Good morning. Thank you for the kind invitation to address you today. It’s been over a decade since an IATA Director General addressed this Federation, although our organizations work very closely together. In fact, we are partners in a very remarkable industry—global air freight.
As you may know, I come from a background of more than 30 years at Cathay Pacific. A strong air cargo business underpinned Cathay Pacific’s growth and was a vital contributor to profitability. So I know very well the important contribution of air cargo to the airline business.
But the importance of air cargo goes well beyond that. It is an essential driver of our global economy.
The world as we know it today, with its rapid spread of new consumer goods, exotic foods, life-saving pharmaceuticals, and global sporting and cultural events, could not exist without air cargo. In fact, when measured by value, a third of goods traded internationally are transported by air. That’s $6.4 trillion worth of business and some 57 million jobs. And the impact through growth and broad economic and social development touches almost every aspect of modern life.
Global air cargo is made possible through complex supply chains. Together we have made it safe, secure and reliable. So reliable, that air cargo is often taken for granted. As a result, it is the unsung hero of many airlines and in fact the global economy.
Historically we saw the air cargo business grow by 5% to 6% annually. And it is not surprising that from this trend evolved a common expectation that air cargo would always grow in tandem with globalization and world trade. But the aftermath of the global financial crisis is now challenging that assumption and the interdependency.
Cargo volumes plummeted in 2009 and bounced back strongly in 2010. That was as expected. But then the growth stopped and long-held assumptions began to unravel.
Air cargo was always thought to be a leading economic indicator. Since 2010 we have seen passenger travel grow in line with improvements in confidence. And air cargo has stagnated. Let me share with you some facts to put that into perspective.
- The market share for air cargo is decreasing. Since 2010 world trade has grown by 12%. Air cargo volumes have only grown by 2% - from 50.7 million tonnes in 2010 to an expected 51.8 million tonnes this year That means that other transport modes, such as maritime, are growing more quickly than air cargo. In other words, air cargo’s share of the cargo pie is reducing. And I should caveat that by noting that integrators are bucking the trend with solid growth. So the picture for the rest of the industry is even bleaker.
- Revenues are shrinking. In 2010 air cargo accounted for $66 billion in revenue. This year we expect revenues of just $59 billion. Looked at another way, four years ago air cargo was 11.4% of airline revenues. This year it will be 8.3%.
I should say that in my long experience of air cargo, the industry has been in the doldrums before, and recovered. Nevertheless, air cargo’s competitiveness is being squeezed by a combination of factors.
Air cargo commands a premium over other modes of transport because shippers are willing to pay for speed. But in recent years, the price gap has widened and shippers have been equally under pressure to cut their distribution costs as global consumer demand has weakened.
Air cargo has cut costs—dramatically—and even in the face of record high oil prices. It’s been an heroic effort that everyone in this room is probably all too familiar with. But we have been outpaced by even deeper cuts by our rivals.
And we are not able to manage supply. Freighters can be parked—and many airlines have done so. It is an expensive method of dealing with the current market slump. But passenger demand is robust. And every wide-body introduced or upgraded to meet passenger demand has belly space hungry for cargo. In that scenario, it’s hard to see yields improving any time soon.
In tandem with these factors, patterns of development, innovation and business intelligence have eroded much of the value that shippers see in speed. Let me share with you four examples.
- Some people believe that the model of manufacturing in developing nations and transporting the final product to the developed world should not be taken for granted. Foxconn—which builds iPhones—is opening an assembly plant in California. Manufacturing in the US is becoming more competitive as wages and transportation costs and the value of local currencies rise in Asia. It is too early to say if on-shoring is an accelerating trend, but the possibility cannot be discounted.
- Advanced data mining techniques are allowing sellers of consumer goods to make accurate predictions of demand further in advance, which is impacting the just-in-time model. With weeks—instead of days—in lead time, sea freight is a cheaper and equally reliable alternative to getting goods to warehouses from where they are distributed to consumers.
- Similarly, a paradigm shift in how perishable products get to market is occurring as more ships are equipped and delivered with highly sophisticated temperature control and lighting systems. Fresh fruit, for example, is being picked earlier and loaded on ships. The products ripen on board where they can be processed, bagged and labeled so that they are ready for immediate distribution on arrival. No need for warehouse or distribution premises on land – the whole thing can be done in transit. Result: time and money saved.
