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Air Cargo: Participants - Processes - Markets - Developments
3658381922, 9783658381929

Author / Uploaded
Joachim G. Schäfer

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Business
Logistics

Table of contents :
Preface
Contents
Abbreviations
Part I: Introduction
1: A Brief History of Air Freight
1.1 The Age of the Pioneers Until the End of the Second World War
1.1.1 Flying – Man’s Eternal Dream
1.1.2 Pre-war Years
1.1.3 Years of the First World War
1.1.4 Airmail as the Engine of Aviation in the 1920s
1.1.4.1 Technical Innovations
1.1.4.2 Development in North America
1.1.4.3 Development in Europe
1.1.4.4 The Golden Age of Airships
1.1.5 Progress in the 1930s
1.1.5.1 Evolution of Modern Commercial Aircraft
1.1.5.2 The Second World War as a New Turning Point
1.2 The Boom Years from the End of the Second World War to the Mid-1970s
1.2.1 The Chicago Convention and the Establishment of ICAO
1.2.1.1 Organisation of the ICAO
1.2.1.2 ICAO Standards and Recommended Practices
1.2.2 Freedoms of the Air
1.2.2.1 First and Second Freedoms (Technical Freedoms)
1.2.2.2 Third to Fifth Freedoms (Commercial Freedoms)
1.2.2.3 Sixth to Ninth Freedom
1.2.2.4 ICAO’s Capacity to Develop
1.2.3 International Air Transport Association (IATA)
1.2.4 Developments in the USA
1.2.5 Development in Europe
1.2.6 Technical Innovations
1.2.7 The Advent of Wide-Body Aircraft and the Consequences of the Oil Crisis
1.2.8 Exogenous Crises as an Engine of Growth
1.2.9 Phase of Deregulation
1.2.9.1 The Arduous Path to Open Air Spaces
1.2.9.2 The New Role of IATA in Deregulated Markets
1.3 Maturity Phase Up to the Global Financial Crisis
1.4 Development Since the Financial Crisis – A Phase of Consolidation?
1.4.1 A Standstill in Aviation Liberalisation – And a Decline?
1.4.2 Development of Traffic Volumes
1.4.2.1 Long-Term Correlation Between Transport Volumes and Gross National Product and World Trade
1.4.2.2 Volatility of Quantities Due to External Shocks
1.4.2.3 Volatility During the Year
1.4.3 Employment Impact
2: Characteristics of Air Freight
2.1 Overview of Air Cargoes
2.1.1 Airmail
2.1.2 Express and Courier Consignments
2.1.2.1 Express
2.1.2.2 Courier Consignments
2.1.3 Conventional Air freight
2.1.3.1 Perishable Goods
2.1.3.2 Goods of Value
2.1.3.3 Emergency Assistance and Urgent Replacement Products
2.2 Advantages
2.2.1 Lower Capital Costs During Transport
2.2.2 Lower Inventory Costs Due to Speed and High Reliability
2.2.3 Lower Insurance Costs Due to High Level of Security
2.2.4 Low Packaging Costs
2.2.5 Lower Upstream and Downstream Costs Due to Closely Meshed Infrastructure
2.3 Disadvantages
2.3.1 High Cost of Air Freight
2.3.2 Size and Weight Restrictions
2.3.3 High Environmental Impact
2.3.3.1 Aircraft Noise
2.3.3.2 Pollutant Emissions in the Vicinity of Airports
2.3.4 Greenhouse Gases
3: Parties Involved
3.1 Consignor and Consignee
3.1.1 Rights and Obligations of the Consignor and Consignee
3.1.2 Allocation of Costs for Freight and Charges (Incoterms)
3.1.2.1 Ex Works (EXW)
3.1.2.2 Free Carrier (FCA)
3.1.2.3 Carriage Paid to (CPT)
3.1.2.4 Carriage and Insurance Paid to (CIP)
3.1.2.5 Delivered to Named Place of Destination (DAP)
3.1.2.6 Delivered to Terminal (DAT)
3.1.2.7 Delivered and Duty Paid (DDP)
3.1.2.8 Considerations
3.2 Airlines
3.2.1 Business Models
3.2.1.1 Full Service Network Carrier (FSNC)
3.2.1.2 Integrators
3.2.1.3 Cargo-Only Airlines
3.2.1.4 Low Cost Carrier (LCC)
3.2.2 IATA and ICAO Airline Codes
3.2.3 Success Factors
3.2.4 Possibilities for Optimising Turnover
3.2.4.1 Load Factor
3.2.4.2 Increasing Average Revenue Through Quality Leadership
3.2.4.3 Product and Price Differentiation
3.2.4.4 Conflicting Objectives in Maximising Returns
3.2.5 Revenue Management as an Integrated Approach to Revenue Enhancement
3.2.5.1 Long-Term Network and Capacity Planning
3.2.5.2 Medium-Term Capacity Planning
3.2.5.3 Short-Term Capacity Planning
3.2.6 Airline Costs
3.2.6.1 Leasing Costs
3.2.6.1.1 Operating Leases
3.2.6.1.2 Financial Leasing
3.2.6.1.3 Islamic Financing
3.2.6.1.4 Current Developments
3.2.6.2 Depreciation
3.2.6.3 Other Aircraft Expenses
3.2.6.4 Kerosene
3.2.6.5 Personnel Costs
3.2.6.6 Handling Charges, Landing Charges and Overflight Charges
3.2.6.7 Transports with Other Carriers
3.2.7 Market Overview
3.2.7.1 US Integrators
3.2.7.1.1 Federal Express
3.2.7.1.2 UPS
3.2.7.2 The New Players from the Middle East and Turkey
3.2.7.2.1 Emirates
3.2.7.2.2 Qatar Airways (QR)
3.2.7.3 Established Airlines from Asia and Europe
3.2.7.3.1 Cathay Pacific (CX)
3.2.7.3.2 Korean Air Lines (KE)
3.2.7.3.3 Singapore Airlines (SQ)
3.2.7.3.4 Air China (CA), China Eastern (MU) and China Southern (CZ)
3.2.7.3.5 Lufthansa (LH)
3.2.7.4 Cargo-Only Airlines
3.2.7.4.1 Cargolux
3.2.7.4.2 Nippon Cargo Airlines (KZ)
3.2.7.4.3 Airbridge Cargo (RU)
3.3 Airports
3.3.1 Branding
3.3.1.1 IATA Designations
3.3.1.2 ICAO Designations
3.3.2 Business Models
3.3.2.1 International Hubs with Cargo Activities
3.3.2.2 LCC Airports with Cargo Activities
3.3.2.3 Genuine Cargo Airports
3.3.3 Success Factors
3.3.3.1 Competences
3.3.3.2 Cooperation with Stakeholders
3.3.4 Connectivity
3.3.4.1 Critical Catchment Area
3.3.4.2 Costs
3.3.4.3 Favourable Climate
3.3.5 Overview of the World’s Leading Cargo Airports
3.3.5.1 Hong Kong (HKG)
3.3.5.2 Shanghai (PVG)
3.3.5.3 Inch’ŏn (ICN)
3.3.5.4 Dubai (DXB, DWC)
3.3.5.5 Tokyo, JP (NRT)
3.3.5.6 Taipei, TW (TPE)
3.3.5.7 Singapore (SIN)
3.3.5.8 Frankfurt Am Main (FRA)
3.3.5.9 Anchorage, Alaska
3.3.5.10 Hamad International Airport, Doha (DOH)
3.3.5.11 Paris, FR (CDG)
3.3.5.12 Miami, Florida (MIA)
3.4 Ground-Handling Agents (GHA)
3.4.1 Air Cargo Services
3.4.2 Success Factors
3.5 Freight Forwarding Companies
3.5.1 Activities
3.5.1.1 Organisation of Pre-Carriage and Onward Carriage
3.5.1.2 Organisation of Main Legs as IATA Agents
3.5.1.2.1 Individual Transport (Direct Shipments)
3.5.1.2.2 Carriage of Consolidated Air Cargo Consignments
3.5.1.2.3 Buyer’s Consol
3.5.1.2.4 Back-to-Back Transports
3.5.1.2.5 Charter Traffic
3.5.2 Market Structure
3.5.2.1 DHL Supply Chain and DHL Global Forwarding, Freight
3.5.2.2 Kuehne + Nagel
3.5.2.3 DB Schenker
3.5.2.4 Panalpina
3.5.2.5 Nippon Express
3.5.2.6 Mergers of Forwarders
3.5.3 Success Factors
3.5.3.1 Customer Mix and Sector Specialisation
3.5.3.2 Size of Enterprise
3.5.3.3 IT Skills
3.5.4 Value Added Services
3.5.4.1 Customs Clearance
3.5.4.2 Insurance
3.5.4.3 Organisation of Pre-Carriage and Onward Carriage
3.5.4.4 Multi-Modal Offers
3.5.4.5 Offer of Time-Definite Air Freight Products
3.5.4.6 Securing
3.5.4.7 Packaging
3.5.4.8 Cash-on-Delivery Results
3.5.4.9 Support for Export Financing
4: Institutions and Associations
4.1 International Institutions
4.1.1 International Civil Aviation Organisation (ICAO)
4.1.2 European Civil Aviation Conference (ECAC)
4.1.3 European Aviation Safety Agency (EASA)
4.1.4 Eurocontrol
4.2 Selected Government Bodies in Germany
4.2.1 The German Federal Ministry of Transport
4.2.2 Federal Aviation Authority (LBA)
4.2.3 Federal Supervisory Authority for Air Navigation Services (BAF)
4.2.4 Federal Bureau of Aircraft Accident Investigation (BFU)
4.2.5 German Air Navigation Services (DFS)
4.2.6 Federal Office of Economics and Export Control
4.3 Interest Groups and Associations
4.3.1 International Federations
4.3.1.1 International Air Cargo Association (TIACA)
4.3.1.2 Global Air Cargo Advisory Group (GACAG)
4.3.1.3 Global Shippers’ Forum (GSF)
4.3.1.4 Airports Council International (ACI)
4.3.1.5 International Federation of Freight Forwarders Associations (FIATA)
4.3.2 Associations in Germany and Switzerland
4.3.2.1 Interest Groups
4.3.2.2 Other Interest Groups
Part II: Processes
5: Means of Transport in Air Freight
5.1 Cargo Aircraft
5.1.1 Types of Construction
5.1.1.1 Propulsion
5.1.1.2 Distinctions According to the Shape of the Aircraft Fuselage
5.1.1.3 Passenger, Cargo and Combination Aircraft
5.1.1.4 Distinctions of Capacity
5.1.1.5 Number of Engines
5.1.1.6 Distinctions by Scope
5.1.1.7 Factory Built Aircraft and Conversions
5.1.2 Boeing
5.1.2.1 DC-10
5.1.2.2 MD-11
5.1.2.3 B727
5.1.2.4 B737
5.1.2.5 B747
5.1.2.6 B757
5.1.2.7 B767
5.1.2.8 B777
5.1.3 Airbus
5.1.3.1 A300 and A310
5.1.3.2 A320 Family
5.1.3.3 A330
5.1.3.4 A340
5.1.3.5 A380
5.1.4 Antonov Family
5.1.4.1 Antonov AN124 (Ruslan)
5.1.4.2 Antonov AN225 (Mrija)
5.1.4.3 AN132
5.1.5 Ilyushin
5.1.5.1 IL114
5.1.5.2 IL76
5.1.5.3 IL96
5.1.6 Other Aircraft Types
5.1.6.1 ATR
5.1.6.2 Bombardier CRJ100/200
5.1.6.3 British Aerospace
5.1.6.4 Cessna/Textron Aviation
5.1.6.5 Fokker F50 and F60
5.1.6.6 Saab 340
5.1.6.7 Business Aircraft
5.2 Air Cargo Containers (ULD)
5.2.1 Advantages of Using ULD
5.2.2 History of the Air Cargo Container
5.2.3 Categorisation of Standard ULDs
5.2.3.1 Air Cargo Containers
5.2.3.2 Air Cargo Pallets
5.2.4 Special Air Cargo Containers and Loading Equipment
5.2.4.1 Temperature-Controlled Container
5.2.4.2 Containers for the Transport of Live Animals
5.2.4.3 Car Racks
5.2.5 Preventing Damage to ULD
5.3 Road Feeder
5.3.1 Legal Requirement
5.3.2 Performing Carriers
5.3.3 Importance of Road Feeders for Regional Airports
5.3.4 Importance of Road Feeders for Hubs
5.3.5 No Substitution by Rail Feeders
6: Handling of an Air Freight Shipment
6.1 Organisation of Physical Operations
6.1.1 Capacity Assurance and Flight Planning
6.1.2 Placing of the Forwarding Order
6.1.3 Allocation and Confirmation of Capacity
6.1.4 Collection of the Consignment
6.1.5 Preparation of Export Documents
6.1.6 Transport of the Consignment to the Gateway
6.1.7 Loading of the ULD and Preparation of the Master AAWB
6.1.8 Delivery of the Consignment to the Airline
6.1.9 Loading of the Consignment on the Aircraft and Transport by Air
6.1.10 Unloading of the ULD Until Delivery of the Goods (Import Process)
6.2 Essential Documents
6.2.1 Air Waybill (AWB)
6.2.1.1 Contract of Carriage
6.2.1.2 Shipper’s Right of Disposition
6.2.2 Master and House Waybills
6.2.2.1 Normal Consolidations
6.2.3 Back-to-Back Shipments
6.2.3.1 Direct AWB
6.2.4 Other Documents
6.2.4.1 Loading List (Cargo Manifest)
6.2.4.2 Automated Manifest System (AMS)
6.2.4.3 Load Instruction Report (LIR)
6.2.4.4 Load and Trim Sheet
6.2.4.5 Dangerous Goods Declaration (DGD)
6.3 Calculation of Air Freight Costs
6.3.1 TACT (The Air Cargo Tariff)
6.3.2 Tariff Classes
6.3.2.1 Class Rates of Goods (Class Rate)
6.3.2.2 Special Rates (SCO, Specific Commodity Rates)
6.3.2.3 Bulk or ULD Rates
6.3.2.4 Contract Rates (Contract Rates)
6.3.2.5 Special Rates
6.3.3 Settlement
6.3.4 Surcharges
6.3.5 Payment of Freight Charges
7: Aviation Security
7.1 The Secure Supply Chain as a Safeguard Against Terrorism
7.1.1 Annex 17 to the Chicago Convention
7.1.2 Cornerstones of Secure Supply Chains
7.1.3 Known Consignors (KC)
7.1.3.1 Certification Procedure
7.1.3.2 High Effort
7.1.4 Phase out of the Account Consignor
7.1.5 Regulated Agent
7.1.5.1 Acceptance of Secure Air Cargo from Known Consignors
7.1.5.2 Acceptance of Air Cargo that is Not Deemed Secure
7.1.5.3 Certification Procedure
7.1.6 Union Database
7.1.7 Technical Means of Verification
7.1.7.1 X-ray Equipment (XRY)
7.1.7.2 Explosive Detectors (EDS) and Explosive Trace Detectors (ETD)
7.1.7.3 Explosive Detection Dogs (EDD)
7.1.7.4 Alternatives Not Approved in Germany
7.1.8 Security Requirements for Airlines (ACC3) and Airports
7.1.9 Possible Innovations and Limitations in the Detection of Explosives
7.2 The Special Handling of Dangerous Goods
7.2.1 Classes of Dangerous Goods
7.2.1.1 Class 1: Explosive Substances
7.2.1.2 Class 2: Gases
7.2.1.3 Class 3: Flammable Liquids
7.2.1.4 Class 4: Flammable Solids
7.2.1.5 Class 5: Oxidizing Substances
7.2.1.6 Class 6: Toxic and Infectious Substances
7.2.1.7 Class 7: Radioactive Substances
7.2.1.8 Class 8: Corrosive Substances
7.2.1.9 Class 9: Miscellaneous Dangerous Substances and Articles
7.2.2 Packagings and Packing Groups
7.3 Prevention of Damage and Loss
7.3.1 Damage to Consignments
7.3.2 Theft of Air Cargo Goods
7.4 Liability
7.4.1 Warsaw Convention of 1929 (WA) and Subsequent Agreements
7.4.1.1 Hague Protocol of 1955 (HP)
7.4.1.2 Guadalajara Supplementary Convention of 1961
7.4.1.3 Montreal Additional Protocols No 4 of 1975
7.4.2 Montreal Convention 1999 (MC99)
7.4.2.1 Status of Harmonisation of Liability Regimes
7.5 Special Features of Trade Financing
7.6 Ethical Risk Areas in Air Cargo
7.6.1 Cartel Agreements
7.6.1.1 Agreements by Air Cargo Carriers on Surcharges
7.6.1.2 Agreements Between the Leading Air Freight Forwarders
7.6.2 Bribery of Public Officials
7.6.3 Harassment in the Workplace
7.6.4 Precaution Through Compliance
Part III: Markets
8: Customer Approach
8.1 Segmentation Approaches in the Air Freight Market
8.1.1 Segmentation Criteria
8.1.2 Segmentation Based on Company Size
8.1.2.1 Cargo Airlines
8.1.2.2 Freight Forwarding Companies
8.1.3 Overview of Important Industry Solutions
8.2 Valuable Goods
8.2.1 High-Tech and Consumer Electronics
8.2.2 Mechanical Engineering
8.2.3 Telecommunications
8.2.4 Automotive Industry
8.2.5 Consumer and Retail
8.2.6 Fashion
8.2.7 Aviation Industry
8.2.8 Valuable Cargo
8.3 Perishable Goods
8.3.1 Foodstuffs and Flowers (Perishables)
8.3.2 Live Animals
8.3.3 Pharma and Healthcare
8.4 Emergency Transports
8.4.1 Oil, Gas and Mining
8.4.2 Marine Solutions
8.4.3 Emergency & Relief
9: Regional Markets and Trade Routes
9.1 Regional Markets
9.1.1 Important Domestic Markets
9.1.2 Countries with Significant Air Cargo Volumes
9.2 Major Trade Routes
9.2.1 East Asia – North America
9.2.2 Europe – East Asia
9.2.3 Intra North America
9.2.4 Europe – North America
9.2.5 Intra Asia Pacific
9.2.6 South Asia
9.2.7 Intra-China
9.2.8 Latin America – Europe and North America
9.2.9 Africa – Worldwide
9.3 Segmentation by Transit Times
10: Courier, Express and Parcel Services
10.1 Success Factors
10.1.1 Pricing and Revenue Management
10.1.2 Maximising Productivity with High Quality
10.1.3 Brand
10.2 Players in the Express Mail Market
10.2.1 DHL
10.2.2 FedEx
10.2.2.1 Preparations
10.2.3 The First Decade
10.2.3.1 Failed Expansion into Europe in the 1980s
10.2.3.2 Acquisition of TNT
10.2.4 UPS
10.2.4.1 Expansion in the USA and Abroad
10.2.4.2 Expansion into the Express Segment in the 1980s
10.2.5 Consolidation of the Market
10.3 Handling of International Express Shipments
10.3.1 Procedure for an International Express Shipment
10.3.2 Major Express Hubs
10.3.2.1 Memphis (MEM)
10.3.2.2 Louisville (SDF)
10.3.2.3 Leipzig (LEJ)
10.3.2.4 Cologne/Bonn (CGN)
Part IV: Developments
11: Innovations
11.1 IATA StB Initiative
11.1.1 e-Freight and e-AWB
11.1.2 ONE Record
11.1.3 Interactive Cargo
11.1.4 Smart Facility
11.1.5 Air Cargo Incident Database (ACID)
11.1.6 Cargo Connect
11.1.7 Discussion
11.2 Innovation in Aircraft Construction
12: Attempt at an Outlook
12.1 Growth Forecasts of Aircraft Manufacturers
12.1.1 E-Commerce as a Growth Driver
12.1.2 Logistics Activities of the Leading Online Platforms
12.1.3 Amazon
12.1.3.1 Main Leg
12.1.3.2 Delivery
12.1.3.3 Competition Between Close Logistics Partners
12.1.4 Alibaba
12.1.5 JD.com
12.1.6 Market Distortions in International Online Trade
12.2 The Future of the Air Cargo Industry from an Industrial Economic Perspective
12.2.1 High Power of Suppliers
12.2.2 Purchasing Power of Customers
12.2.3 New Players
12.2.4 Existing Substitute Products
12.2.4.1 Container Shipping
12.2.4.2 Railway
12.2.4.3 Multimodal Offers
12.2.4.4 Truck
12.2.5 Substitute Products Under Development
12.2.5.1 Unmanned Aerial Vehicles (UAV)
12.2.5.2 Tube Capsules and Hyper Loops
12.2.5.3 Cargo Sous Terrain
12.2.5.4 3D Printing
12.2.5.5 Airships
12.2.6 Internal Competition
12.3 Possibilities of Differentiation Through the Development of Core Competences
12.4 The Particular Future Prospects of Cargo-Only Airlines
References

Citation preview

Joachim G. Schäfer

Air Cargo Players - Processes - Markets Developments

Air Cargo

Joachim G. Schäfer

Air Cargo Participants - Processes - Markets Developments

Joachim G. Schäfer Duale Hochschule Baden-Württemberg Lörrach Lörrach, Germany

ISBN 978-3-658-38192-9 ISBN 978-3-658-38193-6 (eBook) https://doi.org/10.1007/978-3-658-38193-6 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 This book is a translation of the original German edition „Luftfracht“ by Schäfer, Joachim G., published by Springer Fachmedien Wiesbaden GmbH in 2020. The translation was done with the help of artificial intelligence (machine translation by the service DeepL.com). A subsequent human revision was done primarily in terms of content, so that the book will read stylistically differently from a conventional translation. Springer Nature works continuously to further the development of tools for the production of books and on the related technologies to support the authors. This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany

Preface

Hardly anyone who holds a new smartphone in their hands, puts a piece of Victoria perch in the frying pan or receives a replacement for a lost credit card has any idea of the complex supply chain that airplanes have made possible in the first place. Even though airfreight represents only a tiny fraction of the tonnage moved worldwide, today’s standard of living would be almost inconceivable without the aircraft as a means of transport. A broader public takes note of the importance of air freight primarily when interruptions in the supply chains lead to delivery delays or even production stoppages. For example, when European airspace was closed for several days following the eruption of the Icelandic volcano Eyjafjallajökull, the effects were felt worldwide. More than 100,000 flights were cancelled and 10.5 million passengers had to change their travel plans. The impact on air cargo was similarly dramatic: Kenyan flower growers lost US$3 million in sales each day of the shutdown, over a million roses had to be composted and 5000 employees in Kenyan agriculture were temporarily out of work. A number of European car factories were at a standstill because important production parts could not be installed. Indian diamond cutters were no longer able to send their goods to dealers in Antwerp. Bone marrow donations, which have to be administered within 72 h, reached patients too late. But how has the product air freight developed over the last century, who is involved in its creation, what do the processes look like in detail and what are the challenges for the future? As a lecturer in international transport management, I share the observation of many students and practitioners that the overall source material on the phenomenon of air freight is unsatisfactory. Practitioners and academics who want to deal with the subject in more detail have so far had to rely on a few, mostly English-language publications. In the German-language literature, there are a number of publications on the training of freight forwarders, but these place more emphasis on description than on background analysis. I hope to close this gap somewhat with this book. The contents and focal points have emerged from my own professional practice and from discussions with experts. I am particularly indebted to Ewald Heim and Gottfried

v

vi

Preface

von Goßler, who conscientiously read the manuscript and improved it with their comments. Without them, this book would not have been conceivable. Monika Schweiger in the library of the DHBW Lörrach was a tireless help in obtaining the literature. Finally, I would like to thank my editor Susanne Kramer from the publishing house Springer Gabler for her patient, conscientious supervision of the project and her valuable advice on the content. Basel and Lörrach, Germany

Joachim G. Schäfer

Contents

Part I Introduction 1 A Brief History of Air Freight 3 1.1 The Age of the Pioneers Until the End of the Second World War�� 4 1.1.1 Flying – Man’s Eternal Dream�� 5 1.1.2 Pre-war Years�� 5 1.1.3 Years of the First World War�� 6 1.1.4 Airmail as the Engine of Aviation in the 1920s�� 6 1.1.4.1 Technical Innovations�� 7 1.1.4.2 Development in North America�� 7 1.1.4.3 Development in Europe �� 8 1.1.4.4 The Golden Age of Airships�� 9 1.1.5 Progress in the 1930s�� 11 1.1.5.1 Evolution of Modern Commercial Aircraft �� 11 1.1.5.2 The Second World War as a New Turning Point �� 13 1.2 The Boom Years from the End of the Second World War to the Mid-1970s 14 1.2.1 The Chicago Convention and the Establishment of ICAO �� 15 1.2.1.1 Organisation of the ICAO�� 15 1.2.1.2 ICAO Standards and Recommended Practices�� 17 1.2.2 Freedoms of the Air�� 17 1.2.2.1 First and Second Freedoms (Technical Freedoms)�� 18 1.2.2.2 Third to Fifth Freedoms (Commercial Freedoms)�� 19 1.2.2.3 Sixth to Ninth Freedom �� 19 1.2.2.4 ICAO’s Capacity to Develop �� 20 1.2.3 International Air Transport Association (IATA)�� 21 1.2.4 Developments in the USA�� 22 1.2.5 Development in Europe�� 22 1.2.6 Technical Innovations �� 23 1.2.7 The Advent of Wide-Body Aircraft and the Consequences of the Oil Crisis �� 24 1.2.8 Exogenous Crises as an Engine of Growth�� 25 vii

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1.2.9 Phase of Deregulation �� 25 1.2.9.1 The Arduous Path to Open Air Spaces�� 26 1.2.9.2 The New Role of IATA in Deregulated Markets �� 27 1.3 Maturity Phase Up to the Global Financial Crisis�� 27 1.4 Development Since the Financial Crisis – A Phase of Consolidation?�� 29 1.4.1 A Standstill in Aviation Liberalisation – And a Decline? �� 29 1.4.2 Development of Traffic Volumes�� 31 1.4.2.1 Long-Term Correlation Between Transport Volumes and Gross National Product and World Trade�� 32 1.4.2.2 Volatility of Quantities Due to External Shocks�� 32 1.4.2.3 Volatility During the Year�� 34 1.4.3 Employment Impact�� 34 2 C haracteristics of Air Freight 37 2.1 Overview of Air Cargoes�� 37 2.1.1 Airmail�� 38 2.1.2 Express and Courier Consignments�� 39 2.1.2.1 Express�� 39 2.1.2.2 Courier Consignments �� 40 2.1.3 Conventional Air freight �� 41 2.1.3.1 Perishable Goods �� 41 2.1.3.2 Goods of Value�� 41 2.1.3.3 Emergency Assistance and Urgent Replacement Products 41 2.2 Advantages�� 41 2.2.1 Lower Capital Costs During Transport �� 42 2.2.2 Lower Inventory Costs Due to Speed and High Reliability�� 43 2.2.3 Lower Insurance Costs Due to High Level of Security�� 43 2.2.4 Low Packaging Costs�� 43 2.2.5 Lower Upstream and Downstream Costs Due to Closely Meshed Infrastructure�� 44 2.3 Disadvantages �� 45 2.3.1 High Cost of Air Freight �� 45 2.3.2 Size and Weight Restrictions�� 45 2.3.3 High Environmental Impact�� 46 2.3.3.1 Aircraft Noise�� 47 2.3.3.2 Pollutant Emissions in the Vicinity of Airports �� 48 2.3.4 Greenhouse Gases�� 48 3 Parties Involved 51 3.1 Consignor and Consignee �� 52 3.1.1 Rights and Obligations of the Consignor and Consignee �� 53 3.1.2 Allocation of Costs for Freight and Charges (Incoterms)�� 53 3.1.2.1 Ex Works (EXW)�� 55 3.1.2.2 Free Carrier (FCA)�� 56

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3.1.2.3 Carriage Paid to (CPT)�� 56 3.1.2.4 Carriage and Insurance Paid to (CIP)�� 56 3.1.2.5 Delivered to Named Place of Destination (DAP)�� 56 3.1.2.6 Delivered to Terminal (DAT)�� 57 3.1.2.7 Delivered and Duty Paid (DDP)�� 57 3.1.2.8 Considerations �� 57 3.2 Airlines�� 58 3.2.1 Business Models �� 59 3.2.1.1 Full Service Network Carrier (FSNC)�� 60 3.2.1.2 Integrators�� 62 3.2.1.3 Cargo-Only Airlines�� 62 3.2.1.4 Low Cost Carrier (LCC)�� 63 3.2.2 IATA and ICAO Airline Codes �� 64 3.2.3 Success Factors �� 65 3.2.4 Possibilities for Optimising Turnover �� 65 3.2.4.1 Load Factor�� 66 3.2.4.2 Increasing Average Revenue Through Quality Leadership 67 3.2.4.3 Product and Price Differentiation�� 69 3.2.4.4 Conflicting Objectives in Maximising Returns �� 70 3.2.5 Revenue Management as an Integrated Approach to Revenue Enhancement�� 71 3.2.5.1 Long-Term Network and Capacity Planning�� 72 3.2.5.2 Medium-Term Capacity Planning �� 73 3.2.5.3 Short-Term Capacity Planning�� 74 3.2.6 Airline Costs �� 75 3.2.6.1 Leasing Costs�� 76 3.2.6.2 Depreciation�� 79 3.2.6.3 Other Aircraft Expenses�� 80 3.2.6.4 Kerosene�� 80 3.2.6.5 Personnel Costs �� 82 3.2.6.6 Handling Charges, Landing Charges and Overflight Charges�� 83 3.2.6.7 Transports with Other Carriers�� 84 3.2.7 Market Overview�� 84 3.2.7.1 US Integrators�� 86 3.2.7.2 The New Players from the Middle East and Turkey�� 86 3.2.7.3 Established Airlines from Asia and Europe�� 90 3.2.7.4 Cargo-Only Airlines�� 95 3.3 Airports �� 97 3.3.1 Branding�� 98 3.3.1.1 IATA Designations�� 98 3.3.1.2 ICAO Designations�� 99

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3.3.2 Business Models �� 99 3.3.2.1 International Hubs with Cargo Activities�� 100 3.3.2.2 LCC Airports with Cargo Activities�� 102 3.3.2.3 Genuine Cargo Airports�� 103 3.3.3 Success Factors �� 104 3.3.3.1 Competences�� 105 3.3.3.2 Cooperation with Stakeholders�� 106 3.3.4 Connectivity�� 107 3.3.4.1 Critical Catchment Area�� 107 3.3.4.2 Costs�� 109 3.3.4.3 Favourable Climate�� 109 3.3.5 Overview of the World’s Leading Cargo Airports�� 110 3.3.5.1 Hong Kong (HKG)�� 111 3.3.5.2 Shanghai (PVG)�� 112 3.3.5.3 Inch’ŏn (ICN)�� 113 3.3.5.4 Dubai (DXB, DWC)�� 114 3.3.5.5 Tokyo, JP (NRT)�� 115 3.3.5.6 Taipei, TW (TPE)�� 116 3.3.5.7 Singapore (SIN)�� 117 3.3.5.8 Frankfurt Am Main (FRA)�� 117 3.3.5.9 Anchorage, Alaska�� 118 3.3.5.10 Hamad International Airport, Doha (DOH)�� 119 3.3.5.11 Paris, FR (CDG)�� 119 3.3.5.12 Miami, Florida (MIA) �� 120 3.4 Ground-Handling Agents (GHA)�� 120 3.4.1 Air Cargo Services�� 122 3.4.2 Success Factors �� 122 3.5 Freight Forwarding Companies�� 123 3.5.1 Activities �� 123 3.5.1.1 Organisation of Pre-Carriage and Onward Carriage �� 123 3.5.1.2 Organisation of Main Legs as IATA Agents�� 124 3.5.2 Market Structure �� 127 3.5.2.1 DHL Supply Chain and DHL Global Forwarding, Freight128 3.5.2.2 Kuehne + Nagel �� 129 3.5.2.3 DB Schenker�� 129 3.5.2.4 Panalpina �� 129 3.5.2.5 Nippon Express �� 130 3.5.2.6 Mergers of Forwarders�� 130

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3.5.3 Success Factors �� 131 3.5.3.1 Customer Mix and Sector Specialisation�� 133 3.5.3.2 Size of Enterprise�� 134 3.5.3.3 IT Skills �� 135 3.5.4 Value Added Services �� 135 3.5.4.1 Customs Clearance�� 136 3.5.4.2 Insurance�� 136 3.5.4.3 Organisation of Pre-Carriage and Onward Carriage �� 136 3.5.4.4 Multi-Modal Offers �� 137 3.5.4.5 Offer of Time-Definite Air Freight Products �� 137 3.5.4.6 Securing�� 138 3.5.4.7 Packaging�� 138 3.5.4.8 Cash-on-Delivery Results�� 138 3.5.4.9 Support for Export Financing�� 138 4 Institutions and Associations 139 4.1 International Institutions �� 139 4.1.1 International Civil Aviation Organisation (ICAO)�� 139 4.1.2 European Civil Aviation Conference (ECAC)�� 140 4.1.3 European Aviation Safety Agency (EASA)�� 141 4.1.4 Eurocontrol �� 141 4.2 Selected Government Bodies in Germany�� 142 4.2.1 The German Federal Ministry of Transport�� 142 4.2.2 Federal Aviation Authority (LBA)�� 143 4.2.3 Federal Supervisory Authority for Air Navigation Services (BAF) 143 4.2.4 Federal Bureau of Aircraft Accident Investigation (BFU)�� 143 4.2.5 German Air Navigation Services (DFS) �� 144 4.2.6 Federal Office of Economics and Export Control�� 145 4.3 Interest Groups and Associations�� 145 4.3.1 International Federations�� 145 4.3.1.1 International Air Cargo Association (TIACA)�� 145 4.3.1.2 Global Air Cargo Advisory Group (GACAG) �� 146 4.3.1.3 Global Shippers’ Forum (GSF) �� 146 4.3.1.4 Airports Council International (ACI)�� 146 4.3.1.5 International Federation of Freight Forwarders Associations (FIATA)�� 146 4.3.2 Associations in Germany and Switzerland �� 147 4.3.2.1 Interest Groups�� 147 4.3.2.2 Other Interest Groups�� 147

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Part II Processes 5 M eans of Transport in Air Freight 151 5.1 Cargo Aircraft �� 151 5.1.1 Types of Construction �� 152 5.1.1.1 Propulsion�� 152 5.1.1.2 Distinctions According to the Shape of the Aircraft Fuselage�� 152 5.1.1.3 Passenger, Cargo and Combination Aircraft�� 153 5.1.1.4 Distinctions of Capacity�� 155 5.1.1.5 Number of Engines�� 156 5.1.1.6 Distinctions by Scope�� 157 5.1.1.7 Factory Built Aircraft and Conversions �� 160 5.1.2 Boeing �� 162 5.1.2.1 DC-10�� 162 5.1.2.2 MD-11 �� 163 5.1.2.3 B727�� 164 5.1.2.4 B737�� 165 5.1.2.5 B747�� 166 5.1.2.6 B757�� 168 5.1.2.7 B767�� 168 5.1.2.8 B777�� 169 5.1.3 Airbus�� 170 5.1.3.1 A300 and A310�� 170 5.1.3.2 A320 Family�� 171 5.1.3.3 A330�� 172 5.1.3.4 A340�� 172 5.1.3.5 A380�� 173 5.1.4 Antonov Family�� 174 5.1.4.1 Antonov AN124 (Ruslan)�� 174 5.1.4.2 Antonov AN225 (Mrija)�� 175 5.1.4.3 AN132 �� 176 5.1.5 Ilyushin �� 176 5.1.5.1 IL114 �� 176 5.1.5.2 IL76 �� 177 5.1.5.3 IL96 �� 177 5.1.6 Other Aircraft Types�� 177 5.1.6.1 ATR�� 178 5.1.6.2 Bombardier CRJ100/200 �� 178 5.1.6.3 British Aerospace�� 179 5.1.6.4 Cessna/Textron Aviation�� 179 5.1.6.5 Fokker F50 and F60�� 179

