Watch: IATA’s Sullivan on airfreight’s cross-border e-commerce opportunity

With 80% of cross-border e-commerce transported by air cargo, according to IATA, the accelerated shift to e-commerce brought about by the COVID-19 pandemic will continue to create new opportunities for carriers and other participants in air cargo – as long as air cargo continues to offer the right products. In this Industry Pulse webinar, Brendan Sullivan, head of e-commerce and cargo operations at IATA, looks at how transformation by way of digitization and product development can position airlines and air cargo to better serve what is expected to become a $5 trillion e-commerce market in 2021. The lack of a universal e-commerce product offered by carriers creates challenges for e-tailers. “It’s actually an opportunity that airlines can focus on, developing very specific e-commerce products and services that meet the requirements of those service-centric e-tailers,” Sullivan said. In discussing four different air cargo models that serve e-commerce, IATA finds that e-tailers are looking for more transparent and reliable transportation solutions, even if an own-controlled network is not possible. Sullivan predicted that own-controlled operations will likely be limited to the largest retailers, due to the sheer cost of investing in a cargo fleet and facilities. However, “even the smallest player is looking to get more resilience and reliability within their supply chain,” Sullivan said. For smaller players, “partnering, and integrating is perhaps the better model.” Subscribers can access the slides here . A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Charles Kauffman Hello everyone and welcome to this episode of Cargo Facts Industry Pulse, a monthly market update on trends in freighters and equipment, air cargo and the processes that carry it. It is my pleasure to introduce our guest speaker for today, Brendan Sullivan, head of e-commerce and cargo operations at IATA. Brendan, thank you so much for joining us today. Brendan Sullivan It's my pleasure. Thank you. T. Yeah. And so I wanted to talk to everyone today about e commerce. and really the trend in the industry, starting with the consumer behavior and how much consumer behavior is really changed. Throughout 2020. When the pandemic hit, obviously, we went into lockdown or semi lockdown in depending on the country. And really, consumers went to e commerce, I mean, that was really the only option for buying certain types of goods. And it really does show worldwide e commerce is now set to reach $5 trillion in in this year in the year 2021. Now, globally, over 27% of worldwide, retail, e commerce retail sales is done online, right, it's just an absolutely huge amount. And the jumping in the number of transactions is also significant because it's increased 24% from December 2020 to December 20, compared to December 2019. So not only has that the consumer trend for actually purchasing and moving online changed, but also the some of the other underlying trends. For example, 81% of consumers have indicated that they would prefer carbon neutral delivery, and 61% of them would prefer sustainable packaging, different types of packaging. And, and really those kinds of that's consumers making it very, very clear that that is their that is their choice that is their behavior. If we take a look at the global distribution, in 2019, we see that the growth that we've had, up until that point was still uneven. There were two significant players that was China and the United States. They were the biggest ecommerce markets, there's a number of different reasons for that. One of them is clearly population total GDP in the country. But also things like manufacturing capability and internet penetration. Now, both of those countries create significant opportunities for cross border e commerce as well as for domestic air cargo. And in addition to that they make connections between the regions actually are some of the largest international air cargo routes. That doesn't discount there. There are also a number of emerging markets that can have that have a big opportunity for e commerce growth in the coming years. If we look at what happened exactly during the pandemic, or during a number of these, the months of the pandemic, we see that there was exponential growth across the world, especially the United States, Latin America, Europe, China, where we've moved years ahead in a matter of months. And that really we do see that that should slow down to some extent. But it still continues back on the original curve that we had seen. So we had this exponential growth over a very short period of time and then we return to a normal but very positive growth trend in the coming years. So really, what that says is the consumers have changed. Basically everyone is now comfortable with shopping online, and they do so that unlocks all types of new markets. The biggest players are clearly not just domestic players, so the biggest locations are not just domestic. We have inter region and we have international and cross border traffic and that has really solidified during the pandemic and then really accelerated as well we recently undertook a study to evaluate the different models that exist when it comes to actually transporting these goods and we came up with we categorize them into essentially four different models each of them has their own pain points you could call it opportunities challenges really so there's the owned and fully dedicated air transport capabilities that's where the e commerce firm would try and reduce their dependence on third party carriers it limits risk right and it helps increase margins across the value chain it's clearly if you look at the slide more prevalent among the larger players although we do find that even in those larger players there's a mix of some of the other models as well airfreight shippers you know these are