The techniques that airports need to employ to attract cargo service are very different to those used to woo passenger carriers
Just like the late US comedian Rodney Dangerfield’s favourite catch phrase, cargo often “don’t get no respect” in many quarters of the aviation industry, including from airports. More and more airport executives are talking about cargo, but most are yet to put serious effort into understanding how their facilities fit into the supply chains of different industries and with what degree of success. Without such understanding, these airports will have difficulty capturing cargo and many will waste time and money on unfocused marketing campaigns. Worse, they may miss real opportunities that are seized by more analytical and disciplined competitors.
A classic mistake is using passenger marketing and service development techniques for cargo. The differences between passenger and cargo businesses cannot be overstated. Passengers are a consumer market, in which millions of people make discrete purchase decisions, whereas cargo is an industrial market, in which hundreds of people call the shots. Most of these decision-makers work for freight forwarders, not airlines. Attending conferences, printing brochures and meeting airlines may be effective tools for passenger service development, but cargo is altogether different. Airports need to identify and concentrate on a limited number of realistic opportunities, rather than chase every single idea.
Cargo should be an important part of every commercial airport’s portfolio. Many people do not realise it, but the cargo industry is bigger than the passenger airline business. For example, in the USA, most intercity passenger traffic moves by air, while most intercity merchandise trade moves by truck. The seemingly humble US motor carrier industry has about five times the revenues of the domestic scheduled passenger airline business – in fact, the total revenue of domestic US trucking companies almost equals worldwide revenues of all IATA airlines. (For those who say that trucks and aircraft are distinct businesses, read on.)
Air cargo volumes have and will continue to grow faster than passenger traffic. This trend is consistent with the historical development of every other mode of intercity transport yet invented: from ships to railways to motor vehicles, passengers started as the primary source of traffic but cargo grew faster and now represents the majority of revenue.
Few intercontinental passenger routes would be profitable without cargo, which generates 5-15% of total revenue on most overseas flights. Moreover, cargo is also important to many short-haul airlines. For example, Southwest’s annual profits would be an estimated 10-15% lower without belly cargo revenue.
Despite the bright outlook for demand growth, the intensely competitive cargo industry is undergoing rapid structural change. For example, trucks continue to take market share from aircraft in the intra-North America and intra-Europe freight markets. Both the freight forwarding and airline industries continue to consolidate through mergers and acquisitions. The vertically integrated global express carriers – DHL, FedEx and UPS – continue to grow and to push into new markets.
Structural market change creates winners and losers among airports. It may be an abstract concept, but for many airports it has also been a painful reality. Clearly, structural change makes it more difficult – and more important – for airports to forecast and plan effectively, and to undertake a disciplined, focused approach to cargo service development.
Growth rates
Cargo is a volume growth business – but different markets are growing at different rates. MergeGlobal forecasts that global air freight tonne-kilometres will average 5.6% growth during 2005-9, with intercontinental volume averaging 6.1% growth during the same period. The intra-North America and intra-Europe air freight markets will grow much more slowly (at 2.1% and 2.5%, respectively) primarily due to trucking competition.
The relatively slow growth in intra-North America and intra-Europe traffic highlights the fact that trucks are potent competitors to aircraft in regions with good highway networks. Trucking rates generally are far lower than air freight rates and trucks are surprisingly fast on a door-to-door basis because they can run directly from origin to final destination. This means they operate according to the shipper’s schedule rather than the airline’s. Trucks can also be tracked real-time, enabling customers to plan inventory levels and production schedules with greater certainty. Predictability is often as important as speed.
Air freight yields fluctuate based on the cycle of supply and demand, but are clearly in decline (after removing the effects of inflation) when viewed over a 20-year span. Yields have fallen for a number of reasons including regulatory liberalisation, low-price belly lift on intercontinental passenger flights and low-price truck “lift” in intraregional markets with good highway networks.
Because freight demand is growing faster than passenger traffic, it follows that belly capacity will not grow fast enough to accommodate forecast growth in freight volumes. More freighter aircraft will be required to cover the capacity shortfall – what we call the “growth gap”. The problem is that freighters are inherently more expensive than marginally costed belly lift (which accounts for about half of all intercontinental cargo airlift today). As more freighters come onto the market, the industry’s cost structure will rise inexorably and squeeze carrier profit margins unless the long-term trend of falling yields is reversed. Some freighter operators will probably not survive the process – with obvious consequences for the airports they serve.