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5.1.6.6 Saab 340�� 180 5.1.6.7 Business Aircraft �� 180 5.2 Air Cargo Containers (ULD)�� 180 5.2.1 Advantages of Using ULD�� 180 5.2.2 History of the Air Cargo Container�� 181 5.2.3 Categorisation of Standard ULDs�� 182 5.2.3.1 Air Cargo Containers�� 182 5.2.3.2 Air Cargo Pallets �� 182 5.2.4 Special Air Cargo Containers and Loading Equipment�� 183 5.2.4.1 Temperature-Controlled Container�� 184 5.2.4.2 Containers for the Transport of Live Animals �� 185 5.2.4.3 Car Racks�� 185 5.2.5 Preventing Damage to ULD�� 186 5.3 Road Feeder�� 186 5.3.1 Legal Requirement�� 187 5.3.2 Performing Carriers�� 188 5.3.3 Importance of Road Feeders for Regional Airports�� 188 5.3.4 Importance of Road Feeders for Hubs�� 189 5.3.5 No Substitution by Rail Feeders �� 190 6 H andling of an Air Freight Shipment 191 6.1 Organisation of Physical Operations�� 191 6.1.1 Capacity Assurance and Flight Planning�� 192 6.1.2 Placing of the Forwarding Order�� 193 6.1.3 Allocation and Confirmation of Capacity �� 194 6.1.4 Collection of the Consignment �� 194 6.1.5 Preparation of Export Documents�� 195 6.1.6 Transport of the Consignment to the Gateway �� 195 6.1.7 Loading of the ULD and Preparation of the Master AAWB�� 196 6.1.8 Delivery of the Consignment to the Airline�� 197 6.1.9 Loading of the Consignment on the Aircraft and Transport by Air�� 198 6.1.10 Unloading of the ULD Until Delivery of the Goods (Import Process) �� 199 6.2 Essential Documents�� 200 6.2.1 Air Waybill (AWB) �� 200 6.2.1.1 Contract of Carriage�� 201 6.2.1.2 Shipper’s Right of Disposition�� 202 6.2.2 Master and House Waybills�� 202 6.2.2.1 Normal Consolidations�� 202 6.2.3 Back-to-Back Shipments�� 202 6.2.3.1 Direct AWB �� 203

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6.2.4 Other Documents�� 203 6.2.4.1 Loading List (Cargo Manifest)�� 203 6.2.4.2 Automated Manifest System (AMS) �� 203 6.2.4.3 Load Instruction Report (LIR)�� 203 6.2.4.4 Load and Trim Sheet �� 204 6.2.4.5 Dangerous Goods Declaration (DGD)�� 204 6.3 Calculation of Air Freight Costs �� 205 6.3.1 TACT (The Air Cargo Tariff)�� 205 6.3.2 Tariff Classes�� 207 6.3.2.1 Class Rates of Goods (Class Rate)�� 207 6.3.2.2 Special Rates (SCO, Specific Commodity Rates) �� 207 6.3.2.3 Bulk or ULD Rates�� 208 6.3.2.4 Contract Rates (Contract Rates)�� 209 6.3.2.5 Special Rates �� 209 6.3.3 Settlement �� 210 6.3.4 Surcharges�� 210 6.3.5 Payment of Freight Charges�� 211 7 Aviation Security 213 7.1 The Secure Supply Chain as a Safeguard Against Terrorism �� 214 7.1.1 Annex 17 to the Chicago Convention �� 215 7.1.2 Cornerstones of Secure Supply Chains�� 216 7.1.3 Known Consignors (KC)�� 217 7.1.3.1 Certification Procedure�� 218 7.1.3.2 High Effort�� 218 7.1.4 Phase out of the Account Consignor�� 219 7.1.5 Regulated Agent�� 219 7.1.5.1 Acceptance of Secure Air Cargo from Known Consignors220 7.1.5.2 Acceptance of Air Cargo that is Not Deemed Secure �� 220 7.1.5.3 Certification Procedure�� 220 7.1.6 Union Database�� 221 7.1.7 Technical Means of Verification�� 221 7.1.7.1 X-ray Equipment (XRY) �� 222 7.1.7.2 Explosive Detectors (EDS) and Explosive Trace Detectors (ETD)�� 222 7.1.7.3 Explosive Detection Dogs (EDD) �� 223 7.1.7.4 Alternatives Not Approved in Germany�� 223 7.1.8 Security Requirements for Airlines (ACC3) and Airports�� 224 7.1.9 Possible Innovations and Limitations in the Detection of Explosives �� 224

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7.2 The Special Handling of Dangerous Goods�� 226 7.2.1 Classes of Dangerous Goods�� 227 7.2.1.1 Class 1: Explosive Substances�� 227 7.2.1.2 Class 2: Gases�� 227 7.2.1.3 Class 3: Flammable Liquids�� 227 7.2.1.4 Class 4: Flammable Solids�� 227 7.2.1.5 Class 5: Oxidizing Substances�� 228 7.2.1.6 Class 6: Toxic and Infectious Substances�� 228 7.2.1.7 Class 7: Radioactive Substances�� 228 7.2.1.8 Class 8: Corrosive Substances �� 228 7.2.1.9 Class 9: Miscellaneous Dangerous Substances and Articles�� 228 7.2.2 Packagings and Packing Groups �� 228 7.3 Prevention of Damage and Loss �� 228 7.3.1 Damage to Consignments �� 229 7.3.2 Theft of Air Cargo Goods �� 229 7.4 Liability�� 231 7.4.1 Warsaw Convention of 1929 (WA) and Subsequent Agreements�� 231 7.4.1.1 Hague Protocol of 1955 (HP)�� 232 7.4.1.2 Guadalajara Supplementary Convention of 1961�� 232 7.4.1.3 Montreal Additional Protocols No 4 of 1975�� 232 7.4.2 Montreal Convention 1999 (MC99)�� 234 7.4.2.1 Status of Harmonisation of Liability Regimes�� 235 7.5 Special Features of Trade Financing�� 236 7.6 Ethical Risk Areas in Air Cargo�� 237 7.6.1 Cartel Agreements�� 238 7.6.1.1 Agreements by Air Cargo Carriers on Surcharges�� 239 7.6.1.2 Agreements Between the Leading Air Freight Forwarders239 7.6.2 Bribery of Public Officials�� 240 7.6.3 Harassment in the Workplace�� 242 7.6.4 Precaution Through Compliance�� 243 Part III Markets 8 Customer Approach 247 8.1 Segmentation Approaches in the Air Freight Market�� 247 8.1.1 Segmentation Criteria �� 248 8.1.2 Segmentation Based on Company Size�� 248 8.1.2.1 Cargo Airlines�� 248 8.1.2.2 Freight Forwarding Companies �� 249 8.1.3 Overview of Important Industry Solutions �� 250

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8.2 Valuable Goods �� 251 8.2.1 High-Tech and Consumer Electronics�� 251 8.2.2 Mechanical Engineering �� 251 8.2.3 Telecommunications �� 252 8.2.4 Automotive Industry �� 252 8.2.5 Consumer and Retail�� 253 8.2.6 Fashion�� 254 8.2.7 Aviation Industry�� 254 8.2.8 Valuable Cargo�� 255 8.3 Perishable Goods�� 255 8.3.1 Foodstuffs and Flowers (Perishables) �� 256 8.3.2 Live Animals �� 257 8.3.3 Pharma and Healthcare �� 257 8.4 Emergency Transports�� 259 8.4.1 Oil, Gas and Mining�� 259 8.4.2 Marine Solutions�� 260 8.4.3 Emergency & Relief�� 260 9 R egional Markets and Trade Routes 263 9.1 Regional Markets�� 263 9.1.1 Important Domestic Markets�� 264 9.1.2 Countries with Significant Air Cargo Volumes �� 264 9.2 Major Trade Routes�� 265 9.2.1 East Asia – North America�� 265 9.2.2 Europe – East Asia�� 266 9.2.3 Intra North America�� 266 9.2.4 Europe – North America �� 267 9.2.5 Intra Asia Pacific �� 267 9.2.6 South Asia �� 268 9.2.7 Intra-China�� 268 9.2.8 Latin America – Europe and North America�� 268 9.2.9 Africa – Worldwide�� 269 9.3 Segmentation by Transit Times�� 269 10 C ourier, Express and Parcel Services 271 10.1 Success Factors �� 272 10.1.1 Pricing and Revenue Management�� 272 10.1.2 Maximising Productivity with High Quality �� 273 10.1.3 Brand�� 274 10.2 Players in the Express Mail Market�� 275 10.2.1 DHL �� 276 10.2.2 FedEx �� 277 10.2.2.1 Preparations�� 278

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10.2.3 The First Decade�� 278 10.2.3.1 Failed Expansion into Europe in the 1980s�� 280 10.2.3.2 Acquisition of TNT�� 280 10.2.4 UPS�� 280 10.2.4.1 Expansion in the USA and Abroad�� 281 10.2.4.2 Expansion into the Express Segment in the 1980s �� 281 10.2.5 Consolidation of the Market�� 282 10.3 Handling of International Express Shipments�� 283 10.3.1 Procedure for an International Express Shipment �� 283 10.3.2 Major Express Hubs�� 284 10.3.2.1 Memphis (MEM)�� 285 10.3.2.2 Louisville (SDF) �� 286 10.3.2.3 Leipzig (LEJ)�� 287 10.3.2.4 Cologne/Bonn (CGN)�� 287 Part IV Developments 11 Innovations 291 11.1 IATA StB Initiative�� 291 11.1.1 e-Freight and e-AWB �� 291 11.1.2 ONE Record�� 293 11.1.3 Interactive Cargo�� 293 11.1.4 Smart Facility�� 294 11.1.5 Air Cargo Incident Database (ACID)�� 294 11.1.6 Cargo Connect�� 294 11.1.7 Discussion�� 295 11.2 Innovation in Aircraft Construction�� 296 12 A ttempt at an Outlook 297 12.1 Growth Forecasts of Aircraft Manufacturers�� 297 12.1.1 E-Commerce as a Growth Driver�� 297 12.1.2 Logistics Activities of the Leading Online Platforms�� 298 12.1.3 Amazon�� 298 12.1.3.1 Main Leg�� 298 12.1.3.2 Delivery�� 299 12.1.3.3 Competition Between Close Logistics Partners�� 299 12.1.4 Alibaba�� 300 12.1.5 JD.com �� 300 12.1.6 Market Distortions in International Online Trade�� 300

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12.2 The Future of the Air Cargo Industry from an Industrial Economic Perspective�� 301 12.2.1 High Power of Suppliers�� 302 12.2.2 Purchasing Power of Customers�� 303 12.2.3 New Players �� 303 12.2.4 Existing Substitute Products�� 304 12.2.4.1 Container Shipping �� 304 12.2.4.2 Railway �� 306 12.2.4.3 Multimodal Offers�� 307 12.2.4.4 Truck�� 307 12.2.5 Substitute Products Under Development �� 308 12.2.5.1 Unmanned Aerial Vehicles (UAV)�� 308 12.2.5.2 Tube Capsules and Hyper Loops�� 309 12.2.5.3 Cargo Sous Terrain �� 310 12.2.5.4 3D Printing�� 311 12.2.5.5 Airships�� 312 12.2.6 Internal Competition�� 313 12.3 Possibilities of Differentiation Through the Development of Core Competences �� 315 12.4 The Particular Future Prospects of Cargo-Only Airlines�� 317 References

319

Abbreviations

A&A ACARS ACC ACC3

Armstrong & Associates Aircraft communication addressing and reporting system available capacity for contracts, Air Cargo or Mail Carrier operating into the Union from a Third Country Airport ACC3 Air Cargo or Mail Carrier operating into the Union from a Third Country Airport ACI Airport Council International ACID Air Cargo Incident Database ACN Air Cargo News AFTK Available Freight Ton Kilometers AoG aircraft on ground APAC Asia-Pacific ASN Aviation Safety Network ATAG Air Transport Action Group BDL Federal Association of the German Air Transport Industry CAGR Compound annual growth rate CASS Cargo Accounts Settlement System CBP BCC CC Charges Collect (cash on delivery) CCS Cargo Community Systems provider CEIV IATA Center of Excellence for Independent Validators CenStatD Census and Statistics Department Hong Kong SAR CPA Capacity Purchasing Agreements CRAF Civil Reserve Air Fleet DARC Dense Automatic Reject Capability(for air cargo that cannot be adequately screened) DGD Dangerous Good Regulations djW average annual growth DoD US Department of Defense DOM Dry Operating Mass xix

xx

Abbreviations

eDGD electronic Dangerous Goods Declaration EMEA Europe, Middle East, Africa (Europe, Middle East, Africa) EU Europe (Europe) FAK freight all kinds FAZ Frankfurter Allgemeine Zeitung FIATA International Federation of Freight Forwarders Associations GCA Guaranteed Capacity Agreement GDP Good Distribution Practices GSA General Sales Agents GSSA General Sales and Service Agent ICAO International Civil Aviation Organization generally speaking as a rule Kg Kilogram LMC last minute changes Luftag airline supply company nm nautical miles ME99 1999 Monterrey Convention NA North America O&D Origin and Destination P&D Pick-Up and Delivery PLTTF the IATA Piece Level Tracking Task Force PP Prepaid (payment in advance) PP&E Property, Plant and Equipment RFS Road Feed Service (air freight replacement service) SA South America SaaS software as a service SAR Special Administrative Region SCO Specific Commodity Rates SDR Special Drawing Rights (SDR) SHR Secured High Risk Cargo SPX Cargo Secure for Passenger and All-Cargo Aircraft SDR Special drawing rights UBA Federal Environmental Agency ULDB ULD Board ULDR Unit Load Device Regulations of IATA USAP Universal Security Audit Program USAP-CMA Continuous Monitoring Approach of the Universal Security Audit Programme t Tonne WA Warsaw Convention of 1929 WBF wide-body freighter (wide-body cargo aircraft)

Part I Introduction

Every day, a complex, well-oiled mechanism ensures that air freight transports a wide variety of products between continents. More than 70 million tonnes of air freight are moved every year (Air Cargo World 2016). This corresponds to an average daily volume of 280,000 tonnes or the capacity of more than 2000 fully loaded Boeing 747s. How did these volumes come about, how did it come about that entire industries would have been deprived of their economic basis without air freight?

1

A Brief History of Air Freight

Abstract

The history of civil airfreight up to the Second World War is essentially one of airmail. Larger consignments of goods were rarely transported by air. The idea of transporting mail through the air and thus delivering it to the recipient particularly quickly can be traced back to antiquity. The history of air freight really began at the beginning of the twentieth century. The real breakthrough came at the end of the 1960s with the introduction of the first wide-bodied aircraft. Today, goods are transported from all corners of the world, all of which have one of three criteria: they are either particularly valuable, particularly urgent or particularly perishable.

The product air freight is more than 100 years old, it has experienced an initially rapid growth since the first transport of cargo in an airplane. In recent decades, this growth has slowed. Air cargo volumes, as shown in Fig. 1.1, have evolved in an impressive, almost continuous manner over the decades. Most recently, more than 200 billion freight tonne- kilometres were recorded. Although positive growth rates have been recorded for most years since 1945, there have always been years in which volumes have declined. The number of years with declining transport volumes is accumulating. Does this make air freight an obsolete product? In product life cycle theory, the work of Dean and Levitt is considered fundamental (Mercer 1993). A common representation is the sequence of market introduction, growth, maturity, saturation and degeneration. Insofar as the concept of the product life cycle is applied to air cargo, comparable phases of different maturity and growth can be identified:

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_1

3

4

1 A Brief History of Air Freight 250

30% 25%

200

20% 15%

RTK (Bn.)

150

10% YoY change Δ (%) 5%

100

0% -5%

50 CAGR 0 1945

+16% p.a. 1955

1965

+7% p.a. 1975 Freight RTK (Bn.)

1985

1995

+4% p.a. 2005

2015

-10% -15%

YoY Change

Fig. 1.1 Development of air freight volumes since 1945 (in freight tonne-kilometres, and the change compared with previous years, own illustration)

• In the original of DEAN the four phases are described as introduction, growth, maturity and decline. • A pioneering phase until the end of the First World War in 1945, volumes increased over time but remained at a modest level from today’s perspective. • The growth phase, roughly between 1945 and 1975, with an average annual growth (y.y.w.) of 16%. • The phase of maturity, the 30 years between about 1975 and 2005, with an average annual growth of 7%. • The phase of decline, roughly since 2005, with average annual growth of 4%. Davies chooses a different perspective than the four eras proposed here when he distinguishes a total of seven eras on the basis of technical innovations (Davies 1996). Davies also describes the two world wars and the emergence of the wide-body jet as a caesura. In retrospect, his assessment of the success of very large aircraft, such as the A380 and the B747-8, is too optimistic.

1.1 The Age of the Pioneers Until the End of the Second World War The reference to man’s dream since antiquity to fly with special reference to Icarus and Daedalus is a topos. Greek mythology tells of the escape of Icarus and his father Daedalus from captivity in Crete with the help of homemade wings. Icarus, according to the legend,

1.1 The Age of the Pioneers Until the End of the Second World War

5

fell into the sea when he ignored his father’s warnings, and the wax on his wings melted. In this respect, this legend is not only a remarkable depiction of how ancient man imagined flight, but also emblematic of many overambitious undertakings – especially in the history of aviation.

1.1.1 Flying – Man’s Eternal Dream Unlike Greek mythology, references to those daring Chinese who attempted to lift themselves into the air using kites in the sixth century BC are known only to insiders. During the siege of the capital Khaifeng in 1232, the trapped Jurchen attempted to send messages behind enemy lines using flying kites. According to the descriptions, the messages reached their recipients after the lines to the kite were cut (Needham and Ling 1965, p. 577; Needham 2007). A few centuries later, Leonardo da Vinci designed a flying machine inspired by bird flight. The design was hardly technically feasible, as not least the aviation pioneer Lilienthal proved in his writings. The hot air balloons of the Montgolfier brothers at the end of the eighteenth century, on the other hand, which successfully took off into the air and landed safely, were a different story. From today’s Western perspective, the invention of the Montgolfier brothers marks the beginning of manned aviation – and the beginning of the regulation of air traffic: with more than 1500 balloon flights in 1784, just 1 year after the first flight, the Paris police felt compelled to introduce a licensing requirement (Bartsch 2017). While balloons were almost impossible to steer, this was possible with the flying glider designed by the Briton Sir George Cayley (Cayley 1810). Although his work received little attention during his lifetime, Cayley is counted among the fathers of aviation (Gibbs- Smith 1962). Cayley’s merits lie mainly in having theoretically worked out and transferred his observations in nature. He worked mainly with models that proved that the curved shape of the wings was superior to other designs. Only one short test flight is reported. The test pilot Cayley Kutscher acknowledged the landing with his resignation, “Please Sir George, I wish to give notice, I was hired to drive and not to fly” (Ackroyd 2011). Otto Lilienthal built on Cayley’s research, expanded it with his own observations of bird flight, and developed an improved glider. He summarized his theoretical considerations in 1889 in his work “Der Vogelflug als Grundlage der Fliegekunst” (Lilienthal 1889). Lilienthal undertook his own first test flights from 1891 (Lukasch 2014). He was thus the first person to fly an aircraft, but one that could not take off under its own power. During one of the test flights, Lilienthal crashed and died a short time later. He was thus also one of the first fatal victims of aviation.

1.1.2 Pre-war Years The reports on Lilienthal’s flight experiments were received with great interest worldwide. They also reached the United States and inspired the Wright brothers. After they had

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carried out several hundred successful gliding flights with a self-developed biplane over a period of 3 years, they decided in 1903 to equip the construction with an engine and propeller. Generally, December 1903 is considered the date of the first motorized flight. Just 7 years later, on a day in November 1910, the first cargo flight took off in the USA. Photographs show the pilot Philip O. Parmalee sitting on a Wright Model B airplane with two bales of silk lashed to his side. In this plane he transported the cargo, about 90 kg, from Dayton to Columbus/Ohio, a distance of about 70 miles. Parmalee not only made his first cargo flight that day. In some respects it was also the first purely commercial flight and the first charter flight (Allaz 2004, p. 23). Only 1 year later he had a fatal accident during an air show (N.N. 1912). He, just 25 years old, suffered the same fate as many aviation pioneers of his generation. In Germany, the first cargo flight was scheduled for 1911. In August of that year, the Berliner Morgenpost chartered an aircraft to transport newspapers to Frankfurt an der Oder (Gries and Krovat 2011, p. 11). At the same time national authorities began to establish regular airmail networks. The first official service was launched in India on 18 February 1911, and shortly afterwards in Europe and North America (Allaz 2004, p. 26 f.).

1.1.3 Years of the First World War In the early years of aviation, the focus of aviation activities was on the transport of mail. Passengers were carried as early as 1913 in Petersburg, Russia, and St Petersburg, Florida, but only on a small scale, and both times the services ended after a short time (Davies 1996). With the outbreak of World War I, the existing machines were upgraded and new ones were constructed to carry weapons and bombs. During the 4 years of the war, the power of the engines doubled and the machines flew faster and higher. The appearance remained similar. The predominant type of aircraft was a biplane and had a propeller. The Junkers J10 was an innovation in that regard, it was the first low-wing monoplane to be made entirely of metal (Junkers 2019). By the end of the First World War in November 1918, most of the bombers, reconnaissance planes and fighters that were not destroyed had become obsolete. The obvious idea was to use them to transport people and goods. These aircraft were more reliable than the first generation aircraft: they were larger and more powerful, and, because built in higher numbers, they also proved more fail-safe. In Europe in particular, aircraft that were no longer needed were taken over by the national postal companies.

1.1.4 Airmail as the Engine of Aviation in the 1920s In the USA, the development of an airmail network was pursued with particular vigour in the period after the First World War. North America was not nearly as economically depressed as the European belligerents at the end of the war. The aircraft equipment

1.1 The Age of the Pioneers Until the End of the Second World War

7

available toward the end of the war was spartan. Pilots were generally seated in the open, had to navigate by maps, and orientation was along specific landmarks.

1.1.4.1 Technical Innovations It soon became apparent that the former military aircraft could no longer cope with the rapidly increasing transport volumes. The better reliability was no longer sufficient to meet the demands. The military aircraft of the First World War were primarily used for reconnaissance, the transport of bombs and mutual combat (Rathjen 1990). They were not designed for the transport of significant amounts of cargo. After large capacities for the development and construction of new aircraft had been ramped up during the war, these resources lay idle. The U.S. Postal Service first recognized the opportunity to have new aircraft developed that were larger and faster than its own military machines. This new type of airplane built on the design of World War I German Flying Corps aircraft. These, like the foreboding J-10, had a fuselage of light metal instead of a wooden construction with biplanes braced together and were monoplanes. They were also increasingly twin-engined, which increased capacity but not reliability: in the event of failure of one engine, the second was too weak to allow safe onward flight. Air transport only became safer in the course of the 1920s, mainly due to three developments (Brooks 1967): 1. Many of the cash-strapped pioneer companies, which often operated only one or rarely a handful of aircraft, merged to form more powerful airlines. These were more able to invest in reliable aircraft, maintain them regularly, and more positioned not to take undue risks. 2. The increasing prevalence of three-engine aircraft also contributed to improved safety. 3. Wireless communication was introduced and allowed the pilot to contact the ground and other airmen. Despite these innovations, flying was still the domain of adventures for many years, and the safety requirements at that time were in no way comparable to those of today. The fact that, in view of the Pilots might often be willing to take risks, passengers were less inclined.

1.1.4.2 Development in North America By the mid-1920s, a nationwide airmail network had already been established in the USA. The postal service was not only a key driver in the development of efficient transport aircraft, but also helped give birth to some airlines that are still important today. The development of the airmail network in the USA initially still required the cooperation of the postal authority with the War Department (Wensveen 2015, p. 45). In the period between 1918 and 1925, the US Army took it upon itself to carry mail in aircraft on behalf of the government. The first flight on behalf of the US Post Office took off from Maryland to New York on August 12, 1918. Within just a few years, the airmail network was spread

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across the American continent. Letters were transported from New York to San Francisco within a few days starting in 1920. Initially, flights were only made during the day, but from 1924 night flights were also possible – thanks to brightly lit signal masts that mapped the flight path at 16-mile intervals (Davies and Moores 2014; Davies 1996, p. 30). In the early years, the US Post Office still entrusted the army with the task of transporting letters in aircraft. The Contract Air Mail Act of 1925, better known as the Kelly Act, authorized the US Post Office to break away from its dependence on the army and entrust the transport of airmail to private airlines. As a result, this administrative act provided start-up funding for the fledgling airlines in the United States. The bulk of American airlines were undercapitalized and used little modern aircraft. In the early years, operators were able to pass on only a small portion of their costs to customers because ground transportation was comparatively cheap and, more importantly, much more reliable. All too often flights did not start due to adverse weather conditions, and if they did take place they were often overshadowed by accidents (Brooks 1967). Maintaining a flight operation was only possible with a great deal of personal and financial commitment. The term airline at that time has little in common with today’s perceptio. It was primarily focused on the subsidized transport of mail and had little interest in passengers. Passengers were only allowed to fly on the planes if there was still capacity available (Schenk 2004; Davies 1996). In most cases, there were no seats installed in the aircraft anyway. Only the Fairchild 71, in production since 1928, and the larger, three-engined Ford Trimotor had a fixed cabin in which passengers (and cargo) were protected from the elements. Transporting cargo usually proved more profitable. To generate as much revenue as carrying mail, an airline would have had to charge a passenger $450 U.S. for a 1000-mile flight-an unrealistic ticket price (Correll 2008). The Mail Act of 1930 changed the system of compensation, which subsidized the airlines. Preference was given to the larger, better capitalized airlines, which also invested in more efficient machines. Small operators were crowded out on a large scale. What remained were the predecessors of the airlines that dominate the USA today, such as American Airlines and United. Four years earlier, in 1926, the Air Commerce Act gave the Department of Commerce the authority to regulate the design of aircraft, the materials used and other matters. The reason for this was the growing number of serious accidents caused by sometimes foolhardy pilots. In 1938, responsibility for the supervision of non-military aviation was transferred to the Civil Aeronautics Authority (Bunke 1954). This independent agency, a forerunner of today’s Federal Aviation Agency (FAA), was given the task of regulating prices in air traffic and awarding routes to airlines. Both were measures intended to prevent excessive competition and promote the further development of a financially sound aviation industry.

1.1.4.3 Development in Europe In France, Germany and the Benelux countries, which had been severely affected by the First World War, the end of the war was a major turning point. Under the Treaty of Versailles, Germany was obliged to cede territory, pay substantial reparations and disarm.

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9

In retrospect, these treaties proved to be the engine of significant innovation. Originally conceived as a stumbling block, they forced German aircraft manufacturers to produce particularly light and powerful machines. In the 1920s, the German aviation industry advanced to one of the world’s leading roles (Rathjen 1990, p. 28; Davies 1996). As in the USA, the first European airlines, such as KLM, Lufthansa, Air France and Swissair, established themselves after the end of the World War and in the 1920s. As early as 1919, six of these companies formed an interest group, the International Air Traffic Association (IATA). It was the predecessor organization of today’s International Air Transport Association, which operates under the same abbreviation. This “first” IATA endeavored to harmonize the operation of international air routes, but initially limited its activities to Europe until PanAm joined in 1939. In its early years, IATA was mainly concerned with matters relating to the transport of cargo, particularly airmail, as the carriage of passengers was also the exception in Europe. There was an urgent need to establish an to establish an international, neutral body in the form of IATA to coordinate international aviation. Airmail networks had grown rapidly and beyond national borders. For example, airmail had been carried on the Königsberg – Moscow route since 1922, and on the Berlin – Danzig – Königsberg – Riga – Reval – St. Petersburg route since 1928 (Gries and Krovat 2011, p. 19). An important milestone was reached when European airlines were officially recognized as carriers of mail at the first International Airmail Conference in 1927 (Lyall 2011). Until then, many national postal operators were reluctant to entrust letters to the air, which was considered an unsafe mode of transport. Until the mid-1920s, only daytime flights could be reliably used. Compared with the railway in particular, which was also less exposed to the vagaries of the weather, this represented a considerable disadvantage. A great deal of effort had to be expended to enable pilots to orient themselves at night. Light signals were linked along the flight routes at intervals of several kilometres to form special light roads (Gries and Krovat 2011). It was a technique comparable to that which enabled night flights in the USA.

1.1.4.4 The Golden Age of Airships Airships are steerable flying machines whose buoyancy is provided by a gas that is lighter than air (airships.net 2017). Usually the buoyancy was through hydrogen, today by the nonflammable helium. Airships are constructed as rigid airships, semi-rigid airships, and baffle airships, so called blimps (blimp) (György et al. 2008; Bock and Knauer 2003). The types differ in the extent to which the hull is given structure by a skeleton (Klußmann and Malik 2007). The best known type, that of the rigid airship, consists of a load-bearing and formgiving skeleton. It is more commonly known as a Zeppelin in German. Blimps, which collapse after releasing the gas, are nowadays mainly used for advertising purposes (Fig. 1.2). Concepts for the construction of airships have been developed since the late 18th century. But it took another hundred years before these ideas were put into practice (Griehl 2010). In 1897 there was one such successful attempt. However, the airship, which was constructed according to designs by David Schwarz, broke upon landing. The hull had been entirely metal and proved to be unsuitable. Schwarz had died shortly before the

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Aircras Heavier-than-Air Helicopter Rigid (Zeppelin)

Aircra Convenonal

Semi-Rigid (Zeppelin NT)

Airship Lighter-than-Air

Hybrid

Blimp

Balloon

Fig. 1.2 Terminology of flight devices. (Ardema 1985; György et al. 2008)

maiden flight, but his work influenced another designer, Count Zeppelin (Syon ca. 2007), despite the conceptual flaws. Zeppelin, who participated in the American War of Secession as an observer, was able to witness the military use of balloons. He came to the conclusion that balloons, because they were not maneuverable, were not suitable for military purposes, and after his return from America he developed the idea of a dirigible airship. Zeppelin was able to implement his idea with the founding of DELAG (Deutsche Luftschifffahrts-Aktiengesellschaft) in 1909. The airships, built near Berlin, were initially used for civilian purposes, and with the start of the First World War for military purposes as bombers, reconnaissance aircraft and transporters (Blasius 2014). The LZ 104 was loaded with 50 tons of cargo in the final stages of the war in November 1917 to supply the Imperial troops in German East Africa. The airship reached the airspace over Africa, but was ordered back over the Sudan before reaching its final destination. Already in the last year of the war, the zeppelins, which were easy to attack due to their size, were increasingly displaced in their function by aircraft. Despite their limited military suitability, Germany was forced by the Treaty of Versailles to hand over all remaining airships to the victorious powers. Production of Zeppelins took off again in 1924, when the LZ 126 (LZ for Luftschiff Zeppelin), a larger and more powerful version than the older models, was built on behalf of the USA. The next model to be built, the LZ 127 “Graf Zeppelin”, completed a round-the-world flight in 1929. Between 1931 and 1937, the airship was used for regular service between Germany and Brazil. Zeppelins of this generation were now designed to carry passengers, but were also used to transport airmail. The Zeppelin LZ 129 “Hindenburg” (the LZ 128 was never built) was once again significantly more powerful than the Graf Zeppelin in terms of volume, crew, payload and range (Table 1.1). This “golden age of zeppelins” came to an abrupt end with the crash of the “Hindenburg” over Lakehurst/New Jersey in 1937. Before landing, the hydrogen on board had ignited and more than 30 passengers died. Confidence in the safety of the

1.1 The Age of the Pioneers Until the End of the Second World War

11

Table 1.1 Performance data of selected zeppelins Type designation Commissioning Carrying gas volume Range Payload Of which: Paying load

L59 (Africa Airship) LZ 104 1917 68,500 m3 7000 39 to 14 to

“Count Zeppelin” LZ 127 1928 105,000 m3 12,000 60 to 13.4 to

“Graf Zeppelin II” LZ 138 1938 200,000 m3 12,000 105 to 69 to

Griehl (2010), Bock and Knauer (2003)

Zeppelin was permanently strained. The successor model LZ 130 (“Graf Zeppelin II”), which was later converted to helium filling, only carried out a few propaganda flights in 1938 and 1939. The potential of this airship to carry cargo exceeded anything that was possible with aircraft at the time. The theoretical payload was about 70 tons when filled with hydrogen and 50 tons with helium. This capacity is to modern cargo aircraft (Bock and Knauer 2003). With the subsequent discontinuation of the program, the possibility of transporting mail and cargo by airship across the Atlantic was also eliminated. The Hindenburg alone covered a total of more than 300,000 km on its 63 voyages and, in addition to the 7300 people, also transported 9700 kg of freight and almost 9000 kg of mail (Griehl 2010, p. 102 f.).

1.1.5 Progress in the 1930s The global economic crisis, however, led to a sharp drop in demand in Europe. The aviation industry and aircraft construction in Europe were severely affected. The start of air freight being transported in dedicated cargo aircraft can dates back to 1931. This service was used on an as-needed basis and did not follow a flight schedule. The first regular air cargo service that reliably followed a schedule was the United Airlines service between New York and Chicago. It started in 1940 (Wensveen 2015, p. 367) when Transcontinental and Western Air (TWA) introduced regular service between New York and Kansas City. The idea behind the concept of air freight was to ship shipments with a higher average weight at a cheaper rate than express shipments by air, but faster than by rail express (Sheehan 1939).

1.1.5.1 Evolution of Modern Commercial Aircraft This was also the period that is considered the birth of modern commercial aircraft (Behringer and Ott-Koptschalijski 2016; Davies 1996). Until then, airplanes were small and slow. The typical cruising speed was only approximately 100 miles per hour. In the 5 years beginning 1932, with the German Junkers JU-52, the Boeing 247, the Douglas DC-2, and its improved successor, the DC-3, aircrafts came on the market that followed the need of civil aviation, and were not derivatives of military design. Their operation cost

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only half of what had been estimated before and allowed at least the US American airlines to fly (almost) at break even for the first time and not to depend on subsidies or the transport of mail anymore (Brooks 1967). Over 17,000 of the DC-3 were produced, more than any other commercial aircraft in the world (Davies 1996). The new aircraft types accelerated a development that had already begun in the 1920s. Increasingly more overseas destinations could be served from Europe and North America (Brooks 1967). Rival European powers were keen to maintain permanent air links to colonies and areas of interest in Africa and the Asia-Pacific region. The first test flights began already in the mid-1920s. The Netherlands, France and Great Britain were in a race to see who could be the first to link the home countries with the colonies. Belgium, with its interests in Africa, followed a few years later. Before that, there were already numerous air connections within the colonies. However, the transport of goods and passage to the mother country was usually by land and road. By providing a regular service, the Netherlands, for example, succeeded from the late 1920s in reducing the transit time of airmail to and from the East Indies, now Indonesia, from 1 month to about 10 days. The networks were primarily designed to carry letters. Carrying passengers was secondary. In view of the initially very high surcharges, only a small proportion of mail was transported by air in the beginning (Fig. 1.3). A regular letter from London to Karachi

Southampton Alexandria Khartum Lagos

(Sudan)

(Nigeria)

Kisumu

Kalkua

(Kenya)

(Indien)

Durban

(South-Africa)

Singapur

Hong Kong

Darwin Australian Postal Network

(Australia)

Sydney Australian Postal Network

Fig. 1.3 The Empire Airmail Scheme of 1938. (Allaz 2004, p. 99)

New-Zealand

1.1 The Age of the Pioneers Until the End of the Second World War

13

cost 1.5 pence per ounce (approx. 28 gr.), and the airmail surcharge was 6 pence per half ounce (Allaz 2004). This changed as regular airmail networks continued to expand. The efforts of the British Empire were particularly ambitious. The aim of the Empire Airmail Scheme was to transport all first class mail by air. By the mid-1930s, regular services from the United Kingdom to India, Burma, Singapore, Hong Kong, and Australia had begun. It was expected that about 20 tons would be flown in any given week, including two to Egypt, five to East and Southern Africa, seven to Asia and six to Australia. The basis for the high volumes was a radical reduction in tariffs to now 1.5 pence per half ounce. (Allaz 2004). Demand once again exceeded projections. The operator airmail network, Imperial Airlines was overwhelmed, partly because the aircraft used, seaplanes proved unsuitable. The start of the Second World War put an end to the project after only a short time. There were also innovations in the military sector. The arms race initiated by the German National Socialists brought numerous new types of aircraft onto the market after the seizure of power in 1933. Unlike in the First World War, cargo planes were now also being developed with which the front positions could be supplied with materials. Not only in National Socialist Germany, but in many other countries in Europe and in North America, the national governments in the 1930s promoted the development of air transport and in particular the production of their own aircraft. The ability to control airspace in a future war was seen by the military as crucial, and the development of their own competencies in aviation arose as a compelling consequence. This led to the promotion of national airlines, such as Luft-Hansa in Germany, at the expense of smaller providers, and investment in infrastructure, especially airports and radio technologies. Germany in particular invested early on in the training of thousands of pilots, often with government support and in anticipation of the aircrew needed in the event of war. Another field was the promotion of local aircraft manufacturers. In Germany, manufacturers such as Messerschmidt, Junkers and Heinkel benefited from this. In 1939, Germany had more pilots and aircraft than the later Allies combined (Rathjen 1990).