companies that move their goods through fulfillment centers as freight largely they do kind of a traditional consolidation model if that makes sense but some of the challenges there are with some of the visibility issues that we might have with elements within a consignment so the ability to actually track down to that granular level that e commerce customers have become accustomed to and really is become a minimum standard we do also see hybrid models which is a mix of those internal and external capabilities moving freight to the fulfillment centers but also sometimes shipping single parcels to the consumer directly which adds quite a bit of complexity and not only for the ecommerce player the marketplace where the where the seller who has to manage multiple distribution channels but also for the air cargo players who now have to manage in one customer many different models many different types of movement and the fourth model that we identified was really this kind of classic air parcel shipper and these are firms that rely on the typical courier express parcel air mail type setup it's quite common for marketplaces and that's because they have a lot of a lot of dispatch fragmentation so they have lots of smaller dispatches now one of the challenges there is that in particular when it moves into the air mail is that that it's driven predominantly by universal postal union or up regulations and up eu regulations are driven largely by the member states and the member states given that it's a un organization or the postal authorities themselves or their ministry which depending it doesn't mean that you have as much collaborative or competitive discussion when it comes to some of the regulations that might end up coming out so we took those models and we tried to analyze the different challenges the different and turn them into some of the opportunities and strategies that that that the air cargo industry could really focus on and then depending on the degree that a given party wants to to enter into the market they could adopt one or more of these different strategies for example when it comes to some of the pain points on standardized services and pricing right there's not a single ecommerce sort of classic product out there for airlines that that airlines offer and so that can be a challenge for e commerce providers of but it's actually really an opportunity that airlines can focus on developing very specific ecommerce products and services that really meet the requirements of those customers this isn't to say that we want to create some kind of standard because as we recognize in the slide that we were at before you there is quite a mix of players with different requirements and probably the most interesting thing about e commerce is that the level of service required while it's dictated by the commerce shipper is actually it's injected into the transport chain by the customer so every individual customer essentially puts down their expectation they're the ones who say this is what we expect and you know they do that by either clicking the service that they want or by voicing their requirements to have faster or more transparent and so on but interestingly you know and as we emerge from the pandemic and we have even more international routes and city pairings unlocking 80% of cross border e commerce is still transported by air cargo is really designed and extremely well suited for e commerce but that means it does mean that we still have to go through quite a bit of transformation so there's that focus on e commerce products and services that i've touched on but there's also the need to digitize there is dependent and this is not true of every individual player of course but globally across the air cargo industry there tends to be the potential for a relatively low visibility on the status of either consignment or parts within a consignment it starts to get even more complex when you add in some of the query or express or hybrid models where the the level of visibility desired is on the item that might be within two or three layers of nested elements within a consignment when we when it comes to what we saw over the pandemic we saw the need for more supply chain resilience and a lot of focus on that and they're you know building an integrating elements for e commerce into the airline's own system tends to be something that will achieve really good results on in terms of resilience now when it needs to be balanced with efficiency and costs of course but integrating it tends to be a way to offer a kind of resilience to the to the customers which they're clearly asking for and in fact demanding this becomes kind of table stakes is that you know they need the visibility and they need the reliability on routes and networks there is also a kind of the ability to shift and align these kinds of processes to the classic cargo processes and the reason for that is largely for service level fulfilment and the need to kind of have consistent practices within the air cargo supply chain that doesn't mean we don't have differentiation it just means that we kind of aligned the way in which something is is performed and then also to look at the kind of responsiveness and value added services that are perhaps unique in some markets over others or for some consumers i think the other thing that i want to highlight is that there really does need to be a focus on sustainability throughout this so we mentioned that that's kind of that's the consumer trend anyways and it comes that way when it comes to deployment of strategies as well you know here i mentioned that 82% of consumers want recycled packaging recyclable but the numbers is very similar for those who want reusable packaging so it's really key to the to the consumer and e commerce world that the entire operation be as sustainable as possible and that that'd be deployed in these strategies one example you know