Basic Knowledge of Aircargo

Lecture Outline  The Air Cargo System  Cargoes using Air Transport  The Economics of Air Cargo  Air Cargo Traffic Flows  Conclusions Air transportation 

Week 7 Cargo airline operations Dr. PO‐LIN LAI 

Freight tonne kilometers (FTKs)

Freight tonne kilometers (FTKs)

 FTKs measures actual freight traffic.   Some airlines disclose Cargo Tonne Kilometres (CTK)  which explicitly includes unaccompanied baggage and  mail, avoiding ambiguity.  It is the equivalent of RPK for freight.  One FTK is one metric tonne of revenue load carried  one kilometer. The sum of FTKs for every flight stage  flown by every aircraft over a period is the FTK of an  airline over the period.

 FTKs is a measure of how much freight business an  airline gets. Weight carried is not adequate measure  because distance matters: carrying a tonne 10,000km  is clearly a greater supply of transport services than  carrying the same tonne 100km.  FTKs are obtained by multiplying the tonnes of freight  uplifted by the sector distance over which they have  been flown. 

Revenue tonne kilometers (RTKs)

Air Cargo‐ General knowledge

 RTKs measure the output actually sold. They are  obtained by multiplying the total number of tonnes of passengers and cargo carried on each flight  stage distance.

Roughly 150 to 180 billion RTK   Shipping, in comparison,53.4 trillion RTK(16.2 trillion  without bulk)  Non‐express items include perishables, high value  electric goods needing rapid consumer markets  access  Anecdotally, above $3.00 per kilogram in value may  justify shipping by air if time requirement so demand.

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Air Cargo‐ General knowledge

Air Cargo‐ General knowledge  Strong overall  statistical relationship  between air freight and  GDP  Not only GDP but also  Fuel price also affect air  freight in recently years

Type of Cargo Carrier  Combination carrier  Conventional scheduled airlines which carry both  passengers and cargo  Cargo carried in the holds of scheduled passenger  flights (Over 50% of all air freight)

 All cargo carrier  These operate cargo only flights  Both scheduled and ad‐hoc (point to point) charters  Often specialist types of aircraft

Integrator

Major Airlines (2012)

Type of Cargo Carrier  Integrators  Provide a door to door service  Also operate road vehicles for the delivery and  collection of freight

 Contract freighter  Aircraft, crew, maintenance, insurance (ACMI) leases  Carry freight on behalf of other airlines  Offer flexibility

Freight Forwarders

Integrator

 Provide an interface between shipper and carrier  Experts in the complexity of air cargo movements  Packaging, documents, insurance, customs, etc.

 Buy capacity in bulk from airlines and sell in smaller  quantities to shippers  Impact on airlines  Separate transport provider from the customer  Reduce yields as forwarders use market power

 Sector is now being entered by the large 3PLs

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Passenger vs Cargo Operations Passenger

Cargo

Traffic flow

Round trips Low concentration

Often imbalances Key trade flows

Airline choice

Many decision makers Subjective assessment

Few decision makers Objective assessment

Service offering

Delivery time important Minimum changes Day flights often preferred

Duration important Routing not important Night flights preferred

Airline factors Greater revenue Global alliances

Less revenue Market specific alliances

Policy

Increasingly deregulated  for international and  cabotage

Increasingly deregulated  for international only

Rate comparison 

Doganis (2010); Zhang and Zhang (2002)

Shippers use air cargo only when

Characteristics Routine (High

Occasional

 Perishability (e.g. food, fashion)  Opportunity cost (e.g. capital tied up in high value  product: I phone)  Inventory‐related cost (just‐in time)  Time‐definite requirement (express)

Value-Density)

Emergency Shipments

Ultra-high value density

Time critical

Perishable

Nonperishable

Medicines Aid Documents

Gold Diamonds Works of art

Horses F1 Cars

Newspapers Fruit Fish

Electrical goods Microchips

Speed Surface modes disrupted

Security

Speed and security

Short product life

Total logistics cost reduced JIT

Adapted from Doganis (2002)

Cost Issues  A particular problem is how combination carriers  should allocate joint costs  Joint costs:  Occur when the operation of one service cannot be  separated from the operation of another service  Cannot be allocated to a specific service  Negligible reduction in costs if one part is discontinued

How should costs be split between passengers and freight?

Cost Issues 

IATA recommends the following approach to cost  allocation 1. Direct operating costs – apportioned on the basis of  the usable volume of the aircraft allocated to each 2. Cargo specific costs should be identified – examples  include sales and marketing, ground handling, land  transport 3. Administration and indirect costs – split in proportion  to the sum of all the other costs

Not all airlines use this approach, as many see cargo as a profitable by-product of operating passenger services

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Cost Issues

Pricing Tariffs  General cargo rate

 Combi‐aircraft

 Expressed per kilogram, may have minimum weight  May reduce with increased distance  Can differ depending upon direction of travel

 Allocate joint costs on the basis of volume  Cargo occupies both the belly‐hold and part of the  passenger deck

 Quantity general cargo rate  Rate decreases as consignment size increases

 Specific commodity rates

 All cargo aircraft  Greater payload than passenger aircraft  Issue with oversupply of capacity which can affect yields

Pricing Tariffs

 Class rates

 Encourage the carriage of certain cargoes

 Unit load device (ULD) rates  Charge per unit load  Encourage shippers/forwarders to use and fill unit loads

Issues with Revenue Management

 Reduction/surcharge on general commodity rate where cargo  requires special treatment

 Account‐holder tariffs  Available to freight forwarders who generate sufficient business

Capacity

 Contract rates

Passenger

Freight

Fixed number of seats

Weight/volume available affected by many factors Three dimensional capacity (weight, volume, fixing positions)

 Negotiated direct with customers  Guarantee minimum volume over a given period

 Spot rates  Used to fill spare capacity

 Time definite rates  Door‐to‐door service with guaranteed delivery time

Itinerary control Prefer to travel as planned

Can follow any route, providing delivery date is met

Allotments – space for major customers

Contractual obligations affecting available space

Kasilingam (1996)

Overall Market Trends

Major air cargo trade lanes

Boeing (2010)

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Major air cargo for modern  economies

Factors Affecting Demand

Boeing (2010)

Main Air Cargo Locations

Trans shipment Points

Million Tonnes (2012)

4,500,000

N. America ‐ Asia

4,000,000

Europe ‐ Asia

3,500,000

Direct

3,000,000

ANC

Direct PEK KIX ICN NRT PVG

KIX

2,500,000

ICN

2,000,000 1,500,000

Asia ‐ N. America

1,000,000

Asia ‐ Europe Direct

500,000

ANC

0

KIX ICN ACI (2012)

Direct PEK KIX ICN NRT PVG

Ohashi et al. (2005)

Conclusions  Air cargo is a key component of world trade  Playing an increasing role in supply chains as  companies look to reduce the lead time  While some airlines see cargo as a profit centre, it is  actually a joint product from operating an aircraft  This makes cost allocation and revenue  management more challenging

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