1.1.5.2 The Second World War as a New Turning Point As predicted in Italian General Douhet’s book Dominio dell’Aria, published in 1921, the ability to control airspace proved critical in World War II, which began in 1939 (Gries and Krovat 2011, p. 22). Aircraft destroyed the enemy’s critical infrastructure. In addition, the wider bombing of cities interminated the morale and will to resist of large segments of the enemy population. In the course of the war, airborne troops were given another task in addition to bombing enemy territory and aerial combat: the transport of men and material. The aircraft made it possible to move troops over long distances in a short time and to supply the front lines with weapons and ammunition, spare parts, food, clothing and field mail. On the return flights, the aircraft were used to transport casualties. With the transport of goods that were larger, wider, taller and heavier than the packages that had been posted as airmail up to that time, the cargo plane increasingly developed as an alternative for

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transporting war materiel as the war progressed. In Germany during the war, it was the JU 52 that formed the backbone of air cargo operations. This type of aircraft could carry up to 17 people or 2 tons of cargo, with a range with extra tanks of 1300 km. During the encirclement of the sixth Army in Stalingrad, aircraft of this type supplied the troops and flew out wounded. About half of the 1000 transport aircraft in service were destroyed during this period (Table 1.2). For the Allies, the supply from the USA with the help of the DC-3 and the new DC-4 was indispensable. The DC-3, developed from the beginning as a long-range aircraft, was considered superior to “all comparable models” (N.N. 1969, p. 52). It could transport more than 10 tons of cargo over shorter distances. More than one thousand of the four-engine DC-4 were produced in the military version C-54 Skymaster. Like the First World War, the Second World War accelerated the development of aircraft technology in a very significant way. During this time, new, much more powerful engines were developed, jet propulsion was invented and radar was introduced (Rathjen 1990).

1.2 The Boom Years from the End of the Second World War to the Mid-1970s In retrospect, the first decades after the end of the Second World War appear to be a golden age. While Europe initially concentrated on rebuilding destroyed infrastructure and production capacities, North America benefited from high consumer demand, which was additionally fuelled not least by high immigration. Characteristic of this period was the belief in the controllability of the economy, which found expression in Fordism and Taylorism at the level of industry and Keynesianism at the level of the national economy (Markantonatou 2007). Fordism and Taylorism stood for an increasing standardisation of production processes, on the one hand, and a social partnership, which guaranteed adequate and rising wages, on the other. Both were the basis for an economic boom that soon lasted 30 years in the western industrial nations.

Table 1.2 Transit times of the dominant modes of transport on the transatlantic route Means of transport Steamship Zeppelin Seaplane Propeller plane Jet aircraft (jets) Supersonic aircraft Rodrigue (2016, p. 60)

Relevant period 1830–1960 1931–1937 1934–1946 1934–1960 1958–today 1976–2003

Transit time 6 days (4 days 1930) 80 h 15 h 11 h 7–8 h 3.5 h

1.2 The Boom Years from the End of the Second World War to the Mid-1970s

15

In the first years of reconstruction in Europe, civil aircraft played only a minor role as a means of transporting goods. Even within the USA, a country with a large surface area, the transport of urgent goods was usually by rail. Initially, the regulatory prerequisites for transporting goods internationally were lacking, as was the appropriate flight material. The correction of these deficits, i.e. the changes in the general conditions and the development of more efficient aircraft types, gave rise to the actual boom in air freight on the supply side. In the period from 1945 to 1975, volumes increased at an average annual growth rate of 16%.

1.2.1 The Chicago Convention and the Establishment of ICAO As early as 1944, 1 year before the end of the war, representatives of 54 countries met in Chicago at the invitation of the United States to participate in a conference on international civil aviation. In view of the ongoing war, the participants travelled to the USA at great personal risk, with the clear aim of creating the conditions for a flourishing, peaceful international aviation industry in the post-war period. To the disappointment of the American hosts, the participants could not bring themselves to agree on a multilateral opening of airspace. Instead, individual countries reached bilateral agreements in subsequent years, resulting in a patchwork of international arrangements. The first such agreement was that between the United States and the United Kingdom, which went down in history as the Bermuda Agreement of 1946 (Foreign Office 1946). Concerned about the economic potency of US airlines, the UK enforced restrictive conditions. Thus, including stopovers, routes were defined that could be served by the airlines of the two countries. The format of the first Bermuda Agreement served as a blueprint for many of the thousands of subsequent treaties. What varied was the extent to which rights were granted to the other country. As a rule of thumb, the more similar the bargaining power of the contracting parties, the more generous the agreements were. Restrictive, on the other hand, were mostly the agreements concluded between powerful and politically less influential nations (Williams 1999). Instead of a multilateral regulation on the exchange of traffic rights – which would certainly have served to strengthen aviation – the Chicago Conference essentially discussed rules on the use of airspace and requirements for aircraft. The results of the conference have gone down in the annals of aviation history as the Chicago Convention on International Civil Aviation. The Chicago Convention has been amended several times over the years, a sixth time in 2006.

1.2.1.1 Organisation of the ICAO In addition to the definition of procedures and standards for the handling of international air connections, the agreement to establish an International Civil Aviation Organization is one of the essential cornerstones of the convention. The founding of the ICAO, the International Civil Aviation Organisation, was delayed because the treaty first had to be

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ratified by 26 states. Montreal in Canada was designated as the headquarters. In the spirit of the Chicago Convention, the ICAO set itself the goal of promoting sustainable growth in aviation. Organisation and Objectives of the International Civil Aviation Organisation in accordance with Article 43 et seq. of the 1944 Chicago Convention Article 43 Name and composition

An organization to be named the international Civil Aviation Organization is formed by the Convention. it is made up of an Assembly, a Council, and such other bodies as may be necessary Article 44 Objectives

The aims and objectives of the Organization are to develop the principles and techniques of international air navigation and to foster the planning and development of international air transport so as to: ( a) Insure the safe and orderly growth of international civil aviation throughout the world; (b) Encourage the arts of aircraft design and operation for peaceful purposes; (c) Encourage the development of airways, airports, and air navigation facilities for international civil aviation; (d) Meet the needs of the peoples of the world for safe, regular, efficient and economical air transport; (e) Prevent economic waste caused by unreasonable competition; (f) Insure that the rights of contracting States are fully respected and that every contracting State has a fair opportunity to operate international airlines (g) Avoid discrimination between contracting States (h) Promote safety of flight in international air navigation (i) Promote generally the development of all aspects of international civil aeronautics

ICAO’s competence is limited to civil air traffic. Government air traffic, which includes military air traffic, does not fall within the scope of the institution. Since October 1947, ICAO has been one of currently 17 specialized agencies of the United Nations (UN). The status of such specialized agencies is governed by Article 57 et seq. of the Charter of the United Nations. They are legally autonomous and financially independent: they work with the UN but are not subject to it. ICAO has organised itself into three bodies, based on Article 43 of the Chicago Convention: • The General Assembly, in which the member states each have one vote, meets every 3 years. It determines, among other things, the tasks of the Council and the Secretariat.

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• The Council is composed of representatives of 36 member states and is elected for 3 years. It is the executive body and as such implements the directives of the General Assembly. The Council is composed of three groups. Firstly, states such as Germany, the Russian Federation and the United States, which are of particular importance for air transport. The second group consists of States that make the greatest contribution to the provision of facilities for international air transport, such as Argentina, Norway, South Africa and Venezuela. The third group is composed of States representing the different regions. • The Secretariat, headed by the Secretary General, is divided into areas of responsibility: Air Navigation, Air Transport, Technical Cooperation, Legal Affairs and External Relations. It manages the day-to-day business of ICAO. ICAO’s funding is secured through levies on member states. In addition to its headquarters, the organization has regional offices in Bangkok, Dakar, Cairo, Lima, Mexico City, Nairobi and Paris. It sometimes works closely with other specialized agencies, such as the Universal Postal Union (UPU).

1.2.1.2 ICAO Standards and Recommended Practices Priorities have shifted over the decades. For example,, attention is now paid to environmental protection (Sterzenbach et al. 2009). The threats of terrorism have also moved to centre stage. Today, ICAO’s main tasks are as follows: 1. It sets standards and recommendations affecting civil air traffic. Important regulatory areas are international air traffic control and the transfer from one airspace to another 2. It develops international agreements in the field of air law 3. It promotes the interests of economic growth, taking into account the interests of environmental protection 4. It monitors worldwide compliance with the above-mentioned standards on technical safety and protection against terrorism and sets standards with regard to the investigation of air accidents ICAO recommendations and guidelines are adopted in the form of Annexes to the Chicago Convention. These 18 annexes are the essential international regulations on aviation. They contain so-called Standards and Recommended Practices (SARPs). ICAO cannot make any legally binding decisions, but it is expected that the standards will be adopted into the national law of the approximately 190 signatory countries. If a nation decides not to implement a standard, it must report this deviation to ICAO (von Ziegler 2012). The recommended practices are, as the name suggests, recommended to states for implementation.

1.2.2 Freedoms of the Air The signatory states to the Chicago Convention recognize in Article 1 that “every State has complete and exclusive sovereignty over the airspace” above its national territory. This

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means that the airspace above a country’s territory and territorial waters is part of its national territory under international law. If all states were to restrict access to their respective airspace, international air traffic would be impossible. The 1944 Chicago Convention’s rules on access to airspace were inadequate and contrary to the spirit of the Convention, which was to promote civil air transport. Thus, in parallel with this agreement, two other agreements were agreed to regulate the participation of states in air transport. These are the International Air Service Transit Agreement (IASTA) and the Air Transport Agreement (Needham 2007).

1.2.2.1 First and Second Freedoms (Technical Freedoms) The International Air Services Transit Agreement (IASTA) grants overflight rights and the right to technical stopovers to all signatory states. These two rights are generally referred to as the first and second freedoms of the air. Occasionally, the term technical freedoms is also found. The agreement is open to all signatory states of the Chicago Convention. To date, more than 100 UN member states have joined the agreement. As a multilateral agreement, all signatory states enjoy these two rights, to overflight and to technical stopovers. The advantage of not having to negotiate these rights intergovernmentally has led most states to join the agreement (Fig. 1.4). Some countries with large territories are not signatory states to the agreement, e.g. Russia, Saudi Arabia, Kazakhstan, Brazil (Holloway 2008, p. 232). Those states negotiate overflight rights bilaterally and charge for these overflight rights, such as Russia in the past, in the form of sometimes high fees. For example, Israeli aircraft were not allowed to fly in the airspace over Saudi Arabia, which added about 3 h to the flight time from Israel to Asia. Regardless of whether a state has joined the IASTA or the first two freedoms have been agreed bilaterally. In practice, it is usually sufficient for a carrier to file its flight plans to meet the requirements of the countries overflown (Bartsch 2017).

Switzerland

Germany

Belgium

First Freedom: the right, granted by one state to another state to overfly across its territory without landing e.g.: Swiss overflies Germany on its route from Zurich to Brussels nach Belgien

Germany

USA

Japan

Second Freedom: the right to make a landing in the territory of another country for technical, non commercial purposes e.g.: A flight operated by Luhansa stops in Anchorage/Alaska on its way from Germany to Japan to refuel and change the crew Fig. 1.4 First and second freedom

1.2 The Boom Years from the End of the Second World War to the Mid-1970s

USA

19

Germany

Third Freedom: the right to drop off passengers, mail, or cargo from the home state to the partner state e.g.: American Airlines carrying freight from the U.S. to Germany

USA

Germany

Fourth Freedom: the right to pick up passengers, mail, or cargo from the partner state to the home state e.g..: American Airlines carrying freight from Germany to the U.S.

Switzerland

U.A.E.

Oman

Fih Freedom: The right to take on or put down, in the territory of the first state, traffic coming to or desned to a third state e.g.: Swiss carrying freight to Oman via Dubai Fig. 1.5 Third to fifth freedom. (GOA 2004)

1.2.2.2 Third to Fifth Freedoms (Commercial Freedoms) The third to fifth freedoms of the air are based on transit agreements. They are sometimes referred to as commercial freedoms. The third and fourth freedoms are the right to transport passengers, cargo or mail from the home country to a contracting state or back again. These two rights are usually agreed in combination and, unlike the first two freedoms, are bilateral rather than multilateral (Fig. 1.5). The fifth freedom describes the right to perform transport between two contracting states. The prerequisite is that the flight is part of a service that either begins or ends in the airline’s home country. A well-known example is the possibility to fly with Singapore Airlines (SQ) from Frankfurt to New York. The flight is part of the Singapore – Frankfurt – New York service under the uniform flight number SQ26. Another example is the British Airways flight from London Heathrow via Singapore to Sydney. 1.2.2.3 Sixth to Ninth Freedom The subsequent sixth to ninth freedoms, although designated as such, do not have the same status as the first five freedoms due to the lack of an official treaty basis. They are therefore considered unofficial freedoms and, in order to protect domestic aviation, are rarely

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granted. A significant exception is the European Union, where full cabotage freedom exists among member states. The sixth freedom of the air combines the fourth freedom with the third freedom by allowing an airline to pick up passengers and cargo in one country and carry them on to a third country after a stopover in the home country. The use of the sixth freedom has long been in demand. Much of Singapore Airlines’ success has been built on its ability to pilot passengers between Europe and Australia via its Singapore hub. The success of Middle Eastern airlines would also not be possible without this freedom, for example when Emirates and Etihad carry passengers and cargo from Frankfurt via the hubs in Dubai and Abu Dhabi to Hong Kong or Australia. The seventh freedom regulates transport between two foreign states without touching the home country of the airline. This is, for example, a flight operated by an Irish airline from Germany to Portugal. Finally, the eighth and ninth unofficial freedoms are cabotage rights. The term cabotage describes the provision of transportation within a country by a foreign company. In the case of the eighth freedom, a carrier is permitted to transport passengers or cargo within a country if the flight begins or ends in the carrier’s home country, e.g. a flight from Lyon to Paris before continuing to Frankfurt. In the case of the ninth freedom, the onward flight requirement does not apply. The most famous example of the ninth freedom can be found in the recent history of Germany. During the Cold War and until reunification, only airlines of the three Allies were allowed to operate flights between West Germany and West Berlin. Passengers wishing to use air travel on this route had to rely on the services of Air France, British Airways and PanAm. Deutsche Lufthansa did not resume service on this route until 1990.

1.2.2.4 ICAO’s Capacity to Develop ICAO’s legitimacy is initially a borrowed one, derived from that of the UN. But over the decades it has proven to be an indispensable regulatory body for international air transport. The organization has shown itself to be sufficiently flexible to keep pace with technological changes and the changing geopolitical environment. ICAO’s response in the aftermath of the events of September 11, which led to a fundamental revision of Annex 17 to the Chicago Convention, is an example of this adaptability. The growth of air cargo over the decades is in large part a credit to the work of ICAO. Another expression of its success is that since it was first signed, all the member states of the United Nations have acceded to the Chicago Convention except for two dwarf states, the Cook Islands and Dominica, with 20,000 and 70,000 inhabitants respectively. A special case is Taiwan, the Republic of China, which is recognized by only a few states. Taiwan’s application to join the Convention was rejected in 2016 under pressure from the People’s Republic of China (Jennings 2016). One criticism directed at ICAO by environmental associations is a perceived deficit with regard to its contribution to climate protection. They argue that the organization should help ensure that international aviation, which benefits from the tax privilege, is

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obliged to bear the external costs (T&E 2010). In 2016, ICAO adopted measures to limit greenhouse gas emissions from aviation, but environmental groups say these fall short and come too late. Although fuel efficiency is to increase by 2% annually, in view of the expected growth in air traffic, the aim is merely to stabilise fuel emissions by 2020 (ICAO 2011a).

1.2.3 International Air Transport Association (IATA) In the Chicago Convention of 1944, two nations in particular were in the lead: the United States, with its leading aviation industry during the Second World War, which was seeking civilian fields of activity, and Great Britain, which was seeking a link to its numerous colonies (Koffler 1966). The USA favoured the concept of an organisation that, like the United Nations, would focus essentially on the technical aspects of aviation, but would leave room for market forces in other matters. The ideas of the British government ran counter to this. It favoured the creation of an authority that would also be responsible for determining capacities and fares. The incompatible approaches threatened to end in a stalemate. This prompted the airlines to push for their own representation of their interests. The International Air Transport Association was founded in Havana in 1945 as an umbrella organisation for the airlines. It is the successor of the International Air Traffic Association, founded in 1919, whose activities were mainly limited to Europe. In the first decades, IATA’s tasks were primarily twofold: firstly, to standardise virtually all aspects of airline operations and to develop recommendations for improvement; secondly, to set fares for passenger and cargo. The governments of the member states thus delegated to IATA the authority to set de facto prices. Their aim was to define prices that would prevent cut-throat competition between airlines and, at the same time, make services affordable. The first objective was undoubtedly better achieved than the second. The general view at the time was that was effectively a supplier cartel, which by setting prices allowed airlines to maximise profits (IATA 2007, p. 41; Doganis 2007, p. 41; Holloway 2008, p. 150). While it was ultimately within the competence of national authorities to object to air fares, in practice this happened very rarely. Fares – most recently around 200,000 in passage and 100,000 in cargo – were determined in non-public three regional fare conferences, each for 1 year (Doganis 2007, p. 40). The conferences also determined what services were offered at a fare, such as whether a hot meal could be served on a flight. Since the earlier 1970s, criticism of this practice of setting fares increased, partly because despite high prices, the profitability of the airline industry was unsatisfactory. Despite the increasing lack of legitimacy among customers, and not least government institutions (Hannigan 1982), it continued until the end of the decade. Strict collective bargaining was not relaxed until 1979. On the particularly busy North Atlantic route, tariffs for airfreight had already been abolished 2 years earlier in 1977 following a court injunction (Sichelschmidt 1977).

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1.2.4 Developments in the USA Around the same time after the end of World War II that IATA began its function, national regulatory measures in the United States flanked in the promotion of the air cargo market (Wensveen 2015, p. 367). First, in 1948, the Civil Aviation Board (CAB) authorized freight forwarders to act as brokers of airline and shipper interests. It was the Board’s expectation – correct in retrospect – that allowing freight forwarders would open up new areas for air freight and allow it to develop more quickly (Wager 1949, p. 96). A second major decision of the CAB was the licensing of three cargo-only airlines. Of these, the Flying Tiger Line was the first all-cargo airline to regularly transport cargo between the East and West Coasts in 1949. The Flying Tigers’ flight crew consisted primarily of pilots who had gained flying experience in World War II. The aircraft used initially from 1945 was the RB-1, a US Navy development unusable for military purposes. From 1947, the RB-1 was replaced by the more reliable Douglas C-47 Sky Train and the C-54 Skymaster, known from the Berlin Airlift, likewise transports, which operated on behalf of the military. A few years later the military was also the first major customer when the Flying Tigers were ordered to transport materials from the USA to Asia during the Korean War (Allaz 2004, p. 180).

1.2.5 Development in Europe Unlike after the First World War, European aviation was not in ruins in the mid-1940s. In 1949, 4 years after the end of the war, four cargo flight connections between Europe and North America were recorded. On the transatlantic, stopovers at Gander in Newfoundland and Shannon in Ireland were still common. Mostly DC-4 aircraft were used. France maintained permanent cargo flight connections to its colonies (Allaz 2004). The situation in Germany was different. It is true that regular international airmail transports were again carried out between Great Britain and the British occupation zone just one and a half years after the end of the Second World War, in August 1946 (Leinung 1998). But civilian demand for air travel and air transport was only modest in the first post- war decades. In addition, there were restrictions from the occupation statute, which prohibited German civil aviation. In 1951, the assets of the “old” Lufthansa were liquidated on behalf of the occupying powers. Only when the Federal Republic of Germany regained its sovereignty in 1955 was a “new” Deutsche Lufthansa allowed to resume regular flight operations. The project had been planned several years in advance. The first post-war government recognised the importance of air traffic at an early stage. The “Aktiengesellschaft für Luftverkehrsbedarf” (Luftag), founded in 1953 and headquartered in Cologne, was not a legal successor of the old company, despite the same name, but a newly founded company (Klußmann and Malik 2007, p. 396; Lange 1975, p. 315). The company had merely bought the name and trademark from the liquidation estate. As no suitable German aircraft were available at the end of the war, the company switched to DC-3 and Convair type

1.2 The Boom Years from the End of the Second World War to the Mid-1970s

23

aircraft. The Convair “Metropolitan” was the much more modern type of aircraft than the DC-3. It had a pressurized cabin and air conditioning (N.N. 1969, p. 53). Before the first flight in April 1955 pilots and mechanics had to be trained on the new aircraft type (LH o. J.). By 1960 jet aircraftss, i.e. the B707, were deployed on long haul routes,travelling twice as fast (N.N. 1969, p. 57). Since the 1960s, airmail has been transported within Germany via the so-called overnight airmail network. In many cases, Lufthansa passenger aircraft were used. The seats had to be removed for transport (Leinung 1998, p. 100). However, most mail travelling from one continent to another was not transported by air, and if it was, it was transported at high surcharges. Until the end of the twentieth century, international mail to and from Germany was transported by rail or ocean-going vessels (Leinung 1998) – in contrast to today, where mail is transported over the short distance by ground and over the long distance by air. Within Germany, the transport of mail today offers advantages only on a few routes, as trucks and the motorway network as a whole are more efficient than in earlier decades. The time advantages of the airplane, on the other hand, are in intercontinental mail transport. The ocean-going vessel has mostly been displaced in the letter and parcel sector because the savings in shipping did not justify the long transport time.

1.2.6 Technical Innovations As had been the case after the end of the First World War, there was a surplus of decommissioned military aircraft of all categories at the conclusion of the peace. However, these aircraft proved to be less suitable for the transport of goods, and more crucially, for the new requirements of the Cold War. From a military point of view, aircraft were needed that were either particularly fast and agile, or could cover long distances with a high payload. The latter to transport nuclear weapons over enemy terrain. These challenges also literally spurred the development of the civilian aircraft industry. The rapid economic upswing in the USA after the war did the rest to fuel the aviation industry there. In the strong US domestic market, the Boeing and Douglas companies developed into the world’s leading aircraft manufacturers (Table 1.3). In 1958, the Boeing B707 successfully ushered in the jet age with its entry into service. Earlier attempts by Western European and Soviet manufacturers to establish the jet had proved unsuitable for daily flight operations. The DH 106 Comet of the British manufacturer de Havilland had been used as the world’s first jet airliner since 1952, but a series of serious accidents in 1953 and 1954 led to a lengthy grounding. The new jet aircraft combined a number of advantages: greater range, higher speed, better transport capacity, and smoother flight characteristics. As a result, travel times were greatly reduced. In the year a Super Constellation needed 2.5 days for the route London Sydney, with stops in Rome, Cairo, Dubai, Colombo, Singapore, Jakarta, and Darwin in the north of Australia. Ten

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1 A Brief History of Air Freight

Table 1.3 Technical progress for air travellers using the example of the kangaroo route

Year Typical route 1935 Among others London-Paris, by train Paris- Brindisi, Brindisi – Crete – Alexandria – Cairo – Baghdadi – Sharjah – Karachi – Jodhpur – Rangoon – Singapore – Rambang – Darwin – Brisbane (31 stops in total) 1947 Sydney – Darwin – Singapore – Calcutta – Karachi – Cairo – Tripoli 1955 Sydney – Darwin – Jakarta – Singapore – Colombo – Dubai – Cairo – Rome London 1975 Sydney – Singapore – Dubai – London 1990 Sydney – Singapore – London 2018 Perth – London (direct)

Aircraft De Haveland 86

Lockheed constellation Lockheed super constellation B747-200 B747-400 B787

Travel time 12 days

Ticket price (normalized to 2018) EUR 12,000

4 days

EUR 23,000

2,5 days

26 h 23 h 17 h

1000 EUR

Rodrigue et al. (2013), Leadbeater (2018)

years later, a B707 could complete the comparable route in one and a half days with one less stop (Rodrigue et al. 2013, p. 102). It was also shown that the operating costs of a jet were superior to those of propeller planes despite higher fuel consumption: because jets ran on the cheaper kerosene, maintenance is cheaper and the stresses on the aircraft fuselage caused by the vibrations of the engine are lower (Davies 1996).

1.2.7 The Advent of Wide-Body Aircraft and the Consequences of the Oil Crisis After the first B707s began regular service in 1958, the first wide-body aircraft followed little more than a decade later in 1969: the Boeing 747. This aircraft type was a resounding success. Not only was it capable of carrying far more passengers and cargo. It also did so much faster and more economically. The capacity of the older B707 on the North Atlantic route in the early 1970s was only about 24–33 tons, depending mainly on the distance flown (Seidelmann 1971). The fuel consumption of the new wide-body aircraft was significantly lower, and it only required maintenance at longer intervals (Culmann 1990). The reduction in travel times was also considerable. Whereas the journey from London to Sydney in the 1960s still took at least one and a half days, a B747 could cover the distance in barely more than 24 h with a single stop in Asia. With the B747, the economy now had an aircraft that was far more suitable for the transport of cargo due to its capacity. The fuselage was wider, as it was designed to accommodate considerably more rows of seats, and thus also higher due to its construction. The offer of additional transport space quickly met with demand. In some respects, the entry

1.2 The Boom Years from the End of the Second World War to the Mid-1970s

25

into service of the B747 as the first wide-body aircraft was the starting point of the actual airfreight product. As early as 1971, Lufthansa put the first B747 into service in Germany as a pure cargo aircraft. This formed the nucleus of today’s fleet of freighters within the Lufthansa Group. The use of the first wide-bodied aircraft fuelled the development of airfreight containers (ULDs), which enabled the cargo hold to be loaded much more quickly than with manual loading using conveyor belts. The idea of using containers in air freight transport had been on IATA’s mind since the mid-1950s. However, it was not implemented until 1967 at the Puerto Rico Conference (Seidelmann 1981, p. 100).

1.2.8 Exogenous Crises as an Engine of Growth In the late 1960s, the air cargo industry benefited from a series of severe crises and geopolitical upheavals at the expense of ocean shipping. Highlights include (Sales 2016, p. 115): • The closure of the Suez Canal for several years from 1967, which meant that ships on the route from Europe to Asia had to take the expensive and time-consuming detour around the Cape of Good Hope • The Biafra war (1967–1970) and the subsequent severe famine, which triggered an emergency response • The strike of 41,000 English dock workers in 1972 in reaction to the increasing use of sea freight containers (N.N. 1972) In those days, cargo capacities were still very limited. Cargo aircraft were mostly narrow- body aircraft, such as the DC-6, with a capacity of well under 10 tonnes. In this respect, the entry into service of the Canadair CL-44, with a payload of 29 tons, brought a major advance. This type of aircraft, a turboprop, was designed from the beginning as a cargo aircraft, albeit for the military. It could be loaded from the rear and not only through the side, which allowed the transport of larger packages. The main customer of the CL-44 was Flying Tigers.

1.2.9 Phase of Deregulation Until the late 1970s, air travel in the United States – as in most other countries – was highly regulated. Since the end of the First World War, aircraft have been an essential means of fulfilling the government’s mandate to safeguard the postal system in the USA. The industry has been increasingly subject to government control in the years since the Kelly Act in 1925 and subsequent interventions. The regulatory justification for these interventions was found in three assumptions (Bailey et al. 1991, p. 1 f.):

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1. The state is in a better position than free competition to set up networks which are served by the airlines. 2. Subsidies should be justified to encourage the development of networks. 3. Lack of regulation leads to ruinous competition. Ruinous competition was problematic, in the view of regulatory advocates, in that it could lead to sacrifices in safety. In a market that was assumed to be finite and to grow only marginally, it was necessary to ensure that carriers could earn a sufficient profit. This led, among other things, to the CAB. ruling that rates for cargo carried on passenger aircraft should not be lower than those for cargo aircraft. It was necessary to ensure, the CAB said in the early 1970s, that passenger airlines would earn adequate returns and that the economically important operation of cargo aircraft would not be competed with by operators such as Flying Tigers (Miller 1973). But even in the regulated market, the returns to market participants were barely adequate, in both passenger and cargo. In hearings held by the US Congress in 1976, it became clear that numerous competitors had withdrawn from the domestic airfreight market and that the two remaining cargo airlines were in serious financial difficulties. Stakeholders concluded that the freight rates set by the Civil Aviation Board (CAB) – as opposed to passenger rates – were too low because they did not cover the carriers’ costs (US Congress 1982). The opening deregulation of rates was associated with the hope of a revival of the air cargo industry. In the US. deregulation of aviation had been one of the central campaign promises of the newly elected Carter administration. Essentially, implementation occurred through three pieces of legislation. In 1977, the Air Cargo Deregulation Act was passed by the U.S. Congress, followed the next year by the Airline Deregulation Act and again a year later by the International Air Transportation Competition Act. The amendments stripped the CAB of its authority to regulate market access, approve airline routes, and set fares. In Europe, the first market to be deregulated was that between the Netherlands and the United Kingdom in 1984. Both countries were considered to be strong supporters of open markets. In the European Community as a whole, liberalisation was implemented in three packages of measures between 1987 and 1993. This ensured unrestricted market access for airlines of member countries in the EU. Here, too, regulations on capacity and prices were lifted.

1.2.9.1 The Arduous Path to Open Air Spaces Since the Chicago Convention refrained from opening up airspace to the signatory states, the nation states had to agree and conclude individual contracts bilaterally with each other. As a result, the several thousand so-called Air Service Agreements (ASA) negotiated differed considerably both in form and detail. Contents that were commonly negotiated concern the scope of traffic rights to be granted, the airlines that will be privileged for certain city pairs, the frequency and capacity of air services, and the type of pricing mechanism (regulated or free). Given the effort required to negotiate air traffic rights bilaterally between contracting states and the economic disadvantages of regulation, efforts have

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27

been made since the 1980s to liberalise air transport more fundamentally. The so-called “open skies” agreements are agreements to open up the airlines of the contracting parties’ own flight sectors to a certain degree. Probably the most significant open sky agreement to date is the one concluded between the European Union and the United States in 2007, which entered into force in 2008. The agreement replaces 21 individual agreements concluded between member countries of the EU and the United States (Bernecker and Grandjot 2012; GOA 2004; Bhadra and Schaufele). In 2002, the European Court of Justice ruled that bilateral treaties between individual member countries and the US were in breach of Community law. It mandated that these individual treaties be replaced by a joint agreement with the US. As a result of this “open skies” ruling, the several hundred individual agreements between member states and third countries were harmonized and replaced by horizontal agreements between the EU and these states. The agreement between the EU and the USA allows airlines of the member states to fly from the EU to any airport in the USA. Flights within the USA are not covered by this arrangement. Comparable agreements have been concluded between the USA and China and the EU and Australia/New Zealand, among others.

1.2.9.2 The New Role of IATA in Deregulated Markets Members of IATA are free to join the tariff conferences in passenger or cargo, or both. However, the tariffs that are set today are no longer binding. The tariff structure for air freight (TACT), with its approximately five million freight rates, now has more the character of a reference work. Especially in the freight sector, rates are freely agreed (Barwig and Hartmann 2015, p. 121). In the meantime, the Department of Transportation (DOT) of the traditionally IATA-critical USA has also joined the view that the rates are more in the nature of recommendations (Holloway 2008, p. 150). In view of the curtailment of its powers, IATA has had to ask itself about its raison d’être. IATA’s mission today is to represent, promote and serve the air transport industry, but no longer to regulate markets.

1.3 Maturity Phase Up to the Global Financial Crisis From a regulatory point of view, the liberalisation efforts, which initially started in the USA, proved to be an engine of growth. The transition led to some severe upheavals that were not expected (Kahn 1988). To be sure, numerous airlines disappeared. But the need – if there was one – was regularly absorbed by competition. The best-known insolvencies were those of PanAm, one of the pioneers of international air transport, and Swissair. At the same time, other airlines, such as United Airlines, expanded their international services. New players entered the market, with competitive fares (Wensveen 2015, p. 5; Doganis 2007). Prices, and costs fell because players, airlines and airports, and their employees no longer benefit from monopoly rents, in the language of economics.

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In addition to the market shakeout, which, although occasionally criticised, is nevertheless an expression of a more creative destruction in the sense of Schumpeter, the development towards hub-and-spoke systems was a second significant concomitant. Prior to deregulation, most routes were served directly, point to point (P2P). According to a revealing analysis of trends in the U.S. between June 1978 and June 1981, traffic measured in weekly departures between the 517 airports that did not qualify as hubs declined by 12%, while traffic from these airports to major hubs increased by 12%. Traffic between the leading hubs grew by 9% over the same period (Bailey et al. 1991, p. 84). A similar development could be observed in Europe and Asia. The advantage of hub & spoke networks is that signifcantly more connections can be offered and the flights are better utilised, at least in theory. In practice, the design and maintenance of hub & spoke networks is challenging, not least because of the consequences of feeder flight delays. These result in a flight either waiting or not taking off at full capacity and therefore being less profitable (Franke 2017). For a production site that is not located near one of the primary or secondary hubs, this development brought disadvantages. The aircraft flying to and from the area of this hub are usually too small to carry any significant cargo. However, aircraft with a larger cargo capacity are used for flights between the hubs, and these aircraft also fly more frequently (Table 1.4). Another – unexpected – effect of deregulation was the emergence of alliances. These alliances allow a passenger to reach destinations on one ticket that are not offered by individual airlines, or only at a higher cost. For example, a Lufthansa customer can fly from Basel to Salt Lake City via Frankfurt on one ticket, with only the transatlantic flight itself offered by Lufthansa. The number of code-share connections an airline can offer is strongly positively correlated with its profitability (Zou and Chen 2017). In addition, alliance members offer coordinated frequent flyer programs, which are in particular demand by business travelers (Tiernan et al. 2008).

