The Impact of Air Cargo on the Global Economy
Overview of the air cargo industry
The global air cargo industry represents almost 100 billion revenue ton-miles of
transportation, an estimated $52 billion in direct revenue in 2005 and substantially more
revenues in related trucking and logistics services. In this paper, we combine data from
many sources with new analysis of systematic data to characterize the nature of the air
cargo industry and examine its impact on the global economy.
Our analysis indicates that the air cargo industry is responsible for transporting
approximately 29.9 percent of all international trade (by some estimates, substantially
more) and 34.6 percent of non-land-based trade with an annual value of $2.7 trillion in
2004. With time-definite international transactions, production flexibility and speed
characterizing much of the new economy, it is nearly certain that air cargo will play an
increasingly vital role in the global economy. No other means of transportation is better
equipped to meet the economic realities of the new era where global sourcing and
selling, and just-in-time logistics, require that producers receive and ship smaller
quantities more frequently, quickly and reliably over long distances.
Global exports (by volume and value) have outpaced production (by volume) which has,
in turn, outpaced economic growth indicating a substantial restructuring of production
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and distribution. Air cargo has outpaced all, increasing by approximately 80 percent,
over the last decade despite recessions and other setbacks to air transport. Scheduled
air cargo service providing an estimated 4,396,353 tons of weekly air cargo capacity is
available at over 3,400 airports in 220 countries. Charter and integrated express
companies provide additional capacity.
With McKinsey estimating that the 20 percent of manufactured goods that are traded
internationally today will rise to 80 percent by 2020, the air cargo industry is poised for
continuing rapid growth at an expected rate of 5.9 percent annually for the next 20 years
(according to recent estimates by Airbus) and at 6.2 percent (according to analyses by
Boeing).
Our focus here is how operational reforms in the air transport industry, combined with
air rights liberalization and continued improvements in supply and distribution practices,
will allow air cargo to expand its geographic spread – primarily to the southern
hemisphere – and deepen its product mix, thereby further accelerating economic
development and the diffusion of prosperity.
The evolving organizational form of the air transport industry
The air transport industry is already quite large. Korean Air, Lufthansa, Singapore
Airlines, Cathay Pacific, and China Airlines are the largest combination passengercargo
carriers, measured by tons of capacity. American Airlines and United Airlines
provide substantial cargo service without the use of dedicated freighters. Several,
particularly European, airlines such as, Lufthansa, Air France, and KLM, have
particularly broad geographic coverage, offering service to more than 50 countries each.
British Air offers cargo service to over 100.
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Atlas Air, CargoLux, Polar Air Cargo, Nippon Cargo Airlines, and ABX are among the
major dedicated cargo airlines. Cargo airlines tend to have less extensive route
networks but CargoLux serves over 30 countries. Approximately three-fourths of all
international cargo is estimated to travel as belly freight on passenger planes and
another 15 percent on all-cargo airlines.
The global air cargo industry is characterized by an implicit alliance among a network of
cargo-carrying airlines, freight forwarders, airport logistics handlers, ground handlers,
and other parties. BAX Global, Panalpina, Nippon Express, U-Freight, Excel,
Geologistics, and Yusen Air and Sea are among the largest freight forwarders but
others, specializing in particular routes or types of customers, are also important.
Airport logistics and ground handlers are generally local. Each industry sub-sector
participant depends upon the others for its operations, growth and survival but also
competes with the other sub-sectors for profits.
Air cargo offers clients the benefits of secure handling, speed and geographic and
temporal flexibility but, with per kilogram costs that average six times those of ocean
container freight, is relatively expensive. That high cost is compensated by reduced
inventory and warehousing costs but, unfortunately, air cargo often fails to fully deliver
on its promise.
Although door-to-door transit time for air cargo is approximately one-fourth that of ocean
freight, dwell time continues to be an issue in the air cargo industry with relatively recent
studies (e.g., Air Cargo Management Group, 1999) finding little improvement in the
situation over a 25 year period. Air cargo dwell times may even approach those for
containerized sea freight. According to a Minneapolis study, first time importers are
responsible for the lengthiest dwell times but even experienced forwarders often let air
cargo wait for several days before filing import applications. The waiting time inherent
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in the consolidation of freight to obtain more favorable rates from airlines may account
for additional delay. These delays undermine air cargo’s potential advantages.
Given the division of labor in the shipping process, there are organizational and
operational breaks between the shipper, the originating ground handler, the freight
forwarder, the airline, the freight forwarder again, the receiving ground handler, and the
consignee, with specialized customs-clearing agencies sometimes called in to help. In
addition, there might be transfers between inter-regional and local ground services.
The resulting operational delays can be substantial. A large portion of the delay is due
to interruptions in the flow of information between organizations. Often, the
interruptions in information are serious with forwarders and airlines often attempting to
out-maneuver each other to gain a marginal commercial advantage – which can be
crucial to profit margins and therefore survival. Because each actor needs to optimize
its own operations, no one optimizes the system.
