E-Commerce: Boxed In

Can transparency, predictability, and reliability win the e-commerce game against the integrators?

If you were not shopping for a Sparkle Princess Elsa Doll from Disney’s movie “Frozen” during the 2014 holiday season, well, you were somewhat alone. The Sparkle Princess Elsa Doll was the single most popular toy amid the rabid e-commerce buying that took place during the 2014 peak season. How rabid? Try 18 toys per second that were ordered by Amazon customers just on Cyber Monday, the first day after the Thanksgiving holiday in the United States, traditionally a day for heavy online shopping.

In all, Amazon alone shipped to 185 countries during the 2014 holidays, which gives some indication of the massive pressure on air cargo carriers and freight forwarders from e-commerce providers to up their game, or risk losing further traffic to the integrators. The question is, can carriers and forwarders meet the challenge?

Glyn Hughes, the new global head of cargo at the International Air Transport Association (IATA), is part of the community of industry executives working to solve the e-commerce puzzle. Ahead of his retirement last

June, Hughes’ predecessor, Des Vertannes, set the airfreight industry a target of removing 48 hours from door-to-door transit times that have largely remained static at six days since the 1980s. The new man is not backing off from the challenge, but appears to be changing the focus of this streamlining effort.

To Hughes, the issue seems to be less about going faster than about working smarter. Hughes told a cargo media briefing at IATA headquarters in Geneva late last year that the 48-hour challenge was not a goal in itself, but “a consequential benefit of doing something else – transforming the business. Airfreight spends 90 percent of time on the ground. It’s stationary for too long. We need to do things differently.”

Hughes has taken an analytical approach to the challenge. “We need to take a forensic look at the fragmented supply chain, what we can focus on and improve,” Hughes said, which, he explained, was why IATA will soon conduct a global shipper survey, its first in four years.

Structural changes needed

Hughes is particularly concerned about protecting the air shipping business’s stake in e-commerce, a $2 billion-per-year endeavour for about 250 IATA-member airlines in more than 100 countries. Hughes said the association was looking to collaborate more closely with the Universal Postal Union, the United Nations agency that coordinates postal policy among nearly 200 member nations, to ensure that the mainstream airfreight supply chain retains its share of the burgeoning online market.

For more years than most executives in the air cargo industry care to remember, the golden ticket to better e-commerce fulfilment was the implementation of electronic exchange of data. But progress on an electronic exchange has been as slow as a 767 with no engines. Hughes said the air freight industry had failed to make the necessary structural changes in an era of “unchallenged seven to eight percent annual growth.”

Now, combination carriers are fighting unprecedented modal shift – not just from integrators on one side, but from ocean freight and overland services. He pointed out that all Hewlett-Packard computers for the European market now make a 17-day rail journey from China – instead of flying.

“Smartphones are built to consumption, but laptops are built to inventory. You write them off when a new model comes out, so you can take the slower distribution option,” Hughes said. The airfreight industry had been “too passive,” he said. By streamlining its processes and communicating the benefits more effectively, it could at least “start a conversation” with transport buyers about the flown alternative.

As vice president of trade lane management for CEVA Logistics, it is Rich Zablocki’s job to choose modes for the company’s clients. “Customers pick transit time based on the commodity they’re shipping and the amount of money they want to spend,” said Zablocki (pictured), who is also vice chairman of CNS, the U.S. arm of IATA. “If time is an issue, you go to the fastest means; otherwise, you put it on the water.”

The critical issue is to establish new and better criteria to measure how airfreight is performing. “This is fundamental, and will be addressed by the latest Cargo 2000 initiatives,” Zablocki said. The IATA interest group has previously introduced various milestones in the transportation chain, “but each carrier has its own matrix,” he observes. “There is no commonality.”

Some observers argue that comparing airlines is much more difficult than ocean container lines, because the number of origin-destination routes is vastly greater and there is much more variation in aircraft types – not least the challenge of comparing freighters with passenger planes. Zablocki does not agree.

“I’m not sure it’s as complicated as some people picture,” Zablocki said. “The questions are: Did you receive the freight? How long did it take to you to receive confirmation? How long does it take you to put the data into your system? In the past, when carriers have tried to do this, they would choose the trade lane and would collaborate with the forwarder to decide what was typical.”

Unsnarling the airport

A common complaint from airlines and their cargo handlers is that shipments are lingering on their premises for too long. There are, however, airlines addressing this concern. Freighter operator Nippon Cargo Airlines (NCA) is one such carrier. Shawn McWhorter, NCA’s president, Americas, said, “We want everything collected quickly – it’s a transit facility, I’m not sized to be a distribution center – but we do find that many forwarders don’t pick up.”

CEVA’s Zablocki did not argue McWhorter’s point. However, Zablocki explains that forwarders rarely choose to leave freight with the carrier, because handlers take on more work than they can handle efficiently. “A carrier may operate one flight a day on a given route, but suddenly puts on extra charters, or has unplanned diversions and schedule changes. Backlogs then build. It takes handlers a long time to break down freight and pass it out.