Table 1.4 Market overview of the three leading airline alliances, as of 2013

Number of passengers (million) Number of members Country destinations Destinations Important members

Star alliance (since 1997) 727

Skyteam (since 2000) 569

Oneworld (Since 1999) 475

28

19

13

195

178

151

1328 Lufthansa, United Airlines, Singapore Airlines, Turkish Airlines

1024 Aeroflot, Air France KLM, Delta Air Lines, Korean Air

981 American Airlines, British Airways, Cathay Pacific, Iberia, JAL, Qantas

Wang (2014), Kim and Park (2012), Min and Joo (2016)

1.4 Development Since the Financial Crisis – A Phase of Consolidation?

29

In cargo, alliances have been less successful (Merkert et al. 2017; Scholz 2012). Under the model of the Star Alliance, the cargo subsidiaries of Lufthansa, Singapore Airline and SAS had formed a cooperation under the name WOW in 2000. They were later joined by Japan’s JAL. WOW largely dissolved, not least because it failed to add value to customers and participants were reluctant to share customer data (Lennane 2015a; Bowen 2010, p. 135). Skyteam’s alliance of cargo members, Skyteam Cargo, has been somewhat more successful. In 2019, the alliance included 11 members, but only Korean Air and China Airlines have significant air cargo operations of their own. This partly explains why Skyteam Cargo is more successful than WOW: due to their size, Lufthansa and Singapore Airlines are less dependent on fixed cooperation partners than players such as Delta Cargo, Alitalia Cargo or Aeroflot Cargo, which have relatively small cargo volumes of their own.

1.4 Development Since the Financial Crisis – A Phase of Consolidation? The global financial crisis from the second half of 2007 onwards was also followed by a slump in the real economy, which was reflected in a 9% year-on-year decline in air freight volumes in 2009. By 2015, volumes had virtually stagnated. Air freight growth rates remained below those of global economic growth in most years. The picture was quite different in 2017, which saw FTK growth of 9%, the second strongest increase in the last 10 years. The e-commerce boom is seen as a key driver of demand growth. However, unexpected shocks, such as the insolvency of the Korean Hanjin shipping company, again contributed to growth.

1.4.1 A Standstill in Aviation Liberalisation – And a Decline? While most major economies had largely opened their markets by the turn of the millennium, one set of regulations remains in place today. Airline ownership remains tightly controlled, even though most of the formerly state-owned flag carriers have been privatized since the 1990s. In most jurisdictions, ownership or control of an airline may not fall into foreign hands. They must be held by a domestic individual or entity. The rule, notwithstanding criticism that liberalization could strengthen cash-strapped carriers, has endured in most states to this day (Whitaker 2003). For example, the free ownership limit is 25% in the US, 33% in Japan, and 49% in the EU for non-EU member states. An exception is Chile, which allows a domestic airline to be wholly foreign owned (WEF 2016). In the meantime, signs of a possible “re-regulation” can be seen in view of the large number of potentially anti-competitive mergers, especially in the USA. There, the number of leading airlines has been reduced from eight to ten to just four. Following the acquisition of TWA, American West Airlines and US Airways by American Airlines; the merger of Delta with Northwest; that of United with Continental and of Southwest with

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AirTran. (Wensveen 2015, p. 4 f.) The positive outcome of the mergers is that the profitability of the industry has turned for the better after years of severe deficits and even bankruptcies, and as a result the industry as a whole is in a more stable position (Johnston 2013). However, the improved financial returns are not only the result of better utilisation of flights and lower costs, but also less competition – which may make renewed regulatory intervention seem necessary. In the USA. there is a military justification for foreign capital only being allowed to participate in domestic airlines to a limited extent. Defence forces are to access civilian air capacity in the event of a crisis should their own capacity be insufficient. Carriers provide, on a contractual basis, a portion of their fleet, crew, fuel, and ground infrastructure within 24–48 h for contingency (Graham 2003). This fleet is the Civil Reserve Air Fleet (CRAF) of the United States Air Force. The nominated aircraft must meet the military’s requirements for range, payload, speed, and configuration. For example, these capabilities were activated between August 1990 and May 1991 during Operations Desert Shield and Desert Storm, when significant amounts of troops and equipment were moved to the Middle East for the Second Iraq War. Within 24 h of the activation order, 38 aircraft were deployed. Some of these were passenger aircraft used to transport cargo. The procedure of removing seats in B747s, but not the hand luggage compartments and lining the floor with plywood, proved to be of little use and could only be justified by the urgent need for capacity before the war began (DoD 1992). All leading American cargo airlines, namely Atlas Air, Federal Express Airlines and United Parcel Services (UPS), are part of the Civil Reserve Air Fleet (USAF 2014). This virtual fleet enables the US Air Force to limit its investment in its own cargo aircraft, in particular the Boeing C-17 Globemaster III.

In Europe, a similar development has so far only been hinted at. Here, according to an analysis by McKinsey, the three largest competitors had a market share of only 31% (measured in available capacity) in 2014, compared with 75% in the USA (Dichter et al. 2016). Air France and KLM merged in 2004. In 2011, Spain’s Iberia and British Airways came together under the umbrella of International Airlines Group (IAG). For its part, IAG acquired Vueling in 2013 and Ireland’s Air Lingus in 2015. Within the Lufthansa Group, Austrian Airlines, Swiss International Air Lines, SN Brussels Airlines as the successor to Belgium’s Sabena, and Eurowings, among others, have merged (Fig. 1.6). If we compare the development of transport volumes in the period from 2006 to 2017, three things stand out: firstly, the breathtaking pace at which the two express service

1.4 Development Since the Financial Crisis – A Phase of Consolidation?

31

Volume-Development of leading Cargo Carriers in 2006 (FTK mio., schedule services) 18000 16000

FTK, Mio.

14000 12000 10000 8000 6000 4000 2000 0

-1%

Korean Air

2%

Cathay Pacific

-1%

-2%

Luhansa Singapore Airlines

9%

FedEx 2006

7%

-4%

3%

Emirates Air France Cargolux

8%

UPS

1%

CAGR

China Airlines

2017

Fig. 1.6 Volume development of the leading cargo airlines

providers UPS and FedEx have grown; secondly, the strong growth of Emirates, which has moved from sixth to second place in the 11 years, while thirdly, the volumes of the established carriers have stagnated. Another interesting development in international air traffic is the rise of direct connections. By their very nature, connections via hubs take longer than direct connections. Price-sensitive travelers are more willing to accept the loss of time in the face of cheaper ticket prices; the more profitable business and first class travelers are less so. The success of the new B787 and A350 aircraft models is built on the airlines’ assumption that their customers will increasingly opt for direct intercontinental connections. This would be a positive development for the future of air cargo. The B787 and A350 can carry almost as many LD-3 containers as an A380, although the passenger capacity is less than half.

1.4.2 Development of Traffic Volumes As noted in the introduction, the growth in traffic volumes has increasingly slowed down. A major driver of growth rates was globalization, and here in particular the relocation of production to Asia. For decades, the volumes transported by air increased at more than double-digit percentage rates. These growth rates have flattened further since the global financial crisis.

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1 A Brief History of Air Freight

1.4.2.1 Long-Term Correlation Between Transport Volumes and Gross National Product and World Trade The fact that air freight as a product benefits from the growth of the global economy and global trade is easy to understand. Much attention is drawn to the correlation between growth in global Gross Domestic Product (GDP) and that of air freight volumes (Clancy et al. 2008; Oxley 2018). The correlations are particularly important when estimating how volumes will develop in the future. Stakeholders in air freight, such as carriers, freight forwarders and airports, can estimate how demand will develop on the basis of economic forecasts (Table 1.5). In particular, the correlation between GDP growth and freight volumes has proven to be less reliable since the financial crisis. This is mainly explained by the composition of GDP. It also includes the value of services, which by their nature do not need to be transported. Based on an error correction model (ECM), Kupfer et al. (2017) identify the quantities of merchandise exports as the main variable influencing freight volumes, expressed in tonne-kilometres. The development of exports and imports provide a better explanatory relationship than GDP to understand the growth of air freight. So what explains the decline in air freight volumes since 2008? There are several reasons for this. On the one hand, it can be said that a large part of the production that could reasonably be relocated for business reasons has already been withdrawn. The disproportionate growth in air freight was due to goods being produced in Asia for the first time and shipped to Europe and North America. On the other hand, a shift of goods from air to sea and, to a lesser extent, to rail can be observed (Seabury 2014). The decline in demand is being partially offset by countervailing developments, particularly in the pharmaceuticals and e-commerce sectors. However, these have so far not been sufficient to compensate for the loss in other sectors and to return air freight to historical growth paths. For example, in the fashion goods sector, Seabury estimates that approximately 600,000 tonnes of freight shifted from air to ocean during the period 2000–2013 (2014). As a result, air freight continues to grow, but at a much slower rate than before the global financial crisis. 1.4.2.2 Volatility of Quantities Due to External Shocks Overall, volume development since the turn of the millennium has been very volatile. The long-term growth path has been repeatedly interrupted by external shocks Table 1.5 Key growth indicators in air freight, 2012–2017 (A) (B) (C) (D) (E) Oxley (2018)

Indicator Global GDP Global GDP (chewing power adjusted) Global trade Air cargo volumes Multiplier (D/C)

d.j.W. (2012–2017) 2.8% 3.5% 3.1% 4.7% 1.5x

1.4 Development Since the Financial Crisis – A Phase of Consolidation?

33

(Button 2008). Some of these events that have had an impact on traffic volumes are summarised in Table 1.6. The shocks described all have in common that they could not be predicted. Changes in the economy can be forecasted within a certain range, not least on the basis of leading indicators such as the Baltic Dry Index. The impact of natural events or terrorist attacks and their effects on the global economy can hardly be estimated (Abberger et al. 2009). The accumulation of these events has raised doubts among some companies about the robustness of supply chains. For example, some car manufacturers are increasingly sourcing parts from regions that can be accessed without air freight. Table 1.6 Individual events with severe effects on civil air traffic Event The hijackings and attacks of 11 September 2001

Impact At short notice, the airspace over the USA and Canada was closed for several days. When air traffic resumed, the number of aircraft movements was significantly lower than before the events. The number of passengers who had flown worldwide in 2000 was not reached again until 2003. As a result, some airlines fell into financial distress, including those outside North America. In the year after 9/11, Belgium’s Sabena and Swissair fell into insolvency The SARS The pandemic, which spread globally from southern China, was centred in epidemic Asia. Fear of contagion led to a massive reduction in travel to the affected (2002/2003) regions, resulting in the temporary cancellation of passenger flight connections and thus a decline in available cargo space The world financial As a result of the collapse of the real estate market in the US, which crisis (2007–2009) escalated into a global banking crisis, dragging down the real economy. The decline in transport services exceeded that of the gross national product as companies reduced their inventory levels. Global air freight volumes fell by about 13% (Rothengatter 2011). The decline in demand corresponded with cuts in the amount of freight space offered due to capacity cancellations. The eruption of After the eruption of the Icelandic volcano, a large cloud of volcanic ash Eyjafjallajökull moved towards northern Europe. Starting in April, airspace over large parts (2010) of Europe and the North Atlantic was closed for several days (Alexander 2013). During the period in question, 43% of cargo flights and 51% of all scheduled flights were cancelled in the European Union (Steinhäuser 2013, p. 66) The earthquake in A number of important production facilities in Japan were affected by the Japan (March 2011) earthquake. One of the sectors particularly affected was automotive suppliers. Production in the Japanese vehicle manufacturing industry fell by 50% between February and April 2011. Because airlines cancelled passenger flights to Japan, freight capacities were also lost. Worldwide, the production of vehicles was temporarily affected due to supply bottlenecks (Wente 2013; Arto et al. 2015) Own representation

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1 A Brief History of Air Freight

1.4.2.3 Volatility During the Year In contrast to long-term volatility, which can be attributed to economic cycles and exogenous shocks, intra-year fluctuations can be anticipated much better. Typically, there are two peaks in any given year, one around March and one in October and November. The first peak can be attributed to the Chinese New Year (CNY), when factories in China shut down production for 2 weeks. During this time, workers and employees visit their families, resulting in the largest migration of people in the world each year. When products that were finished before the holiday begins are shipped out, this regularly leads to excess demand. A similar situation arises shortly before Christmas, when consumer goods of particular value are shipped from Asia to North America and Europe. For some years now, the launch of new smartphones, for example by Apple in September, has led to an additional boost in demand. Months with exceptionally weak freight volumes, on the other hand, are January and February shortly after the end of the Christmas season. Other effects that can be observed with regularity are demand overhangs at the end of the quarter, when listed companies in particular try to boost their sales figures once again. Within a week, volumes are usually stronger towards the end of the working week than at the beginning of the week. Given that these fluctuations follow certain patterns, the parties involved – carriers, ground handlers and freight forwarders – can adjust to them to a certain extent.

1.4.3 Employment Impact In Germany, logistics is the third largest sector of the economy: according to a study by the Fraunhofer Institute in Nuremberg, around 2.5 million or 8.3% of all employees subject to social insurance contributions work directly in this sector. Of these, around half are employed in warehousing and handling and a quarter each in transport and delivery and in administration (Kübler et al. 2015). No employment figures are known for the actual air freight sector. In 2015, the German Freight Forwarding and Logistics Association estimated that “services for transport” generate around 100 billion euros in revenue. For the air freight sector, this amounts to 8 billion euros. Unfortunately, no Germany-wide figures on the employment impact of air cargo are known. There is some transparency for Frankfurt Airport, where approximately 81,000 people were directly employed in 2015. This includes approximately 6500 employees in freight forwarding and transport and 1500 employees in cargo handling. This figure of 8000 employees includes a proportionate number of employees in security services, airlines, public authorities, personnel services, etc. If one combines the two above-mentioned data in a lump-sum manner, an employment of 1.2 million employees in the various areas of logistics excluding warehousing as well as a share of 8% of the total turnover, it can be estimated that approx. 90,000 persons are

1.4 Development Since the Financial Crisis – A Phase of Consolidation?

35

employed in the broader sense with air freight tasks. This figure includes not only the directly attributable employees who work as pilots, controllers, security officers and air freight forwarders, but also those who indirectly handle air freight, such as express delivery staff, truck drivers and employees of the regulatory authorities. For the German aviation sector as a whole, it is assumed that 330,000 people are employed directly and 829,000 indirectly. A figure of 90,000 in air freight would correspond to approximately one tenth of the workforce.

2

Characteristics of Air Freight

Abstract

The large mass of goods can be transported efficiently by sea or land. Compared to these modes of transport, the airplane occupies only a small niche. Air freight accounts for just 1% of the volume transported worldwide. On the other hand, according to IATA, it represents 35% of the total value of goods transported (Shepherd B, Shingal A, Raj A, Value of air cargo. Air transport and global value chains. Hg. v. IATA. Montreal. https://www.iata.org/publications/economic-briefings/value-of-air-cargo-2016-report. pdf, 2016).

2.1 Overview of Air Cargoes Air cargo is freight that is transported by air. Despite the almost tautological nature of this definition, the term requires delimitation (Fig. 2.1). While in English a distinction can be made between Air Cargo and Air Freight, in German both terms are usually translated as Luftfracht. (Allaz 2004, p. 8; Wensveen 2015, p. 365). As early as 1973, Lewis Schneider presented a basic classification of air freight in the US domestic market, which, although outdated in some places, is still valid in principle for international air freight today. He named three segments based on the needs of customers (Schneider 1973). Firstly, that for unplanned emergencies (emergency, unplanned); secondly, for perishable, planned routine shipments (routine perishable) and thirdly, for routine shipments that can be diverted to the ground (routine surface-divertible). In accordance with the American literature (O’Connor 2001), air cargo or air freight in the broadest sense comprises the following products:

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_2

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2 Characteristics of Air Freight

Courier

Same Day, same night

Charter

Same-Day, In-Night

Express Freight

Next Day Express

Air-Freight

Day Certain

Uncertain

Land and Sea Shipments Leers

Regular Parcels

Documents

Parcels 1 Kg

Freight 31,5 kgs

Fig. 2.1 The market for transport services

(a) Airmail (Air Mail) (b) Courier and express shipments (Courier and Express) (c) Classical air freight in the narrow sense (Air Freight) Personal baggage is not be defined as air cargo if it accompanies passengers on board an aircraft (Baxter and Srisaeng 2018).

2.1.1 Airmail As was made clear in the review of the history of air freight, in the beginning, mainly letters and, to a lesser extent, small parcels were transported in aircraft. Compared to earlier decades, airmail is now of only minor importance. Taking the example of Germany: Until the mid-1990s many letters were transported in the overnight airmail network. A guideline recommended that letters covering a distance of more than 450 km were to be transported in parts by air. Such mail was transported by chartered Lufthansa aircraft. The mail was transported either directly or via the central hub in Frankfurt am Main. After a brief interruption, Deutsche Post has again been serving more distant routes, such as Berlin-Stuttgart,

2.1 Overview of Air Cargoes

39

by night flight since 2009: it had become apparent that the transit time promise could not be maintained with truck transports alone (Schott 2009). In Germany – unlike in the USA – no additional fee is charged for this service. Airmail is now of only minor importance for airfreight companies. It accounts for only 4% of the volumes transported worldwide (Boeing 2014b).

2.1.2 Express and Courier Consignments In practice, one considers courier and express shipments in one group with parcels as part of the CEP segment (Manner-Romberg et al. 2015). CEP stands for the three products Courier, Express & Parcel. What these products have in common is that the maximum weight of the individual package typically does not exceed 31.5 kg, which is roughly equivalent to 70 pounds. The assumption is that a delivery person can carry such weight without a health risks. National and European regulators have largely subscribed to the CEP market view. Unlike the regulated letter market, the market for courier, express and parcel shipments is largely liberalised and characterised by competition. Parcel shipments are mostly transported by road, only rarely by air, so they will not be discussed further here.

2.1.2.1 Express Compared to conventional airfreight, the market for express shipments is even more important and growing faster. Express shipments, like parcels, are moved within fixed networks with one or more hubs in their centre. In order to guarantee the short transit time promises, the aircraft is used as a means of transport over medium and longer distances. For this purpose the leading integrators maintain their own extensive fleets of cargo aircraft, most of planes also carry the brands. The integrators serve less frequented regions that do not justify maintaining own fleets through commercial uplift in cooperation with other airlines (Scholz 2012, p. 7). For example, UPS diverts express shipments destined to less accessible parts in Africa from the hub in Cologne to Amsterdam or Frankfurt, where they are loaded onto Lufthansa, KLM and other flights. The market is essentially dominated by three providers: DHL, UPS and Fedex, now including TNT. These express service providers are often referred to as integrators because their systems, from pick-up, sorting, long-distance transport and delivery, are integrated (O’Connor 2001, p. 155). Even though essential parts of the transport chain, such as the first and last mile in particular, are outsourced to third parties, it still appears as if it is provided by a single company. Despite the distances, the integrators are able to offer next-day service for certain international relations through sophisticated network planning. For example, an earlier UPS cargo plane leaves Cologne Bonn Airport at 9:30 p.m. German time, reaching the Worldport in Louisville, KT at midnight local time. After sorting, the shipments are distributed to the outbound machines and delivered to 90% of business addresses in the US before 10:30 am the next morning (de Jong 2017).

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2 Characteristics of Air Freight

A forerunner of today’s service providers was the US Railway Express Agency (REA), an association of railway companies in the USA. The agency was founded on the instructions of the US government in 1917 towards the end of the First World War to guarantee the rapid transport of troops and their supplies. Its founding incorporated established express service providers, including two companies now known primarily as financial service providers: Wells Fargo and American Express. The Railway Express Agency did not operate its own railroads, but purchased hold space from railroads and, beginning in 1927, from airlines, and paid a commission on sales (Frederick and Lewis 1941). In cases where express shipments were transported by air, delivery was either made directly by delivery trucks or through local depots. A 1933 newspaper article describes the process exemplified for shipments that arrived by air in Newark, New Jersey and were destined for New York. From the airport they were trucked to the REA depot in Newark, from there by train to New York, and from there again by truck to the consignee (N.N. 1933). The thoroughly timed ground network guaranteed fast pre- and post-carriage, and thus true door-to-door deliveries within a few days. In light of the costs express service remained a niche business for the airlines, contrary to their expectations, especially compared to the revenues generated by regular mail (Wensveen 2015, p. 366). It was particularly suited to sending cheques and urgent documents – the same products that would form the bedrock of DHL Express’s business in 1969. After a protracted strike, the rise of competitors such as UPS in the core business, and litigation, the company fell into bankruptcy in 1975. The airlines then developed their own express services, but without being able to offer a similarly comprehensive network as was possible under the REA umbrella.

2.1.2.2 Courier Consignments In order to deliver items the same day it is generally not possible to route them via distribution centres. Courier shipments are those that are transported individually and accompanied personally. They usually are of lower weight and volume and are picked up and delivered in person. They are transported by road or rail, and less frequently by air. The market is dominated by small and medium-sized companies, such as local bicycle couriers. The company Go! is one of the few providers with an international presence in Europe. And yet, the roots of the DHL corporation go back to courier services. In the early days, one of the company’s founders, Larry Hillblom, transported shipping documents in his personal luggage on flights between Hawaii and California and then delivered them personally (Scurlock 2012). An example of an international courier service from today is time:matters GmbH, a subsidiary of Lufthansa Cargo. It primarily uses airplanes for its urgent, high-priced shipments. A smaller portion of the approximately 500,000 shipments per year are transported by on-board couriers, where personal constant supervision is guaranteed. Time:matters relies on couriers in 40 countries.

2.2 Advantages

41

2.1.3 Conventional Air freight Conventional airfreight is that where the individual shipment unit is heavier than 31.5 kg and which is not provided from a single source but with the involvement of different parties. The consignments are usually not sorted in automated facilities. Conventional airfreight involves very heterogeneous products, often a hodgepodge of goods with different characteristics and requirements.

2.1.3.1 Perishable Goods Exporters of perishable goods, e.g. flowers, vegetables or fish, often rely on air transport. Shipping is a form of creative air freight in the sense that it created a market that previously could not be (Schüller 2003, p. 10; DLH 1967, p. 41). For example, fresh fish and tropical fruits from Africa can hardly be transported in time to consumers in the Middle East or Africa by land or water. However, if the transport of these goods takes longer than a few days, the goods are no longer fit for consumption. 2.1.3.2 Goods of Value The situation is different, however, for goods of high value, such as capital goods or luxury items, which could alternatively be transported by other means. It is clear that air freight, with the exception of the above-mentioned perishable goods, mainly comprises goods that have a relatively high value in terms of weight. The aircraft manufacturer Boeing estimates that air shipping is justifiable for goods with a value of at least USD 16 per kilo (Boeing 2014b). Purely commercial considerations play a role for goods with a high value. A shipment that has been produced but not yet sold to the final consumer ties up capital, which has bears interest. If these costs exceed those of transportation, air freight is the cheaper alternative. 2.1.3.3 Emergency Assistance and Urgent Replacement Products In addition, air freight is also used to transport items whose sales value tends to be low. These include urgently needed documents or products, such as spare parts, whose actual material value is rather low, but whose early arrival at the destination can help minimize opportunity costs or even save lives. For example, the value of a drill pipe is low compared to its heavy weight and hardly predestined for air transport. However, the transport costs become neglible when put in relation to the downtime costs of an oil production platform. Why are certain goods transported by air, others by rail, sea or road? The answer is found in the advantages and disadvantages that the product brings.

2.2 Advantages Air freight is particularly suitable for products that are valuable and need to be transported particularly quickly and reliably over a longer distance (Göpfert and Braun 2009; Rodrigue et al. 2013). The advantages are expressed in lower capital costs, insurance premiums,

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lower packaging costs and cheaper pre- and post-carriage costs. The lower ancillary costs partly compensate for the higher actual transport costs.

2.2.1 Lower Capital Costs During Transport The transport of air freight is fast. In the fastest, and most expensive segment by weight rate, courier and express shipments, transit times of less than 24 h can be achieved even for intercontinental shipments. A standard intercontinental freight shipment takes an average of 6 days from the shipper’s ramp to that of the consignee, even if the actual transport by air takes only half a day or 10% of the total transport (Damsgaard 1998). The reason for this is that shipments must first be transported to the point of departure, consolidated, packed, and prepared for shipment in terms of customs. This process usually takes 2–3 days. This is followed by the actual flight, for which 1 day may be allocated. The transport usually includes at least one stopover with corresponding transit. Finally, another 2–3 days can be expected for deconsolidation of the shipment, customs clearance and transport to the destination. Almost all mobile phones and higher-end laptops are flown. The reason for this is the sober weighing of transport costs against the cost of tying up capital. The example of smartphones produced in China and sold in Europe illustrates this. A typical mobile phone weighs approximately 400 g including packaging and accessories. The size of the packaging measures 7 × 0.7 × 14 cm. A container would hold approx. 40,000 units. At a sea freight rate including pre- and on-carriage of about 4000 US dollars, the transport costs would be about 10 cents per unit. The air freight costs, again including pre- and on-carriage are set at 1 US Dollar per unit. How can air freight be advantageous with this? Let us assume that the manufacturer calculates with a cost of capital of 5%. The weighted average cost of capital (WACC) is significantly higher than the return on fixed-interest investments. In simplified terms, they consist of the costs of debt and equity (Brealey et al. 2011, p. 216 ff.). Since owners are liable with their deposits and these are the last to be taken into account in the event of insolvency, they expect a higher return. With a selling price of USD 600 per unit and a sea transport of 50 days, capital of more than USD 4 per unit would be tied up. This sum is calculated by multiplying the selling price of USD 600 by the cost of capital of 5% multiplied by 50 days divided by 360 days. In contrast, for an air freight shipment with a transit time of 7 days, the capital commitment cost is only about 60 cents. If the savings in terms of packaging and insurance are added to the air freight shipment, it is easy to see that the aircraft is regularly chosen as the cheapest mode of transport.

2.2 Advantages

43

This relatively short transport time is impressive when compared to the alternative transport modes of sea and rail. A typical sea freight shipment from the Chinese hinterland to Germany takes about 6–8 weeks, including pre-carriage and onward carriage, packaging and customs clearance. Pure sea transport from East Asia to the German ports takes about 5 weeks. Transport by rail from the western provinces in China to Europe takes slightly less than 3 weeks. It is remarkable that the transit time of air freight has hardly accelerated for decades. Despite technological progress, aircraft do not fly faster and processes on the ground are taking longer, instead of quicker due to stricter safety regulations.

2.2.2 Lower Inventory Costs Due to Speed and High Reliability An even more important, cost-reducing effect of the short transport time is another. It reduces the need to store goods to ensure supply. If, for example, a European customer is in demand for a spare part, it can be dispatched in Asia and reach the recipient in almost the same time as if it was dispatched from a central warehouse in the Benelux countries. Sometimes such goods are produced only if in demand. This way airfreight helps to reduce inventory costs. The automotive industry, for example, has managed to minimise its inventory through just-in-time deliveries. These business models would not be possible without air freight.

2.2.3 Lower Insurance Costs Due to High Level of Security Transportation by air is very safe. Aircraft disasters usually attract a lot of attention, but they are very rare. Accidents involving private aircraft are more frequent, but are rare in civil aviation involving commercial aircraft. Between 2006 and 2015, only 65 aircraft crashed or were involved in accidents in this sector (excluding the successor states of the Soviet Union), with a total of 3191 fatalities (Boeing 2016b). It is misleading to assume that pilots of cargo aircraft take higher risks. As one pilot convincingly illustrates, they are just as attached to their lives as pilots of passenger aircraft. If a accident frequency of cargo aircraft is evident, it may be more because cargo aircraft tend to be older. Due to the low accident rate and short transit times, insurance costs are significantly lower for air cargo shipments than for other modes of transport.

2.2.4 Low Packaging Costs The cost of materials for packaging, labor costs are significantly lower than for sea freight. Shipments transported in container ships have to be packed more conscientious, in two respects. Firstly, container ships are exposed to potentially higher centrifugal forces in

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2 Characteristics of Air Freight

stormy weather on the open sea. The shipments must therefore be adequately secured. Secondly, container ships pass through different climatic zones. A ship sailing from North Asia via the Suez Canal on its way from Asia to North Europe in winter, for example, will encounter a wide variety of climatic zones, from very dry to very damp, from very cold to very hot. The design of the container may exacerbate the temperature conditions. With an external temperature of 25°, the temperature in a dark-painted container can reach around 50 ° with the appropriate solar radiation (GDV 2016). Of course, air freight shipments must also be appropriately packaged. Cartons, plastic boxes or plywood crates are usually suitable as packaging. Larger consignments are consolidated on pallets and held together with film or packing straps, as is usual for other modes of transport. A particular challenge is the increased security regulations that have been in force since 2013 and have increased the cost of packaging. According to the revised regulations, a consignment must be packed in a tamper-proof manner. This means that no other items, such as explosives, can later be inserted into a shipment. If a package is damaged or has an opening, it no longer qualifies as tamper-evident and cannot be accepted for shipment.

2.2.5 Lower Upstream and Downstream Costs Due to Closely Meshed Infrastructure One advantage of the aircraft is that virtually all economic centres can be reached by air. Long-haul aircraft require runways with a length of at least 2000 meters and rarely more than 2700 m. In Germany alone, more than 30 airports have a runway of more than 2000 m. Around the world, the network of airports is becoming ever more closely meshed. Infrastructure measures in Asia and the Middle East are particularly ambitious. China embarked on a project in 2012 to increase the number of commercial airports from 160 to 230. Proximity to an airport handling cargo reduces road transport costs and the risk of damage. For example, the on-carriage costs for an air freight shipment from Munich Airport with destination Ingolstadt are much lower than for a container shipment from the seaport of Bremen. Good accessibility by air is particularly interesting in destinations that cannot be reached well by ship and other modes of transport. Some major economic centres such as Mexico City, Bogota, Madrid, Brussels, Delhi or Beijing are not connected by rivers to major seaports. For certain shipments that cannot be easily transported on a rail car or by truck, shipping by cargo aircraft can therefore be a valid alternative to complex multimodal transportation.

2.3 Disadvantages

45

2.3 Disadvantages The fact that not more goods are transported by air is mainly due to the high costs. Ecological concerns indirectly lead to an additional increase in the cost of the service. And some products cannot be transported at all or only in special aircrafts due to their size or weight.

2.3.1 High Cost of Air Freight Air freight is expensive. The air freight rate for a larger shipment from Asia to Europe or North America with a chargeable weight over one tonne averaged between USD 3 and 4 per kilogram in 2015 (Drewry 2014). Shippers with irregular shipment volumes can expect a total cost of USD 10 per kilogram, from the ramp of the departure warehouse to the ramp of the consignee. The most important cost drivers in the operation of aircraft are kerosene and personnel. The share of personnel costs is inevitably lower for freight transport than for passengers, which further underscores the importance of the kerosene price. The price of kerosene fluctuates quite significantly, and the total cost of air freight is correspondingly volatile. After a sharp drop in rates in the mid 2010s shipping a kilogram of air freight costs 20x more than it would have costs shipping it via ocean freight. Even on a long-term average, the multiplier published by the English consultancy Drewry is around 12 times sea freight rates (King 2015).

2.3.2 Size and Weight Restrictions One of the main problems that stand in the way of shipping by air are size restrictions. A shipper is well advised to inquire the permissible dimensions in good time before shipping. The maximum size that can be transported depends on the type of aircraft and thus on the interior of the aircraft and, above all, the doors for the vast majority of aircraft, a consignment can only be loaded from the side. Parts that are longer than the width of the aircraft can only be pushed in from the side, which in turn restricts the maximum permissible width of the consignment part (Fig. 2.2). The problem is particularly virulent in passenger aircraft and explains why a doors are usually replaced when converting passenger aircraft to cargo aircraft. In the USA, the express company DHL was unable to load the standardized airfreight containers into aircraft of the acquired subsidiary Airborne Express (Airborne Express 2005). Airborne used former passenger planes that were converted to cargo planes and refrained from replacing the doors for cost reasons. As a rule of thumb, shipments that exceed 120 cm in length, 200 cm in width, or 150 cm in height at any point can be considered oversized. In the cargo

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2 Characteristics of Air Freight Width of Shipment

Length of shipment

Fig. 2.2 Maximum consignment mass when loading through the side cargo door. (Smith 1974)

version of the Boeing 747, packages can be transported up to a length of 20 m, a height of 300 cm, a width of 340 cm through the upward folding nose door. The weight can be another restriction. Only by exception, colli weighing more than 50 tons have been transported in a B747 in the past. The Russian airline Volga Dnepr Airlines, which essentially uses the Antonov AN-124, also transports shipments weighing up to 150 tons.

2.3.3 High Environmental Impact Even though the relative share of air traffic in pollutant emissions is only about 1–2% worldwide (Panahi et al. 2010), the industry is under great pressure to limit them. In addition to the emission of harmful gases, the problem of noise emissions is at the centre of public debate. In 2004, ICAO set itself three main objectives in the field of environmental protection: –– limit or reduce the number of people affected by significant aircraft noise; –– limit or reduce the impact of aircraft engine emissions on local air quality; and –– limit or reduce the impact of aviation greenhouse gas emissions on the global climate The Committee on Aviation Environmental Protection (CAEP) within ICAO is responsible for the main tasks relating to the implementation of the measures. Members and observers from various signatory states are represented in the committee. In addition to the three aforementioned problem areas of noise, greenhouse gases and locally effective pollutants, aviation causes further induced pollution, in particular through the construction and operation of airports and on the routes to and from the airport (Sterzenbach et al. 2009, p. 70). For example, trucks and vans transporting air cargo, as well as employees working at the airport who

2.3 Disadvantages

47

use cars to travel to work, contribute significantly to noise and dust pollution in metropolitan areas. In contrast to the first three, these factors are not described in detail below.

2.3.3.1 Aircraft Noise Noise is “undesirable audible sound […] which may cause disturbance, annoyance, impairment or damage”, according to the definition in DIN 1320. Operators of all modes of transport – land, sea, inland waterway and air – are aware of the problem of noise. The only exception are pipelines. According to calculations by the Federal Environment Agency, significantly fewer people in Germany are affected by aircraft noise than by noise from other modes of transport. According to this, as of 2016, approximately ten million people in Germany are affected by road noise during the day (six million at night), six million by rail traffic noise (five million at night) and approximately 800,000 residents are affected by aircraft noise (approximately 200,000 at night). This means that the problem of noise is nevertheless more virulent than in the case of maritime shipping. Seaports are usually located at a greater distance from residential areas, whereas aircraft take off and land over densely populated areas. Because aircraft carry far fewer goods than ships or trains, so emissions are particularly high in relative terms. ICAO has defined four balanced approaches to help limit noise emissions (ICAO 2008): 1. Reduction of noise at source, for example through the use of quieter aircraft and adjustments to engines, wings and landing gears 2. Local measures in the area surrounding the airport, e.g. passive noise protection, noise- based take-off and landing fees 3. Noise abatement operating procedures, in particular by enabling steep approach angles using satellite-based navigation. 4. Noise-reducing operating restrictions (operation restrictions) The 33rd ICAO Assembly adopted the approach in Resolution A33/7. The regulations were thus incorporated into the national law of the member countries. While emphasizing the balance of the initiatives, ICAO also prioritizes the first three measures and – if unavoidable – the fourth, operating restrictions. Operating restrictions are to be used only as a last resort, if the other measures do not lead to any significant improvement. The industry has already made considerable progress in limiting aircraft noise, the first starting point of the ICAO. The noise emissions of a modern B787-8 are around 80% lower than those of a four-engine B707–120 that made its maiden flight in 1957 (BDL 2015). Progress has also been made in the development of newer, steeper approach procedures. For example, landing approaches at Frankfurt/Main can now be made with a glide angle of 3.2° instead of 3°, provided the aircraft in question is equipped with a precision navigation system. Finally, improved aircraft utilization, both for passenger and cargo, has led to a more favorable environmental balance per passenger or tonne-kilometer.

