The transportation business
has always been subject to seasonal and yearly cycles and fluctuations.
International service has likewise always been tied to currency value,
with cargo affected by changing trade patterns, the volume of passenger
business and leisure travelers. Dealing with these ebbs and flows in business
volume has long been a major challenge for carriers.
Passenger carriers found a partial solution
to seasonality through revenue management systems (RMS) that used price
buckets to manage demand – lower priced buckets could be widely
opened in the low season to increase passenger numbers and shut down or
restricted during peak demand to maximize revenue per seat mile (RSM).
Carriers thus used price to manage demand and increase the market size
when needed. They also were successful through IT systems to minimize
the control of travel agents over their market.
This was not a strategy that cargo carriers
could replicate. Many did lower their prices in low periods, but the effect
was not to increase overall freight market size, but mainly to poach business
from competitors. The air cargo industry was further shaped by the role
of freight forwarders and professional traffic managers that mediated
between carriers and customers – their job was to secure the lowest
possible price for their company to maximize their profits, and they were
willing to exploit the perishable nature of airline business to do so,
squeezing carriers during low periods when planes might plausibly sit
idle without their business and insisting on the same rate during the
rest of the year.
On The Spot
Airlines tried to keep steady the relationship
through contracts, but these were difficult to enforce – forwarders
could (and did) tell carriers that they didn’t have enough business
to meet contract requirements while they had, in fact, simply moved their
freight on another carrier that offered a lower “spot price.”
By monopolizing contact with the ultimate client, forwarders had the leverage
in the relationship and boycotted any airline that went directly to clients
instead of working through them.
Integrators like FedEx revolutionized the
air cargo industry by finding a way to go around the forwarders as well
as the commercial companies’ traffic managers to reach into the
mailrooms and offices of business clients and regular consumers, creating
a business model less exposed to seasonal ups and downs. The seasonal
fluctuations that it couldn’t eliminate, it managed by chartering
additional aircraft under short-term AMCI contracts from air cargo charter
airlines so that it continually maintained high load factors.
This development enabled major changes
across the economy. Overnight delivery, high reliability and consumer-accessible
IT tracking allowed firms to replace expensive inventories of spare parts
at their regional and global production and inventory facilities with
just-in-time delivery for parts and products. Those
same features enabled the explosion of e-commerce, as consumers could
order directly from manufacturers and vendors and receive their purchase
delivered to their door. By lowering costs across the logistics chain,
this breakthrough made it easier for smaller commercial companies to expand
regionally and globally at a reduced cost, increasing their competitiveness
against big business.
But even with these changes, the air freight
scheduled airlines and the integrators still haven’t eliminated
the seasonality factor, and have compensated with the wave of expanded
Sorting and packaging in an Amazon Warehouse.
Now we have Amazon and the stage is set
for another breakthrough. Amazon’s core business is e-commerce,
making it the source of freight demand at an economy-influencing scale.
Through large-scale, low-cost AMCI contracts, it secures its needed freight
aircraft, allowing it to pit charter cargo airlines against each other
for the lowest price for fear of missing out on this business. Its ability
to influence seasonal demand through sales pricing (like Amazon Prime
week) allows it to accomplish something like RMS at the passenger airlines,
changing volume of cargo demand and market size through pricing. Its reach
isn’t limited to major markets either – through less-than-planeload
contracts with schedule carriers (and even some integrators) it can profitably
start to serve smaller, less-developed destinations.
All-In-One For Real
The Amazon concept integrates e-commerce,
product management, data mining and final delivery (including air and
ground logistics operations) and so represents a completely new model
for commercial distribution. Amazon can track user purchases and browsing
history to offer personalized deals, buy or negotiate from power with
vendors and carriers to provide the lowest prices, and reliably deliver
goods to consumers’ doors, giving a single company unprecedented
control over retail sales. It will have far-reaching second- and third-order
effects potentially, as the ability to rendering brick-and-mortar retail
(even luxury shopping malls) obsolete.
To Nuts Approach
With Amazon’s recent acquisition of
Whole Foods, we’ll see if this model can work for grocery and fresh
food distribution as well. No traditional retailer can match Amazon’s
model – the only ones that come close, Costco and SAMS, can pass
along price savings through their warehouse distribution and bulk-purchasing
model (eliminating middle-man profit-taking and reducing infrastructure
costs), but it still requires a trip to the store. I expect that e-commerce
will increasingly become the standard for retail sales, with Amazon leading
The Next Breakthrough?
Air freight airlines and integrators will
continue to exist side-by-side with the Amazon logistics chain as they
are indispensable to global trade, but they need their own breakthrough
as they will have pricing pressure on the e-commence side where free delivery
is the new standard of the industry. It will have to organizational and
technological to break free of the problems of seasonality and cut-throat
Bill Boesch started his career in global transportation
and logistics in 1965 working for Seaboard World Airlines. He later
joined Flying Tiger Airlines and Emery Worldwide. Mr. Boesch then
left Emery to become Pan American World Airways’ Senior Vice
President where he headed both Passenger and Cargo Sales and Operations.
He left Pan Am to lead American Airlines’ Cargo operation
and retired from AA in 1998. Under his direction American became
a world leader in the air cargo and logistics business.
Boesch was part of the extensive on site planning and support of
the Iraq drawdown, involvement with the Afghanistan operations,
and has worked on all aspects of the Civil Reserve Air Fleet (CRAF)
from both an airline and government standpoint.
Mr. Boesch has also served as Chairman
of the International Air Transport Association (IATA) Cargo Executive
Subcommittee in 1996 and 1997, Vice Chairman of IATA’s Cargo
Committee. Mr. Boesch served on the Board of Directors of Air Cargo
Incorporated, Air Cargo International, The International Air Cargo
Association (TIACA), Envirotainer, Cargo Logistics Solutions, Deutsche
Post/DHL Global Mail, al Seqir and consulted for major U.S. companies
including Flight Safety.
Mr. Boesch is the recipient of numerous
awards including the Lifetime Air Cargo Achievement Award, the Ellis
Island Medal of Honor and various awards from the U.S. Department
Mr. Boesch is presently continuing
his work for the U.S. Government and heads up The Council For Logistics