Runaway e-commerce growth reshaping air freight: Part I

Today, we begin a two-part analysis of the ways in which surging demand from e-commerce is changing how participants across the air freight supply chain operate and what the future of air freight in a logistics world built around e-commerce might look like. Part I offers insights into what qualifies as e-commerce, which trade routes are emerging as the major drivers in e-commerce traffic, and how carriers are working together, or with other partners, to meet growing demand. Join us next week for Part II, when we examine how the e-commerce marketplaces are making moves toward offering their own logistics services, and how airports are addressing new infrastructure requirements to meet e-commerce shopper expectations of rapid deliveries.

Despite slowing growth in general cargo traffic in 2018, compared to 2017,  the appeal of e-commerce for shoppers across the world is proving to be a continuous boon for air freight demand. While this is great news for an industry that might otherwise be feeling the pain of protectionist sentiment and new tariffs – particularly between the United States and China – air cargo logistics operations are also dealing with some e-commerce growing pains requiring major new investments in aircraft, airport infrastructure, and other areas.

Carriers, airports, and industry observers all agree that e-commerce traffic has been responsible for much of the surge in air freight demand, but clearly defining what is meant by “e-commerce traffic,” outside of such obvious examples as the parcels and pallets traveling aboard one of Amazon’s Prime Air freighters, is trickier. No industry standard has emerged yet to enable more accurate tracking of e-commerce traffic as a category of air freight, but several obstacles, including how to differentiate e-commerce orders of perishable cargo that are already broken out of general cargo, are apparent.

Steven Verhasselt, Vice President, Commercial, at Liège Airport (LGG), told Cargo Facts that most e-commerce volumes moving through the airport are classified as general cargo. Although e-commerce cargo is mostly comprised of parcels, that classification is unlikely to change, both because sorting e-commerce cargo from general cargo is a complicated process and because every airport that attempts to break out e-commerce volumes from general cargo draws different parameters for what qualifies as e-commerce cargo – making comparisons meaningless.

However difficult it may be to measure e-commerce growth apart from overall cargo growth, it is harder to argue with traffic statistics. Both LGG and Ontario International Airport (ONT) – airports prioritizing air cargo growth, compared to some, like Amsterdam Schiphol, that have seen cargo volumes decline year-over-year – reported July cargo traffic up by at least 25%, year-over-year. That figure is particularly impressive given the slowdown in growth reported by the industry at large, compared to 2016, as well as the protectionist tariffs that have marked the current trade war between the US and China. Clearly,  regardless of external factors that would have once slowed down air cargo demand – and may be slowing some general cargo demand – the paradigm shift of online shopping has opened a new frontier of e-commerce demand that is, so far at least, continuing to drive high air cargo traffic.

Pinpointing market demand

It should come as no surprise that logistics providers, airports, and carriers are reporting a global rise in e-commerce activity, considering that the runaway success of US-based e-tail giant Amazon has made its founder and CEO, Jeff Bezos, the wealthiest person on the planet. Much of the growth in e-commerce, though, is found in markets outside of those dominated by Amazon. Michael Piza, Senior Vice President, Americas, with China-based forwarder Apex Logistics, told Cargo Facts that Apex is seeing increasing e-commerce activity on east- and west-bound routes, with Korea emerging as a particularly large demand driver, alongside India and Vietnam.

Still, China is by far the largest single source of demand for e-commerce. Sushant Mantry, Vice President, Cross Border, DHL eCommerce, noted in a recent blog post that Chinese shoppers account for an impressive 40% of global e-commerce demand. Much of that is domestic within China – a large majority of Chinese e-commerce shoppers (61%, according to Mantry) begin their online shopping through China-based Alibaba’s Tmall platform – an even higher percentage than the estimated 39% to 49% of Americans who begin their e-commerce shopping directly through Amazon. Many of the Chinese shoppers are also located in China, but Mantry notes that a significant number of Chinese expatriates living in the US, Canada, Europe, and South Asia still shop on Chinese e-commerce platforms, such as JD.com or Taobao, leading to growing e-commerce traffic from China to those regions.

Liège’s Verhasselt also noted growing e-commerce volumes on both east-to-west and west-to-east routes. Freighters ex-China into LGG have typically carried around 100% of their cargo capacity, and, he said, excluding certain express carriers, the airport sees about ten widebody freighters per week carrying only e-commerce from China. A May agreement between freight forwarder Dachser, and e-commerce logistics company 4PX to charter thirty-nine 747-400F flights between Hong Kong International Airport (HKG) and LGG will bring some 3,900 tonnes of e-commerce air freight into Europe.

Carriers pursuing partnerships

Turning to air cargo carriers, capacity shortages or gaps in their networks that fail to fully take advantage of growing e-commerce demand has led carriers to implement some creative solutions. While codeshare agreements are not uncommon in the air cargo industry, the need to meet rising demand has led to an increasing number of joint ventures and other partnerships, either with other carriers or logistics partners.

One example is Dubai-based Emirates SkyCargo, which signed a memorandum of understanding (MoU) with Cainiao Smart Logistics, the logistics arm of Alibaba Group, to facilitate cross-border e-commerce deliveries using Dubai as a hub. Dennis Lister, Emirates’ Vice President of Cargo Commercial Development, told Cargo Facts that the carrier realized it “could offer a value-added service to e-commerce players around the world,” rather than just to its own fleet, using its convenient positioning in Dubai as a hub for the Middle East, Africa, South Asia, and Europe. Under the terms of the MoU, Emirates SkyCargo and Cainiao will work together on cross-border e-commerce trade and airline cargo operations for e-commerce shipments in those regions. The MoU with Cainiao is likely only a starting point for the carrier’s e-commerce operations. Emirates SkyCargo, Lister said, plans to continue building on the strengths of its Dubai hub, fleet, and network.

Alibaba has also made other moves into the air cargo space in partnership with integrators and express carriers. In May, Alibaba partnered with Shanghai-based ZTO Express, as Cainiao moves to build up physical assets in its previously asset-light, data-driven logistics network. Alibaba has also backed other express companies, including Best Logistics and YTO Express, as well as its airline affiliate, YTO Cargo Airlines.

In another move intended to capitalize on the growth in cross-border e-commerce, Turkish Cargo, ZTO Express, and Hong Kong-based PAL Air Ltd. signed a partnership agreement in June for the formation of a Hong Kong-based logistics joint venture (JV).

These partnerships allow the carriers and logistics providers to benefit from the strengths of other air cargo operators without requiring a large capital or manpower investment to develop additional infrastructure within their own networks. Turkish Cargo operates a fleet of more than 300 aircraft, which benefits ZTO and PAL Air, while those operators offer door-to-door capabilities and a focus on the Chinese market, which could subsequently benefit Turkish Cargo. Turkish also stands to gain from the opening of its hub at the Istanbul New Airport (IST) later this year, which will further expand its own cargo handling capacity.

Learn more about e-commerce and its impact on demand for freighter aircraft 10-12 October at  Cargo Facts Symposium, where a roundtable panel discussion will be dedicated to the topic. For more information, or to register, visit www.cargofactssymposium.com.