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2 Characteristics of Air Freight

Despite the progress made, residents continue to be affected by the noise emitted particularly by cargo aircraft. For one, all-cargo aircraft have a significantly higher average age than passenger aircraft. While modern passenger aircraft are equipped with quieter engines, all-cargo aircraft often still have quite noisy turbines. Secondly, air freight, especially that of express service providers, is moved at night, where the population is more sensitive than during the day. Noise pollution not only affects people’s sense of well-being, but also their health. According to a study by the Federal Environment Agency, the correlation between noise and increased risk of heart disease was demonstrated using the example of Cologne Bonn Airport (Greiser 2010). Both of these factors partly explain why air freight in Europe is increasingly handled at more remote airports such as Hahn, East Midlands, Leipzig or Liège. These are often also locations with high unemployment, areas where local residents and politicians are more willing to accept noise.

2.3.3.2 Pollutant Emissions in the Vicinity of Airports Since airports are mostly located in densely populated areas, the problem of local pollutant emissions is a particular focus. ICAO’s efforts to reduce these are focused on landing and take-off (LTO) operations up to an altitude of approximately 900 m (about 3000 feet). In addition to the aircraft themselves, the operation of ground supply systems, such as loading devices and mobile power generators, the operation of stationary decentralized power generation systems and the entire vehicle fleet are among the sources of pollutant emissions. In order to reduce local emissions, infrastructure investments at airports are unavoidable. One starting point is the supply of power to aircraft. If they do not have to produce electricity and fresh air themselves during loading and unloading, turbines can remain switched off longer and kerosene can be saved. After a lengthy test phase, Lufthansa is now using aircraft tugs. The 800-hp so-called taxi bots move the aircraft not only to the gate but also across the apron to and from the runway. So far, the tow tractor pulls the aircraft types A320 and B737. Further generations should also be able to tow the B747 and the A380 (Lufthansa Technik 2015).

2.3.4 Greenhouse Gases The effects of aviation on the climate and the environment have not yet all been researched, particularly with regard to interactions in higher atmospheric layers (OECD 1997; Bernecker and Grandjot 2012). Nitrogen oxides (NOx) form ozone in the troposphere, which contributes to climate warming. NOx contributes to the decomposition of the greenhouse gas methane, which leads to a cooling of the atmosphere. Other factors such as soot or contrails also have a cooling or warming effect (Table 2.1). According to estimates by the Swiss Federal Office of Civil Aviation, based on the knowledge available in 2010, the climate is primarily affected by CO2 emissions in the long term (BAZL 2010).

2.3 Disadvantages

49

Table 2.1 The effect of aviation emissions on the radiation balance of the Earth’s atmosphere Output CO2 (carbon dioxide) NOx (nitrogen oxide) NOx (nitrogen oxide) Streaky contrails Spreading contrails Sulfates Soot

Effect Directly greenhouse-effective Produces the greenhouse gas ozone Breaks down the greenhouse gas methane Reflection, scattering and absorption of light Contrails can spread to form feathery clouds (cirrus clouds) Directly greenhouse-effective Soot absorbs thermal radiation, can act as a condensation nucleus

Action time after emission […] Over many decades Months

Heating/cooling Warming Warming

10 years

Cooling

Minutes to hours

Warming

Hours

Tending to warm, possibly strongly warming in the short term Weeks (troposphere) to Cooling months (stratosphere) Weeks Warming

BAZL (2010)

Since airplanes consume much more energy, measured by the weight of the transported goods, than rail or ship, the burdens on the environment are also higher. The CO2 footprint generated by air transport is many times that of ocean shipping. According to one estimate, the CO2 emissions of two tons of cargo transported over a distance of 5000 km amounts to 6600 kg CO2 when transported by air and only 150 kg CO2 when using a small container ship (Siegle 2014). This difference is not even compensated for by the usually shorter preand post-carriage by road to the airport instead of to the seaport.

3

Parties Involved

Abstract

Some 120 years after their invention, aircraft are an established technology. The real complexity in aviation is not based on mastering the machines – even if tragic accidents occasionally occur when new types of aircraft are introduced. Rather, the complexity is based on the many wheels that interlock every day and are interdependent in ways that are almost invisible from the outside. These wheels are all those parties involved in ensuring that an air cargo shipment reaches its destination on time and without damage.

A typical air freight shipment involves a large number of players. At least two groups of actors can be distinguished. On the one hand, there are those directly involved, i.e. the consignors and consignees of cargo, the airlines, airports, ground handling companies, customs authorities and freight forwarding companies, as well as the relevant institutions and associations (ICAO and IATA). On the other hand, there are those that indirectly contribute the success and security of air freight. These include, for example, air traffic control, the social partners and flight schools. (Their role will not be discussed further here, however, as their contribution to passenger and cargo air traffic is equally important). Supply chains are complex. This complexity is due in part to the large number of parties involved in customer-supplier relationships (Linz 2008, pp. 48–51). At the beginning and end of the supply chain are the shipper, often identical with the producer, and the consignee, who may or may not be identical with the buyer. The next party is the carrier. Furthermore, forwarding agents, airports and ground handling agents (GHA) are usually involved. Authorities such as customs, regulators and air traffic control are also important players.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_3

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Table 3.1 A distinction between logistics service providers Party Consignor or consignee (1PL)

Explanation Until the outsourcing of logistics activities at the end of the 1970s, it was common for producers to organise their own logistics. Today, companies sometimes still decide to organise and carry out transports themselves. To this end, they maintain their own permanent plant transport or carry out a transport themselves on a situational basis. Airbus is one of the few 1PLs in air freight that transports its accessories with its own aircraft Carrier (2PL) These maintain their own means of transport, e.g. a park of trucks, railway wagons or aircraft. It is the airlines or road hauliers that move air freight by air and on the ground. In view of the changes in international accounting, it is irrelevant whether he actually owns the means of transport, or leases them on a long-term basis Forwarders The focus of the 3PL is less on the execution than on the organization or and procurement of the transport. 3PLs are either freight forwarders or integrators that integrators provide supply chain solutions. Typically, a 3PL such as Kuehne + Nagel or (3PL) Hellmann relieves its balance sheet by purchasing services and investing less in its own facilities or equipment. In this respect, integrators such as UPS maintain their own fleets in the expectation of being able to offer greater reliability. Others, such as DHL express in Germany, like freight forwarders, also rely on service providers for delivery and collection Lead A 4PL or LLP hardly needs any fixed assets of its own; it is “Aszet light”. LLPs logistics orchestrate complex supply chains on behalf of and in collaboration with their provider customers. They are either independent companies, or organizationally belong to (4PL) a 3PL. In the latter case, LLPs combine their own services with those of their competitors Own representation

The different service ranges of logistics service providers are summarized in Table 3.1. In Anglo-Saxon usage, the term third or fourth party logistics provider (3PL or 4PL) is more common than that of freight forwarder. Attempts to conclusively define 4PL and LLP vary and are often contradictory. The definitions used here base on the American literature (Coyle et al. 2015). The providers differ primarily in two aspects – the way in which they provide their services and the extent to which they have to hold capital for this purpose (cf. Table 3.1). In air freight one will meet all the above, shipper and consignee, carrier, forwarder and 4PL. The nature of the cooperation and the interdependence are factors that make up the complexity of the service.

3.1 Consignor and Consignee The main institutions involved in the creation of air cargo services represent the shipper and the consignee. The shipper is usually the producer or owner of the goods being shipped. The consignee is usually the party to whom the shipment is addressed. The

3.1 Consignor and Consignee

53

shipper and consignee are the first parties among the logistics participants and the only ones without whom an air freight shipment cannot be imagined. All other parties can be dispensed with if necessary. An air freight shipment can be carried out without outside assistance and with a company’s own flight equipment.

3.1.1 Rights and Obligations of the Consignor and Consignee For the purposes of the IATA Conditions of Carriage, the shipper is the party whose name appears on the air-waybill as the contracting party. As a rule, the shipper concludes a contract of carriage with the airline. However, a shipper can also be a freight forwarder, for example if it acts as a consolidators of shipments from various shippers and consignors. The rights and obligations of the shipper are regulated in detail in the respective applicable laws and terms and conditions. In relation to pure air freight transport, the main obligations of the consignor are summarised briefly: 1. He shall prepare the goods for dispatch, i.e. pack them properly and securely for transport, label them and mark them with labels. 2. He must provide the necessary documentation, which is required, among other things, for subsequent customs clearance. 3. He shall, where applicable, observe the provisions relating to dangerous goods. 4. he is to pay the freight The consignee has the right to delivery of the goods as long as outstanding freight charges and any duties and taxes have been paid. The recipient or buyer has committed himself to the seller through the purchase contract. The contract of carriage is a construct that is concluded for the benefit of a third party, usually the consignee. Usually there is no direct contractual relationship with the carrier or forwarder. As simple as the rights and obligations may appear at first glance, the division of responsibilities is complex in detail. For example, the question of whether the consignor or the consignee has to pay the freight can rarely be answered in a binary fashion; instead, both parties usually bear part of the costs.

3.1.2 Allocation of Costs for Freight and Charges (Incoterms) As a rule, the seller and buyer agree during the purchase negotiations not only on the payment terms and warranties, but also on the handling and payment of the transport. In most cases, the basis for this is the Incoterms of the International Chamber of Commerce (ICC). The term Incoterms is derived from the abbreviation for International Commerce Terms. The clauses regulate which costs and which risk the respective contracting parties have to bear. They do not regulate the time of transfer of ownership, the consequences on

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liability in case of unexpected events and generally not the consequences of breaches of contract (Ramberg 2011, p. 17). The clauses are agreed voluntarily and are not a state legal norm (Bernstorff 2017, marg. no. 44). The Incoterms were first established in 1923, with six clauses at that time (Stapleton 2014). In 2010, the seventh revision to date was adopted. This version contains a total of eleven delivery clauses, four of which are reserved exclusively for shipment by inland waterway or sea vessel. The latter are FAS, FOB, CFR and CIF. They will not be discussed below. The most important obligations for the remaining seven clauses are summarized in Table 3.2. Four groups of clauses can be distinguished: • Group E: the collection clause (EXW) • Group F: the dispatch clauses where the seller does not bear the cost of the main transport (e.g. FCA). • Group C: the despatch clauses where the seller bears the cost of the main transport (e.g. CPT). • Group D: the arrival clauses (e.g. DAP) The two opposite clauses are Ex-Works, where the seller is only responsible for providing the documents and proper packaging, and Delivery, Duty Paid (DDP), where he makes the goods cleared for import available to the buyer on the arriving means of transport ready for unloading at the named place of destination. The Incoterms are the most common clauses in world trade. Other regulations, such as the Revised American Foreign Trade Definitions of 1941 or the Uniform Commercial Code (UCC) of 1951, have only regional significance. Since these regulations sometimes use the same designations but differ in content, it is necessary to specify the basis precisely in the purchase contracts, for example as “EX Works Buckingham Palace, London, UK in accordance with Incoterms ® 2010”. Table 3.2 Obligations of the buyer and seller according to Incoterms 2010 Packing Loading at the point of departure Export documentation Fast forward Handling costs departure Flgh. Air freight Discharge Handling costs arrival Flgh. Caster Customs clearance Insurance

EXW S B B B B B B B B B –

S: Seller, B: Buyer, SoB: Seller or Buyer

FCA S S S SoB B B B B B B –

CPT S S S S S S SoB B B B –

CIP S S S S S S SoB B B B V

DAT S S S S S S S S B B –

DAP S S S S S S SoB S B S –

DDP S S S S S S SoB S S S –

3.1 Consignor and Consignee

55

In order to be sufficiently precise, the contractual agreement between buyer and seller must also specify which version is to apply. In their versions, the Incoterms have sometimes defined the time of the transfer of costs and risks differently. For example, in maritime trade, the railing of the ocean-going vessel used to be considered the place where the risk passed to the buyer. In the 2010 version, it is the time when the goods are loaded on deck. In order to avoid later disputes, the address of the transfer should be named as precisely as possible. Such a precise delivery term that could be the subject of a sales contract would be, for example: “FCA VW Werk, Halle 8, 26723 Emden, Germany, according to Incoterms® 2010”. The Incoterms suitable in principle for air freight are Ex Works (EXW), Free Carrier (FCA), Carriage Paid to (CPT), Carriage Paid Insured to (CIP), Delivered Named Place (DAP), Delivered Terminal (DAT) and Delivered Duty Paid (DDP). Which Incoterm is recommended for the design of a specific sales contract depends on a number of factors.

3.1.2.1 Ex Works (EXW) When concluding the freight term “ex works” (EXW), the seller already fulfils his obligations when he makes the goods available to the buyer at an agreed point in time at the plant, factory or a warehouse. Medium-sized companies in particular often want to relieve themselves of the burden of organising transport (Schäfer 2019a). The clause stipulates that the buyer is already responsible for loading the first means of transport. It is neither the seller’s responsibility to load the goods onto the collecting means of transport nor to clear the goods for export. This means that the consignee must ensure that the carrier appointed by him loads the vehicle himself and brings all the necessary loading aids. In the case of small consignments that can be packed onto a hand truck, the consignee or the appointed truck driver can manage this. In the case of large and unwieldy packaging materials, however, he will often be dependent on the support of employees of the departure warehouse, for example by providing a forklift truck. This means that this freight term is hardly suitable for the international transport of goods, although it is still very often agreed in practice. If the consignor supports the loading, e.g. by having the goods transported by a forklift driver in the warehouse, he assumes a liability risk. As a rule, he acts without an order, unless the support was ordered by the buyer. In international goods traffic, a corresponding notification is not very practical. A further problem arises from the fact that the buyer must clear the goods for export. This means that the seller may be missing important documents, as the buyer has only a limited obligation to provide him with information. In most countries, exports are exempt from VAT and are therefore not included in the sales price. However, the seller must provide the tax authorities with proof of export – this can only be obtained with the cooperation of the buyer (Gardner 2012; Schaefer 2017).

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3 Parties Involved

3.1.2.2 Free Carrier (FCA) (FCA) The term that is more appropriate than “ex works” is “free carrier to a names place” The seller delivers the goods to the carrier or other person designated by the buyer or to another place. In addition to airlines, freight forwarders also qualify as carriers. The seller, unlike “ex works”, is responsible for loading the collecting vehicle and for clearing the goods for export. The named place may be, for example, the seller’s factory or the airport of departure. In the first case, the buyer bears the cost of inland freight in the exporting country; in the second, the seller bears the cost. It is in the interest of both parties to specify the exact place of transfer. 3.1.2.3 Carriage Paid to (CPT) “Carriage paid to” (CPT) means that the seller delivers the goods to a certain place or has them delivered by a carrier. This means that he concludes a contract of carriage and bears the costs of the transport. Unless otherwise agreed, it is the buyer’s responsibility to unload the goods. The importation of the goods in the country of destination is the responsibility of the buyer. A special feature of the clause is that the place of delivery and the place of destination are different. The risk already passes at the place of delivery, the place where the seller hands over the goods to the first carrier, although the seller has to bear the transport costs to the place of destination. As the seller has only limited influence on the choice of carrier and the mode of transport, intent to defraud is found more frequently with the CIP clause than with others. The contracting parties are advised to contractually regulate the seller’s discretion regarding the transport or to pay for the goods only upon receipt. In practice, payment step-by-step upon proper handover of the consignment can be ensured primarily by means of a documentary letter of credit (Ramberg 2011, p. 55). 3.1.2.4 Carriage and Insurance Paid to (CIP) The carriage and insurance paid to (CIP) clause corresponds to CPT in that the seller also arranges and pays for transport to a named destination. In addition, he takes out transport insurance to compensate the buyer in the event of loss of or damage to the goods. The transfer of risk is, as with DPT, at the moment the goods are handed over to the carrier. However, according to the clause, the seller is responsible for taking out transport insurance with minimum cover. This coverage is only 110% of the sales price in the currency of the purchase contract, and is thus usually insufficient from the buyer’s point of view. The buyer will therefore either contractually insist on higher cover or arrange insurance with higher cover himself. 3.1.2.5 Delivered to Named Place of Destination (DAP) Under the delivered at place (DAP) clause, the seller organises and pays for the transport to an agreed place and bears the transport risk until then. Compared to DAT, the responsibility therefore also extends to the transport from the airport terminal in the country of destination to the place of destination.

3.1 Consignor and Consignee

57

He shall place the goods at the disposal of the buyer at this place, to be specified exactly, without arranging for unloading. The handling of import formalities and import duties is the responsibility of the buyer.

3.1.2.6 Delivered to Terminal (DAT) Like DAP, DAT is also newly included in the Incoterms with the 2010 revision. The term “delivered to terminal named place of destination” replaces an older clause (delivered ex quay (DEQ)), but is expressly also suitable for other means of transport than the ship. The ICC’s application note on the interpretation of the trade clause indicates that an airport terminal may also be the appropriate destination (Bernstorff 2017, p. 367). As international airport terminals are sometimes quite large, to avoid disputes, even the unloading point in the terminal should be specified. The seller bears the costs of transport to this place and signs insurance up to this place. Unloading at the place of destination is in principle the responsibility of the consignee. The costs incurred up to this point are the responsibility of the seller. 3.1.2.7 Delivered and Duty Paid (DDP) The clause “delivered, duty paid to named place of destination” is usually just as unsuitable for international transport as Ex Works. In a way, this is the mirror image of “ex works”, as the seller organises and pays for the transport to the destination and bears the transport risk. The seller is also responsible for taking care of import formalities and import duties. In very many cases it is difficult to comply with these obligations. For example, import VAT is only refunded if the buyer had the power of disposal at the time of import. This is precisely not the case with DDP (ICC Austria 2012). 3.1.2.8 Considerations Unfortunately, there is relatively little information in the literature on the prevalence of the respective supply clauses in practice. A study by Tompkins Associates on behalf of the Supply Chain Consortium provides some indications (Ferrell and Tompkins 2011). The most common clause is FOB, which is common in ocean freight, followed by DDU, which has been replaced by DAP. EXW follows in third place. The study confirms the observation that Ex Works remains one of the clauses most commonly agreed despite any doubts about its suitability. Of the C clauses, only CIF was of prominent importance. Contrary to the naive belief of some, there is no “free lunch” in international trade. An importer does not save on transport costs by choosing DDP. Sellers include the costs of transport, insurance and customs clearance in their sales prices. The purchase price increases depending on which services are included. In principle, it can be stated that the party with better bargaining power vis-à-vis the carriers should also pay for the transport leg. For example, in traffic from China to Europe, the FCA clause is advisable because Chinese exporters are often better able to organise the first transportation leg within China. They are usually better acquainted with the local

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supply of efficient carriers and are more likely to be able to circumvent administrative hurdles in the export process. The German importer, on the other hand, usually has larger transport volumes than the Chinese producer and thus has access to more attractive rates than his Asian contract partner. He will therefore prefer to bear the air freight costs directly. Conversely, for a large exporter, such as a German mechanical engineering company, the freight term DAP is recommended if it can purchase the air freight more cheaply than the Asian buyer. The reason why certain clauses continue to exist despite their lack of suitability can best be explained by the traditional inertia of some organizations. Where the predecessor already favoured a clause, the successor adopts it without fundamentally questioning its meaning. Often, the same clause is used indiscriminately for different commercial transactions (Malfliet 2011). Another explanation lies in the lack of know-how of those responsible in export departments. For example, in the case of EXW, the seller often supports the loading at the point of departure without knowing the liability risks (Schaefer 2017).

3.2 Airlines Airlines primarily provide for the transportation of passengers and cargo. Less often, they organize transportation to and from the airport. For most airlines, cargo is an insignificant by-product. In 2015, cargo accounted for just 7% of total aggregate revenue reported by IATA members. In the years between 1950 and 1990, the share still oscillated between 10 and 12% (Table 3.3). Why is air freight not a more significant revenue generator? One possible answer is that the product has for a long time been neglected in favor of passenger operations: Cargo was, and still is, generally viewed by network carriers as an additional contribution, as extra revenue to the more profitable passenger operations. The majority of airlines have delegated sales with end customers to freight forwarders, placing themselves in a position of dependency. The dominant position of the forwarders is unsatisfactory for most carriers. In general it is the 3PL that decides which airline is used for a shipment. The opportunities for a carrier to differentiate itself from its competitors in the freight sector are very limited (Xianquin 2017). Table 3.3 The shares of passenger, mail and cargo in airline revenues over time (Allaz 2004, p. 335) Year 1951 1960 1970 1980 1990 1999

Passage 78.3% 84.9% 85.6% 86.4% 88.1% 86.5%

Mail 9.1% 5.2% 3.8% 1.9% 1.3% 0.8%

Cargo 12.6% 9.9% 10.6% 11.7% 10.6% 12.7%

Total 100% 100% 100% 100% 100% 100%

3.2 Airlines

59

3.2.1 Business Models While in the past there were still various mixed forms, over time different business models have emerged with which airlines appear on the market. Today, four clearly distinguishable models can be distinguished: 1. The network carriers, abbreviated to FSNC (Full Service Network Carrier) airlines. They serve the market with a comprehensive range of services and operate a wide- ranging network. In American, the term legacy carrier is also commonly used. It describes airlines which, unlike the so-called low-cost carriers, were already active before deregulation. 2. The integrators, led by UPS, FedEx and DHL Express, who focus more on the urgent transportation of small shipments such as packages and documents. They are called integrators because they integrate the entire supply chain, including the cargo aircraft and the pickup or delivery vehicles, into one service. 3. The cargo-only airlines, which transport only general cargo and no passengers. 4. LCCs (low-cost carriers), focus on transporting passengers over short – and medium- haul routes. LCCs, like the category of holiday airlines, do not maintain networks but primarily offer point-to-point connections. In an older analysis, the German Aerospace Center also distinguishes between regional airlines, holiday airlines and hybrid carriers (DLR 2008). Today, however, these segments are only marginally relevant at best: 1. Regional airlines operate services within a country or between different countries. Due to the use of smaller aircraft, these have higher costs than LCCs. In most cases, the model is no longer economically viable. The majority of independent European regional airlines are today either insolvent and liquidated, such as OLT, or have been taken over by larger airlines. The majority of regional airlines are now de facto part of network carriers, such as United Express in the USA or Eurowings as a subsidiary of Lufthansa. 2. On medium-haul routes, the sub-segment of holiday airlines is increasingly similar to that of LCCs and can therefore be assigned to this category. On long-haul routes, the service offerings of the leisure airlines and the network carriers have converged to such an extent that a differentiation can hardly be justified. 3. The hybrid carriers mentioned in the DLR study have since disappeared from the market. TNT was taken over by FedEx, Aer Lingus by IAG and Air Berlin went bankrupt. As a result, the four segments mentioned, LCCs, network carriers, pure cargo airlines and integrators, describe the market of civil aviation sufficiently accurately, even if one abstracts from the pure cargo business.

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Cargo Revenues (2006, Bn. USD) 38,6

33.7

30.6

8.0

8.5

Passenger Airlines that carry freight under deck only

Pure Cargo Airlines

n/a LCC

Combinaon Carrier

Integrators

Fig. 3.1 Airline cargo revenues (broken down by business model)

Most cargo is transported by integrators and network carriers, as Fig. 3.1 illustrates. The latter either have their own cargo-only aircraft or load cargo exclusively into passenger aircraft. A smaller share of total cargo is transported by carriers that focus exclusively on this segment.

3.2.1.1 Full Service Network Carrier (FSNC) Most network carriers also transport freight to some extent and are then referred to as combination carriers. The segment accounts for approximately USD 40 billion in revenue (Gildemann 2018). Over shorter distances, these airlines usually only transport express, courier and mail shipments. Heavier goods are not usually flown over shorter distances, as the aircraft deployed are usually too small to carry freight or loading the aircraft would be too time- consuming. On medium and longer routes, cargo is loaded as long as the cargo space, flight schedules and capacity utilisation permit. Figure 3.2 shows that Asian carriers such as China Airlines (CI), Cathay Pacific (CX), Qatar Airways (QR) and Korean Air (KE) are much more involved in the cargo business than the US carriers United (UA) and American Airlines (AA). The cargo business here is largely delegated to the two integrators FedEx (FX) and UPS (5X). The leading American legacy carriers United, Delta and American Airlines did not maintain their own cargo aircraft. They only offer cargo space below deck. In view of the unsatisfactory profitability of pure freighter aircraft, competitors in Europe and Asia have also adopted this business model. These include all three major US airlines. Also European and Asian companies such as BA/Iberia (IAG), Finnair and Japan Airlines. These have

3.2 Airlines

61

Passenger and Freight Volumes of Leading Cargo-Carriers (2017) 18000 FX

Cargo Volumes (FTK . Thsd)

14000 12000

EK

5X

CX QR

10000 8000 CX 6000

True Combinaon Carriers

Pure Cargo Carriers

16000

RU 5Y PO

4000

KE CI OZ BR

SQ NH EY KL

CA

CZ

LH

TKBA AF

2000 0

UA

AA

PAX Airlines with limited Cargo Acvies

0

50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000 Passenger-Volumes (RPK, Mio.)

Fig. 3.2 Passenger and cargo volumes of the largest cargo airlines (Air Cargo News 2018c)

divested their own freighters in recent years and rely exclusively on passenger aircraft to transport cargo. In the past, Finnair had operated its own MD-11 s and B747s, among others. IAG Cargo replaced the service with its own freighters by cooperating with Qatar Airways. The flight schedules of these carriers do not always meet the needs of shippers. Ideally, goods that have been completed during the day are picked up in the afternoon by short-haul vehicle, transported to the airport and shipped onwards the same night. On the transatlantic, for example, this is only possible for transports in the direction of Europe, but not for flights from Europe to North America, as passenger planes usually depart in the morning. In the overall view of the cargo carried, these airlines do not play a special role. Only 10% of cargo sales are handled by combination carriers that do not manage their own freighters (Boeing 2018b). Unlike the US carriers, some of the European and Asian carriers have freighter-only aircraft. 38% of cargo revenue is generated by FSNCs that operate their own freighters. For example, Lufthansa Group has MD-11F and B777F aircraft in 2019 and Air France-KLM has B747F and B777F aircraft. On the Asian side, Cathay Pacific, headquartered in HongKong, and Korean Airlines are among the world’s leading cargo carriers. These airlines can offer shippers a better deal by using freighters. Firstly, because freighter aircraft can accommodate larger shipments and secondly, because the departure times are not based on the needs of the passage. In the aforementioned example of the transatlantic route, where passenger aircraft carry cargo to North America no earlier than the morning of the following day, LH Cargo offers night flights with freighters from Munich and Frankfurt.

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3.2.1.2 Integrators The three major integrators operate their own airlines to varying degrees. The term integrator can be traced back to the fact that integrated services are offered, from the sender’s door or ramp to the recipient, and for this purpose the company maintains its own integrated fleet of aircraft and vehicles based on highly integrated IT systems (Onghena 2011). • FedEx Express, which formerly operated as Federal Express, is the largest airline in the world by cargo volume. In 2017, FedEx Express operated 420 aircraft. • UPS Airlines is the airline of United Parcel Service, Inc. It was founded in 1971 and is headquartered in Louisville, Kentucky, where UPS’s central air hub is located. UPS Airlines operated 237 aircraft in the comparison year. • Deutsche Post DHL Group maintains a fleet of more than 250 dedicated aircraft, of which 190 are purely freighter aircraft. Control is exercised through a number of different shareholdings. As a wholly-owned subsidiary, DHL Aviation is not an airline, but merely an umbrella organisation for various airlines, many of which carry the name DHL Aviation. European Air Transport Leipzig GmbH is one of the main pillars. This company alone operates more than 30 A300, A330 and B757 freighter aircraft serving destinations in Europe, Africa and Asia. In addition, the Group holds 50% of the shares in a joint venture with Lufthansa AG, Aerologie GmbH in Leipzig. Aerologic flies ten B777s (as of 2018) to and from destinations in the DHL Express network in Asia on weekdays and for Lufthansa Cargo on weekends. Polar Air is a US cargo airline, 49% of which is owned by DHL and 51% by Atlas Air Worldwide Holding. US legislation requires that at least 50% of the shares and 75% of the voting rights in US airlines are held by locals (Bitzan et al. 2014).

3.2.1.3 Cargo-Only Airlines Today, scheduled cargo carriers are less common than in the past. Only 10% of cargo revenue, or $8 billion, is generated by airlines operating freighters exclusively. With the advent of wide-body aircraft, passenger planes were able to load cargo at marginal costs. The low market rates weighed on the returns of cargo-only airlines, which operate at full cost. Some carriers became insolvent or were taken over by FSNC and integrators. A prominent example of this is the pioneer cargo airline, the American company Flying Tiger. With its fleet of DC-8 s, it was for a time the largest cargo airline in the world. After economic difficulties, it was taken over by Federal Express in 1989 (Adelson 1988). Some remaining operators are Cargolux, Nippon Cargo and the two subsidiaries of the Volga Dnieper Group, Air Bridge Cargo and Atran Airlines. CargoLogicAir (CLA) is a start-up from 2015, with close ties to the Volga Dnieper Group. Polar Air is a joint venture between Atlas Air (51%) and DHL (49%). The aircraft are primarily used on behalf of DHL Express, but major air 3PL such as Kühne + Nagel, Expeditors and Nippon Express are also among its customers (Polar Air Cargo 2018).

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Somewhat larger is the number of cargo airlines that do not maintain networks but operate exclusively on a charter basis. Such business is usually conducted outside the usual IATA agencies. Typical customers for charters include other airlines, express service providers, major freight forwarders, aid agencies and the military. Given the finite demand and financial commitment that must be made to maintain regular operations, the charter model is the more realistic business option, especially for smaller, lower capitalized companies. An example of this is Western Global Airline, based in Estero, Florida (USA). As of 2018, it maintained an older fleet of 14 MD11Fs and 2 B747–400BCFs on wet lease and for charter (Western Global Airlines 2018). The Volga-Dnieper Group includes Volga- Dnieper Airlines, which is responsible for charter operations within the group of companies. It is the world’s largest operator of AN-124 s, of which it had twelve aircraft in service in 2018. Atlas Air is another provider of charter services. The company generated approximately half of its revenues from this segment in each of the years 2014 to 2016, followed by revenues from the leasing (ACMI) segment (Atlas Air 2017).

3.2.1.4 Low Cost Carrier (LCC) The segment that was only made possible by the deregulation of the airline markets and has experienced decades of growth is that of the so-called low-cost carriers (LCCs). The business model of these airlines is based, among other things, on the fact that aircraft only stay on the ground for a short time at a time. The time it would take to load the aircraft with air freight is at odds with this business model. Globally, LCC practices in dealing with air cargo differ: • The leading European LCCs EasyJet and Ryanair mostly do not offer the possibility to transport air cargo. The former airline Air Berlin offered limited air cargo transport through its subsidiary Leisure Cargo (Siegmund 2016). In addition, airmail was sometimes carried or aircraft were used to transport mail at night on a few routes. In the past, for example, Air Berlin aircraft were used at night on behalf of Deutsche Post. • In the U.S. the pioneer of the LCC industry, Southwest Cargo, offers a limited service for the transportation of air cargo between airports (Southwest Cargo 2015). Transportation from the shipper’s door to the consignee’s door requires the involvement of courier services. The focus is on transporting very urgent cargo that will be loaded on the next plane out (NFO, next flight out), perishable goods, and human remains. Cargo must be dropped off no later than one hour before departure, and can be picked up one hour after arrival. The weight of normal cargo is limited to about 100 kg, and that of human remains to about 250 kg. JetBlue, another American LCC, has not transported air cargo since 2015 (JetBlue 2016). • The picture is somewhat different in the Gulf region and Asia, where, at least in the past, numerous LCCs such as AirAsia, FlyDubai and Jazeera have transported air cargo (Morrell and Klein 2018, p. 88 f.).

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Given that major players in the LCC market, such as Ryanair, have stayed away from the cargo market and others, such as Jet-Blue, have exited the segment, it is questionable if LCCs will ever play a significant role in North America and Europe. In principle, the space on planes is available, as travelers generally check in little baggage to avoid costs. However, the additional revenue and distribution that could be generated in the cargo market does not justify the time lost and therefore the costs incurred by loading and unloading cargo on the tarmac. On top of this, on many important intra-European routes trucks and vans can also deliver freight in a short time at much lower costs. As LCCs increasingly open up to long-haul, this calculation may shift in favour of cargo. One European carrier entering the air cargo market is Norwegian. Unlike its direct competitors Ryanair and EasyJet, which are limited to short – and long-haul, Norwegian also serves long-haul destinations, including Asia and the US. In 2013, the airline launched Norwegian Cargo, its cargo subsidiary. On these routes, dwell time on the ground is longer, making loading aircraft with cargo less of a bottleneck. Norwegian operates the B787 Dreamliner on long-haul routes, which accommodates ULDs (Norwegian Cargo n.d.). A similar perspective could open up if Lufthansa were to acquire Condor, a LCC in the long- haul segment.

3.2.2 IATA and ICAO Airline Codes The IATA and ICAO assign designators with which airlines can be uniquely identified. Originally, both designators were identical. They were specified by ICAO and, if an airline was a member of IATA, adopted by the latter. Since the deregulation of the markets, as a result of which many new airlines were founded, the systems have separated. IATA codes are assigned on the basis of Resolution 762. They consist of two digits, letters and numbers respectively. ICAO codes have consisted of three letters since 1987. This allows more combinations than the IATA system. However, IATA does not require more combinations for its fewer than 300 members (Table 3.4). In practice, the IATA codes are usually more common because they are more concise and have longer been in use. They also designate the respective flight number, e.g. flight BA001 from London City (LCY) via Shannon (SNN) to New York (JFK). For billing purposes, IATA has also assigned three-digit number combinations. They can be found on tickets and air waybills. For Deutsche Lufthansa, for example, the three-digit code is “220”. Occasionally, the ICAO code has also become established, e.g. for ANA, for All Nippon Airways, or a different designation, such as ABC as an abbreviation for Air Bridge Cargo.

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Table 3.4 Markings and codes of selected airlines Airline Air Canada Air France Air Bridge Cargo All Nippon Airways British Airways

IATA designation AC AF RU NH BA

Cargolux Cathay Pacific China Airlines Etihad Airways Emirates Korean Air Lufthansa Nippon Cargo Airlines Qantas United Airlines

CV CX CI EY EK KE LH CONCENTRATION CAMP QF UA

IATA code 014 057 580 205 125

ICAO marking ACA AFR ABW ANA BAW

– 160 297 607 176 180 220 933

CLX CPA CAL ETD UAE KAL DLH NCA

Homeland Canada France Russia Japan United Kingdom Luxembourg Hong Kong Chinese Taiwan V.A.E. V.A.E. South Korea Germany Japan

081 016

QFA UAL

Australia USA

Own representation

3.2.3 Success Factors In the very heterogeneous air freight market with a large number of providers, price is largely a datum set by demand. Innovative products are quickly copied and rarely form the basis for lasting competitive advantages, as the introduction of temperature-controlled airfreight shipments exemplified. As a result, airline success is achieved primarily by the consistent operational management of revenues and costs, and less often by strategic long shots. The embeddedment of these functions tend to drive the success. This is particularly evident in the low-cost carrier segment. For example, the competence of Southwest Airlines and Ryanair to systematically reduce costs along the entire service chain and to pass costs on its stakeholders – passengers, pilots or airports.

3.2.4 Possibilities for Optimising Turnover Airlines have limited options to increase revenue. They can offer premium products, for example through flexible tickets or booking classes with higher-quality service, such as business class. Good service or customer loyalty programs that are perceived as attractive, such as Lufthansa’s Miles & More, can also lead to higher ticket prices. What applies to the passenger segment also applies to the cargo segment. With premium products such as

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temperature-controlled transports, the mix of heavy and light goods or express shipments, carriers are endeavouring to increase average yields per tonne. Otherwise, prices are largely determined by the intersection of supply and demand. An airline thus has three main levers to increase its revenues for a given flight material. It can optimise the utilisation of the aircraft deployed or differentiate the prices for the services offered. It can also increase average revenue by improving the quality perceived by customers.