- External factors are also putting pressure on the business. As environmental awareness among consumers continues to evolve, there is a bias against air freight. Facts notwithstanding, the perception is that air freight is more carbon intensive than local sourcing. The industry is committed to carbon neutral growth from 2020. But Sony—a big customer of air freight—has pledged to cut its air freight volumes by 20% as an act of environmental responsibility.
I am not here to predict the end of the air cargo industry—far from it. The theme of this speech is building solutions together. And what we need to do together is to drive the changes needed for our industry to adapt in order to thrive in a dynamic business environment.
That should not come as a surprise. No business or business model survives without change. And if I look at these four forces challenging air cargo’s competitiveness—changes in the economics of just-in-time manufacturing, longer delivery lead times facilitated by improved predictability of demand, innovation by our competitors, and environmental pressures —there is clearly a need for our industry to take a long and hard look at its value proposition, so as to guide improvements in competitiveness.
I’d like to spend the next few minutes sharing some ideas on how we can work in partnership to build a stronger future for air cargo. My short list is: improve quality, implement e-air waybill (e-AWB) and e-freight, enhance security, and become much closer partners.
Improving the quality of air cargo
Let’s start with quality. We are in the year 2013 and we are still talking about embedding the quality standards of Cargo 2000 (C2K). If shippers are paying a premium for the speed of air cargo, there is little value in a delayed delivery. If a customer has paid for a 100% cool-chain, it needs to be delivered—including the integrity at the airport facilities which book-end any shipment. And if a customer entrusts us with valuable goods it is not acceptable to deliver the goods damaged—or worse to have them fall victim to theft.
Air cargo is a premium product. Quality and reliability has to be in the industry’s DNA. .
C2K provides a good start in building the benchmarks and measures of key quality metrics so that our customers can have some confidence in the forwarder/airline combination they are using. And from that we can drive up quality.
I have asked Des Vertannes and his team to work with FIATA and the Global Air Cargo Advisory Group (GACAG) to enhance the C2K master operating plan so that we can measure the service promises of the industry to its shippers. I expect this process to demonstrate its first fruits by the end of 2014. Together, I know that we can generate real momentum in the race to drive up quality and reliability.
Investment for a digital future
Efficiency is the next element. In 2013 customers expect instantaneous access to accurate information. I expect it from my bank with e-banking. I expect it for my travel with online reservations and e-ticketing. And those shippers who pay a premium for air cargo should expect the same. They get it already today from the integrators and there is no reason why it should be any different for the rest of us. That was a large part of the inspiration for e-freight. We started the vision in 2004. Nearly 10 years later, I think that we would all agree that progress has been disappointing.
The commitment of IATA and our members to e-freight is very much alive. It has been on the agenda of every IATA Board of Governors meeting that I have attended since 2008. But penetration of e-AWB as an initial step is still at just 9%. That is not even half the 2013 target that the airline CEOs who sit on the IATA Board have set.
The theme of this speech—delivering solutions together—holds the answer. Airlines alone cannot deliver e-freight. We can do a lot on e-AWB and there are some excellent examples of success in markets like Hong Kong, Singapore, Seoul and Dubai. These are still rare exceptions, and implementation largely is the result of the determination of the home carriers. But to be successful, we need the whole air cargo value chain to be marching with the same goal, to the same beat and completely in tune.
IATA’s biggest lesson from a decade of working on e-freight and e-AWB is an increased appreciation of the power of partnerships.
We have seen some progress this year. The partnership with FIATA on the multilateral e-AWB, which achieved government approval in April, has been a great step forward. The recent endorsement of TIACA was also very welcome. It is encouraging that the whole air cargo industry is increasingly aligned behind the target of 100% e-AWB adoption.
Commitment and endorsement must manifest itself in action in order to see results. That’s a long way of saying that more airlines and forwarders need to sign up. There are some major organizations present in this room – both airlines and forwarders – that are not yet on board. And we cannot make industry progress—building a better, more competitive future for all of us—without individual contributions and leadership.
Improving air cargo security
Along with quality and efficiency, we also share a common commitment to security. Our record is good. But the threats are real, the challenges are big and regulators’ expectations are high.
2001 changed the paradigm on aviation security in general. And the printer cartridge plot in October 2010 had an even more profound and focused impact on air cargo security. Since then governments, especially in the US and EU, have imposed a number of security directives tailored to managing risk. The onus is firmly on the industry to ensure air cargo is appropriately screened in accordance with this new risk-based approach. We fully support a risk-based approach and are eager to engage with governments to implement practical and harmonized measures that both facilitate global trade and keep our industry secure.
