Air Cargo

Air cargo traffic continues to grow at a healthy rate, but it has not yet achieved the status
envisioned by the air cargo pioneers of the 1930s and 1940s. They fully expected that air cargo
would in time be the most important revenue source for the airlines. After all, every known form
of transportation had earned more money from the carriage of freight than of people. Thus, the
only real question for the airlines was how soon air freight would overtake passenger revenues.
Most experts felt it would happen within years or 10 years at the most.
So what has happened? Why is it that the time frame for the ascendancy of air cargo keeps being pushed into the future? And why do many experts suspect that air cargo may never be the
top money maker?
A fundamental reason for air cargo's inability to surpass passenger revenues is that air is a
premium-cost transportation mode compared to any surface system. It costs far more to operate
an airplane than to run a truck, ship, or railroad car. Thus, there has to be a compelling reason for
customers to use air services. Computer companies regularly ship by air, for example, because
the added cost of air transportation is more than offset by getting the product to market and into
service earlier. Shippers of perishables-such as fresh fruits, flowers, and fish-use air transport
because they have no other way to reach their worldwide markets. But shippers of most
commodities find surface delivery times acceptable and therefore choose the lower transportation
costs associated with surface modes. .
Another reason freight lags behind passenger traffic is that aircraft being produced today,
and on which air cargo has relied in the past, have been designed primarily for the carriage of
passengers and are not particularly well suited for freight. Nor are we likely to see, any time
soon, the research and development funds needed to produce a vehicle better suited to the
carriage of cargo.
The unprofitable operations of freighter aircraft through the years also took a toll on air
cargo's reputation. The fact that freighters lost money somehow translated to the belief among
senior management of the leading US carriers that air cargo was an unprofitable businesscertainly
not a valid conclusion when you look at the profits that are made by the carriage of
cargo in combination aircraft. In any, event, the perception that cargo was a loser has convinced
many passenger airline managements not to invest their scarce capital in any more freighter
aircraft.
Although, air cargo has failed to achieve the preeminent position that was expected of it,
and in spite of the limitations imposed by the marketplace and the 'design of aircraft, air cargo is
alive and well. More and more companies are using air cargo services as they experience the
inventory reduction benefits that air transportation can provide.

Although air mail was the first of the air cargo products, it now accounts for only about 7 percent
of the revenues for cargo carried by the world's air, lines. Mail growth has been steady but slow,
advancing an average of about 4 percent a year but eclipsed by the faster growth in express and
freight. Mail will probably continue to grow at a leisurely pace, aided on the one hand by the
expansion of international commerce and beset on the other by the rapid growth of fax services
and small-package carriers. The real potential for air cargo growth lies with air express and air
freight. In the short term, most projections place air cargo growth on the order of 6 to 8 percent a
year.
Two primary factors influence freight growth: economic conditions and rate levels. The
outlook for both is positive for cargo. Moderate economic growth is expected to continue into the
future, with only a minor slowdown in the short term. Cargo rates should also remain low as
several factors serve to keep the lid on prices.

A large number of new aircraft have been introduced in recent years. This new capacity will
help keep prices down. Labor costs for the world airlines should continue to move downwards
due to better utilization of the labor force to continued industry consolidation.
In addition, the formation of an integrated European economic community should result in
increasing traffic to Europe from all areas of the world. The European market will consist of
some 330 million people, exceeding by half the size of the United States. Furthermore, to the
extent that trade barriers are removed, customs procedures simplified, and carriers given more
t1exible operating rights, air cargo traffic growth will be stimulated.
FedEx and UPS, the two major US express operators, are expanding their international
services so that they can offer worldwide distribution. But they face some formidable
competition from well-established international operators, notably DHL and TNT, both of which
provide global service. The competition promises to keep the small-package express market
lively for a while.

The globalization of the world economy-the production of parts and the assembly of products
half a world away from where they will be placed in service-will also provide a major stimulus
to air freight. Rather than rely on ocean transportation, which can take as much as two or ,three
weeks shippers can transport the goods by air within a couple of days. For products with a short
shelf life-be they magazines or fashion goods or fresh fish--air freight is the only real choice
shippers have, and they are realizing it more and more (see Figure 4-4).
All in all, the future of air cargo should well exceed its past. Air cargo revenues may not
overtake passenger revenues in the next 5 to 10 years, but the gap between them will
undoubtedly be narrowed. The blend of additional capacity (air cargo people simply can't accept
unused capacity); the continued explosion of traffic in the competitive express package market,
and the customers' interest in quick and reliable delivery will fuel air cargo's accelerated growth.