3.2.4.1 Load Factor The passenger load factor is measured by the number of all paying passengers in relation to the number of available seats. In order to compare performance internally and with competitors within the framework of benchmarking, the key indicators are usually standardized on the basis of flight kilometers or miles. In the passenger sector, the load factor is expressed as a proportion of the capacity demanded (RSK, Revenue Seat Kilometre) in relation to the available seat capacity (ASK, Available Seat Kilometre):

Load factor Passage RSK / ASK number of passengers distance flown

/ avg number of seats / aircraft number of aircraft distance flown

Only paid tickets are taken into account as passenger kilometres, not persons taken along free of charge, such as pilots in transfer. Similarly, the calculation in the freight sector is made as a divisor of the paid freight (RCK, revenue cargo kilometre) and the available freight capacity (ACK, variable cargo kilometre). The practice of calculation sometimes varies. In the sample case, cargo includes actual air freight and airmail (British Airways 2009).

Load factor cargo RCK / ACK cargo tonnage distance flown

/ avg capacity offered / aircraft numberofaircraft distance flown

Lufthansa AG’s load factor in the Passenger Business segment was more than 10 percentage points higher than in the Cargo segment in 2017, as Table 3.5 shows. This is a typical phenomenon. It is due, on the one hand, to the stronger focus on the passenger segment and, on the other hand, to the more complex capacity planning in the cargo segment. This will be discussed in more detail in Sect. 3.2.5. The network carriers have learned from the low-cost carriers to improve the utilization of their own aircraft. This in particular by dynamically adjusting prices. As any passenger can observe, the chances of the neighbouring seat on a flight with an LCC remaining free are negible. This means, in both passenger and cargo, that the customer

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Table 3.5 Lufthansa Group key figures for 2017 Available seat-kilometres (ASK) in million Seat-kilometres sold (RSK) in million Seat load factor Freight tonne-kilometres offered (ACK) Freight tonne-kilometres sold (RCK) Cargo load factor

322,821 261,156 80.9% 15,619 10,819 69.3%

German Lufthansa

is “rewarded” if he buys capacity on a particular flight early and irrevocably. If she decides only a few weeks or days before departure, she usually pays more but the carrier will also make an effort to sell the last vacant seat. Often the price varies over the course of a week or even a day.

3.2.4.2 Increasing Average Revenue Through Quality Leadership In view of the high competitive pressure prevailing in the airline industry, ticket prices and freight rates are largely determined by demand. In the passenger segment, yield is usually expressed as RASK (Revenue per Available Seat Kilometer) on the basis of available seat kilometers (ASK). It is in the range of a few cents. At Lufthansa AG, it amounted to approximately 8.7 euro cents in 2017. The RASK is used, among other things, as a benchmark to compare the development of performance over time and in comparison with competitors. A provider can achieve higher average revenues if its services are perceived to be of higher quality. In the freight sector, the key quality components are the transit time between two airports (from acceptance to delivery), the damage rate and the reliability with which consignments are handed over to the consignee or his agent within the advised time window. Compared to the consumer goods sector, the term quality is more difficult to define for services. The quality of haptic goods is measured by the fact that they are ideally free of defects. In services, the subjective element of perception plays a more significant role. Parasuraman et al. have added significantly to the research on marketing of services (1985). Although they derive their findings from the consumer business (B2C), they can certainly be extended to the B2B sector. Their model is based on the idea that quality should be measured by the extent to which expectations and performance are congruently aligned over time (Lewis and Booms 1983). Thus they identify five gaps due to which customer expectations and the perception of the management (of a service provider) can diverge (Parasuraman et al. 1985, p. 44 ff.) (Table 3.6). Since the expectations of customers in the service sector are often not understood or insufficiently implemented, the risk of failure is high. As a result, customers turn away and switch to competitors. This risk is sometimes even greater in air cargo than in other service

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Table 3.6 Gaps in the provision of services Gap 1

2

3

4

5

Description Between a consumer’s expectations of a service and management’s perception of what those expectations are

Example from the air freight industry It may be that the appearance of a delivery person is important to the customer, but that this expectation is not known to a company. Service providers that customers may not trust are therefore used The inadequate translation of The airfreight industry is aware that transit perceived customer times of the standard product averaging six expectations by management days are difficult to communicate. This into specifications (quality realization has few consequences. Transit times specs.) have hardly shortened over the past 30 years The insufficient fulfilment of Management requirements must be understood the specifications. The handling by employees and they must be sufficiently process involves a large number motivated to comply with them. For example, of employees with different due to time pressure or lack of training, an training, motivation, pay and employee in the freight department may load a cultural backgrounds shipment in a ULD in a place where it is not intended to be loaded and damage occurs Between what the company A carrier that advertises quality must strive for communicates to the customer compliance at all locations as a performance standard and what is actually delivered Between the expectations of the For a premium product such as air freight, for customer and the perception of example, delays are rarely accepted as a rule. a service However, the perception of punctuality can be increased if the causes of a delay are credibly explained to customers

Parasuraman et al. (1985)

industries because the carrier and freight forwarder work with a variety of third parties. The carrier cannot fully control the behaviour of customs authorities, GHA, airport authorities, truck carriers. Quality is initially experienced subjectively. Against the background of their own expectations and experiences, two people will assess the quality of an airline such as British Airways differently. The air cargo industry, and indeed the shipping industry, has long struggled to define criteria against which quality can be objectively measured (Table 3.7). The Cargo IQ initiative launched by IATA helps to create transparency by standardizing the quality achieved by competitors and making it comparable. One of the key performance indicators (KPI) measured by Cargo IQ is the NFD rate, i.e. the percentage of shipments and physical or electronic documents that, based on individual agreements between carriers, were available for pick-up on time and the consignee was notified. NFD stands for “notified” (cargo and documents ready for pick-up at airline/handler the

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Table 3.7 Timely availability of freight and documents (NFD), based on individual agreements, in % for the month of January 2018 Air Canada Air France Cargo American Airlines Delta Etihad IAG Cargo KLM Lufthansa Cargo Qatar Airways Cargo SAS Cargo Singapore Airlines Cargo Swiss United Airlines

74% 76% 82% 84% 77% 80% 82% 85% 85% 80% 96% 79% 79%

IATA (2018e). Note: AirBridge Cargo, Cargolux, Cathay Pacific, China Southern, Finnair, Korean Air Cargo, Saudi Cargo and Virgin Atlantic either underreported or were still in the process of implementing CargoIQ during the reporting period

customer/forwarder is notified). NFD and FAP (flown as planned) are two key figures that receive special attention in Lufthansa Cargo’s reporting, which is based on the Balanced Scorecard (Winkler and Lehnhardt 2010). Cargo IQ supports carriers and their customers, after several attempts by the industry to measure quality. However, the parties involved have not yet achieved the desired level of quality with this. What is remarkable about the figures in Table 3.7 are the individual values. In hardly any other industry would customers be willing to accept reliability rates of 80%. The figures are sometimes also an indicator of the investment backlog that burdens the industry.

3.2.4.3 Product and Price Differentiation An airline that sets different prices for the same product in air cargo is engaging in price discrimination. In passenger air transport, with its high competitive pressure, price discrimination is widespread. A business traveller usually has to pay significantly more for her flexible, rebookable ticket than a tourist sitting next to her who bought his restrictive ticket early (Stavins 1996). However, there is also a view that the two products, the flexible and the restrictive ticket, are not one product that has been discriminated against, but two different ones. A product usually consists of a core product and services. An airline’s fullfare ticket is more valuable than a low-cost, non-refundable ticket. Opportunities to increase sales through price differentiation.

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1,50

1,50

1,20

1,20

0,90

0,90

0,60

0,60

0,30

30 Tons @ 0,75 $/kg

15 tons @ 1,20 $/kg

0,30

0,00

22 tons @ 0,62 $/kg

0,00

1 0

2 0

3 0

4 0

5 0

Revenues without price differnaon 22.500 $

6 0

1 0

2 0

3 0

13 tons @ 0,30 $/kg

4 0

5 0

6 0

Revenues with price differnaon 35.540 $

In this case, it seems more permissible to assume price gradations within a product line (Kotler et al. 2011, p. 632). These are not homogeneous products, but differentiated products with differentiated prices.

It is noteworthy that one of the first theoretical considerations on the subject of price discrimination relates to the transport sector. Jules Dupuit, a French engineer and later economist, remarked as early as 1849 on the practice of railway companies offering different products at different prices (Ekelund 1970, p. 275): It is not because of a few thousand francs that would have to be spent to put a roof over third class or to upholster the seats there that one or another [railway] company maintains open carriages or wooden seats […]. What the company is trying to do is prevent customers who can pay for second class tickets from travelling in third class

The price gradations allow a service provider to skim off the different willingness to pay of the customers. In the example, an airline succeeds in significantly increasing revenue on a flight by offering a differentiated range of products (Sterzenbach et al. 2009, p. 354 ff.).

3.2.4.4 Conflicting Objectives in Maximising Returns In the attempt not only to maximize revenue, but also to optimize it, airlines are faced with a conflict of objectives. Modifying a fictitious example from the passenger sector

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Table 3.8 Conflict of objectives between optimisation of capacity utilisation, turnover and yield per freight tonne own representation Tonnage booked standard (1.30/ kg) 25 13.5 5

Booked tonnage prime (1.90/ kg) 5 13.5 19

Sales 42,000 43,200 42,600

Yield per ton 1.40 1.60 1.78

Utilization 100% 90% 80%

(Rose 2013), the following scenario can be constructed: For a flight with a cargo capacity of 30 tons, a standard product is offered at US$ 1.30/kg and a premium product at US$ 1.90/kg. Table 3.8 shows three scenarios with very different results. In the first scenario the load factor is optimized and in the second the revenue. In the third scenario, the maximum yield per ton is achieved with a comparatively low load factor of the aircraft. Obviously, both a one-sided focus on revenue and on load factor fall short. The ability to estimate demand as accurately as possible in the granularity of individual flights and to align one’s own supply staggered by products and rates with it qualifies as an actual core competence, since it is not easily copied as shared knowledge of an organization. The factors that go into these forecasts include historical demand, macroeconomic developments, changes in general conditions, price developments, and the like. While revenue management systems in the passenger sector are already well developed, pricing in the cargo sector is still relatively crude for the most part and offers interesting potential for increasing yields in the future.

3.2.5 Revenue Management as an Integrated Approach to Revenue Enhancement Revenue management is a method of increasing revenue by optimizing the use of resources. In air cargo, it is understood as the integrated management of freight rates and available inventory, cargo space and transport containers (Kasilingam 2014). In cargo, the term Air Cargo Revenue Management (ACRM) has gained acceptance over other terms such as revenue management simply because it takes into account quantities as well as prices (Hertwig and Rau 2010). In this context, the management of supply volumes turns out to be the more complicated element and one that is significantly more challenging in cargo than in passenger traffic. Revenue management methods that are successfully used in passenger traffic are hardly suitable in freight traffic (Kim and Park 2012; Shaw 2011, p. 44 f.; Popescu 2006): • Passengers usually travel back to the starting point of the journey, cargo usually only in one direction. • Passengers are similar in weight, size and needs. Even passengers over 2 m tall and weighing 120 kg can usually manage to squeeze into an aircraft seat. Cargo, unlike passengers, comes in much more varied sizes and weights and sometimes has special

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temperature requirements in the hold. Larger sized consignments in particular cannot be handled easily. • A passenger will usually accept the temperature on board. Cargo, on the other hand, is often temperature-sensitive. Carrying pharmaceutical products or perishable goods such as flowers or fish makes it necessary to use special ULDs or to set up different refrigerated areas in the aircraft. In one flight, Mr. Smith may be asked to make room for Ms. Jones and use a later connection – a consignment of frozen fish cannot easily be substituted in the cargo hold with a machine tool of a different weight and packing mass. • Also, cargo differs in terms of its fragility and value of goods. In the hold, a fragile shipment may not be placed below a heavy shipment. On board, however, a small child can sit next to a heavy athlete. Valuable consignments, such as foreign currency, jewellery or watches, require even more attention. Passengers in first class tend to be more demanding than those in the rear of the aircraft, but generally do not require special handling. In one respect, however, planning cargo capacity is easier. While a passenger assumes a certain routing when he buys his ticket, cargo can be allocated with more flexibility. Thus, many roads lead to Rome or Hong Kong. As long as transit times are adhered to, a shipper is largely indifferent to how the goods are transported to the recipient. All these factors make the planning and sale of freight capacity particularly challenging. In practice, the majority of carriers follow a multi-stage process with different time horizons (Hoffmann 2013; Kasilingam 2014; Hertwig and Rau 2010; Yan et al. 2006; Popescu 2006; May et al. 2014). In long-term capacity planning, the network is optimized. In medium-term planning, capacities are secured through contracts with selected customers. In short-term planning, the remaining free capacities are sold on the spot market and the yield of the individual flight is optimized.

3.2.5.1 Long-Term Network and Capacity Planning Network management is the optimization of the overall network – instead of profit maximization of individual tradelanes (Sterzenbach et al. 2009, p. 307 f.). An airline plans its network in the long term after analysing the environment in economic, political and regulatory terms, if necessary with the help of market research (Franke 2017, p. 48). The scenarios incorporate findings about current demand, competitors’ activities and expected future developments. Based on market strategies, network scenarios are developed. These in turn form the basis for investment decisions and flight plans. In view of the lack of parity on many routes, it is often the case with freight-only flights that the return flight follows a different routing than the outbound flight. For passenger flights, this is the exception. On flight LX294, for example, SWISS flies to Dar es Salaam (DAR) with a stop in Nairobi (NBO), while the return flight is direct. In most cases, passenger aircraft fly back to their point of departure. The routing added to the flight schedule by LH Cargo in 2011 is far more complex. Twice a week, LH Cargo MD-11s flew to Dakar, Viracopos near Sao Paulo, Manaus, Quito

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and Bogota, and to Curacao for a technical stopover, before returning to Frankfurt (Lufthansa Cargo 2011). Such routing compensates for a lack of balance in demand. Manaus as a duty-free territory is an important import market for electronic goods, but not an export market. Accordingly, many perishable goods are shipped from Bogota. Quito and Bogota are high altitude cities, which limits the take-off weight. In order to load as much export goods as possible from the two cities, the stopover on Curacao has been included. An example of an even more complex routing is shown by Qantas flight QF7521 with a B747F. It flies the route Sydney – Chongqzing – Shanghai – Anchorage – Chicago O’Hare; on the return leg under flight number QF7558 from O’Hare – Dallas Fort Worth – Los Angeles – Honolulu – Sydney (Baxter et al. 2018). With such rotations, it is not possible for pilots to fly back to their starting point unless they would take it on another airline. A pilot flying a passenger aircraft from Frankfurt to Hong Kong will usually start the return flight after a few days’ rest. For cargo flights this is rather the exception. The stops also serve the purpose of regeneration, but not before a flight home, but to an onward flight to another location. Mission planning can even include a round-the-world trip, as in the example of a FedEx pilot. This involved routing Memphis – Paris, Paris – Delhi, Delhi – Shanghai, Shanghai – Memphis (O’Kelly 2014). A mission is followed by an extended period of recovery at home, longer than would be common for the pilot of a passenger aircraft.

3.2.5.2 Medium-Term Capacity Planning Using the example of Lufthansa Cargo, Hellermann (2006) describes the process of how the airline itself manages the sale of freight capacities. The process begins with the publication of flight schedules, each of which is valid for six months. The available tonnage in the cargo hold is calculated in passenger aircraft, as described elsewhere, at the maximum payload minus the weight of the kerosene, the passengers, their baggage and their catering. Additional boundary conditions that must be taken into account are the expected temperatures, the air pressure and the condition of the runway. In front of this capacity, smaller quantities are kept free for express products based on forecasts, which are booked at short notice but also guarantee higher margins. The majority of the capacity is thus open for longer-term contracts (available capacity for contracts, ACC). When deciding how much of the expected capacity should be sold in the long term (long term contract, LTC), the carrier faces a classic conflict of objectives. By doing so, it secures a certain level of capacity utilization, but at generally lower revenues (Hertwig and Rau 2010). These are primarily concluded with a smaller selection of major customers, the key accounts. All airlines with significant cargo activities maintain corresponding partner programs with the relevant larger air freight forwarders. Freight forwarders and large shippers have two options to choose from to secure their capacity needs: • In the form of a Capacity Purchasing Agreement (CPA), whereby he undertakes to bring in defined tonnages on a specific route and on specific days of the week. This is a

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Block Space Agreement (BSA). The contracts generally have a term of 6–12 months and cannot be terminated prematurely. • That of a Guaranteed Capacity Agreement (GCA), whereby capacities are also booked here for a defined flight route on defined weekdays, but the booking can be cancelled free of charge up to 72 h before departure. If the cancellation is made at shorter notice, a penalty fee will be charged. Guaranteed bookings are also referred to as allotments. Hellermann reports that on average about one third of the capacity is sold on the basis of long-term contracts, but on some routes up to 70% and on other routes no tonnage at all (Hellermann 2006).

3.2.5.3 Short-Term Capacity Planning The remaining capacity is sold starting 30 days before departure, as a form of capacity control via the spot market (Hoffmann 2013; Slager and Kapteijns 2004). Here, shippers, smaller forwarders and those forwarders who have not secured their current requirements on a long-term basis can secure freight space. If, in addition, there is still capacity available shortly before departure, carriers approach selected target customers directly. In doing so, they offer special conditions for loading “ideal” freight. This consists of goods that optimise the weight/volume ratio – e.g. low-density cargo items if the flight is otherwise mainly booked with heavy packages, or temperature-sensitive goods. The tonnage – and by analogy the volume – available for freight is thus calculated as the difference between the payload, minus the weight of passengers, catering, their baggage, mail and additional kerosene (Kasilingam 1997). It can be regularly observed that airlines overbook their cargo space, i.e. they would not be able to fulfil their contract if all partners would also deliver the booked cargo quantities. The phenomenon of systematic overbooking is well known from passenger aviation. It has been practised since the 1960s (Rothstein 1971). Airlines calculate on the basis of empirical values with a certain number of passengers or freight that will not take the flight. Forwarders usually book more freight than they actually need in order to secure capacity and because long-term contracts generally offer more favourable conditions than the spot market. The penalties that the shipper or forwarder incurs for cargo space bookings that are not honored are small. They are usually less than the lost contribution margin of an underutilized cargo flight (Lin et al. 2017). The problem of overbooking could be reduced if there were a better exchange of data between carriers and airlines about the volumes that are inbound. However, the benefits of such an exchange lie mainly with the airline, rather than the freight forwarders (Feng et al. 2015). To improve the quality of forecasts, airlines would need to reward their core customers in some way for providing reliable data. If there is still a short-term excess demand for a specific flight, a spill, the airline is forced to prioritize the loading of the aircraft. The problem will be more pressing when more cargo is delivered or more passengers than expected appear on a passenger flight:

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• The additional weight of passengers and their luggage increases the take-off weight of the aircraft, requires more kerosene and thus reduces the capacity of cargo that can be carried. Standard values are used to calculate the weight of passengers, such as 88 kg for men, 70 kg for women and 35 kg for children (Morrell 2011, p. 160). IATA even recommends using 100 kg per passenger. • The extra baggage reduces the space available for cargo If, in addition to a higher number of passengers, adverse weather conditions make it necessary to take on more kerosene, the available capacity in the cargo hold is reduced even further. Only in rare cases is it possible to react to capacity fluctuations by using other aircraft or by making adjustments to the flight schedule. In practice, this means that on a passenger flight, cargo is abandoned in favor of baggage, since the contribution margin of passengers is usually higher. In the case of a freight-only flight, a decision is made on the basis of the freight rate paid and the importance of the customer as to which goods will be loaded on the scheduled flight and which will have to wait for a later connection. In the language of logistics, a shipment is rolled. The problem of temporary capacity bottlenecks occurs especially during the peak season in autumn, when goods are flown from Asia to Europe and North America for the Christmas trade. Meanwhile, January, August and December are typically low volume months (Murphy and Daley 2001). Unused cargo space, on the other hand, is perishable like hotel rooms that are not used. The ability to forecast demand as accurately as possible and thus make the best possible use of cargo space is a key success factor.

3.2.6 Airline Costs For these reasons, a carrier’s ability to increase revenues is clearly limited. Instead of increasing revenue, limiting expenses promises more sustainable success. The operating expenses of an airline can be summarized as follows (Holloway 2008, p. 273 ff.; Hwang and Shiao 2011): • Indirect costs: marketing and sales expenses, buildings and equipment, other overheads • Direct fixed costs: aircraft maintenance costs (depreciation and leasing costs, insurance), time-dependent maintenance, fixed personnel costs for crews, etc. • Direct variable costs: kerosene, usage-based maintenance, airport charges, overflight charges, variable personnel costs For combination carriers allocating costs to individual products is difficult. Some airlines choose to have the business units responsible for freight shipping purchase freight space from the parent company. This way, outsiders get an idea of the amount of each type of cost. However, the allocation of costs between freight and passage is to some extent arbitrary. In many cases, only variable costs directly induced by freight are allocated, in

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Table 3.9 Income statement of Cargolux for the financial year 2013 (USD million) Revenues Other operating income Aircraft lease expenses Aircraft maintenance expenses Other aircraft expenses Depreciation expenses Fuel Personnel costs and benefits Handling. Landing and overflying Trucking, truck handling and interlining Other operating expenses Operating profit Net financial costs Profit before tax

2013 1957 32 −32 −95 −7 −123 −919 −240 −287 −111 −114 60 −51 9

Percentage of total costs

2% 5% – 6% 46% 12% 14% 6% 6% 3%

particular those arising from ground handling sales, documentation and invoicing, and additional fuel requirements. If there is still room for freight in a passenger aircraft, but no longer for passengers, then the optimal freight rate corresponds to the marginal costs (Garrod and Miklius 1977; Miller 1973). The full cost is borne by the passengers. In such a case, air freight is a by- product that supports the profitability of the core passenger business. The additional revenue from the cargo business serves as a contribution margin in the overall account. The head of cargo at American Airlines put it this way some time ago: “Passengers won’t ride in the basement. So I have excess capacity, and that’s how I price the cargo (Trimble 1993, p. 313)”. This commercial decision is tantamount to subsidising freight at the expense of passenger traffic if passengers alone bear the fixed costs and a large part of the variable costs of flight operations. The full costs of the freight business can only be reliably derived for pure freight airlines. In the case of integrators, the road-based activities, especially in collection and delivery, distort the picture. The example of Cargolux can be used to illustrate the main cost components of a cargo airline (Table 3.9). The airline Cargolux is suitable for this purpose because it operates only one type of aircraft and, at least in the past, it has published annual reports although it was not listed on the stock exchange. Cargolux suffered from weak earnings for years. Even in the cited year 2013, the pre- tax return was only 0.5%, a pre-tax profit that was only marginally above break-even.

3.2.6.1 Leasing Costs Like any other company, airlines finance their investments either internally by investing undistributed profits or externally, by financial institutions granting loans or investors taking a stake in the company (Spremann 1991, p. 184 ff.). The funds are primarily used for the procurement of flight material. A brand new Boeing 747–8 Cargo has a list price of

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approximately $350 million, a B767 Freighter of approximately $185 million, and an Airbus A300-600F of $75 million. In view of these high acquisition costs, leasing is a viable financing alternative for fast- growing airlines. Smaller airlines also benefit from the discounts granted to larger leasing companies for purchase and maintenance. Airlines become operators of aircraft, while the aircraft become the property of investment companies (N.N. 2012a). Nevertheless, leasing is rarely the less expensive alternative to buying. A major reason for this is that the lessor wants to protect himself against the possibility that the operator under lease might handle the aircraft with less care than if he owned it. The lessor protects itself contractually against this risk by carrying out regular, costly checks.

Among the leading airlines, the following had a particularly high proportion of leased aircraft in 2010 (Golub 2010): Malaysia Airlines (97%), Mexicana (85%), Thomson Airways (86%) and Aerolineas Argentinas (84%). The top two lessors by far are Capital Aviation Services (GECAS) with 1450 from Stamford, CT (USA) and Ireland’s AERCAP with 1166 leased aircraft (as of end August 2016). Both companies generate revenues of more than USD 5 billion. The next lessor follows with only 445 aircraft and a turnover of USD 1 billion. Originally, as part of the General Electric Group (GE), GECAS only financed aircraft equipped with GE engines. However, this strategy has since been abandoned.

In the case of financing, a distinction is made between operating leases with a shorter term and financial leases with a longer term. In the case of an operating lease, the risk remains primarily with the lessor; in the case of a financial lease, the risk is transferred to a greater extent to the lessee. 3.2.6.1.1 Operating Leases Operational leases of aircraft extend over a maximum period of seven years, on average five years (Morrell 2013). Contracts are usually terminable against a manageable penalty payment. Given the shorter contract period and the greater flexibility that comes with it, the aircraft are mostly less specifically configured to the operator’s specific needs and often do not fly under the lessee’s brand. In the operating leasing of aircraft, so-called dry and wet leasing are the most common forms of contract. • Wet leases are generally more suitable for shorter-term contractual relationships, which can last between a single flight and up to two years. The most common form of wet lease is the ACMI, which stands for Aircraft, Crew, Maintenance and Insurance. Here, the lessor not only provides the aircraft, but also the crew and insurance, and takes care of the maintenance of the aircraft. The lessee, on the other hand, bears the costs for kerosene and pays the overflight and airport fees. • In contrast to a wet lease, neither personnel nor maintenance or insurance are provided by the lessor in the case of a dry lease. However, in a dry lease, which usually provides

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for a contract term of at least two years, the aircraft is flown under the operator’s Air Operator Certificate (AOC). At the end of 2013 Cargolux operated 22 aircraft, six of which were leased in the form of a dry lease. The total cost of the lease was $32 million, or an average of $5.3 million per aircraft. Specifically, the aircraft were as follows, with an average age at mid-year 2013 of 12 years (own calculation based on data from Planespotters 2017) • • • • • •

LX-ACV: B747–400BCF (23 years since first flight) LX-DCV: B747–400BCF (23 Y.) LX-ECV: B747–400S (4 Y) LX-OCV: B747–400F (14 J) LX-WCV: B747–400F (6 Y) LX-VCC: B747–8F (2 J)

Given a list price of more than USD 200 million for a new 747–400 Freighter, the leasing fees of EUR five million seem low. However, the leased fleet also included older, converted former passenger aircraft such as the LX-ACV, which made its maiden flight back in 1989 and was subsequently in service with Korean Airlines for 21 years, until 2010. This aircraft had reached the end of its economic life and was returned to Boeing a few years later. 3.2.6.1.2 Financial Leasing The financial lease is characterized by the fact that the aggregate leasing fees amount to a large part, usually 90%, of the purchase price, and the contract extends over approximately three quarters of the economic life. The contract generally cannot be terminated during its term, or by exception, only against high contractual penalties. Because of the long contract term, the aircraft can be configured and painted to meet the lessee’s needs. Most contracts include the option for the operator to purchase the aircraft at the end of the term. The instrument had tax advantages in the past, especially in the form of Japanese leveraged leases. Due to changes in legislation, it has lost some of its attractiveness (Morrell 2013, p. 242 f.). Nevertheless, the instrument remains attractive for fast-growing airlines. A large part of the fleet of the market leader Emirates, for example, is leased. An example of the financing arrangements is the contract that South African Investec Bank signed with Emirates in May 2016. Emirates is leasing four A-380 s over a 12-year period. Investec financed the $1 billion purchase price through a subsidiary with the help of banks and institutional investors in the Middle East, Asia and Europe. 3.2.6.1.3 Islamic Financing In view of the capital requirements of airlines from the Middle East and parts of Asia, manifested in particular in the rapid growth of the big three carriers Emirates, Etihad and

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Qatar, another financing instrument is increasingly coming into focus. The Koran prohibits Muslims from charging interest (“riba”) on monetary transactions. The prohibition of interest, with its Old Testament roots, is also anchored in Christianity and Judaism and proved to be an obstacle to investment and thus to growth until the late Middle Ages. In Islamic banking, finance and the real economy have to be related to each other: pure financial transactions such as derivatives, which were largely responsible for the crisis of 2008, are, according to Islamic legal scholars, contrary to the Koran. Pragmatic alternatives have emerged for the prohibition of charging interest. The conservative rules have led to Islamic banks being exposed to lower yields but also to significantly lower fluctuations. This benefits airlines, such as Emirates, which financed four A380s with this vehicle in 2016, for example (Kassem 2016). The best known financing products are ‘Murabaha’, ‘Ijarah’ and ‘Sukuk’ (Elasrag 2011; Morrell 2013). For example, an investor, often a bank, buys an aircraft and successively resells it to the customer at a premium to the purchase price. As a result, the financial instruments chosen are very similar to traditional leasing constructs. Airlines that have used Sharia-compliant financing instruments include Emirates, Saudi Airlines, Air Arabia, Royal Jordan, Pakistan International Airlines, Sri Lankan Airlines, Turkish Airlines and Ethiopian Airlines. The country with the perceived greatest need for investment in new aircraft is the Republic of Iran. The fleets of the two leading airlines, Mahan and Iran Airlines showed an average age of well over 20 years in 2015. It is to be expected that the instrument of Islamic financing will increasingly come into play in the expansion of Iran’s aircraft fleets. 3.2.6.1.4 Current Developments In the past, leasing allowed airlines to preserve their balance sheets. With the adjustment of the International Financial Reporting Standards (IFRS) in 2016, this possibility disappears. As of 2019, airlines will have to list leasing obligations with a contract term of more than 12 months in their balance sheet. As a result, the fixed assets item in the balance sheet will be strengthened, and at the same time the corresponding payment obligations will have to be listed. It is estimated that the changed rules will expand the balance sheets of airlines worldwide by USD 3000 billion (Hailey 2016). Despite the disappearance of tax advantages, the importance of leasing is steadily increasing. It can be seen that more and more airlines are concentrating on their core business, i.e. the operation of aircraft, which does not require ownership.

3.2.6.2 Depreciation Cargolux reported depreciation costs of USD 123 million in 2013, which corresponds to approximately 5% of total costs. Unlike Holloway (2008), widebody aircraft are depreciated over a longer period of 20 years or more to a residual value of 5–10% (Table 3.10). Cargolux also follows this depreciation policy. For the 2013 financial year, it set the economic life of the airframe at 20 years and that of the engines at 13 years with a residual value of 15% and 7% of the acquisition cost respectively (CV 2014, p. 50). The amount of depreciation costs can be understood in the rule of three. In 2013, Cargolux had taken

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Table 3.10 Depreciation practices of selected airlines Airline Aircraft type Air France-KLM Unspecified Cathay Pacific Passenger Freighter Cargolux Airframes Engines Emirates New Lufthansa New Qatar Airways Passenger Freighter Singapore Passenger airlines Freighter Turkish airlines Passenger Freighter

Economic life 20–25 years 20 years 20–27 years 20 years 13 years 15 years 20 years 12 years 7 years 15–20 years 20 years 20 years 20 years

Residual value – 10% 10–20% 15% 7% 10% 5% 15% 20% 5–10% 5% 10%

Depreciation rate (straight-line) 4–5% 5% 3–5% 5% 13% 6% 5% 7% 11% 5–6% 5% 5%

IATA (2016b)

delivery of three new B747–8 s. These were taken into fixed assets at a cost of USD 532 million. This corresponds to an average of EUR 177 million. With 14 aircraft of the −400 and − 8 series, this results in an estimated acquisition value of EU 2.5 billion. If these are depreciated to 10% over 18 years (as an average of the above airframe and turbine depreciation lives), the amount is quite close to the above figure.

3.2.6.3 Other Aircraft Expenses Cargolux reported other aircraft expenses of USD six million for 2013. These mainly consisted of insurance costs. In view of fixed assets of more than USD 2 billion, this is a relatively small amount. It is an expression of the high safety standard in aviation. 3.2.6.4 Kerosene By far the largest cost item for any airline is fuel. The share of kerosene in total costs has risen significantly in the decades since the first widebody aircraft entered service. In 1972 they were around 11% and in 1981 around 30%. In the period between 2010 and 2018, they ranged between 19% and 33%. As Fig. 3.3 shows, the development of jet fuel prices has a direct impact on the profitability of airlines. According to the annual report, the kerosene price at Cargolux averaged USD 985 per tonne for the year. The price of kerosene was very volatile in the years before and after the financial crisis of 2008. The spot price for kerosene (US Gulf Coast) has ranged from around USD 0.50 to close to USD 4 per barrel in the summer of 2008. Airlines deal with this volatility in different ways. They regularly pass on the costs to their customers in the form of fuel surcharges or higher ticket prices and freight rates. In addition, many players try to hedge their exposure. However, this cannot cushion the economic risk in the long term if fewer passengers book flights or less freight is transported due to high surcharges (Fig. 3.4).

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40,0

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Fig. 3.3 Relationship between the cost of kerosene and the profitability of airlines organised in IATA Ψϰ͘ϱϬ

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Fig. 3.4 Evolution of jet fuel prices over the period 1997–2016, in US$ per gallon

The share of kerosene in total costs is higher for cargo airlines than for passenger airlines. This is particularly because cargo aircraft have a higher average age and are therefore operated less efficiently. Freight airlines also do not incur certain costs, such as

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advertising, passenger catering and cabin crew personnel costs and expenses. Although higher jet fuel prices are passed on to customers in the form of fuel surcharges, the higher costs are demand-driven. Therefore, the operating results of pure cargo airlines are once again more volatile than those of passenger airlines in view of fluctuating kerosene prices. Airlines have various levers with which they can control kerosene costs, but the savings come at a high price. The age of the aircraft fleet is sometimes the most important factor, as younger aircraft are more fuel-efficient. Depending on the state of the kerosene price, replacing an aircraft with younger aircraft may pay off sooner or later from a business point of view. Another factor is the length of the routes flown and the choice of stopovers. On long routes, a considerable amount is burned just to transport the necessary amount of kerosene, and at the same time the maximum transportable payload is reduced. A B747–400F consumes about 3.4 gallons of kerosene per km, which corresponds to about 10 kg of kerosene per kilometer. If the flight distance is extended by 1000 km, this reduces the maximum payload by 10 tons of cargo.

3.2.6.5 Personnel Costs Personnel costs accounted for approximately 12% of total costs at Cargolux in the reporting year. In flight operations, the personnel costs of a freighter are naturally lower in comparison with its sister type, which also carries passengers, as the costs for cabin staff are eliminated. However, at the same time, the personnel costs for pilots are significantly higher than for cabin crews, so the difference is less than the lower headcount on a cargo flight would suggest. The pilots, i.e. flight captains and first officers, made up the largest block of the approximately 1600 employees at Cargolux with 528 employees. Pilots trained on the B747 are courted by other carriers and salaries are accordingly high. According to the company, a first officer earned approximately EUR 49,000 at the beginning of the year and EUR 74,000 after 5 years of service. He or she also receives, among other things, a pension, life, accident and disability insurance as well as insurance against loss of licence. Two blocks of time off of three and six days respectively are included in the duty rosters, each of which extends over 28 days (Cargolux 2017). The salary of an experienced flight captain could be up to EUR 190,000 p.a. Given the shortage of licensed pilots, airlines sometimes have to rely on creative, costly solutions to recruit staff. Cargolux, for example, has developed a special offer for flight captains in its Chinese subsidiary. It is explicitly aimed at candidates who want to work in Asia and keep their centre of life in Europe. The rosters envisaged for this life model provide for either 14 days on duty/12 days off or 18 days on/17 days off. This equates to 168 and 177 off days respectively, calculated over the year. Accommodation in China and while travelling is provided by the employer (Cargolux China 2018).

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The other two large blocks of employees are sales and marketing (510) and maintenance (404). Around three quarters of the ground staff are based in Luxembourg.

