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.

RMS & RSM

     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.

Enter The Professionals

     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.

The Integrators

     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 trade.

Sorting and packaging in an Amazon Warehouse.

Amazon Breakthrough

     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.

The Soup 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 way.

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 cost competition.
Bill Boesch