that came out through one of these shipping days so during the singles day 12 million parcels were packed using the china smart packaging algorithm in 2020 which helps reduce the wasted packaging selects the correct one for the items that are going to be packaged within it that's a huge number but that's not quite the total number of parcels that they prepared throughout that period and so they're that that is something that the airlines are going to need to learn Look at their own sustainability strategy there and ensure that it is incorporated in whichever of the different strategies they deploy in order to enter into the market. Now, in terms of kind of high level overview, and, and the discussion around the strategies and the need for transformation, that's all I've prepared at this point, I want to thank you for the opportunity to give you a little bit of information, we post some other information on our website. So there's the articles and the e commerce monitor. They're available at the website on the on the link that's there. And Charles, I hand it back over to you for some some q&a. Charles Kauffman Brendan, thank you for this excellent overview of what is now a $5 trillion market in which Air Cargo is vital. And as you've highlighted, has an opportunity to play a larger role moving forward, I certainly do have a few questions, you shared a slide on air cargo models, and he tailors. And I'm curious if you can speak a bit more to how this has trended in recent years. You know, obviously, we've seen Alibaba and Amazon move in this direction. But is this part of a gradual shift? Or, you know, what do you see is the barriers for some of the smaller players maybe to shifting over to here, these own capabilities, sharing capabilities model? Brendan Sullivan Yeah, I think the trend has been for the larger players to do more of this, as we've seen, right, that the investment is increased, the level has increased the barrier and the reason why we maybe don't see that much of it for the smaller players is that it's actually quite expensive. It's not an easy thing to jump into. And in those cases, partnering, and integrating is perhaps the better model. And that's why I mentioned that there's this need to kind of balance that. That initial, you know, the cost side of things with your need for efficiency and resilience. I go back to resilience for a second, the trend that we do see is that even the smallest player is looking to determine to get much more resilience and reliability within their supply chain. If they're using for example, airmail today, and they're not seeing the capacity, reliability that they had, because capacity has been a huge problem throughout this year. They're going to look for other avenues, right. And so they're all looking for that. And it means closer relationships with your partners. But it also means integrating processes and that sort of thing. So that might be the one that the step that we're seeing happen more frequently. It's probably a really positive thing for airlines Well, for the entire Air Cargo industry is that there are these opportunities to deal with many, many smaller players, there's obviously still opportunity to deal with the larger players, of course, but the number of smaller players, smaller marketplaces, individual shippers is absolutely huge. So that's a huge number of customers that there's potential to deal with. So I think we see more of the trend towards that, that piece of resilience, that's the bigger theme, integrating into your own capability, less of a trend towards that that trend is sort of focused on larger players, it seems. And one of the reasons might be, of course, that it it's actually rather complex to and costly to kick off. Charles Kauffman Right. And when we do look at a player like Alibaba or Amazon, which is, you know, quickly growing its its own controlled fleet. It's now approaching nearly 100 freighter aircraft. You know, something that I'm I'm I've been trying to grapple with is whether, you know, Amazon is contributing to growth to the air cargo market, or if these volumes are coming out of other integrators or express networks. I'm curious if in your experience you have an opinion on that. Brendan Sullivan But I have an opinion, I think it's a little hard to pinpoint the data. That's one of the one of the challenges. That said, I believe this is growth in the air cargo industry without, to me without a doubt. What we've seen I mean, if you just imagine capacity was decimated throughout the past year, the airline business tree is still deep in crisis. And cargo demand level reached its 2019 levels in January of this year. That is not exclusively vaccines, that is not exclusively the COVID related, you know, pe and so on and so forth. That is that is definitely ecommerce playing a significant role. I think where it starts to get a little bit difficult to pinpoint is, of course, this is really changed retail models for a lot of these players. And things which may have moved by another mode previously are now moving in small quantities by air, there is clearly an ecommerce push towards omni channel by most if not all players, certainly all of these fast moving consumer goods companies, they have many channels. And so that's where it starts to get really hard to pinpoint To what degree we see this, this increase. That That said, I mean, to me, the figures that we have, you know, would indicate that ecommerce is playing a role in growing air cargo. And certainly also playing a role in ensuring that anything that isn't going to move by air in the future is offset, and then even made more positive by what is moving by air. You know, provided that the industry can continue down this transformation path and actually, you know, actually capitalize on all of it. Because everything that I mentioned, you know, if it's a if it's a challenge for an e commerce player, and it doesn't