for air freight, however, because capacity is still growing faster than demand as the passenger business continues to take delivery of belly cargo-friendly next generation aircraft.
Scharwath says that while global demand has grown 4-5 percent this year, capacity has grown 6-7 percent. The result is relentless pressure on yields. "We have had this overcapacity for almost ten years now, apart from 2010," he says. "This is the overarching issue for air freight at present."
What can be done about it is less clear. Many airlines respond to yield pressure by rushing to boost their special products range, especially in the pharmaceutical field, but Scharwath predicts this bonanza will soon come to an end. "Pharmaceuticals yields will come under pressure," he says. "We see that shippers already trying to achieve that, and some are successful and some not."
Lower yields are also continued bad news for freighters, and one wonders how a large forwarder such as Kuehne + Nagel views the continued decline in maindeck capacity. Scharwath’s answer is that there will always be a role for freighters, for example moving outsize cargoes and on high volume perishable routes. But he clearly expects the shakeout in the sector to continue, particularly among all-cargo airlines.
"I think they will be more under pressure than those carriers who have both freighters and belly capacity, which is a more stable model," he says. "We will probably continue to see one or two all-cargo operators, though probably not the size they are now, and probably with a lot more charter movements supplementing their scheduled operations."
He also thinks that ulimately there may have to be different rates for belly and freighter capacity, with freighters charging more. "You see that already to some extent. If it is an outsize load that can’t go in the hold then freighter airlines already charge a higher rate."
Set against all these trends what can air freight do to fight back? One promising note is that Scharwath says some shippers are concerned that the relentless downward pressure on yields may start to affect quality. That suggests that there is scope for better airlines to command a premium – if they can prove that they are worth the money.
Scharwath also reckons there are new sources of business to be had if air freight can make itself more user-friendly. One way it could do this, he says, is by ending the blizzard of security and fuel surcharges and offering all-inclusive rates. "We need more transparency in our pricing, so that the customer knows exactly how much he has to pay."
K+N has proved this in practice by launching KN FreightNet, a new web interface that allows customers with an account to go online, enter shipment details, get an immediate binding quote including all surcharges, and then book and track the shipment online. Though still in its early days (it is still being rolled out and will be available globally by the end of the year), Scharwath says this has already brought in a whole new segment of business.
"These were shipments which would have been too expensive for our sales force to pursue," he says. "I think there are also lots of young people out who have grown up with social media and who want to be able to control online how they interact with their service providers. The site is so easy to use that it takes the complexity out of booking an air freight shipment."
To date FreightNet has only been available to existing K+N customers, but the forwarder is thinking of making it public – not to allow any member of the public to book a shipment, but to let any company that wishes set up an account.
This approach is similar to the kind of thing the integrators have offered for years, but Scharwath says the K+N system is much broader in scope. "On integrator sites you can only book shipments up to 70 kilos for urgent shipment. Our system takes anything up to 400 tonnes. "
One might wonder why more forwarders don’t take this obvious step. Scharwath’s answer is that none of the other big forwarders have the unified airfreight, seafreight and accounting IT system that K+N has. "You need a single global system to have this kind of product. Once you start getting into interfaces with other systems, it gets too complicated."
K+N has also been an enthusiastic exponent of e-freight and has been digitising all shipper documents for eight years. "If you look in our files, often the only paper you see is the airwaybill," Scharwath says.
In addition, it is one of the very few forwarders to have XML messaging capability, which replaces Cargo-IMP messages with internet-friendly messages that can be read by any computer, including shipper ones. "You can’t do e-freight without XML," Scharwath says. "It is the only way to integrate all the relevant parties into the system."
Not surprisingly, given these technological resources, he is keen to see e-freight adopted as soon as possible, and is pleased to note a new impetus to it in recent months. "IATA and major carriers such as Lufthansa are really pushing on it," he says. "I think next year will be the big year for the e-house airwaybill."