Spring 2023

Collaborating to compete

Collaborating to compete

Technology can help air freight stakeholders develop e-commerce products to meet the huge opportunity for a ‘hybrid’ delivery solution that sits between those offered by postal and express operators, reports Megan Ramsay

According to IATA, the annual value of global retail e-commerce sales was forecast to exceed US$4.4 trillion by 2025 but reached this milestone in 2021, accelerated by the Covid pandemic. Retail e-commerce sales in 2022 were estimated at around $5.5 trillion, and the new forecast for 2025 now stands at $7.4 trillion.
With e-commerce sales now estimated to make up more than 20% of total global retail sales, and 20% of air freight traffic, the prolific growth of this sector continues to present ever-more significant opportunities for the air freight sector and its main stakeholders.

IATA believes one of the still untapped opportunities is for air freight to offer a “hybrid delivery product” that sits between “postal shipments being a bit too slow, and express shipments too expensive” for many shippers, commodities or products. With airlines able to “offer speed, visibility, reliability and consistency”, IATA says carriers are “well positioned to deliver on these promises”, although “only a few have entered this market, by collaborating to meet this hybrid modal”.

Amar More, CEO of freight tech specialist Kale Logistics Solutions, says e-commerce companies “are always concerned about Amazon as it continues to increase capacity – and are looking for fast, efficient alternatives to ship packages to customers. Airlines can meet this need, expand their revenues, and provide a competitive offering for e-commerce shipping that allows the retailer to compete with Amazon effectively.”

Currently, the only competitive alternative to e-commerce giants like Amazon, Alibaba or JD.com is the to-door parcel delivery service offered by postal operators; China Post, for instance, is a big player in this market. The integrators are significantly more expensive, based as they are on the provision of express services at a premium price.

So why are most scheduled airlines, which have the fastest connections between any two points, still not in the game?

Stan Wraight, president and CEO of aviation consultancy SASI (Strategic Aviation Solutions International), believes it is because they have paid too little attention to air cargo, and given control of much that happens on the ground to third parties. Plus, airports are not equipped to process so many small parcels, and there is a lack of companies that would work with an airline to provide first- and last-mile services plus Customs clearance.

“No airline has really made too much of an effort to think about how to put together a network that can offer the same quality, transparency and cost-effective price by managing it themselves rather than giving it up to a third party,” he says. “That is where the dilemma now comes for the airlines.”

Virtual integrators
In order to compete in the e-commerce space, he believes carriers should professionalise the way they approach e-commerce, acting as what SASI calls “virtual integrators”.
On domestic routes, this is relatively simple – but cross-border shipments involve significant complexities, not least Customs and security as key hurdles. Historically, airlines have not encouraged handlers to develop the extra services that are needed to support cross-border e-commerce: Customs clearance, first/last mile, and IT systems that allow transparency. Plus, handlers tend to be geographically isolated, and communication between them is often a stumbling block.

“You need to create an end-to-end/door-to-door IT platform that scheduled airlines can use,” Wraight believes.

Fundamentally, in order to compete with existing e-commerce giants, integrators and the largest, cheapest e-commerce delivery provider of all – postal operators – the air freight industry must offer the speed, transparency, quality, compliance and convenience of e-commerce at a competitive but still-profitable price – and a choice of providers. So, airlines must invest in creating a dedicated product portfolio for e-commerce, in Wraight’s view.

If this is organised under the ‘virtual integrator’ model with the right partners – IT, handlers, first- and last-mile delivery, Customs clearance and security – he is certain that it is possible to set up an e-commerce service that is faster than any integrator or e-commerce giant on any direct point-to-point route.

Dedicated e-commerce products
Some airlines are developing dedicated e-commerce products. Rivo sits on top of Air Canada’s domestic network to provide door-to-door e-commerce deliveries across Canada. Turkish Airlines has partnered with Singapore-based e-commerce platform Shopee to build “air cargo bridges for cross-border e-commerce shipments”.