“Facilities are not big enough to accommodate the number of trucks pulling up,” he adds. “Handlers can manage in low season, but may not have sufficient labor to handle peak flows.”

There are initiatives to resolve some of the shortcomings Zablocki highlights. NCA, for example, is trialing a scheme at its Chicago hub whereby it makes its own deliveries to forwarders’ off-airport premises. “It comes at a cost, but I think it’s a more efficient process,” McWhorter said. “We’re a full-service carrier. The philosophy is that if we can prove the service works, and the consignee is telling the forwarder he is getting a better service, we have added value.”

McWhorter said transit time is not the real issue. The old mantra of getting what you pay for applies to transportation schedules. “If you tender to me on a Friday and I have it in your hands by Tuesday, I’ll give you a cheaper price, just as if you are a private consumer choosing from Amazon’s dropdown shipping options.”

A forwarder may buy capacity a year ahead based on tendering a theoretical number of pallets on a Tuesday, Wednesday and Friday, but in reality it will let shipments accumulate over several days to build the Tuesday consolidation. Carriers find this strategy counterproductive.  

“They could run it to me sooner, but want to build better pallets,” McWhorter said. Some cargo will be used as a buffer, and if it gets rolled, it moves on a later flight. “If they send the first pallet direct to me, then I’m charging $14 per kilo. … Sure, I can move air freight overnight if that is what’s required, but ocean doesn’t suddenly become competitive if I take a little longer. Modal shift is not a huge threat. On short-haul and intra-Asia perhaps you see it, but usually you’re talking 30-day movements door to door, and more likely 40 to 45 days.”

With that kind of time horizon, the product in question matters. Mature consumer products are less time-sensitive and thus at risk of migration, “but the new chip, the new machine to make the chip, the latest phone is going to fly,” McWhorter asserts. While integrators stand accused of hoovering up all the “Alibaba business,” he said they face the same time-versus-money considerations as other operators.

“Look at FedEx,” McWhorter said. “Their international express business is flat or declining, but they see growth in deferred three-, five- or seven-day traffic, which moves on third-party carriers. Premium service is where they make their profit, and FedEx can sacrifice load factor to beat everyone to [Seoul] Incheon from Oakland, or DHL from Cincinnati.

“As regards the ‘secondary’ market, the integrators have to be more cost-effective and will offer the same reliability as other operators, because they are using them.”

The difference, he said, is that even where the integrators use common carriers, they can still call upon their own freight forwarding divisions, as well as their ground transportation, thus eliminating some of the links in the conventional air freight supply chain.

“Quality, predictability, transparency, and reliability must be at the heart of all we do,” Hughes emphasized to the IATA event. “We’re not integrating process and data.”

The importance of e-freight

Still, the e-freight drive remains crucial. The drive toward e-freight must be “by the industry, for the industry” rather than prompted solely by a carrier body. Hughes candidly admits, “We lost years’ worth of opportunity on e-freight because [the initiative] had ‘IATA’ in front.” The association helped “lubricate the pinch points,” but was not actively handling the cargo, he said.

Ask officials at IATA and they will quote statistics on an e-freight infrastructure that they say is advancing.

Guillaume Drucy, IATA’s head of cargo e-business, said 22 percent of air waybills were now electronic, but added that removing paper was not enough in itself. “The way we share information is not optimized – the flow of data mirrors the flow of paper documentation as parties send it one to another, and there are still issues of data quality,” he said.

There are other reasons to promote e-freight beyond speed-of-transport. In fact, CEVA’s Zablocki said modernizing the industry and eliminating paper is the true goal, not reducing the number of days in transit. “Improving the amount of information you’re able to send electronically achieves better security and sustainability,” he said.

The sticking point for McWhorter is when paper documents and the e-air waybill don’t marry up. “The industry has gone through most of the issues around technology and transmission standards, and we have to work with forwarders to resolve this,” he said.

Finally, Zablocki believes that removing the need for repeated data reentry will be e-freight’s most important contribution. “The customer should enter the initial data and the forwarder and airline make their own additions. It’s a building process. If we eliminate the air waybill, we’ve eliminated the need for repetition.”

While it is hard to argue with that vision, the e-air waybill is only one part of this complex jigsaw. “When we get to electronic consignment security declarations, that’s the real step forward,” McWhorter insists.

He is encouraged that aviation and customs authorities in key markets such as Shanghai are now committed. The document pouch and the need to distribute all that paper must be consigned to history, he said. “When documents are lost it becomes a monumental nightmare and can delay the recovery of freight.”

“It can boil down to the customs authority’s requirements and whether they are able to accept electronic data,” Zablocki said. “Air Cargo Advance Screening [the U.S. Customs preclearance program] will force people to recognize they have to get data into their systems accurately and quickly. Once we get that nailed down and there is some commonality in what carriers expect, e-freight will skyrocket.”

Everyone agrees that streamlining the air freight process is nowhere near as simple as the passenger equivalent, many years back, of migrating over to e-tickets. There are too many invoices, packing lists, manifests, and Customs declarations involved. But it’s clear to all that unless the industry changes its historic practice, customers will find other routes to market. People do want their Sparkle Princess Elsa Dolls, after all.