The Value of Air Cargo
Ladies and Gentlemen, Dr. Liu, Good Morning. It is a pleasure to be here in Berlin.
The theme for this World Cargo Symposium (WCS) is ‘The Value of Air Cargo’. I think we can all agree that instinctively we know that air cargo is tremendously valuable. But how does one measure that value? Can it be defined? What does it tell us? And what lessons should we draw from what we discover? In my view, air cargo can be measured and recognized in myriad ways, but the conclusions we draw from understanding that value are complex and not always reassuring.
Perhaps the most dramatic and far-reaching example of the value of air cargo was witnessed here in this very city. 68 years ago, Berlin saw one of the greatest relief efforts ever undertaken by man. The Western sectors of what was then a city divided between the Soviets and the West were blockaded on Stalin’s orders. The intention was to force the Americans, British and French to leave.
The response by the Allies was the greatest airlift in history. Over the course of a year, 2.3 million tonnes of essential cargo was flown into West Berlin. Airfields like Templehof and Tegel became household names. The populace suffered great hardship, but they survived. And Stalin was forced to admit defeat. Air cargo had saved the day.
Today, air cargo remains essential for the work of disaster relief and for delivering aid, but that is only a fraction of the real value air cargo brings to all of us, every day. Let’s consider, in almost ten years that this WCS has been meeting, over 450 million tonnes of freight have been carried by air. And air cargo carries one third of global trade by value, around $6 trillion worth each year.
Modern life as we know it would simply be impossible without air freight. Life-saving medicines, crucial electronic components, the latest consumer goods, the sell-out Christmas toys rushed to the shops, race horses, cultural treasures, jewelry, food, flowers - the list is almost endless. And the industry carries all these goods because the global economy thrives on speed and connectivity – precisely the value air cargo offers above all else.
Volumes up, but revenues down
In volume terms the industry saw expansion continue in 2015, albeit slowly, and total freight tonnage exceeded 50 million for the second year in a row, reaching an all-time high of 51.3 million tonnes. Freight Tonne Kilometers grew by 3.0% in 2015. We know, however, that the cargo industry, while carrying more than ever before, is going through a difficult time financially. Cargo revenues are down from the 2011 high of $67 billion to just $52 billion last year. And looking ahead to 2016, we see further mixed fortunes. Oil prices are predicted to stay relatively low and volumes will expand modestly again. But yields are likely to fall further. Our Senior Economist George Anjaparidze, will explain these trends in much greater detail later today.
So the value of air cargo can be measured very differently depending on your perspective. For the world, air cargo is a vital motor of the global economy. But to many airlines, the bottom-line value is falling. And shippers are telling us that we don’t provide value for money. Last year’s Global Shipper’s Survey revealed that air cargo rated an average satisfaction score of 7 out of 10. That is not good enough for what should be a premium service.
Our challenge, therefore, is to increase the service quality of air cargo so that our customers value the industry more. That has two main elements to it. It means remaining true to our top priority of safety, finding ways to deal with the challenge of lithium batteries, and issues such as Unit Load Device (ULD) management. Secondly it means industry transformation to modernize processes, provide a more personalized customer service, and create a better relationship between the actors in the value chain.
Safety is the top priority
The most pressing safety issue facing the industry is that of lithium batteries. The industry has worked long and hard to ensure that lithium batteries can be carried safely. The vast majority of lithium battery shipments are packaged, documented and tendered in full compliance with appropriate aviation regulations. But with 400 million lithium batteries being produced each week, ICAO has had to acknowledge the risks of improperly manufactured batteries, not packed in compliance with the dangerous goods regulations (DGR) and IATA Lithium Battery Shipping Guidelines. It has concluded that the best course of action is a temporary ban on lithium battery shipments in the bellies of passenger aircraft.
Let us be clear. This decision is not a reflection on the thoroughness of the DGR or the industry’s commitment to safety. The issue lies with the lack of enforcement of the regulations by governments. Banning lithium batteries from air freight does not solve the issue of counterfeit or non-declared goods. So it is essential that governments redouble their efforts to enforce the regulations and close the loopholes that prevent prosecutions of serial offenders. Meanwhile, the industry will continue its research into new methods of fire suppression, and new ways to pack and transport batteries, to be absolutely certain they are safe. If this twin-track approach is followed, I am confident that the ban will eventually be lifted by ICAO.