Emirates, meanwhile, offers an end-to-end e-commerce shipping solution called Emirates Delivers, for both small businesses and individual customers, with deliveries from the US into the UAE. As reported by CAAS in December 2022, the airline has been able to deliver shipments almost within 48 hours, including last-mile delivery.

Another example is Lufthansa’s heyworld B2C e-commerce product, which – in cooperation with partners – covers first-mile, export Customs clearance, A2A (airport to airport), import Customs clearance, last-mile, and different return solutions including open box.

heyworld’s modular design enables it to adapt depending on country, setup or customer, such as different ways of providing return labels; documentation in various forms; insurance; CO2 reporting; implementation of customer tools or standards into the process; or various return solutions.

heyworld focuses on B2C shipments. Its customers are mostly shippers, marketplaces and online retailers who wish to send goods to their own customers. Given the difficulties in ensuring Customs compliance in a C2C setting, heyworld plans to stick to B2C business.

Managing shipments individually
“The main challenges result from the number of parcels that must be handled,” says Boris Hueske, joint managing director of heyworld.
“On the physical side of things, each parcel must be separately scanned, weighed, measured, and labelled as each parcel’s recipient is different. Also, for Customs inspections, parcels need to be singled out. With our sorting machine, we can offer high-quality and reliable services at scale.”

On the digital side of things, once again there is a need to manage each shipment individually. heyworld enables all parties in the supply chain to access information pertaining to shipments to ensure smooth cross-border transport, including compliance with Customs regulations.

Role of technology
A key function of technology for e-commerce is that it supports the speed required in this vertical, as compared with traditional business-to-business cargo – especially at handover points such as to or from an airline, Customs clearance, and injection into the last-mile delivery system.

More noted that the logistics industry has varying degrees of IT maturity among its stakeholders. “Large players have sophisticated IT solutions to manage their end-to-end operations, but small or medium enterprises (SMEs) are still on Excel-based data or, worse, maintain physical files.

“With different contours of IT systems, the movement of cargo across the supply chain suffers. Data discrepancy, time-consuming operations, and a lack of trade visibility and transparency exist, thereby making the entire supply chain inefficient and non-conforming,” he says.

Kale Logistics Solutions offers a cargo community system that supports the entire supply chain; it can automate the shipment journey, beginning with the online transaction at the retail shopping site, More points out, noting that the Cloud-based platform provides real-time data visibility and seamless transparency between all parties via mobile applications.

Orchestrated movements
Not all e-commerce shipments are equal: some are bulk orders bound for distribution centres or retail outlets, while others are individual packages on their way direct to the end consumer. In this latter scenario, the existing forwarder’s business model can still work well, while in the former case there remains the potential for forwarders to perform services such as consolidation from multiple vendors, for instance.

In addition, Sebastian Wouters, global head of e-commerce at forwarder Kuehne+Nagel, notes that some of the larger e-commerce players’ distribution networks and inventory are to some degree decentralised so as to optimise last-mile delivery and therefore overall transit times. Different models have different requirements in terms of how shipments need to be broken down and forwarded on to their next destinations, and forwarders can play an effective role in the deconsolidation and regional distribution of smaller shipments.

Consolidation is critical
Consolidation is critical when it comes to e-commerce. Moving tens of millions of shipments of small individual items a day is hugely complex and costly – so there needs to be much more focus on consolidated e-commerce and breaking down e-commerce at the destination, in More’s view.

He describes Kale’s Logistics e-Marketplace as a “game-changer” in this regard. The platform connects shippers and end-users with features like price discovery, reviews and ratings, airline schedules, route optimisation and predictive analysis.