As a result, air cargo service has become increasingly more integrated and groundlinked,
characterized by door-to-door service from shipper to customer, as opposed to
airport-to-airport. Integrated express carriers, grew, in fact, out of the institutional
failings of the airline-forwarder-handler coalitions. Express companies have thrived by
reducing the reluctance to share information among participants and improved
optimization because all parties except shipper and consignee are internalized within
the same organization. That advantage has allowed integrated express handlers to
offer time-definite service and to reduce door-to-door delivery times.
That level of service has been valued by a significant segment of the air cargo market to
the point that integrated express now accounts for an estimated 11 percent of the
international air cargo market. In the United States, air express actually accounts for
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over 70 percent of all air cargo shipments, despite its premium cost, and the average
weight of each shipment has now risen to approach six pounds. FedEx, UPS, and DHL
are the largest integrated air express companies with operations in over 200 countries
each and 952,000 employees, collectively. They own or operate 677, 577, and 420
aircraft, respectively, placing each among the largest airlines in the world and they
serve over 300 airports internationally.
Transparency and time-definite services are increasingly becoming expected by
shippers and consignees. In a 2003 study, The International Logistics Quality Institute
found that 70 percent of the 800 companies surveyed would incur significant supply
chain problems if their intercontinental air freight shipments were even one or two days
late. Fully, 73 percent of respondents expected time-definite service to be common in
the future. The backbone task of the air cargo industry will increasingly be in providing
high-quality service for routine shipments.
In an attempt to fill this demand and to answer the innovations of the integrated express
carriers, the airline-forwarder-handler coalitions are now increasingly offering timedefinite
services. Airlines have attempted to streamline cargo services by introducing
three major air cargo portals (booking platforms): Europe-focused GF-X (Global Freight
Exchange), North American-oriented CPS (Cargo Portal Services), and Asian-allied
Ezycargo.
Airline-forwarder coalitions may be inherently unstable without an ownership (profitsharing)
relationship. Accordingly, some freight forwarders, such as Nippon Yusen, and
express companies, such as DHL, own substantial portions of cargo airlines – NCA
Nippon Cargo Airlines and ABX, respectively. Post offices – essentially ground
handlers with extensive networks – are increasingly attempting to leverage their assets
in new ways and are therefore becoming increasingly involved with air cargo.
Our research found substantial inefficiencies in the air transport process for much of the
market and premium prices in the rest. The next challenge for the air transport industry
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may be delivering integrated express level of service to “commodity” and out-size freight
at progressively decreasing yields. Such a re-formation of service – possibly by a
WalMart of the air – will allow a greater range of products to be transported by air. A
totally different organizational structure may evolve in the attempt to utilize airplane
capacity as fully as possible. Given the difficulties airlines often have in coordinating
cargo flows, it is possible that they may eventually decide it is advantageous to outsource
all cargo operations except flying.
Types of goods shipped by air and the industries dependent upon air cargo
Air transport is critical to the movement of goods in national and global supply and
distribution chains. From the beginning, air transport specialized in high value-to-weight
products, perishable goods, emergency deliveries for unanticipated shortages, and
products requiring the security of increased attention. High value-to-weight ratios imply
a relatively light transportation cost burden and high inventory costs if goods are long in
transit. Highly perishable goods incur a significant decrease in product value with any
delay. The absence of critical components of complex supply or distribution chains
means significant assets would lie idle if the components are not delivered in a timely
manner.
While those features still apply, today an amazing array of goods is shipped by air from
gems to bendy-buses to breeder cattle. The air cargo industry has thrived on the rise of
industries incorporating high levels of knowledge into lightweight goods but the industry
has been able to move down the value-to-weight ladder.
New economy products such as microelectronics, pharmaceuticals, aerospace
components, medical devices, and other high value-to-weight products account for
close to three-fourths of international air cargo by value. Nevertheless, the use of air
cargo is quite broad. In 35 of the 67 two-digit product categories (SITC) used to broadly
classify goods, at least ten percent of the international trade is shipped by air. In 23 of
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the categories, at least a quarter of all trade goes via air.
Looking at product categories (SITC 4-digit classification) more closely, reveals that
electronic microcircuits account for more air cargo than any other detailed product
category by a factor of more than two. Aside from the sectors just mentioned,
diamonds, audio and video recordings, chemicals and airplanes themselves are major
products that move by air, each exceeding $50 billion in trade. In 582 of the 1279 4-
digit SITC product categories, ten percent or more of the international trade is shipped
by air. In 315 of the categories, at least a quarter of all trade goes via air.
Overall, air cargo accounts for 34.6 percent of non-land international trade but only.6
percent of the weight. The average value-to-weight ratio of air shipped goods is 31
times as high as that of vessel-shipped goods. Even within detailed product
classifications, goods with higher value-to-weight ratios tend to be shipped by air. On
average, within the detailed 4-digit classifications the value-to-weight ratios of air
shipped goods are ten times as high