get solved by a partner of theirs, it's very likely they will solve for themselves. Right. And that may mean shifting models around and changing procedures and possibly even moving from mode to mode. Right. And Charles Kauffman you mentioned that, you know, the, the granularity of the data hasn't historically been available. And that's one complicating factor that makes it difficult to kind of parse out e commerce volumes, is the added changing how we tracks and identifies e commerce shipments and separates those from general cargo? Or, you know, might this be possible moving forward? Brendan Sullivan It's still difficult, we continue to look into how best to track this, both from an economic indicators standpoint, you know, tracking different indicators, but also from a more granular operational level. We've discussed things like adding special handling codes and all these kinds of classic airfreight tools that we might have to identify things. But the reality is, is there isn't a one size fits all for e commerce. e commerce isn't just b2c, it isn't, you know, it's kind of everything now, right? b2b expects it, there's new b2b to see models as well, that are where we're still using a single Air Cargo supply chain. And so, there isn't really a way to say this is ecommerce, you know, and that one isn't easily by identifying it through what we would normally do product codes and special handling codes. So unfortunately, we don't have, like I said, an easy way to do this. But we're continuing to try and dig a little bit deeper, correlate some of the, you know, we have the retail level data is there, retail sales, but trying to link that into what moved exactly by air that that part is is still missing to some degree. Actually, last year, in June, we had planned an e commerce Think Tank, we were going to bring together at that time, you know, the major e commerce players, the airline's, you know, service providers and so on and try and work through some of these challenges prioritize which ones the industry needs to focus on. Obviously, we could not meet in June of last year. And it may still be a challenge for the early part of this year. So we intend to move some of these discussions, forwards online, virtually. And that seems to be one of the big ones. Even the e commerce marketplaces that we engage with, would like more information on the same. The airline's obviously are very keen on that. I think you would find the same with just about every ground handler or other service provider. This is a key area of focus. It probably sits right up there with visibility and safety and security. You know, knowing what's in there and knowing that it's safe to move around, you know, and then knowing how much of it probably want to Charles Kauffman all right now that that makes sense it is it is a challenge but it does seem like there's an opportunity to continue refining the process with industry stakeholders moving forward brenda we've covered quite a lot of ground today if we had to kind of summarize what we've discussed in in you know concise manner could you leave us with three main takeaways Brendan Sullivan yeah absolutely so really you know there are many players who have transformed already and we're capitalizing and we've established what they believe their position is but i believe that needs to continue that the air cargo industry really does need to transform in order to build a robust air cargo supply chain that serves ecommerce to the to the extent that it absolutely can probably the three key things is the covid 19 pandemic accelerated ecommerce penetration it's solidified the shift in consumer behavior that to me is absolutely crystal clear the second is that ecommerce is adding growth into the air cargo industry and therefore it's key to industry prosperity and its ongoing survival and profitability really and that carriers airlines and their partners really need to get down and address the pain points through we've identified those five strategies but which one of them depends on what role you wish to play in the market but really deploy strategies that adapt to the e commerce player needs quite specifically which means a very customer focused view on delivering and if i could add that that kind of underlying almost fourth takeaway is that the consumer has made it very clear and continues to make it very clear that sustainability has to be a focus of those strategies and so that i believe that runs the entire scope of those strategies from aircraft use and operational sustainability all the way through to you know sort of packaging single use plastic plastics and so on and so forth it runs the entire gamut and that needs to definitely exist regardless of which strategy in fact throughout all of those strategies and really that's kind of the call to the industry is you know together we do need to embrace ecommerce and adapt by transforming along the lines that we've described Charles Kauffman i do certainly see that sustainability component be becoming more of an integral thread and in in much of what the industry does so i think that's a that's a great point to end on Brendan, thank you so much for joining us today Brendan Sullivan thank you very much thank you for the opportunity and i look forward to speaking to you again Charles Kauffman Yes of course we'll definitely have you back soon and to all of our viewers thank you so much for joining us and for the latest on all things freighters and conversions and for more multimedia content like this continue to check out Cargofacts.com Cargo Facts Asia, taking place April 20-21 as a virtual experience, is the event for exploring opportunity in the Asia-Pacific region. The event continues to bring together the best, brightest, and most innovative executives in the global air cargo industry. Learn more and register at www.cargofactsasia.com .

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