3.2.6.6 Handling Charges, Landing Charges and Overflight Charges Handling costs, landing fees and overflight charges accounted for approximately 14% of Cargolux’s total costs. Handling includes costs for the transfer of shipments. While in Europe and North America competition between handling providers is provided for by law and costs are negotiable, in other countries airlines have to accept costs as given. The most effective way to avoid excessive handling costs is to handle them in-house or to choose an alternative airport. However, airlines do not always have the option to divert. Especially in emerging markets such as Africa, the costs can be relatively high. Overflight costs are incurred due to the use of airspace. The vast majority of UN member states have signed the IASTA (International Air Service Transit Agreement), thus granting each other the first and second freedom of air traffic. In practice, however, the granting of rights does not mean that overflight of a territory (first right) or landing at an airport (second right) must be free of charge. In Article 1, Sect. 4 of the IASTA, the right of the signatory states to charge “reasonable charges” for the use of airports and facilities was laid down (ICAO 1944). However, discrimination is not permitted. Foreign airlines may not be charged higher fees than domestic airlines. The fees also cover the costs incurred by air traffic control over land and open sea. The USA has taken over air traffic control over large parts of the Pacific and smaller parts of the Atlantic. This ensures a largely seamless safety net. The costs are to be borne by the airlines. Many large territorial states, such as Brazil, Russia and China, have not joined the agreement. Russia in particular is repeatedly criticised for charging excessive fees. In Europe, the fees are collected centrally by EUROCONTROL and transferred to the member states. In Europe and many other countries, they are calculated on the basis of the maximum take-off weight (MTOW) of the aircraft, the actual or theoretical shortest distance flown within a segment and a unit rate. Mathematically, the fees are determined according to the formula:

Distance Factor Weight Factor Fee Rate

The distance factor is one-hundredth of the distance flown. In addition, flat rates are charged. As an example, the costs are calculated for the flight of an A320 with an MTOW of 77 tonnes from Barcelona (BCN) to Copenhagen in January 2013 (EUROCONTROL 2018): • • • • • •

Spain: 1.38 ∗ 1.24 ∗ 71.88 EUR = 122.93 EUR France: EUR 8.84 × 1.24 × 64.76 = EUR 709.87 Belgium: 0.87 × 1.24 ∗ 67.99 = EUR 73.35 Netherlands: 3.22 ∗ 1.24 ∗ 65.53 = EUR 261.65 Germany: 2.19 ∗ 1.24 ∗ 76.65 EUR = 208.15 EUR Denmark: 2.14 ∗ 1.24 ∗ 73.56 EUR = 195.20 EUR

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Table 3.11 Different overflight charges of selected countries using the example of a B747–400 Country Canada United States United States (open sea) Ireland Germany France

Cost in USD per km (example of a B747–400) 0.73 0.36 0.14 1.18 2.97 2.53

Sridhar et al. (2015)

In total, the costs for air traffic control amounted to EUR 1571.15. An overview of different overflight charges for a B747–400 can be found in Table 3.11. It can be seen that overflight charges in North America are significantly lower than those in Europe. Depending on different flight charges, the optimal flight plan may differ from the one with the lowest fuel consumption. With regard to the efforts to minimize the pollutant emissions of air traffic, this practice is hardly satisfactory.

3.2.6.7 Transports with Other Carriers Interlining is the transport of a passenger or a shipment by a carrier other than the one that issued the original transport document (O’Connell and Williams 2011). For example, Cargolux has an interline agreement with its Russian competitor ABC Air Bridge Cargo. It makes little sense for cargo airlines, for example, to maintain a regular service with their own wide-body aircraft to Iceland. With the help of Interlines, however, Cargolux can offer a service to and from Keflavík. As described in Sect. 5.2.4, transport to the departure airport or from the airport of entry is mostly done by truck. For example, in 2017 Cargolux operated a road feeder between Luxembourg and the fourteen German cities of Berlin, Bremen, Dortmund, Dresden, Düsseldorf, Frankfurt, Hamburg, Hanover, Cologne, Leipzig, Munich, Münster-Osnabrück and Stuttgart. The Czech capital Prague is connected by feeders to Luxembourg, Vienna and Budapest airports. Even though Cargolux only flies to eight airports in Europe – in addition to Luxembourg, these are Glasgow-Prestwick, Maastricht, Barcelona, Vienna, Budapest, Milan and Istanbul – almost all of Europe’s economic centers can be connected to the Cargolux network. The maintenance of this network accounted for approximately 6% of Cargolux’s total costs in 2013.

3.2.7 Market Overview When analysing the world’s leading cargo airlines, two parameters are usually used: firstly, the volume transported (irrespective of the distance flown) and secondly, the tonne- kilometres. Both data are generally only collected for regular scheduled service, but not

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Table 3.12 The world’s leading cargo airlines in 2017 (with fixed schedules, excluding charters) by freight kilometres Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Carrrier FedEx Emirates UPS Qatar Airways Cathay Pacific Korean Air Cargolux Lufthansa Air China Singapore Airlines China Southern China Airlines AirBridgeCargo All Nippon Turkish Airlines Atlas Polar Air British Airways Etihad Airways United Airlines

IATA code FX EK 5X QR CX KE CV LH CA SQ

FTK (2017, million) 16,851 12,715 11,940 10,999 10,722 8015 7322 7317 6701 6592

RPK (2017, thousand) 0 276,608 0 142,037 123,478 75,907 0 226,633 188,137 122,136

FTK (2014, million) 16,020 11,240 10,936 5997 9464 8079 5753 7054 4910 6019

CAGR (2014–2017) 1.7% 4.2% 3.0% 22.4% 4.2% −0.3% 8.4% 1.2% 10.9% 3.1%

CZ CI RU NH TK 5Y PO BA EY UA

6174 5741 5543 4810 4728 4515 4378 4364 4303 4249

206,092 38,702 0 84,594 134,913 n/a 0 145,170 90,000 338,388

4736 5266 3248 3847 2580 n/a 3153 4329 4159 3073

9.2% 2.9% 19.5% 7.7% 22.4% n/a 11.6% 0.3% 1.1% 11.4%

Air Cargo News (2018c)

for charter flights. This means that the overview is somewhat distorted, and the tonnages of the on-demand transports are omitted. The data in Table 3.12 is based on 2017. The order of carriers, their transported volumes and the size of their fleets change continuously. Therefore, the enumeration can only provide a snapshot value. What emerges as a relatively stable element is the development of four groups of carriers in the freight sector: • the leading role of the two American integrators, FedEx and UPS • the strong position of relatively new players from the Middle East and Turkey with Emirates, Qatar, Etihad Airways and Turkish Airlines • the declining importance of the established airlines from Asia and Europe, such as Singapore Airlines, Korean Air and Lufthansa • the occupation of a niche by cargo-only airlines such as Cargolux and All Nippon The North American combination carriers, although leaders in passenger traffic, play a relatively insignificant role in the transport of cargo. They all refrain from operating dedicated freighters in the face of competition from integrators.

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3.2.7.1 US Integrators Two of the airlines shown in Table 3.12 are subsidiaries of the two integrators UPS and FedEx (cf. Sect. 10.2). They dominate the air freight market simply because of their domestic American market, which, unlike the European market, is primarily served by air. They dominate even if not only the tonnage transported but also the distance flown is taken into account. The two players have only been on the market for a relatively short time compared with the Asian and European carriers, many of which were established as early as the 1920s. 3.2.7.1.1 Federal Express FedEx operates FedEx Express, the world’s largest cargo airline, with a fleet of more than 400 owned and leased aircraft. The backbone of the fleet is the B757, a narrow-body with a payload of approximately 40 tons of cargo. In 2018, there were over 100 of these aircraft in the fleet. They had an average age of 26 years, but had been modernised once again to increase reliability and reduce fuel consumption. The aircraft type with the lowest average age is the B767-300F. FedEx acquired 50 of these brand new. It was the largest order for this 40-year-old aircraft type in Boeing’s history. In addition, Fedex acquired the option to order another 50 aircraft of this type. The modernized B767, a narrowbody but capable of carrying ULDs, is cheaper to operate than the older MD-10s and A300s, and is generally regarded as very reliable. 3.2.7.1.2 UPS UPS Airlines is the Louisville, Kentucky-based subsidiary of integrator United Parcel Service. As early as the 1920s, UPS occasionally transported packages by air, but only until the beginning of the so-called Great Depression in the 1930s. In the early 1980s, the company decided to take advantage of deregulation to build its own fleet of aircraft. Until then, urgent shipments had been transported as part loads, for example by Flying Tigers, the cargo airline later acquired by rival FedEx. In 1988 UPS received the license from the FAA to operate its own aircraft and UPS Airlines was founded. In 2018, UPS had more than 240 aircraft in service, mainly B757s, B767s and A300s. UPS was also among the last operators of the MD-11. Original plans to order a freighter version of the A380 were abandoned, citing delivery delays.

3.2.7.2 The New Players from the Middle East and Turkey The two Middle Eastern airlines, Emirates and Qatar Airways, are among the fastest growing carriers in the world. In the past, Etihad Airways was mentioned in the same breath as its competitors from Dubai and Doha, but the airline has recently lost market share. It has been replaced by Turkish Airlines, another Middle Eastern carrier with a similar business model to Emirates and Qatar. The success of these airlines is essentially based on several pillars (O’Connell 2011): the strategic development of the hubs by consistently exploiting the 6th freedom of the air; the offer of high-quality products in passenger and cargo; and the massive investment in

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marketing, for example by sponsoring sporting events and sports clubs. To what extent the success is also due to government subsidies remains controversial at best. Carriers point to the fact that they have not received any direct government funding. This is in contrast to the European FSNCs, which, as former state-owned companies, were certainly subsidised in times of weakness in the past and did not earn their current position solely from their own cash flow. However, their ability to raise capital is facilitated when loans are guaranteed by the state. The fact that the new airlines, unlike their European and Asian competitors, do not have legacy costs in the form of high salaries, social standards and pension provisions, and that use more modern aircraft with lower maintenance and operating costs, has a clearer impact. For the year 2008, O’Connell (2011) shows that Emirates has lower costs than British Airways in most lines in the income statement. In terms of ATK, these are in the areas of: Fuel (−29% of the cost, compared to B.A.) Personnel (−64%) Landing fees and overflight rights (−51%) Handling (−69%) Maintenance and upkeep (−80%) Depreciation and amortization (−65%) Only in the areas of distribution (+41%) and operating leasing (+645%) are Emirates’ costs higher than those of its British competitor. In total, Emirates’ costs per ASK were 41% lower than those of its British competitor in the year under review.

Istanbul Airport, unlike the airports in the Gulf, can be reached from Europe by smaller short-haul aircraft. Connections, especially between Germany and Turkey, are already excellent, as many former guest workers and their descendants use the national carrier Turkish Airlines. Istanbul Airport is also more conveniently located on the route to Asia because it is further north. Compared to a theoretical direct flight – in practice the flight route regularly deviates from the shortest connection – the detour between Frankfurt (FRA) and Beijing (PEK) via Istanbul (IST) is 15% and via Dubai (DXB) 37%. On the Frankfurt – Hong Kong route, the detour via Istanbul is 8% longer and via Dubai 18% longer (Table 3.13). The airports in Russia on the flight route from Europe to North Asia are even more favorable than Istanbul. On the Frankfurt – Beijing or Frankfurt – Hong Kong routes, a stopover in Moscow (SVO) does not really mean a noticeable detour. For various reasons, the airport has not yet been able to exploit the potential. So far, Dubai and Doha have been able to exploit the bundling advantages in cargo due to their size. Most connections between

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Asia and Europe are not equally busy, depending on the direction. Consolidation at the locations helps to optimise aircraft utilisation. However, the advantages can be transferred to the new airport in Turkey. This will replace the existing Atatürk metropolitan airport (Stoller 2014): the latter, with 60 million passengers in Europe, is already the third largest after London Heathrow and Paris CDG. When completed, the new airport is expected to have six runways and be able to handle 150 million passengers and 4 million tons of cargo per year. While there was no room for freighters at Ataturk Airport, the new site is expected to be able to park up to 30 wide-body freighters (WBF) at a time (Toczauer 2018). The carriers from the Middle East mentioned are all classic combination carriers that are also active in the cargo sector. They maintain their own freighters to supplement their belly capacity (Table 3.14). Cargo from Asia to Europe often remains on the same aircraft to be flown on after a few hours. Rebranding the aircraft under a new flight number allows restrictions in traffic rights to be circumvented. The tonnages appear in the statistics as quantities handled, but often do not leave the aircraft fuselage. Table 3.13 Comparison of detours required for intermediate loads in the Middle East Flight route FRA – PEK FRA – SVO – PEK FRA – IS – PEK FRA – DXB – PEK FRA – HKG FRA – SVO – HKG FRA – IS – HKG FRA – DXB – HKG FRA – SIN – SYD FRA – DXB – SYD

Distance 4853 4872 5565 6651 5697 5701 6144 6697 10,296 10,493

Additional distance (in %) +0.4% +15% +37% +0.1% +8% +18% +2%

Table 3.14 Freighter fleets of the leading airlines in the Middle East 787-8F Emirates Eithad Airways Qatar Airways Saudia Turkish

2 2

747–400F 1

4 3

777F 13 5 16 4 5

A330-200F

A300-600F/A310-300F

8 10

4

Total 14 5 26 10 22

TK Cargo (2019), Planespotters (2019b), QR Cargo (2019), Eithad Cargo (2019), Emirates SkyCargo (2019)

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Emirates and Qatar Airways are facing competition, especially from Turkish Airlines, as soon as the new major airport in Istanbul (ISL) has replaced the existing Atatürk Airport and can be used to its full extent. So far, the expansion of Turkish Airlines’ cargo activities has been limited by the limited capacity at Atatürk. In the future, however, TK plans to increase cargo volumes even more than passenger numbers (Turkish Airlines 2018). 3.2.7.2.1 Emirates Emirates, based in Dubai, is a passenger airline with its own cargo aircraft. The airline was founded in 1985 and is still state-owned today. Disputes led Gulf Air, a joint venture of several Gulf states, to cut its connections to Dubai in 1985. In response, the Dubai government quickly launched Emirates airline, providing it with US$10 million in start-up funding (Nataraja and Al-Aali 2011). The nucleus of the company was the ground handling company dnata, which had already been operating at Dubai Airport since 1959. In the beginning, Emirates was positioned primarily as a competitor to Gulf Air, which at the time also included Abu Dhabi, Dubai’s neighbouring emirate, as well as Bahrain, Qatar and Oman. As early as 1987, two years after its foundation, the first European destination, London, was added to the flight schedule. Emirates’ global ambitions became clear in 2007 at the latest, when the company announced at the Dubai Airshow its intention to order 120 Airbus A350s, 11 A380s and 12 Boeing 777–300 ERs, worth around USD 35 billion. This was followed three years later by the order of 32 additional A380s and 30 B777–300 ERs (Emirates Group 2017; Shaban 2015). The real backbone of the Emirates fleet is the A380, which is popular with passengers. With this type of aircraft, Emirates is able to transport up to 615 passengers and their baggage via their hub in Dubai. However, this aircraft type is hardly suitable for the transport of cargo, Emirates itself states the payload with just 8 tons. The older B747-400 ERF jumbos were returned to the lessor during 2017. Since then, SkyCargo has focused on the A777 type. To allow customers to continue to transport oversized consignments, among other things, Emirates has partnered with Cargolux (Nelson 2017). Thus, the B777Fs with their payload of 103 tons in cargo are virtually the counterpart to the A380 in passage. In 2017, Emirates served 140 cities in 80 countries. SkyCargo’s network exceeds that in the passage by another 15 cities, such as Atlanta, Basel or Mexico City. Despite the climatic challenges in summer, Emirates is one of the leading carriers in the transport of perishable goods. In 2016, Emirates carried close to 400,000 tons of these goods (Air Cargo News 2017). 3.2.7.2.2 Qatar Airways (QR) Qatar Airways was founded in 1993–8 years after Emirates. Until then, the Emirate of Qatar had a stake in Gulf Air, as the emirate of Dubai did.

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The former joint venture Gulf Air has had a chequered history, with decades of unsatisfactory business development. Gulf Air, or its predecessor organization, had been operating flights in the Middle East and neighbouring regions since the 1940s. A number of Gulf Cooperation Council (GCC) members participated in the company, in addition to Qatar, Bahrain, Abu Dhabi and Oman. Qatar withdrew completely from Gulf Air in 2002, and Abu Dhabi in 2005. All of these states established their own airlines; today Bahrain is the sole owner (Nataraja and Al-Aali 2011; Hooper et al. 2011).

Qatar Airways started out on a modest footing with a small number of aircraft, most of which were acquired second-hand from other airlines. To catch up with its Gulf competitors, Qatar Airways placed an order for 60 A350s and 20 B777s at the Paris Air Show in 2005, with a total value of US$16 billion (Hooper et al. 2011). In 2011, Qatar Airways sought to acquire a stake in Cargolux – a venture that ultimately failed. Although QR is one of the fastest growing airlines in the world, it is comparatively small on many routes, such as the important routes to Australia. The continued growth is remarkable in that Qatar’s political relations with neighbouring states are very strained. Led by Saudi Arabia, several countries in the region ordered a boycott, border closure and revocation of overflight rights for Qatar Airways in 2017. Nevertheless, even in this crisis year, the airline’s revenue increased by more than 10%, and in the cargo segment by as much as 19% (Flight Global 2017).

3.2.7.3 Established Airlines from Asia and Europe Compared with older statistics, the established airlines from Europe and Asia play a much smaller role than, for example, at the beginning of the twenty first century. They have lost market share, especially to competitors from the Middle East. 3.2.7.3.1 Cathay Pacific (CX) The roots of the Cathay Pacific company go back to 1946, when the US American Roy Farrell and the Australian Sydney de Knatzow founded the company. Their first flight transported 2000 live chicks from Sydney to Manila. Originally based in Shanghai, it quite soon moved its headquarters to the British Crown Colony of Hong Kong. As early as 1948, the trading company Butterfield & Swire, today’s Swire Group, took a stake in the up-and- coming airline. After years of rapid growth in the 1960s and 1970s, Cathay Pacific added new long-haul destinations in Europe and North America to its flight schedule. In 2018, the cargo subsidiary Cathay Pacific Cargo served about 46 destinations worldwide. The cargo segment contributes about 20% of the company’s revenue. Cathay had recently suffered particularly from aggressive competition from airlines in China and the Middle East, and was forced to embark on a comprehensive restructuring program in

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2017. During this phase, the airline’s cargo division remarkably proved to be an anchor of stability. Cathay is seeking closer cooperation with other carriers. In 2017, it launched a collaboration with Lufthansa Cargo, in which the two airlines coordinate network planning, distribution and handling between Hong Kong and Europe, among other activities. A strategic partnership with Atlas Air was also launched in the same year. 3.2.7.3.2 Korean Air Lines (KE) Today’s Korean Air (IATA code KE) is a successor company to Korean National Airlines, which was founded in 1947. The company has been fully privately owned since 1969, a typical Korean Jaebeol. These corporations, which also include Hyundai, Kia, Samsung and LG, among others, form the backbone of Korean industry and have close economic ties with each other. The nepotism often found in the Jaebeol sometimes leads to inefficiencies, and in the worst cases to compromised safety. This was particularly evident at Korean Airlines. For example, the Air Safet Network database records a whole series of serious accidents (ASN 2019). In 1978 and 1983, flights carrying passengers were shot down over the territory of the then Soviet Union. In 1999, a cargo flight from London to Milan crashed. The causes were technical and pilot error. According to investigations, a culture of strict hierarchies in the cockpit made it difficult for errors to be communicated in a timely manner. At the start of the millennium, the airline’s reputation was tarnished after its many accidents. It had a reputation for not adequately following essential international safety standards (Flottau 2001). These problems were addressed and there have been no major incidents since. However, the problem of nepotism has not been dealt with to this day, as the “Macadamia incident” in 2014 illustrated (Fifield 2018). The close cooperation between the Jaebeol, on the other hand, has contributed significantly to the success of Korean Air, not least in the cargo sector. The Korean economy is similarly export-heavy as the German economy. The products, smartphones and other high-tech products that Korean companies manufacture in their own country are typical air freight goods. But these products are increasingly being produced in China. Asian competition is also giving Korean Air Lines a hard time. Although the volumes transported are rising, they have recently not reached the level of 2010 (Fig. 3.5). Cargo activities accounted for around a quarter of the Group’s total revenue in 2017. Cargo is transported below deck and in freighters. The future backbone will be the B777Fs. They are gradually replacing the older B747Fs. The MD-11 s, which served for a long time as passenger aircraft and later as converted freighters, are already no longer part of the fleet.

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Development of transported cargo volumes Korean Air Lines (thousand tonnes) ϭϴϬ

ϭϱϳ ϭϮϴ

ϱϭ

Ϭ ϭϵϲϵ

ϭϰ ϭϵϴϬ

ϭϵϵϬ

ϮϬϬϬ

ϮϬϭϬ

ϮϬϭϲ

Fig. 3.5 Development of Korean Air Lines’ cargo volumes

3.2.7.3.3 Singapore Airlines (SQ) Singapore Airlines is the national carrier of the Asian city-state. Despite its small home base, the airline, founded in 1947, has managed to become one of the leading players in intercontinental air travel. The cargo division, Singapore Airlines Cargo, employs around 900 people. Cargo-only aircraft include B747–400Fs, while below deck it can load into A330, A350 and B777 aircraft. Further capacities are available via the regional subsidiary Silk Air and the low-cost subsidiary. Singapore Airlines Cargo has been a separate company since 2001, but is to be reintegrated into the parent company in the future. This is a reflection of the structural changes that the cargo market has undergone since the turn of the millennium (SIA 2017). Despite a reduced freight fleet, the volumes transported have increased, which can be explained by increased additional loading below deck. 3.2.7.3.4 Air China (CA), China Eastern (MU) and China Southern (CZ) Air China, China Eastern and China Southern Airlines, they are the “Big Three” airlines in the People’s Republic of China (Toh 2018). The three companies can be traced back to the state monopoly of the Civil Aviation Administration of China (CAAC), CAAC Airlines. The latter was largely responsible for Chinese air traffic through its operational arm until 1988. With the break-up of this monopoly, four categories of airlines emerged in China (Zhang et al. 2004):

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Table 3.15 Freighter fleet of the “Big Three”, as of 2018 Airline Air China Cargo (CA)

China Southern (CZ) China Cargo (CK), subsidiary of China Eastern (MU)

Number of aircraft 3x B747-400F 4x B757-200F 8x B777F 14x B777-200F 3x B747-400F 6X B777F

Planespotters (2018a, b), China Southern Airlines (2018), Zhang et al. (2018)

• the six spin-offs Air China, China Eastern and China Southern, China Northern, China Southwest and China Northwest Airlines • the joint ventures of the CAAC and some local governments, such as Xiamen Airlines. Many of these companies have now been absorbed into the “Big Three”. • Companies owned by the provincial governments, such as Shanghai Airlines • Start-ups by financial institutions, state-owned enterprises or foreign investors, such as Hainan Airlines Air China is the state-owned national airline of the People’s Republic of China, the flag carrier. Its home base is the capital’s Beijing International Airport. Air China was originally assigned to serve international, but competitors China Eastern and China Southern have also added international connections. They serve an increasing number of destinations in Europe and North America in the flight schedule. In the area of international cargo, the Big Three play a leading role; in domestic intra-Chinese traffic, their competitors certainly do as well. China Southern, headquartered in Guangzhou, is now the largest carrier in Asia in terms of the number of passengers transported, among other things. To meet the capital requirements for its rapid expansion, the company is listed on the stock exchanges in Hong Kong, New York and Shanghai. As of 2018, the airline operated its own freighters, two B747s and twelve B777s. China Eastern has bundled its cargo activities in its subsidiary China Cargo Airlines (CK). When it was founded in 1998, CK was the first all-cargo airline in China. China Eastern and China Southern are members of the Sky Team Alliance, Air China of the Star Alliance. 3.2.7.3.5 Lufthansa (LH) The history of Deutsche Lufthansa goes back to the merger of two competing players. In 1926, Deutsche Areo Lloyd AG and Junkers Luftverkehrs AG merged their activities to form the newly founded company “Deutsche Luft Hansa AG”. The merger was forced by the state. As in the USA, the individual companies were hardly competitive as long as they were left to their own devices and exerted pressure to obtain subsidies. In the early years, the owners of the new airline were the German Reich, the state governments and the old companies. The founding of the company had been preceded by intensive efforts on the

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part of the Reich government to steer competition between the national carriers in a different direction. After the National Socialists seized power, the activities of the airlines under the Luft Hansa umbrella were brought into line and the last remaining competitors were squeezed out. While this was to the airline’s advantage in the period leading up to the Second World War, it ultimately meant its downfall in the course of the war: aircraft were confiscated and pilots drafted into the Luftwaffe. By the end of the war, numerous aircraft had been destroyed and crews killed, injured or taken prisoner. In the first post-war years, Germany was excluded from air traffic; until 1948, Germans were not even allowed to travel as passengers. With the conclusion of the Paris Treaties in 1954, the young Federal Republic regained its sovereignty and thus its air sovereignty. In the following year, 1955, the newly founded Deutsche Lufthansa began flying again to destinations in Germany and abroad. Despite the similarity in name, Lufthansa was not a legal successor of the defunct Luft Hansa; however, it was able to acquire its trademark rights (Gries and Krovat 2011). Beginning in 1957, Lufthansa transported cargo to the United States, not only below-deck, but also in dedicated freighters. Initially, Douglas C-54 freighters with a load capacity of 8 tons were used. In subsequent years, other destinations were added to the network, such as Brazil, Argentina, Hong Kong, Japan and South Africa. In the 1950s and 1960s, Lufthansa also transported freight within Germany and neighboring countries; routes that are now served by road feeders. In the financial year 2017, Deutsche Lufthansa AG presented itself as a group with approximately 130,000 employees and total revenue of EUR 35 billion (Table 3.16). The most important business segment is the so-called network airlines (23 billion in revenue), which include SWISS, Brussels Airlines and Austrian Airlines in addition to LH. This business segment is complemented by the point-to-point airlines Eurowings and Germanwings with a turnover of approximately EUR 4bn. The MRO and Catering segments contributed revenue of EUR 5.4bn and EUR 3.2bn respectively. The Logistics segment is the Group’s smallest business segment in terms of revenue and employees. In addition to the activities of Lufthansa Cargo, the business segment also includes Jettainer AG, which manages ULD for the Group and third parties, as well as time:matters and the equity investment in AeroLogic. The relative independence with which Lufthansa Cargo (LCAG) operates within the Group structure is unique among the competition. Since 1994 LH Cargo has been organised in the legal form of a public limited company, but is wholly controlled by the Lufthansa Group. Table 3.16 Business segments of the Deutsche Lufthansa Group in 2017

Turnover (EUR million) EBIT (EUR million) Employees Lufthansa Group (2018)

Network airlines 2524

Point-to-point airlines 4041

Logistics Technology Catering 2524 5404 3219

2263 50,190

94 7501

242 4511

415 21,502

66 34,563

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Lufthansa Cargo uses its own and chartered freighters and markets Lufthansa’s free lower-deck capacities. Approximately 50% of the cargo is transported in freighter aircraft and 50% in the lower deck. Lufthansa Cargo uses various freighter aircraft manufactured by Boeing. At earlier times, it operated aircraft of the type B737, the B747–200, the DC-8 and DC-10. The B747s were retired back in 2005. In 2011, it was decided to successively retire the aging MD-11 s by 2024. Alongside UPS and Fedex, Lufthansa Cargo was one of the most important customers for the MD-11s. The 12 MD-11s will be replaced by a smaller number of B777F aircraft; possibly also by an A350F, should this be offered by Airbus in the future (Fischer 2017).

3.2.7.4 Cargo-Only Airlines Pure cargo airlines operate cargo aircraft on a charter basis or on the basis of fixed flight schedules. Of particular interest are those – few providers – that operate wide-body aircraft, such as the B747 in particular: They are to be distinguished from those airlines that operate feeder services with small aircraft as service providers for integrators. 3.2.7.4.1 Cargolux Luxembourg’s Cargolux, headquartered at the Grand Duchy’s airport, is one of the few pure cargo airlines. The company was founded in 1970 with the participation of the airlines Lugari, the Icelandic Loftleidir and other investors. The first aircraft used was a Canadair CL-44, the first destination Hong Kong (Lobo and Zairi 1999). In the late 1970s, investments were made in the first B747s. Today, the fleet consists exclusively of different variants of this aircraft type. Despite all the government’s efforts to promote Luxembourg as a logistics location, there is no actual domestic market. The majority of the volumes Cargolux transports come from or are destined for one of the other EU countries. Therefore, the development of a network beyond Luxembourg was important for the airline from the very beginning. The road feeders and transhipment warehouses are an integral part of this business model. This enables Cargolux to serve locations that that it does not fly to. The feeders are equipped with rollerbeds and can accommodate ULDs, which reduces transit times and the risk of damage from transhipment operations. As the most important customer at Luxembourg Airport, Cargolux benefits from advantages that would be difficult to achieve at another location. Since there are no passenger flight operations comparable to those at the major airports in Frankfurt or Paris, the distances between the cargo terminal and the aircraft are short. In the Luxembourg hub, the airline has a warehouse with a surface area of over 85,000 m, with a special area of 3000 m2 for handling pharmaceutical products. In three different sectors, temperature-sensitive products can be temporarily stored before onward transport (Fig. 3.6).

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Fig. 3.6 Cargo aircraft of the airline Cargolux (2019)

Thanks to the focus on a single, very efficient aircraft type, the B747, the support from the airport and the business model that is exclusively focused on freight, Cargolux is considered one of the most reliable providers in the market. These were the conditions that allowed it to survive in the long term as one of the few cargo-only airlines. After several years of Cargolux closing with losses, a development company from Henan, China, joined the cargo airline as a strategic investor. This company should not be confused with the HNA Group, the Haikou-based conglomerate that has invested in numerous airlines, Swissport, Gategroup and Deutsche Bank, among others. 3.2.7.4.2 Nippon Cargo Airlines (KZ) Nippon Cargo Airlines (NCA) is also a pure cargo airline. It was founded in 1978 and is based at Narita Airport, the capital of Japan. In 2018, it operated a fleet of eleven B747–400 and B747–8 freighters. When it was founded in 1978, All Nippon Airways (ANA) was still a shareholder, but the conglomerate Nippon Yusen Kabushiki Kaisha (NYK) is now the sole owner. NYK is one of the world’s leading shipping companies and operates one of the largest fleets of container ships. In 2018, Nippon Cargo’s B747 fleet operations were temporarily suspended after Japanese government inspectors discovered significant deficiencies in maintenance activity records. Even before that, Nippon Cargo came under criticism after it misdeclared flight accidents. The deficiencies have been linked to cost-cutting efforts by the carrier. The order for two more B747–8 s was cancelled in 2017.

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Table 3.17 Volga Dnepr Group fleet overview Volga-Dnepr Airlines (charter area) – 12 AN-124 – 5 IL-76

Airbridge Cargo Airlines, Cargo Logic Air and Atran Cargo Airlines (network area) – 18 B747F – 5 B737F

Volga Djnepr Group (2019b)

As with Cargolux, NCA relies on cooperation with a strategic partner. In 2018, the cooperation with ANA was intensified again within the framework of a code share and a block space agreement. ANA itself operated only B767-300F aircraft as freighters only that year. The cooperation with Nippon Cargo allows ANA to expand its cargo offering. Nippon Cargo also benefits from the cooperation by using ANA’s below-deck capacity on routes on which it is not active itself. 3.2.7.4.3 Airbridge Cargo (RU) Russian Airbridge Cargo, headquartered at Moscow’s Sheremetyevo Airport (SVO), is a relatively young company. It was founded in 2003. Two B747–200 s were in service at the launch. The company is better known in day-to-day operations by the catchy abbreviation ABC, rather than the IATA 2-letter code RU. ABC is part of the larger Volga Dnepr Group, whose activities are essentially divided into two divisions: a charter division for on-demand business and a network division with transports subject to a regular flight schedule (Table 3.17). To support the growth of the group, investments were made in the hub in Moscow. At the airport, there is a 20,000 m2 storage area, which is TAPA certified and specially designed for handling dangerous goods and pharmaceutical products.

3.3 Airports Aerodromes, sometimes referred to as airdromes, are places where aircraft take off and land. ICAO defines an aerodrome in Annex 14 as “a specified area of land or water (including buildings, installations and equipment) intended to be used either wholly or in part for the arrival, departure or movement on the ground of aircraft” (ICAO 2016b). This includes air fields used by the military and general aviation. Airfields consist at a minimum of a grass runway, where the approach and departure here is the sole responsibility of the pilot and not of a controller. There is hardly a place on earth that is not close to such a simple airfield. They are essential for supplying the local population with perishable goods and mail, for tourism, where for research. The Jack F. Paulus Skiway, for example, with its 3.6 km runway, serves to supply the Amundsen-Scott Station at the South Pole (Matheson 2010, p. 213 f.). Measured against the total tonnage carried worldwide, however, these small airfields are of little relevance. Most air freight is handled via a few major airports. In Germany, an additional distinction is made between commercial airports and special airports. These are demarcated from landing fields and glider airfields (§ 38 LuftVZO).

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Permission to operate an airport is granted by the competent aviation authority of the federal state in which the airport is located. Special airports, or in official German airports for special purposes, do not serve general traffic. One of the few special purpose airports in Germany is the airport in Lahr, Baden. Since 2002, cargo aircraft of all sizes are allowed to be handled at Lahr, but only after prior notification (Airport Lahr LHA). Airports for General Transportation are found much more frequently.

3.3.1 Branding Airports appear under a specific name. This is either borrowed from the name of the place or a prominent person. Examples are Amsterdam Airport, Zurich- Kloten, or John F. Kennedy Airport in New York. In Germany, Munich Airport markets itself also as Franz Josef Strauß airport.

3.3.1.1 IATA Designations IATA strives to assign codes to airports based on their names. These codes consist of three letters and are usually assigned only once. The IATA or colloquial 3-letter code is usually retained even if the official name of the airport changes. For example, the IATA code for Beijing is still PEK, corresponding to the former name of the Chinese capital. The code for Mumbai is BOM, for Bombay. The situation is a little more complicated in North America. In Canada, the 3-letter codes for major airports all start with Y, such as YVR for Vancouver and YTO for Toronto. In the US, the codes cannot begin with N, K, or W because those letters are reserved elsewhere. Therefore, the code for Newark Airport is EWR. The Federal Aviation Authority uses its own codes, but most of them are the same as those used by IATA (Table 3.18). The three letters are enough to theoretically provide more than 17,500 airports with a oneto-one code (26 letters to the third power). In fact, only about half of the possible combinations have been assigned. In addition to airports, some train and bus stations also receive an Table 3.18 IATA and ICAO codes of the leading cargo airports Airport Hong Kong International Memphis International Shanghai Pudong International Incheon International Ted Stevens Anchorage International Dubai International Louisville International Narita International Taiwan Taoyuan International Frankfurt am Main International Own representation

Location Chek Lap Kok (Hong Kong) Memphis/Tennessee (USA) Greater Shanghai (PR China) Greater Seoul, (South Korea) Anchorage/Alaska (USA) Dubai (UAE) Louisville/Kentucky, (USA) Greater Tokyo (Japan) Greater Taipei (Taiwan) Frankfurt

IATA code HKG MEM PVG ICN ANC DXB SDF NRT TPE FRA

ICAO code VHH KMEM ZSPD RKSI PANC OMDB KSDF RJAA RCTP EDDF

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IATA code. The codes are primarily relevant for the handling of passenger flights and air freight shipments. They can be found on practically every air ticket and air waybill.