THE MARKET FOR AIR FREIGHT
A review of the major commodities shipped by air, according to data supplied on an annual basis
by the Air Transport Association, gives a good idea of the major markets for air cargo. These
commodities include the following:
• Auto parts and accessories Machinery and parts
• Printed matter
• Electronic/ electric equipment and parts, including appliances
• Fashion apparel
• Footwear
• Tools and hardware
• CDs, tapes, televisions, radios, and recorders
• Computers and software Fruits and vegetables
• Sporting goods, toys, and games
• Live animals
• Chemicals, elements, and compounds
• Machines for electronic data storage and processing
• Metal products
• Photographic equipment, parts, and film
• Cut flowers and nursery stock
• Plastic materials and articles
• Medicines, pharmaceuticals, and drugs
• Instruments-controlling, measuring, medical, and optical
• Food preparations and miscellaneous bakery products

Shipping commodities by air is the most desirable form of distribution when one or more of the
following characteristics is present:
When the commodity is:
A Perishable
B Subject to quick obsolescence
C Required on short notice
D. Valuable relative to weight
E. Expensive to handle or store
2. When the demand is:
A. Unpredictable
B Infrequent
C In excess of local supply
D Seasonal
3. When the distribution problems include:
A. Risk of pilferage, breakage, or deterioration
B High insurance costs for long in-transit periods
C Heavy or expensive packaging required for surface transportation d, Special handling or care
needed
D Warehousing or stocks in excess of what would be needed if air freight were used
For commodities that are perishable, subject to quick obsolescence, or required on short
notice, the speed of air transportation becomes advantageous. Timing is important for products
such as recordings, fashion apparel, and novelty items. When the market is seasonal or demand
fluctuates for any reason, air freight allows an immediate response without the penalty of costly
fixed overhead-being out of stock or overstocked. A manufacturer that offers a wide selection of
styles, sizes, colors, or accessories in a product line and whose market covers a wide geographic
area is usually faced with the dilemma of carrying costly inventory and obsolescence or long
delays in filling orders. Air freight can eliminate the cost of carrying inventory. Customers can
select freely from the entire line of products and they can be assured of delivery from a central
warehouse as quickly as from a local warehouse.

Air freight is premium service. It projects an image of premium product and company
progressiveness. The retailer who advertises "flown in from. . ." and the salesperson who assures
the client that "we'll fly it in from our main office" understand the value of such an image. The
various modes of transport represent great differences in quality. Air freight can add a new
competitive edge to the marketing effort. Superior service adds value to any product and
generates a quality image for the shipper.
Air freight can stimulate growth in existing markets, and it allows firms to enter new
markets without making a commitment to large, fixed investments in warehousing and
inventories. Test markets supplied overnight by air allow adjustment to market response as
readily as to the demands of a local market.
The risk of pilferage, breakage, or deterioration is minimized through the use of air
transportation because of the lack of en-route handling and exposure of goods to long periods
under minimum security. Insurance charges tend to be substantially lower for air freight than for
surface freight, because there is less risk by air and because the transit time is shorter. Insurance
represents a considerable expenditure for many companies.

Packaging for air freight is usually of minimal cost. Because air transport reduces the risk of
jolts and shocks, cardboard cartons usually will suffice, whereas heavy wooden crates may be
required for surface transportation. Ground handling is done on a more individual basis than is
the case for most other modes of transportation. Risk of exposure to the elements is slight, and
for commodities for which containerization is used, there may be no need to package at all.
The total costs associated with carrying inventory are high; it includes the cost of capital
tied up in warehouse facilities and in stock, insurance, and taxes. In addition, stocked items may
become obsolete, and the cost of labor and multiple handlings is a major consideration. With
each handling, loss and damage is a factor. Air freight can often bring about drastic reductions in
the cost of carrying inventory. Businesses that use regional warehousing supplied by surface
transportation can reduce safety stocks and perhaps eliminate some warehouses. Even when air
freight costs more than surface freight, the tradeoff in reduced costs has made it profitable for
many businesses to substitute overnight distribution by air from a central warehouse.

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Maani Sharma [ MBA Aviation ]
Manager Aviation NEWS Project

www.All-Aviation-NEWS.in

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