On a more positive note, freighters are routed and scheduled for cargo demand not passengers – so a fast-growing freighter fleet should create service opportunities for strategically located interior airports, especially in North America and Europe where major gateways are increasingly congested and expensive. Dozens of airports around the world hope to become the next freighter gateway for their region – in some cases, half the continent. Most will be disappointed, simply because the economic returns to scale have and will continue to drive carriers and forwarders to concentrate traffic and service at a limited number of points. It follows that airports that are the first to secure freighter service will have a powerful advantage over comparable airports with no service – what consultants call “first mover” advantage.
If it was easy to secure intercontinental freighter service, there would be dozens of new freighter gateways popping up. As the map shows (see previous page), there certainly is no shortage of well-located airports with long runways able to handle long-haul freighter operations. Yet, of the more than 600 commercial airports with 3,000m (9,800ft) or longer runways, just over 100 of these airports presently receive frequent intercontinental freighter service (defined as at least three departures a week). Only 10 of these airports are pure freighter gateways that lack intercontinental passenger service.
So how can an airport become a “first mover” in the great intercontinental freighter gateway game?
Success stories
Many people point to Huntsville in Alabama, Calgary in Canada and Vitoria in northern Spain as successful freighter gateways. These three airports offer good locations and facilities – but so do dozens of other North American and European airports looking for freighter service. Why and how did these three airports succeed? Several common elements – analysis, focus and patience – enabled a disciplined, long-term approach to cargo service development and marketing.
Analysis helped to identify and prioritise specific opportunities, allowing airport management to concentrate on the highest-potential prospects. Effective analysis focused on figuring out exactly how each airport fits into the supply chain, and how, with acceptable risk, the proposed freighter service would drive higher growth and profitability for the target companies.
Focus enabled each airport to develop meaningful relationships with key decision-makers at the target forwarders and carriers. This is critically important because new service decisions involve risk, no matter how much quantitative analysis has been done.
Patience was necessary, even with a highly focused strategy, because most airports are not willing or able to offer large subsidies that tilt the economic calculus or mitigate financial risks associated with new consolidation gateways and freighter services.
For example, Huntsville undertook years of marketing, backed up by in-depth analysis, before persuading Panalpina (one of the leading global freight forwarders) to locate its new south-eastern gateway at the airport. Panalpina’s Dixie Jet service was aimed at customers from the Carolinas to Texas, rather than the local Huntsville market. In contrast, Calgary leveraged its local oil and gas industry – which generates significant traffic from Calgary to Europe and the Middle East – to attract Cargolux on its directionally weak return flights from the western USA to Europe. Similar to Huntsville, Calgary invested in analysis before approaching its targets, and devoted considerable time and money in meetings over multiple years before securing service.
There are several pure-freighter gateways in Europe, thanks in large part to tightening environmental restrictions at major airports like Frankfurt. One of the most interesting is Vitoria, which has successfully focused on perishables traffic to expand its service area far beyond the neighbouring industrial areas in northern Spain. Vitoria’s focus – represented in its investment in fast-track perishables facilities, as well as service development efforts – has paid off most recently with the swift replacement of inbound freighter service from Canada after authorities banned the previous carrier in the wake of a fatal crash.
Looking forward, effective cargo development tools and strategies involve the following:
- Build solid analytical foundations
The first step is to understand the cargo industry and the market segments in which an airport can realistically compete. Who are the decision-makers that the airport should seek to influence? What are the risks and economics of the proposed service – and how can the airport and surrounding community mitigate the risks and reduce costs? Successful airports think through the answers to these key questions before making the first contact with a carrier or forwarder. - Set clear priorities and sustain focus
Airports that maintain a sustained focus on a limited number of realistic objectives have the best chances for success. It is hard for airports to influence forwarder and carrier decisions unless they develop an understanding of the economics, risks and differing competitive strategies in the business. Equally important, airports must build personal relationships with the decision-makers at forwarders and carriers. The process takes time: virtually all of the success stories cited here worked for years to obtain their first freighter service. - Tap all possible resources
Non-airport entities often have greater flexibility in funding investments and inducements to win freighter service. Including regional development agencies, chambers of commerce and other entities not constrained by airport finance rules can add a significant dimension to an airport’s efforts to secure cargo service.
It is natural for people to focus on passengers, not cargo. Most airport executives have flown, but few have been shipped, although flying on certain low-fare airlines may feel that way. However, airports that do not invest in truly understanding demand and competition – the relevant cargo markets, industry participants and competitor airports – risk wasting time and resources on unproductive service-development efforts. Worse, they risk losing out to more focused and disciplined competitors. In this business there is a substantial “first mover” advantage. The airports that are the first to attract intercontinental freighter service will be far ahead of the dozens of hopefuls.
DAVID HOPPIN OF MERGGLOBAL/WASHINGTON
Source: Airline Business