“Bringing logistics service providers together on a unified technology platform is a huge step for the e-commerce industry, known to be highly fragmented,” More says.
Hueske stresses that there is already a great deal of co-operation, combining the strengths of different partners along the e-commerce supply chain to build seamless, quality services for cross-border e-commerce customers. With preferred time windows for certain services, the optimisation of the delivery time from the moment something is ordered until the end-customer receives his parcel must be consistent and minimal, he says.

Collaboration is essential if the industry is to cope not only with changing customer demands but also shifting regulatory requirements (such as those outlined in the text box ‘Changes: Near-shoring and new regulations’).

Forwarders remain crucial
“It will be hard for airlines to [succeed in e-commerce] without the forwarders, and vice versa,” says Wouters. “E-commerce has the same underlying needs as general cargo – such as bookings, consolidation, onforwarding – so the traditional freight forwarding paradigm is still valid for the future of e-commerce, but the requirements and needs do evolve.”

And forwarders, who have access to multiple carriers, can coordinate the supply chain better than any single carrier, he remarks – certain that freight forwarders can help customers in the e-commerce space to find the best options, capacity and routings for their required transit times.

“We orchestrate the journey from origin to destination,” he notes.

Some of the larger forwarders are going further, using their substantial purchasing power to put their own planes in the air. Kuehne+Nagel entered into a long-term charter agreement for two liveried B747-8Fs operated by Atlas Air last year; Geodis is another forwarder that controls its own air cargo capacity. In this context, smaller and medium-sized forwarders should see airlines as strategic partners – even “a life-saver”, says Wraight.

“Partnering with airlines to offer airport-to-door services protects revenue, data and customers, and makes it possible for a small or medium-sized freight forwarder to compete with the large forwarders, e-commerce giants and integrators.”

Future trends
E-commerce will grow beyond national boundaries to find new markets, More says. In addition: “The combination of machine learning/artificial intelligence and big data can do more than automate – it can automatically optimise several processes that currently either take tremendous amounts of time and effort or can’t be done at all.

“One area it’s set to drive is increased e-commerce personalisation that can help give customers a better store experience,” he continues. “With the rapid expansion of direct to consumer (D2C) brands and their customer-binding ethos, the e-commerce sector has counterbalanced the resumption of in-store shopping, alongside an increased focus on omnichannel and social commerce.
“E-commerce will also see growth as hyper-local and cross-border. We will see an entire range of new products being added, such as groceries, agro-produce, medicines and even services. It will capitalise on customers’ expectations for instant gratification and use innovative technologies like blockchain to simplify logistics.”

EU rule changes
Digital handling at piece level will likely be the most impactful change that will support the improvement of e-commerce services, Hueske believes. “With the upcoming changes due to ICS2 (Import Control System 2), this change might be coming sooner than later,” he adds. “Automatic status reports and API integrations for carriers might improve the overall performance here.”
Release 1 of ICS2 in March 2021 required express carriers and designated postal operators established in the EU to provide a minimum set of advance electronic data. By 1 March 2023, all goods imported by air in postal, express, and general cargo consignments will require the full ENS (entry summary declaration) data set.

More outlines several other trends that he believes will shape the industry:
Voice commerce and headless technology (where the back end of a website is decoupled from the front end) will open the door to automated commerce.
As consumers become vocal about climate change, e-commerce will follow the sustainability trend in its operations, processes and supply chain.

Excess capacity in cargo warehouses will be evaluated and potentially repurposed into modular e-commerce logistics centres and distribution facilities.

Forwarders and ground handlers will consider entering the first- and last-mile business with innovative solutions and “new-age” vehicles such as drop boxes, multipurpose lockers, or drones.
The convenience of e-commerce, and its utility for dispersed populations, mean it is here to stay. Wouters says the challenge for the whole air freight industry is how to cope with the expected growth in demand in the coming years. If there is not enough capacity, prices will rise again and the attractiveness of e-commerce could diminish, Wouters warns – emphasising that this is not about competition, but about collaboration.

“Parties working together in the industry will be a key enabler to keep up with future growth and innovation,” he concludes.