The industry’s commitment to safety is also captured by our increased focus on the use of ULDs. This has come under heightened scrutiny since the publishing of the 2013 National Airlines Bagram accident report. ULDs are aircraft components and all industry stakeholders need to recognize this fact and treat these units with the appropriate level of care and expertise. To assist the industry with awareness, we are launching a new campaign to improve safety and quality so that our people on the ramp or in the warehouse are safer, and the $330 million annual bill for ULD-related damage can be reduced. We have some striking visuals for this campaign which you can see at the IATA booth, and hear about in detail at the ULD Track tomorrow.
Importance of industry transformation
While safety is always the top priority, it is through transformation and modernization of processes and technology that air cargo will remain relevant and improve its service offering to shippers. To this end, IATA has dedicated resources to a new air cargo transformation program, to lead and shape our response to this challenge. Keep an eye out for more information on this in due course.
If we take a moment to consider the less glamorous side of the industry – the passenger business – we can see that in recent years it has been completely reinvigorated. The shopping experience, the process through the airport, the interaction with the customer - every aspect of the passenger journey has been transformed. Is it a coincidence that after a decade of change, profitability and passenger load factors are at record highs? So where are the ground breaking air cargo solutions? Perhaps the answer lies in industry data-sharing platforms. Maybe new entrants in the market place will arrive with disruptive innovations. Or possibly e-commerce will be the igniter of change. The industry certainly cannot afford to miss the opportunities that e-commerce is opening up. The delivery models keep evolving. We now have click and ship, click and deliver and click and collect solutions. And just last week, Amazon announced plans to lease 20 freighters in a bid to secure more control over its supply chain.
By contrast, the industry’s own embrace of digital processes moves slowly. The struggle to implement the e-Air Waybill (e-AWB) continues. Last year we reached about 36% global penetration compared to a target of 45%. And this year the industry target is 56%. To support the industry accelerate implementation we have launched e-AWB 360, which is a community based approach to e-AWB introduction. Some other additional tools are on the way to assist carriers and forwarders, but in the end, this will come down to the industry’s willingness to change.
Raising the quality bar
The increasing sophistication and specialization of goods being carried by air is requiring the industry to lift its game. Despite the challenging business environment many airlines, freight forwarders and ground handlers have invested heavily in temperature controlled supply chain solutions. But there are concerns over quality of service in air cargo supply chains. Many shippers report that tarmac temperature excursions are an all-too-common consequence of complex processes and lack of harmonized procedures. This must change. Patient safety is a shared obligation and the industry has to respond by increasing collaboration.
Compliance certification solutions, such as IATA’s CEIV Pharma program, are a practical approach starting to generate real momentum. Since the last WCS we have seen new airport communities in Liege, Madrid, Barcelona, Miami, Singapore and a new European community which will be announced this Wednesday. So far, 29 entities have been CEIV Pharma certified, and we have another 58 currently undergoing the CEIV Pharma certification process. With initiatives such as CEIV Pharma, the industry will be better placed to reassure shippers and regain the market share it has lost in this fast-growing sector.
The push for the transformation of the quality of the air cargo industry is leading to continual effort to raise performance in every area. Later this week we will see a relaunch of Cargo2000 (C2K). C2K has been doing valuable work for many years, setting benchmarks, defining quality standards, and improving the transparency of cargo handling. Its members comprise some 80 of the biggest names in air cargo, who have given it a vote of confidence in approving funds to increase the size of the team and relaunch the group, including a name change to bring it up to date. Please keep an eye out tomorrow afternoon when the new C2K, its future plans, and some new participants, will be revealed.
Modernized Agency program
In terms of transformation, I should also talk about the modernization of our Agency program. For the past two years IATA and FIATA have undertaken a complete review of the program, with the ambition to make it a more balanced and equitable program for airlines and freight forwarders. Many of the potential new program developments have been jointly worked out, but a few issues still remain. IATA together with our airline members have decided to push on and implement some of the new elements already agreed upon. And work will continue towards a future independent and jointly managed IATA/FIATA Air Cargo program.
Value of air cargo to Germany
Since we are here in Berlin, I hope you will permit me to digress for a moment and explore some German aviation issues. German businesses have benefitted greatly from the growth of the integrated global economy, particularly the notable success of German exporters. But that success needs strong aviation connectivity, and regrettably this is being put under pressure by certain political decisions. Airport infrastructure is perhaps the most pressing example. In 2010 a strict ban on night flights at Frankfurt came into force. This has had a particularly significant impact on air cargo. In today’s global competitive environment it is clearly economically damaging to have Germany’s largest airport hub shut down for one third of every day.
Not only has the ban been economically damaging, it has also been environmentally counter-productive. Some flights have moved into the shoulder hours and significant volumes are being trucked to places such as Amsterdam and Brussels.
