When Ocean Group and NFC, two UK companies with global logistics businesses, announced a merger a month ago, it probably did not create much of a stir in airline boardrooms. Persistent reports over recent months that Lufthansa Cargo was in talks with Deutsche Post (the German post office) and global express operator DHL might scarcely have made a ripple either. Yet both are symptoms of a larger change that could be about to sweep air cargo, one which could force airlines to assess their whole approach to the sector.
The Ocean and NFC merger is perhaps the more straightforward. Given that only 500 companies dominate 40% of world trade, and that those companies are consolidating and getting more global by the day, some shake-out in the logistics sector has long been predicted.
Converging factors point to it. One is the size of some of the customers - walk into almost any airport cargo shed in the world and you will see the same logos on the boxes for IBM, Volkswagen and the rest. Another is the fickle nature of modern manufacturing. In the computer, mobile telephone or textile industries, factories can switch country as often as every two years in search of lower labour costs or better deals. Finally, the supply chain itself is a prime target for manufacturers keen to squeeze out cost. Ironically, this has led to more use of expensive air freight in the past decade, as logisticians realised it was cheaper than holding inventory in warehouses.
The logic is clear. Major manufacturers are looking for multimodal logistics partners who can take on their activities worldwide and at lower cost, whether Kenya, Kuala Lumpur or Kentucky. The major freight forwarders - or global logistics suppliers as they are known these days - have spent the past decade responding to this call with fierce global expansion. MSAS (the main component of Ocean Group), Kühne & Nagel, Panalpina, Circle and six or eight others, are close to being truly global players.
But manufacturers want more. As well as geographical reach in moving shipments, they want depth in logistics on the ground - pick and pack, warehousing, kitting, vendor-managed inventory, etc. This has traditionally been the preserve of ground based logistics firms such as Ryder, Menlo and the Hub Group in the USA, and of NFC, Tibbett and Britten and Danzas in Europe.
Major multinationals say with one voice that their ideal would be a combination of the two - global reach with logistics depth. E-commerce has only added to this trend, adding home delivery to the wish list. Hence the merger between Ocean and NFC. Ocean chief executive John Allan has being adding depth for some time to MSAS' reach. In 1998, he brought McGregor Cory and Intexo, two European logistics firms owned by Ocean, under the MSAS banner and set about integrating them into the global forwarding business.
The NFC deal will swell this logistics capability "eight to ten times", says Allan. "We now have a global third party logistics business of comparable strength to our forwarding business," he says. The UK's Financial Times believes the new group will be the world's second largest.
Allan is in no doubt that further deals will follow. "The competition is getting the same messages from their customers that we are," he says. He predicts there is room for three or four global logistics players - a big reduction from the 15 or so contenders at present. That decrease alone should worry airlines.
Forward threat
At present, even larger forwarders such as Swiss-based Panalpina account for only 2% of the cargo volumes carried by Lufthansa, but merged entities could soon be reaching 5% or more. Ever visionary, Lufthansa has been preparing for two years for such eventualities by forming close partnerships with its leading customers. Swisscargo, the cargo arm of the SAirGroup, has followed. Most airlines, however, have watched these proceedings with bemused detachment.
One danger for carriers is increasing commoditisation of their cargo product. For pure transportation, margins are low and yields under constant year-on-year pressure. Simple market economics suggests that the bigger the customers, the bigger the discounts they will be able to squeeze. "One of the major competencies of forwarders is screwing airlines," is how Paul Jackson, managing director of air freight expert Triangle Management Consultants puts it. The smart money in cargo is in the value-added sectors, the logistics operations that the larger forwarders are making their own.
What are airlines to do? Some years ago, KLM Cargo suggested it might get into value-added logistics itself and, for its pains, was slated by the rest of the industry: "It was the right strategy but the application was a disaster," says Jackson. KLM still has a logistics division, but has been markedly lower profile about it in the past 18 months.
Another approach was taken by SAir Logistics, parent of Swisscargo, when it formed a joint venture with Panalpina last year. The new joint venture buys capacity and operates its own leased freighters on routes that major multinational manufacturers need, blurring the line between forwarder and airline, and escaping the tyranny of the passenger division. Klaus Knappik, boss of SAir Logistics, is blunt that its motivation in forming the venture was that it seemed the only way for a carrier to get access to the higher yields of the logistics business.
Whatever results from talks between Lufthansa, Deutsche Post and DHL could be a similar kind of venture: but it could be more alarming. Lufthansa Cargo has continually surprised the air cargo industry recently with daring moves that seem to break the mould - its partnerships with forwarders, a switch to time-definite services. Could it be about to tear up the boundaries between air cargo carrier, express company and logistics?
To understand what makes the talks so potentially radical, look at the recent history of Deutsche Post. The German post office, despite still being state owned (it is to be privatised) has become a one-company logistics-company consolidation machine in the past two years.
In short order it has brought the European logistics activities of Dutch shipping company Nedlloyd, Swiss-based global forwarder and logistics company Danzas (along with a major Scandinavian forwarder and trucker Danzas has just bought) and US-based global forwarder AEI. This is like Manchester Airport buying up British Midland, British Airways and American Airlines all in a few months.
As if that were not enough, Deutsche Post scares the freight industry because it also has that most desirable commodity in the e-commerce age - home delivery. True, it has this capability only in Germany, but, with the addition of a global express company - and maybe a maindeck cargo airline - it would be formidable. DHL Worldwide Express is one- quarter owned by Lufthansa, a quarter by Deutsche Post and a quarter by DHL's three US founders. Japan Airlines, the remaining shareholder, recently sold its stake to two German investment trusts. It does not take a genius to work out that something big could be cooking.
If a deal involving substantial stakes does emerge from the talks, then all bets are off in air cargo. Reinhard Langer, chief operating officer of Kühne & Nagel, one of Lufthansa Cargo's biggest customers, admits that would be a serious worry, while Allan admits it would give him "pause for thought".
What kind of changes might such a deal bring in its wake? Jackson sees driving change as the paradox between the low rates earned by freighter aircraft operators in relation to their capital cost, and the desire of major shippers and forwarders for dedicated lift independent of passenger flows.
That problem will remain, Jackson points out, so long as freighter capacity is priced at the same low incremental rates as belly capacity. The Panalpina-SAir venture was one attempt to solve this conundrum: a logistics group like Deutsche Post owning or controlling its own airline might be another. Whatever solution evolves, Jackson predicts that it could double or triple the amount of freighters in service. "Longer term, air freight is going to surpass the passenger business: it has happened in every other transportation mode," he says.
One wild card remains to be thrown into this pack. FedEx and UPS watch the game, and speculation has been rife that they will make moves, too. FedEx was mooted as a buyer for Ocean Group. UPS, meanwhile, is sitting on a huge cash pile and could buy almost anything in the freight sector, say analysts. Will it go for a large forwarder, a fellow express operator like TNT (now owned by the Dutch post office) or a ground logistics firm? Watch this space.
Source: Airline Business