This can be challenging. A recent example is the ACC3 regulation implemented by the EU. It imposes a considerable burden on airlines…and by extension, on the entire air cargo supply chain. By 1 July 2014, all carriers carrying goods into the EU from non-green states will need to be independently validated as to the security standard of their cargo supply chain. That means that the airlines and ground handlers at those stations handling those carriers will also need to be independently validated as conforming to EU published standards. If those stations have not been independently validated or have not been given an exemption by the EU, then they will not be able to uplift cargo for onward transport into the EU, even if that cargo has been screened and secured.
I believe that the timeline is challenging. We have a lot to do and not a lot of time in which to do it. And there is probably cause to engage with the EU in a realistic evaluation of the situation.
In the meantime, the EU is absolutely adamant both on implementing ACC3 and on the time frame. So my message to the airlines, ground handlers and forwarders here today is two-fold. First, make plans to get validated as soon as possible. IATA has set up a Center of Excellence for Independent Validators, a training program approved by numerous EU member states. The second message is to look for areas to cooperate. There are only a limited number of validators. So it makes sense for airlines, ground handlers and forwarders on certain routes and in certain markets to coordinate requests to be validated. This should maximize efficiencies and minimize costs, as well as increase the chances of the industry meeting this very tough deadline.
Committed to change
There is a big prize at stake if we can work together successfully to improve competitiveness by delivering on the quality, efficiency and security programs that I have just described. If air cargo could increase its share of the volume of global trade by just two-tenths of one percent, it would generate an additional 40% of revenue, worth around $25 billion to airlines alone. That’s our common case for working together to deliver fundamental changes that will protect air cargo’s value proposition to its customers. Instead of talking about how we divide the pie amongst ourselves, we need to focus on how we can best grow the size of the pie together.
I am here today to reassure you of IATA’s commitment to work in partnership to deliver the solutions that will secure the future for air cargo.
A good example of that commitment is the Cargo Agency Modernization Program—or CAMP. For 18 months, we have been cooperating closely with FIATA, to re-shape relationships along the value chain. We all recognize that we need a modernized relationship that helps build trust and treats the Forwarder-Airline relationship as a partnership of equals. That will lead to the enhanced cooperation that will help industry adapt to the momentous changes it faces.
In the last few weeks there have been particularly fruitful discussions, and we are on track to be able to announce the new proposals at the next World Cargo Symposium, in Los Angeles next March.
2014 will be a milestone year for aviation. We will celebrate 100 years since the first commercial scheduled air service. On January 1st 1914, Tony Jannus piloted a Benoist flying boat carrying a single fare-paying passenger from St. Petersburg to Tampa, Florida. It is not known whether he carried any cargo!
Since then, aviation has grown from a hobby for daredevils, to the essential engine of the global village. Aviation has become the fastest, safest, and best value form of long distance transport. And those service values need to apply equally to the movement of goods.
But this is not pre-ordained. The history of aviation is littered with businesses and ideas that have come and gone. Equally, the industry itself adapts and transforms with each new generation. Our commitment to safety and security is constant. But aside from that, everything else is up for grabs. Recent safety issues relating to Lithium batteries and undeclared dangerous goods means our collaborative efforts to maintain the integrity of the air cargo supply chain have never been more critical.
Yet despite the challenges I’ve been talking about, I am a cargo optimist. If it can adapt, air freight has a competitive future – potentially a very bright one. Meeting here in Singapore reminds me of the optimism that all of us should have in our future. Singapore is among the wealthiest nations on earth. But it wasn’t always that way. Connectivity—including aviation connectivity—is a pillar of the Singapore economy. Look north, east, west and south and you will see that we are surrounded by opportunity. Asia is growing wealthier by the minute. The Asian middle-class is expected to triple by 2020, which will have an enormous impact. In volumes, it is like creating a market the size of today’s middle class in the US and Europe combined. Asia is not the only growth story. Emerging markets around the world—Africa, Latin America, Central Asia, Russia and so on—offer enormous potential.
Some have described air cargo’s past as a tug-of-war among the different parts of the value chain--and there may be some truth to that characterization. But the past need not dictate the future. By working together, we can deliver the solutions that will position air cargo to meet the needs of tomorrow’s world. They are big, challenging and definitely worth all our efforts.