It is the purpose of this introduction to discuss relevant topics briefly in context of air cargo alliances and in a manner that relates to the subject of this book. It should help the delighted reader to get some sort of understanding about the current market conditions, without making any claims of being complete. The business of air cargo operations has been a field of rapid changes and developments in the last few years. Embedded in a framework of global economics, trade development and subject to manifold regulations, air freight as a barometer of trade will continue to be a key driver in furthering globalization.
Air cargo carriers operating in a global market are faced with all different kinds of challenges, including rather recent developments like the liberalization of air transport markets, increasing competition through the growth of integrators, as well as inherent challenges like directional imbalance, marginal pricing of substantial volumes, the absence of new dedicated freighter aircraft, airport noise regulations and a dependence on belly cargo and therefore a schedule to please passengers.
Adding to that, air cargo operations are highly dependent on the overall world economic situation and macroeconomic variables. Other factors, such as the development of the oil price can have a large impact on the demand for and the supply of air freight services as well.
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As fuel costs make up a large part of the variable costs, especially on long haul freighter aircraft operations, a high oil price can lead to freight forwarders substituting the higher priced air transport services with road or maritime transport. Although the demand for air freight services has increased over the decades, freight yields have been declining sharply since It can be argued that liberalization in the air transport market can both be seen as an opportunity as well as a challenge for established air cargo carriers.
Increased competition has forced cargo carriers to act and change their old thinking patterns and behavior. No longer protected, they had to find other ways of keeping their strong market position and standing. This challenge has been one of the key drivers for the foundation of alliances in that sector. On a positive note, liberalization allowed airlines to operate more efficiently within alliances and on their own. Liberalization attempts have been ongoing among many countries and trade blocks worldwide.
It may well be argued that in an integrated economic block like the European Union, several packages have led to a high degree of freedom and harmonization. Still, liberalization is an ongoing process and air transport freedom rights differ among all countries and are very much dependent on overall integration into a more open world economy. Global markets are far from contestable.
It may well be that an airline that wants to expand into another market by acquiring a competitor will cause the traffic rights of the acquisition target to expire. This complex of problems has recently been in the news when Lufthansa took over Swiss and Austrian. In either case, Russia wanted to draw the traffic rights from both carriers as it no longer recognized Swiss as a Swiss airline and Austrian Airlines as being an Austrian company.
In such cases, alliances can help to circumvent existing regulations.
Strategic Alliances in the Aviation Industry
For a detailed analysis of the status of the liberalization efforts in the airline industry and the benefits of more open skies, see IATA study on liberalization. Although air cargo volumes increased rapidly ten per cent annual growth between and  , the traditional airfreight sector suffered from an economic decline. They have introduced new levels of service standards via extensive use of information technology and comprehensive global network Melbin, ; Hamilton, and Chu et al.
However, air freight as a key instrument of globalization is still confronted with plenty of opportunities like an increase in international trade, rapid economic development of emerging markets and innovation. Liberalization and deregulation have enabled carriers to open new routes, enter new markets, attract new customers and build new relationships. Apart from air cargo carriers, Fu et al.
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Leaving unpredictable fuel costs aside which can also be hedged to account for unpredictability and to allow safer planning , it is safe to assume that this results in a light gradual decrease in production cost over time. The necessity of innovation in air cargo operations has been neglected for a long time, after few breakthrough innovations during the last 60 years.
At the same time, cargo airlines are integrated in ultra dense global networks that provide fast service for customers but still rely on outdated IT systems and procedures. Protective market conditions in the past and leftover structures of those times frustrated innovation and have directed the evolution of the industry into a contrived and artificial structure. This is even more true for the cargo side of the business, as freighter aircraft are often happen to be converted ex-passenger aircraft and stay in service even longer.
All of them are derived from passenger airplane models and come with all sorts of compromise for dedicated air cargo carriers. Innovation in the field of airplanes can best be described as being incremental.