We have to accept the ban is not going to go away. And the mediation process at Frankfurt was the right way to go. But it cuts both ways: when politicians such as Transport Minister Dobrindt say there must be no further night flight restrictions, we ask that they keep to their word. And we must all agree that there is a balance to be struck between the needs of local communities, and the economic benefits that flow to everyone from a thriving aviation industry.
The situation in Berlin is different, but also damaging. As we’ve heard from Dr. Karsten Mühlenfeld, the situation is disappointing, to put it mildly. The airport is years late and, compared to initial plans, billions over budget. How can it have gone so wrong? The key issue now is for airlines to have some certainty – they need clarity on when the airport will open, and clarity on the costs that they will be expected to pay. Berlin may not be a cargo hub but these issues still affect air cargo flows from the region. If Berlin has a vision for its economic role at the heart of Europe, then it needs proper air connectivity for passengers and freight.
The opportunity of Germany’s strategic plan
We do, however, have some positive signs. This year the grand coalition has kept its promise to develop a national aviation strategy for Germany. The aim of the strategy is to protect and strengthen the aviation sector, considering the significant positive economic effect that the industry brings. Sadly, something else that is significant has been the impact of the German air passenger tax. This raises EUR1 billion per year and without question it is damaging Germany’s economy and connectivity. It would be helpful if the strategy were to acknowledge that.
We know that the Strategy is being taken seriously at every level. There has been intense dialogue with industry stakeholders and associations. We hope the result will be a good tool for decision making by future federal governments and give the industry the necessary guidance for investing in their businesses here in Germany.
The German government has another opportunity to boost the economy and that is to push for the long-overdue reform and modernization of European Air Traffic Management (ATM). This is an issue that will benefit not just Germany, but the whole of Europe. Next week we will publish a report from independent consultants SEO Amsterdam. The report concludes that EUR 245 billion of economic value will be unleashed by modernizing European ATM. Much of that value is driven by increased trade – which needs air cargo. Our estimate for Germany’s share of these European-wide improvements is for a jobs uplift of 158,000 and GDP benefits of EUR 45 billion annually in the year 2035. So there is a big prize at stake if new momentum for airspace reform can be found. I hope the German government will recognize the value of pushing this forward at long last.
Before I conclude, I would like to offer an apology that I cannot stay with you beyond lunchtime today. Believe me when I say nothing except a summons from the future King of England would have prevented me from staying. But that is exactly what takes me away from you earlier than I would have liked. Today, at Buckingham Palace, in the presence of Prince William the Duke of Cambridge, leading transport representatives will sign a Declaration committing their industries to support initiatives to combat the illegal trade in wildlife, which threatens to drive many of our most precious and iconic species to extinction. Sadly, many smugglers take advantage of aviation connectivity to traffic their illegal and obnoxious products. Air transport must play its full part in helping to combat this destruction of our natural inheritance. As part of our action program, we have held workshops in Kenya and Bangkok to assist airline and airport staff to recognize suspicious packages and behavior. More are planned, and I hope you will all join us in our fight against this terrible trade.
There is one other environment issue to which I wish to draw your attention today. Our 7-year push for the world’s governments to agree a single global market based measure (MBM) for aviation carbon emissions culminates in September this year at the ICAO assembly. The MBM is vital if the industry is to meet its target of carbon-neutral growth from 2020, which we set back in 2009. It is in all our interests to push hard for this agreement. The alternative is an increasing patchwork of taxes, charges and regulations, implemented nationally and regionally, that will restrict the value we can bring to the world. Our license to grow is dependent on our ability to demonstrate we are on a sustainable path. So I urge you to support the work we are doing and ask your governments to put their support behind the proposal currently under discussion at ICAO.
That call for unity brings me to my final point. The value of air cargo is so great because it is a team effort. It is an industry built on the efforts of different organizations, sometimes with different aims and needs, but always focused on delivering for the customer. That requires a unified approach. It is why we continue to support the work of the Global Air Cargo Advisory Group to develop harmonized policies on key industry issues. And if the industry is going to thrive in the coming decades, it will only be because the different participants in the air cargo chain have pulled together behind a common vision. Let us be in no doubt that this industry faces momentous change in the coming years. New entrants and new technologies are coming that will fundamentally disrupt the business as we have known it. No-one can be sure exactly what will change or how. But if the air cargo business can stay focused on the customer, delivering a reliable, high-quality service at a competitive price, and building on the speed and flexibility for which air freight is renowned, then this business will survive and prosper.