New R&D rivals
Nonetheless there has been a continuous stream of innovation in the fields of RFID, tracking and tracing, development of time sensitive express products as well as products that offer greater flexibility for customers. Innovations that yielded special products for temperature sensitive cargo could be one of the key drivers that have helped cargo carriers to gain access to totally new customer groups, e. Notable initiatives in the recent years that try to obtain foothold in the industry are Cargo and E-Freight. Cargo aims at implementing a new quality management system for the worldwide air cargo industry that should reduce operating costs and enhance customer service while improving the efficiency of air cargo in general.
Star Alliance Member Airlines
All this should happen in close partnerships with courier service providers. A topic that is gaining momentum worldwide and that is becoming increasingly important is the security of the supply chain as a whole. All of these changes require a capable IT infrastructure. IT systems are expensive to change but necessary to keep up with the pace of business integration and better customer service booking, tracking etc and - as with other investments — can help to lower the costs and improve service in the long term.
Information technology and handling of information flow is definitely the key for many cargo change initiatives. Another current development that aims at improving safety and security along the air cargo supply chain as well as at enlarging economic savings refers to the deployment of new ULDs unit loading devices.
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With decreasing market regulation, air carriers are forced to compete more fiercely. Being on the edge of innovation, quick reaction to customer needs and development of new products can help them to gain a lasting strategic advantage over their competitors. As stated earlier, the demand for air service operations depends heavily on the state of the world economy. A study in that used simple linear regression came to the conclusion that the growth of air freight equates 3.
From to , the average growth rate for FTK was 9. Four characteristics evolved in the analysis of the results: . The above chart from Boeing Airplanes describes the growth rates of air cargo in the last decade and highlights the volatility in the demand for air cargo services. According to Boeing, even though scheduled freight yield increased from to because of fuel surcharges, it had been declining since , at an average rate of 4.
Latest data from Boeing shows that in the world maritime industry generated an estimated total of 60 trillion RTKs compared to However, this maritime traffic includes movement of bulk commodities such as oil, metal ores, and grains, most of which cannot be directly compared to high-value dry commodities associated with transport by air. A better comparison of the air and maritime modes can be made using the remaining maritime dry cargo after bulk commodities have been subtracted, which totaled about The short term outlook is not comforting after all.
Still, the long term outlook is bright. Although recent statistics point to a decrease in demand for freight volume, the long term upward trend is intact. According to Boeing world air cargo traffic is expected to grow 5. Air freight RTK growth, including express traffic, will average 6. Airmail traffic will grow much more slowly, averaging only 1.
It should be noted that because of the dramatic drop, the historic year world air cargo growth rate fell from 3. Overall, world air cargo traffic will increase from Markets linking Latin America with North America and Latin America with Europe, as well as markets between the Middle East and Europe, will grow at approximately world average growth rate. The more mature North America and Europe markets reflect lower-than-average traffic growth rates. This long term upward trend is also reflected by estimates of Airbus and Boeing regarding the need for new freighter aircraft in the coming years: According to Boeing, the freighter fleet is forecast to expand by more than two-thirds, from 1, airplanes in to 2, airplanes in Apart from short term considerations, the future outlook for cargo carriers can be considered bright as growth will continue over the next decades with the support of an increase in international trade, development in emerging markets and the growing need to transport time sensitive, higher-value goods.
Air cargo operators offer an undifferentiated, highly perishable product: Although companies try to differentiate their offerings from their competitors, provided services are still very similar. In addition to this, the air cargo services are highly perishable; an empty cargo hold cannot be stored for future sale and represents a dead loss for the service provider.
However, because of its nature, the cargo business is also much higher regulated when it comes down to safety standards and statutory requirements. As a key driver of international trade, air cargo is highly dependent on the global economic situation and constantly has to cope with fluctuations in demand. The supply with air cargo services, however, is very inelastic. This can come as a problem as companies configure their capacity in order to manage demand surges, which is usually part of a long term planning process.
Reaction to unexpected demand shifts, such as a change in aircraft configuration or a change in fleet size can be costly and require great effort. Air cargo operators therefore employ a very complex fare structure to account for that. With regard to the cost structure of a cargo airline, large part is made up of fixed costs as marginal costs are low. In times of a strong dollar, this can prove to be an even greater concern for air transport operators outside the United States of America. The competition in air cargo operations happens to be among carriers from all over the world, each carrier from a different home country.
That implies that every air cargo operator has to deal with very different basic conditions in terms of available resources, economic and technical regulations. Compared to other modes of transport, air freight volumes are very low as both passenger airlines as well as dedicated cargo carriers together carry only one per cent of the world trade volume with their aircraft fleets. However, research estimates the value of those — often time sensitive - goods to make up between ten and 30 per cent of the world trade value.
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In order to face the challenges and to leverage the opportunities, air cargo operators have adapted their short term as well as long term strategy in different ways. Short term reactions to a decline in economic activity included taking airplanes out of service and storing them in the desert. Long term considerations have led to different kinds of co-operations with competitors, most importantly the formation of alliances, which should have helped to create economies of scale, deal with the increased complexity of information flow and should have enabled each company to cover a bigger network.
Being autonomous, wholly owned subsidiaries of their parent companies, they enjoyed a greater degree of freedom and flexibility in decision making and in their operations. At that time, all parent companies were also members of the Star Alliance. The underlying premise of WOW was that customers are no longer seeking pure transportation services but innovative solutions to complex logistics requirements. Therefore the WOW alliance was looking for ways to harmonize business product lines, processing, handling and information technology systems as well as ways to unify freight networks, sales and marketing structures to meet customer demand for rapid, reliable and flexible global service.
Hopes to revolutionize the air cargo business in a way that Star Alliance has transformed air travel were flying high but the following years will eventually prove that the venture did not take off quite as planned and never managed to live up to the promising name. The rollout of the brand name WOW was delayed until March. This was only half the truth as each carrier has retained the individual brandings for their time-definite products td. At that stage LH Cargo has embarked upon long-term "business partnerships" with the major forwarders and was already planning new ventures with Deutsche Post World Net and DHL to enhance and promote their own products.
SIA Cargo, on the other hand, openly admitted that it did not have the resources to set up such programs. After the launch of seamless joint express services on the worldwide systems and a time-definite general cargo product, alliance planners now focused on the integration of sales, handling and IT systems as well filling missing geographical gaps in the global network to increase market share and global presence.
Despite a combined fleet of 33 dedicated freighter aircraft MD11 and F and the underbelly capacity of aircraft, the three founding airlines still held only about ten per cent of the global market share at that time, which showed the high degree of fragmentation in the air cargo industry. Although it was unclear how much business actually moved as part of the alliance, each member carrier had set aside ten per cent of the capacity on all their flights toward a seamless, worldwide air freight network by September By , the alliance had reached its peak, operating a combined fleet of 43 freighters and more than passenger aircraft with bellyhold capacity, serving "an unparalleled route network of destinations, linking the world's major trading centers.
On the contrary, the limits of alliances seem to have been immanent from the very beginning. What is more, the development of AeroLogic  was well under way at that time. It was in the same breath that the founding member of WOW proclaimed that it is no longer bound by any alliance or partnership and was openly speaking about a portfolio of partnerships. This change of wording reflected the shift of thinking inside the German cargo carrier: The WOW alliance no longer had the highest priority. In a vicious circle, decreasing commitment of all members to the alliance and their partners led to an increasing engagement in other strategies, which led to further contradictions of the alliance.
Other reports claim that members of the WOW alliance have competed against each other and have failed to agree on joint offers, in light of the general increase in competition within the global commercial aviation industry. Even before the announcement of its withdrawal from the alliance in Lufthansa Cargo has started to change the livery of their aircraft back to a pre-alliance state without any WOW markings.
After entering bankruptcy in January and financial restructuration, Japan Airlines decided to suspend all scheduled freighter flights after more than 50 years of operations by November With the storage and sale of six dedicated and three freighter aircraft, Japan Airlines simultaneously left the WOW alliance.