3.3.1.2 ICAO Designations A parallel system of four-digit ICAO codes exists for the purposes of flight operations and air traffic control. Each of these location codes is assigned only once. The ICAO codes are more difficult to “read” than the IATA codes, as they follow a more complicated logic. Simplified, the first letter indicates the region, the second the country and the last two mostly the city. For example, Amsterdam Schiphol Airport has the code EHAM – E for the region of Northern Europe, H for the Netherlands, AM for Amsterdam. In Germany, this Rule of thumb does not apply. For example, the two most important commercial airports in Germany have the codes EDDF (Frankfurt am Main) and Munich EDDM. The third letter here indicates “D”, as it is an international commercial airport. In the USA with a large number of airports, the coding again follows a different logic. For example, J.F. Kennedy Airport has the intuitively more understandable code KJFK – K for the USA region, the following three letters follow the IATA coding. ICAO codes for airports that are no longer in operation, such as Berlin-Tempelhof, are not to be reassigned for at least six months. In practice, to avoid confusion, reassignment rarely takes place. The four letters on which the code is based allow many more airports to be assigned than in the IATA designation system. In the relatively small nation of Iceland, approximately 30 airports were assigned an IATA code and more than 60 airports were assigned an ICAO code in 2009 (ICAO 2009Annex 4–2). The coding scheme and a list of all coded airports can be found in ICAO document 7910, Manual on Location Indicators.

3.3.2 Business Models Airports are used by the military, for private and business aviation and, above all, for civil aviation. When looking at the world’s largest commercial airports handling passengers and cargo, three business models stand out (Fig. 3.7): • National hubs: These include the world’s largest airport in terms of passenger volume and aircraft movements, Atlanta (ATL), and to a lesser extent Tokyo Haneda (HND), Dallas (DFW) and Beijing (PEK) airports. The aforementioned airports primarily serve domestic and regional destinations in passage rather than long-haul destinations. The synergies with belly freight are low here. • International hubs such as Miami, Florida (MIA) in North America, Frankfurt (FRA) and Paris (CDG) in Europe, and Shanghai (PVG), Seoul (ICN) and Singapore (SIN) in Asia.

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Relaon Passenger and Cargo Volumes at globally leading Airports Cargo

5,000

HKG

4,500 MEM 4,000

PVG

Air-Cargo (Tons, k)

3,500 3,000 2,500

Internaonal Hubs

ICN

ANC SDF

NRT TPE MIA

2,000 1,500 1,000

DXB

FRA CDG LAX SIN AMS LHR CAN ORD JFK HND ISTDFW

PEK

ATL

500 0

0

20,000

40,000

60,000

80,000

100,000

Naonal Hubs

120,000

Number of Passengers (Arrivals & Departures, k)

Fig. 3.7 Ratio of passenger and cargo volume of the world’s largest commercial airports

• Primary cargo airports: They all have passenger traffic to a lesser degree. Such airports include the bases of the integrators Fedex and UPS, Memphis, Tennessee (MEM) and Louisville, Kentucky (SDF), as well as Anchorage as a stopover between Asia and North America. A borderline case is Hong Kong as the world’s largest cargo airport, which was also used by 80 million passengers in the year under review. Not mentioned in the list are the so-called airports that are not hubs, but serve as a destination or departure point for passengers and are accordingly also referred to as O&D airports (origin and destination). In individual cases, they too may be active in the cargo sector.

3.3.2.1 International Hubs with Cargo Activities The primary hubs of those airlines that play a leading role in one of the three alliances are the winners of consolidation in the aviation industry (Graham and Morrell 2017, p. 13 ff.). The hubs, which include London (LHR) and Hong Kong as hubs for Oneworld, Paris (CDG), Amsterdam (AMS) and Incheon (ICN) for Sky Team, and Frankfurt (FRA) and Singapore (SIN) for the Star Alliance, show a high number of flight connections. They allow passengers to reach their destination with as few connecting flights as possible. The growth of these hubs has been at the expense of smaller hubs on the periphery, such as Lisbon or Stockholm. The problems facing these hubs in Europe are, on the one hand, their geographical location, which makes further growth in capacity difficult, and, on the other hand, competition from airlines in the Middle East and Turkey.

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The consolidation of the competitive landscape has in some cases led to a massive loss of importance of individual airports. For example, the international airport in Cincinnati largely lost its function as a hub as a result of Delta’s insolvency in 2005 and the subsequent merger with Northwest. The new company, once again operating under the name Delta, relocated many activities to Detroit, an hour’s flight north. Instead of four, passengers now fly to only a single destination in Europe. The annual number of passengers decreased from 22 million in 2005 to just six million in 2016 (CVG 2016). Some of the loss of importance was offset by the return of DHL Express to Cincinnati. DHL maintained its international hub for the USA there until 2003 and relocated it back there in 2009 after the attempt to serve the domestic American market from Wilmington/OH failed.

The operators of these hubs are trying to differentiate themselves by offering passengers a genuine transfer or boarding experience while spending time in transit. At such airports, only a small portion of revenue comes from direct airport charges, the larger share from ancillary services. The most significant contributions come from parking fees, car rental companies and duty-free shops (Taneja 2017, p. 99 ff.). The hubs of London Heathrow (LHR), Dubai (DXB) and Munich (MUC) were pioneers in this respect. This leads to passengers preferring these airports in transit, and spending more than average while they are there. But if the layout of airports and processes are geared exclusively to the needs of passage, this generally happens at the expense of cargo. For example, when airlines in an alliance are bundled together in a terminal, it shortens transfer times for passengers. Lounge offerings for frequent flyers and first and business class passengers can also be optimized. At London Heathrow, for example, Star Alliance members have bundled their activities in Terminal 2 and those of the Sky Team in Terminal 4. In the past, the time-consuming transfers by bus between terminals deterred passengers from transferring in London, and sometimes connections were missed or baggage was lost. Terminal optimization in London and elsewhere has shortened passenger transit times, but often at the expense of cargo transfers (Merkert and Ploix 2014). Most of the hubs (London Heathrow, Frankfurt/Main, New York JFK) can hardly expand anymore. They were once planned outside the metropolises, but in the meantime the cities have grown to the edge of the airport. That many hubs often place little importance on cargo when they can simultaneously generate higher revenues in the passenger sector is not surprising. It explains why some of the major hubs in the world, such as Heathrow or Atlanta are insignificant cargo airports. Other revenue streams are simply more profitable in the face of limited growth opportunities. Munich and Paris in Europe and Denver in North America are exceptions where it has been possible to develop major airports in new locations. In this context, the Asian hubs of Hong Kong, Pudong, Incheon and Taipei occupy a special position. They were built from scratch in a new location, often on artificial islands in the sea, and were not subject to the same growth restrictions as their European and American counterparts.

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Table 3.19 World’s leading airports, ranked by number of international passengers Rank 1 2 3 4 5 6 7 8 9 10

Airport Dubai (DXB) London (LHR) Hong Kong (HKG) Amsterdam (AMS) Paris (CDG) Singapore (SIN) Incheon (ICN) Frankfurt (FRA) Bangkok (BKK) Taipei (TPE)

International passengers (embarkation and disembarkation, in million) 87.7 73.2 72.5 68.4 63.7 61.6 61.5 57.1 48.8 44.5

ACI World (2018)

In everyday language, hubs are often referred to synonymously as gateways, which is to be considered imprecise. In terms of air freight, gateways are airports where air freight is delivered by means of transport other than aircraft – usually by truck. In hubs, air cargo is additionally delivered, handled and transported onward by aircraft. Major cargo airports usually perform both functions. For example, the largest cargo airport, Hong Kong, is a gateway for products manufactured in the hinterland in the Pearl River Delta area and delivered by road, as well as a hub for products flown in from China’s more remote provinces for onward transport, particularly to North America and Europe (Zhang et al. 2004, 80 ff.).

Remarkably, the two largest passenger airports, Atlanta/Georgia (ATL) with approximately 104 million and Beijing (PEK) with 96 million passengers, do not appear in the overview in Table 3.19. Both are airports that, even if they offer international connections, are primarily national hubs.

3.3.2.2 LCC Airports with Cargo Activities In the context of market liberalization, many airports worldwide lost their original significance as so-called O&D airports. They were and are at the beginning and end of a journey (origin and destination), but offer few or no transfer options. The number of direct connections with network carriers to other O&D airports was reduced and traffic was routed via hubs. Some of these airports have changed their business model and subsequently opened up to the so-called low-cost airlines. The FSNCs no longer play a prominent role here. For example, Lufthansa no longer flies to Cologne/Bonn and Swiss no longer flies to the Euroairport Basel/Mulhouse. Before its insolvency, Swissair was the dominant airline at this location, today it is the LCC Easyjet (NZZ 2015). The strengthening of the so-called low-cost airlines, such as Ryanair and Easyjet in Europe, or Southwest in the USA, has also had significant consequences on the way airports are operated. LCC airports often

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have a smaller, more comfortable core that dates back to earlier, more profitable times and cheaply built extensions. They lack the features that characterise hubs: an elaborate terminal structure that is also architecturally appealing, lounges for business travellers, a good infrastructure in terms of hotels and business centres. The synergies with cargo are low at airports that are primarily geared to the so-called low-cost carriers, as LCCs mostly only transport baggage and no cargo in the belly for the reasons mentioned above. Nevertheless, some O&D airports have significant cargo activities. In addition to the low-margin LCC business, the operators have secured a second mainstay, which helps to spread the costs for the infrastructure over several users. Every commercial airport has certain fixed costs for the operation of the tower and the fire brigade. In addition to the Basel and Cologne/Bonn airports mentioned above, East Midlands is another example of this. At these locations, air freight is transported almost exclusively by road feeder or freight-only aircraft. The often locally politically motivated attempt to recommend already existing airports in the periphery as a base for LCC was rarely successful. The locations were mostly former military airports that were handed over to civilian use after the end of the Cold War. Some well-known examples from Germany are Lübeck, Memmingen or Baden-Baden airports. Although these airports had sufficiently long runways and were able to provide parking spaces and an infrastructure that met basic requirements, most travellers were not willing to accept long journeys to their actual destination in the long term. Without support payments, the business models of these airports proved to be unsustainable in the long run. It is common practice for LCCs to demand substantial subsidies. They rarely feel committed to one location. As a result, the economic situation of many of these airports was precarious and ended several times in the insolvency of the operating companies. The EU’s restriction of state aid in 2014 is expected to clean up the airport landscape. Operating aid may be paid for a maximum of ten years. From 2024 onwards, such aid will be completely prohibited.

3.3.2.3 Genuine Cargo Airports Airports that focus primarily on cargo handling often have a similar history to LCC bases. They are mostly former military airports. However, the cargo business is in the foreground at these airports. This is flanked by a base load of passenger traffic, thus sharing the expense of maintaining the infrastructure. The idea of basing airports exclusively on freight without the accompanying operation of passenger traffic is hardly profitable from an economic point of view. At the former LCC airports Lübeck and Zweibrücken, regular commercial flight operations were discontinued. In the examples mentioned, attempts to ensure survival through the cargo business had failed. The sources of income resulted primarily from landing fees and the leasing of land. Since cargo planes land less frequently than passenger planes, the revenue is usually insufficient to sustain operations. Nevertheless, cargo airports are interesting in terms of location policy because of the employment effect in the area of low-skilled jobs. The most prominent example in Germany where the development of a military airport in the periphery into an LCC base failed was Hahn Airport. Here, passenger numbers and aircraft movements at Hahn had been in sharp decline since 2007. LCCs such as Ryanair

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pushed their move to larger airports such as Frankfurt am Main. Hahn’s airport company described the business model in 2013 as “no longer sustainable”. Unlike Lübeck, however, the airport’s operators have managed to partially compensate for the decline in passenger operations with cargo business. Hahn still accounted for 133,000 tons of cargo in 2015 (Federal Statistical Office 2016). The airport owes these volumes in large part to the fact that Frankfurt am Main (FRA) is operating at capacity and is affected by a strict ban on night flights. Meanwhile, Hahn appears to have the critical mass to attract more cargo airlines to the site (STAT Trade Times 2017). This allows the maintenance of the infrastructure necessary for cargo operations, such as transshipment halls and road feeders. Another example is East Midlands Airport in central England, which was used by the Royal Airforce until 1946 and by civilians since 1965. It is the second largest airport in the UK in terms of cargo after Heathrow and serves as an important hub for DHL and UPS, among others (CAA 2017). It also serves a whole range of LCC destinations primarily in the tourist regions of Europe. In Germany, Leipzig and Cologne/Bonn, in Spain Vitoria and in Belgium Liège are airports where freight handling forms a significant part of the service offering. In the USA, the locations of the two integrators Fedex and UPS, Memphis and Louisville, are sites with a comparable business model.

3.3.3 Success Factors Among civil commercial airports, increasing specialization has been observed in recent decades, with airports focusing on one of the market segments network carrier, LCC or cargo, without necessarily completely neglecting the others. This was primarily due to changing market conditions, such as the emergence of low-cost airlines and the regulatory environment, e.g. with regard to noise regulations. Due to a stricter noise protection regime, DHL Express relocated its European hub to Leipzig in 2008 after more than 20 years. Although Brussels remains an important location for air freight, the operator’s primary focus is now on passenger services. The number of studies dealing with the success characteristics of cargo airports is manageable (Gardiner 2006; Gardiner et al. 2005; Niine et al. 2017). In his analysis based on a survey of cargo airlines, Gardiner identifies nine factors that have a positive impact on a cargo airline’s choice of airport: 1. Demand of the route (O-D Demand) 2. Presence through forwarders 3. Passenger traffic (for combination airlines) 4. Presence of partner airlines 5. Flight duration and costs 6. Market access 7. Presence of competitors

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8. Airport fees 9. Support measures Bilateral restrictions, night flight bans and noise regulations are listed as negative factors that stand in the way of a possible choice of location. The above analysis focused primarily on factors identified as important by a key customer group, the airlines. It is not exhaustive, for example climatic conditions were not addressed. To complement this, a list of six factors (6C) that determine the success of a cargo airport is proposed. • • • • • •

Competencies Cooperation with Stakeholders Connectivity Critical catchment area Costs Climate and weather conditions

Airlines generally have alternative options should they not be satisfied with the situation at a particular airport. For example, Amsterdam, Cologne/Bonn, Liège and even Frankfurt airports are all within a small radius. Several international cargo airlines such as Singapore Airlines Cargo, Saudi Airlines and Yangtse River Airlines relocated their operations from Brussels to Amsterdam or Frankfurt, after aircraft noise restrictions were tightened at the Belgian capital’s airport. Hong Kong Airport is facing competition from major airports in the People’s Republic of China, which can grow more easily and already have multiple runways. In the Middle East, Dubai, Bahrain and Abu Dhabi airports are all competing for passengers and cargo. Anchorage occupies a special position among the leading cargo airports, with no significant competitors on the route between North America and North Asia.

3.3.3.1 Competences One of the most important requirements for the suitability of an international cargo airport is that the tarmac is sufficiently long to allow long-haul aircraft to take off. For long-haul aircraft taking off at approximately sea level, a runway of at least 3000 m, or 10,000 feet, is a requirement. Due to thinner air, which reduces propulsive power, longer runways are found at higher altitudes. Another prerequisite, which is self-evident in itself, is that the air traffic control at the airport is able to navigate the aircraft (Huber 2011). Airports generally require areas of at least 500 hectares of land, making the establishment of new airports or the growth of existing airports in conurbations a major challenge. For safety reasons, the immediate surrounding area cannot be built on (N.N. 2012a). Examples of airports that were originally built in the surrounding areas of larger cities and are now part of the expanded urban are Dubai, and Frankfurt. Their expansion possibilities are very limited, and the growth needs of passenger and cargo are often in conflict. For passenger operations, the focus is on building hotels, conference facilities, parking garages,

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rental car centers, and access to local and long-distance public transportation. Freight needs, among other things, transshipment halls, parking for trucks, and areas where cargo equipment can be parked.

3.3.3.2 Cooperation with Stakeholders Airports are dependent on an adequate relationship with stakeholders in order to be able to operate successfully in the long term. Stakeholders are groups or individuals who can influence the goals of the organization or who may be influenced by it (Freeman 2010, p. 46). In this specific case, in addition to passengers, these are primarily the owners, management and employees of the companies operating in and at the airport, such as the operating company, airlines, ground handlers, retailers, freight forwarders and loading companies. While these groups generally have a positive attitude towards the growth of the airport, the interests of local residents usually run in a different direction. These include the direct residents as well as the part of the population living in the approach and departure corridors. The extent to which the concerns of a stakeholder group are perceived (salience) depends on three factors: their power and the legitimacy and urgency of their concerns (Mitchell et al. 1997, p. 873 ff.). In the case of residents suffering from aircraft noise, all three conditions are met; residents are a “definite” stakeholder group. They have legitimate and pressing interests and ways of expressing them. They are, at least in Western democracies, in a position to influence the airport’s business model, for example through political parties or legal action (Table 3.20). The problem of noise emissions is a particular concern for operators of cargo aircraft because they have a higher average age and thus tend to be noisier and fly more often at night. Cargo aircraft are therefore often the focus to reduce noise emissions. Examples of successful interventions include Frankfurt Airport, where flight activities have been restricted. In order to protect local residents from excessive noise, plans were introduced in North America and Europe decades ago to ban obsolete aircraft. These are either no longer allowed to take off or land at all or, like the older B747–400 at London Heathrow, Table 3.20 Night flight closures of selected European hubs Airport Amsterdam Paris CDG Copenhagen Munich London LHR Frankfurt Madrid Milan Brussels Zurich ZRH (2019)

Capacity (movements/ hour) 108 97 83 82 81

Unrestricted operating hours 06:00–23:00 06:00–23:15 06:00–23:00 06:00–22:00 07:00–23:00

General ban on night flights No No No No, noise quota No, noise quota

81 78 70 68 68

05:00–23:00 07:00–23:00 06:30–23:30 24 06:00–23:00

23:00–05:00 No No No 23:30–06:00

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at least not within certain time corridors. In addition to the blanket exclusion of excessively noisy aircraft, two further levers can be found to counter the noise problem (Morrell 2013, p. 260 ff.). These are, on the one hand, requirements with regard to approach and landing, for example the requirement to stop the aircraft by braking instead of reversing thrust. Secondly, at many airports the noise emissions of the aircraft types are taken into account when charging landing fees. The issue of aircraft noise is greater in Europe than in the US, where cargo airports are either in less populated locations or can take off over water, as at airports in Anchorage (ANC), New York (JFK and EWR), Chicago (ORD), Los Angeles (LAX) or Miami (MIA). In Asia, the public is generally less effective at articulating their concerns, if they intend to do so at all. However, it is also common practice at non-European airports to involve stakeholders in an active dialogue, as the examples of Louisville and Hong Kong show (Woodward et al. 2009; Airport Authority Hong Kong 2016).

3.3.4 Connectivity The term connectivity, is intended to refer to the number and quality of connections in the context of air freight. Numerous studies have described the relationship between connectivity (Table 3.21) and the economic development of a region (Boonekamp and Burghouwt 2017; Brueckner 2016). The sheer number of connections is not yet a measure of the performance of a hub for cargo, since on the one hand many aircraft do not carry cargo and on the other hand both charter flights and road feeders are usually taken into account in the statistics. Road feeders can be set up at comparatively low cost.

3.3.4.1 Critical Catchment Area A key success factor for a cargo airport is its strategic location and catchment area. With the exceptions of Anchorage and Dubai, all of the leading airports mentioned have a significant catchment area. This is defined as the region that can be served by trucks and sprinters within a few hours. These are considerably cheaper and more flexible to use Table 3.21 Connectivity of Europe’s largest cargo airports Airport Amsterdam (AMS) Brussels (BRU) Paris (CDG) Frankfurt (FRA) London (LHR) Luxembourg (LUX) Madrid (MAD)

Number of destinations served directly by wide-body aircraft 122 61 130 141 120 57 59

Boonekamp and Burghouwt (2017)

Number of destinations served directly and indirectly by wide-body aircraft 237 171 271 286 273 102 218

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compared to aircraft (Bowen 2012). If goods can be picked up or delivered in this way within a reasonable period of time, this gives an airport a considerable locational advantage. As a benchmark, destinations in Europe with a distance of up to 800 km or 12 h travel time by truck can still be included in the catchment area for normal air freight. In individual cases, distances of over 1000 km are also covered, such as with the Cargolux road feeder from Luxembourg to Budapest, 1200 km away. For express shipments, travel times of up to four hours are to be expected. By using small bullet vans, or sprinters, it is possible to serve places at a distance of approx. 400 km in time. Road vehicles can be scheduled far more flexibly and cost-effectively than aircraft, whose deployment is tied to flight schedules and whose operations and maintenance is very expensive. This means that for freight, the catchment area of an airport is much larger than for passengers, where it is assumed to be around 100 km (Boonekamp and Burghouwt 2017). It explains why cargo is concentrated at relatively few airports and it also illustrates why airports rely on direct access to the trunk road network, preferably highways (Yuen et al. 2016). For example, FedEx once decided against Kinston and in favor of Greensboro as the hub in the southeastern U.S. because of its much better access to the network of interstate highways (Bowen 2012). In Europe, Belgium, the Netherlands and the German Rhine-Ruhr metropolitan region form the economic centre of gravity. They are the central part of a larger economic area that stretches from the English economic centers of Liverpool and Manchester in the north down to the upper Italian cities of Turin and Milan. For some time this area has been known as the “Blue Banana”, in reference to the colour of the European Union, banana because of its curved shape. Despite all conceptual criticisms (Faludi 2015), the banana seems to describe the European economic area more validly than a bunch of grapes spread over almost the entire continent (Kunzmann and Wegener 1991). The “discoverer” of the banana, the French geographer Roger Brunet, was keen to point out that France is at best grazed by it (Brunet 1989). Major European cargo airports are positioned along the shape, namely Amsterdam, Liege/Liège, Cologne-Bonn, Luxembourg and Frankfurt am Main (Mujica Mota et al. 2017). Paris Charles-de Gaulle airport, on the other hand, is located outside the classic “banana”. As a newly planned and greenfield airport, CDG has many advantages, but also the crucial disadvantage that less freight can be diverted to the road in the pre-carriage or onward carriage. In the USA there is no comparable economic core area, but at least three. Here, the most important economic areas have developed firstly in the Northeast, the Boston, New York, Baltimore and Washington region, secondly along the Great Lakes including Chicago and Pittsburgh, and thirdly in California. Here, the aforementioned picture of grapes seems more valid. From the three “optimal” locations near Los Angeles, Memphis, Tennessee and Philadelphia, Pennsylvania shippers can reach the American population with an average lead time of 1.3 days. These are the economic gravity centers near which the two integrators, FedEx and UPS, have positioned some of their hubs. FedEx’s central hub is in Memphis, Tennessee; those of UPS and DHL are in Louisville and Cincinnati, respectively, both in Kentucky. The freight forwarder Panalpina used Huntsville in Alabama as a hub for its own charter network.

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3.3.4.2 Costs Airports charge different fees and charges for the use of infrastructure. These cover the costs of operation. However, the charges also have a certain incentive effect, for example if older aircraft with louder engines are charged more than modern aircraft. As a rule, the charges are made up of several factors. The landing fee is usually levied as a lump sum and can be based on the maximum take-off weight. The noise charge is levied depending on the type of aircraft; as an incentive charge, it favors quieter aircraft. Since all-cargo aircraft have a higher average age than passenger aircraft, noise charges can be a significant criterion in the selection of an airport. A comparable charge is the emissions fee. The aircraft parking fee is levied per parking operation, based on departure weight and parking time. The cargo fee is based on the tonnage of incoming cargo and transfer cargo. It is also levied on cargo transported by road feeder service. In addition to airport charges, cargo airlines consider wages and salaries as another significant cost factor. Since air cargo handling often takes place during nighttime hours, it is subject to widely varying surcharges depending on the location and applicable labor law or negotiated wages. Integrators need their staff in a manageable time window of four hours or less. The size of the pool of available labor, and therefore the amount of labor costs, can vary widely locally. Typical is the use of workers who see the wage as a supplement, such as students, low-income workers or housewives, and sometimes also agricultural workers. A less significant differentiating factor is the cost of fuel. Kerosene as fuel for aircraft turbines is mostly produced and used outside North America as “Jet A-1 fuel”. In the USA, the “Jet A” fuel type is still found, with a slightly higher freezing point of −40 °C, instead of the −47 °C that otherwise prevails. “Jet B” kerosene with a freezing point of −60 is only used for flights to regions with very low temperatures, such as Alaska or Siberia. AvGas (Aviation Gasoline), which is mostly marketed as type 100 LL, is only used in small aircraft with gasoline engines; it is of practically no relevance from an air freight perspective. Differences in kerosene prices at airports are essentially due to the costs of transport, management and provisioning at the aircraft – and not to taxes, as aviation fuel is generally taxexempt. The tax exemption is regulated in most countries on the basis of bilateral agreements (Sterzenbach et al. 2009, p. 86). For the area of the European Union, Directive 2003/96/EC regulates that taxation is only permissible for domestic transport. This exemption has little relevance for air freight, as this, with the exception of express traffic, is normally transported by road feeders within an EU country. A further cost-reducing effect results from the fact that several fuel suppliers usually compete with each other at cargo airports. 3.3.4.3 Favourable Climate Ideally, an airport is usable all year round, around the clock and without restrictions due to the weather. Climatic factors that can restrict use are primarily wind, ice, snow and fog as well as excessive heat and humidity. During severe storms, even large aircraft are unable to take off and land safely, especially if they are blowing across the runway. Such storms are seasonal phenomena in Asia and the southern US states than hurricanes or typhoons. Ice formation is a problem in more ways than one. It makes it necessary to de-ice aircraft, otherwise the functioning of mechanical parts is impaired. Ice also reduces the traction of

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runways, which can lead to an aircraft not being able to take off in time or come to a stop in time after landing. Heat is a problem that affects the performance of aircraft turbines during take-offs, especially in the Middle East and Africa. In the summer months, for example, temperatures in Dubai reach 40 °C or more at midday, with humidity exceeding 80% (Arvis 2011; O’Connor 2001). In the high altitude metropolitan airports of South America, the combination of heat and low oxygen levels further degrades performance. This affects the thrust of aircraft and hence the payload available. At these locations, flight schedules are structured so that aircraft land primarily during the hot midday and afternoon hours, and takeoffs are scheduled for the cooler hours of the night and early morning – they are only secondarily oriented to the needs of their customers.

3.3.5 Overview of the World’s Leading Cargo Airports Global air cargo handling is concentrated at a few dozen airports. The top twelve cargo airports (Table 3.22) handled a total of more than 30 million tonnes of international cargo in 2017, roughly 40% of global tonnage (Harris 2018a). Table 3.22 Leading international cargo airports in the world, measured in loaded and unloaded tonnage of Conventional airfreight (excluding express, airmail) Rank 2018 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Airport, Country (IATA Code) Hong Kong, HK (HKG) Shanghai, CN (PVG) Incheon, KR (ICN) Dubai, AE (DXB) Taipei, TW (TPE) Tokyo, JP (NRT) Doha, QA (DOH) Singapore (SIN) Frankfurt, DE (FRA) Anchorage/AK, US (ANC) Paris, FR (CDG) Miami/FL (MIA) Amsterdam, NL (AMS) London, GB (LHR) Bangkok, TH (BKK) Chicago/IL (ORD) Los Angeles/CA (LAX) Istabul, TR (IST) Leipzig, DE (LEJ) New York/NY (JFK) Total tonnage top 20

ACI World (2018, 2019)

Quantity of cargo loaded and unloaded (thousand tonnes) 5018 2916 2858 2641 2305 2198 2164 2155 2045 1992 1937 1771 1716 1684 1453 1393 1375 1213 1127 1051 41,011

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Remarkably, the airports mentioned sometimes differ quite significantly in their business models. Memphis and Louisville are essentially hubs for FedEx and UPS express networks, respectively. Dubai and Anchorage is a transit point on Asia – Europe routes. Singapore, Frankfurt, Paris, Doha and Paris airports are home bases for major combination carriers, and hubs that are also important for passenger traffic.

3.3.5.1 Hong Kong (HKG) Hong Kong International Airport is the world’s largest cargo airport. It was opened in 1998, and is located on the island of Chek Lap Kok. For the construction of the airport, the topography of an island was straightened by removing hills. In addition, the island was significantly enlarged by filling in land. In 2015, around 100 airlines flew to around 180 destinations around the world. Hong Kong’s Airport’s success is essentially based on three pillars: 1. Hong Kong is firstly a gateway for goods produced in the hinterland along the Pearl River Delta (PRD), 2. as a former crown colony, it is a hub between China and the countries of Southeast Asia, and 3. a transit station between the hostile but economically closely intertwined PR China and Taiwan (Zhang 2003). Although direct cargo flights have been permitted in transit between the PRC and Taiwan since 2006 (Fang 2006), which weakens this third pillar, many goods are still routed via Hong Kong. Until the relocation to the new site, Kai Tak Airport was Hong Kong’s major international airport and also the world’s most important cargo airport at the time. The airport’s runway jutted far into Kowloon Bay in the middle of the metropolis. By the end of the 1980s, the airport had already reached its capacity limits and was no longer able to handle the steadily growing volume of passengers and cargo. In addition, the airport’s approach was highly challenging from an aeronautical point of view and required several course changes, as a chain of hills made it impossible to approach the runway in a straight line. The new airport was built with the painstakingly obtained consent of Hong Kong’s then-future protecting power, the People’s Republic of China (Tsang 2007, p. 253 f.). The completion of the airport took place, contrary to plan, one year after the People’s Republic had taken control of the former British Crown Colony of Hong Kong. In 2015, the new airport employed more than 70,000 people, handled nearly 70 million passengers and 4.4 million tons of cargo. The airport directly contributes about 5% to the GDP of the Special Economic Zone and is therefore of high strategic importance. The main pillars of the local economy – trade and logistics, tourism, the financial market and trade, and the service sector – are highly dependent on the functioning of the airport. These sectors account for another 57% of Hong Kong’s GDP (HKIA; Airport Authority Hong Kong). The main products exported by air from Hong Kong are jewellery, mobile phones and other telecom products, precious metals, semiconductors and electrical components (CenStatD 2012).

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The airport has become a victim of its success and, like its predecessor, is operating at the limits of its capacity. Capacity is therefore to be expanded to 102 million passengers and 8.9 million tonnes of freight by 2030. This will require the construction of a third runway and corresponding terminals. The island will be further enlarged at the northern end by land fill. Construction began in early 2016, and the new facilities are scheduled to come on stream in 2024. The operators are virtually forced to expand, as without it there is a threat of airlines migrating to other locations. The airport is facing increasing competition from neighbouring Shenzhen, as well as more distant centres such as Beijing and Seoul, and is striving to defend its role as a leading cargo airport. Whether this capacity expansion is justified in view of the costs and possible environmental impact remains controversial. Critics point to competition from airports in the Pearl River Delta (PRD). The area has a population of more than 40 million. It includes the major cities of Guangzhou, Shenzhen and Foshan with their manufacturing plants. Hong Kong is essentially a trading metropolis that exports goods delivered by truck from the People’s Republic. Unlike in the 1970s, local production no longer takes place in any significant way. Companies that once produced in Hong Kong relocated their production to the People’s Republic decades ago. The value of re-exports has significantly exceeded that of gross domestic product since the 1990s (Zhang 2003). 99% of Hong Kong’s textile exports are re-exports, three-quarters of which originate from the PRC alone (Chan 2017). Exports diverted via Hong Kong escape profit taxation thanks to a tax loophole (van der Kamp 2016). Guangzhou and Shenzhen are in the process of implementing their concrete plans for a fifth and third runway, respectively. The three airports are expected to engage in a bitter dispute for supremacy. In this dispute, Hong Kong benefits from its existing role but is politically weakened. Guangzhou and Shenzhen are closer to the actual manufacturing bases, especially the textile and electrical industries. From a strategic perspective, neither the Guangdong provincial government nor the People’s Republic has any interest in privileging Hong Kong. Both rather focus their attention on the development of the Pearl River metropolitan region. Since the People’s Republic controls the airspace around Hong Kong, Hong Kong Airport is ultimately dependent on the goodwill of the Chinese authorities.

3.3.5.2 Shanghai (PVG) Shanghai Pudong International Airport (Pudong for short) is one of two international airports in the Shanghai metropolitan region. The airport was opened in 1999. Although Pudong is already one of the largest airports in the world, it still has room for expansion with its four runways. In 2014, Pudong handled nearly half of PRC’s air cargo. The second international airport is Shanghai Hongqiao International Airport (IATA: SHA), but since the opening of Pudong, it mainly handles domestic Chinese and intra-Asian flights. It handles about half a million tons of domestic Chinese air cargo (Shanghai Airport Authority 2016). The two airports in Shanghai are hubs and gateways for a whole range of national airlines as well as Chinese and international cargo airlines. As gateways, they serve the eastern Chinese provinces of Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi and Shandong, SHA

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for domestic traffic and PVG for international traffic. The three leading integrators DHL, UPS and Fedex all operate a hub in Pudong, making it the only major airport where the three competitors simultaneously maintain their own hubs. The international cargo activities are bundled in the Shanghai Pudong International Airport Cargo Terminal (PACTL). This is a joint venture between the airport company, Lufthansa Cargo and a third-party investor. In 2015, the airport handled 1.6. million tons of cargo, 650,000 tons of imports, and 950,000 tons of exports. The central cargo terminal 1 is 50,000 m2 and has facilities for special cargo, such as frozen food, among others. Since opening, some airlines have moved to expansion buildings in Cargo City East. In 2008, PACTL West was also opened, which is expected to be able to handle 1.2 million tons of cargo annually. This part of the airport has storage space of more than 120,00 m2. Pudong is connected to 30 cities throughout the People’s Republic of China by truck via a road feeder network. More than ten other cities are reached by cargo flights (PACTL 2016). Despite the economic success: with its location on the east coast of China, Pudong Airport is indeed in an important catchment area, but geographically it is not optimal. For the important economic centers in the north of the country, the airport is a little too far south on the route to America. The disadvantage is even more pronounced on the important route to Europe. The Chinese central government has made considerable investments to promote the economic regions in the hinterland, far away from the coastal regions. This is intended to stop the rural exodus. It is expected that such hinterland airports as Chengdu, Zhengzhou and Chongqing will gain in importance. Chongqing, with its population of more than 30 million, is often counted as the largest metropolitan region in the world. So far, poor transport links to seaports had emerged as a major constraint for the region. Investment in airports beyond Shanghai and Beijing is a key vehicle for hinterland development.

3.3.5.3 Inch’ŏn (ICN) Incheon International Airport is a major airport located about 50 km. west of the center of the South Korean capital Seoul. The airport was built on artificially raised land between two islands in a construction period of ten years. Since no existing buildings had to be taken into account in the design of the construction, the airport could be ideally tailored to the needs of passengers and cargo. The airport has been in operation since 2001, replacing Gimpo International Airport, which like many locations in Asia had reached capacity limits. Since the opening of Incheon, Gimpo serves only inter-Korean and some inter-Asian connections. The city of Incheon also has a major seaport, which allows the pre-movement from manufacturing facilities in northeastern China, such as Ningbo, Dalian, and even Shanghai to be organized inexpensively by ship (IIAC 2017). Incheon itself is a major city with a population of more than three million and, together with Seoul and several other cities, forms the Sudogwon metropolitan region. It is home to around 25 million inhabitants, half the population of South Korea. The region thus forms the economic heart of the country. In recent decades, much production has been relocated

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to the neighboring People’s Republic of China due to the lower labor costs there. However, the production of high-value industrial goods has often remained in the country. The main export goods loaded at Incheon Airport are semiconductors, followed by smartphones (Lee and Yang 2003). These are the products that are usually transported by air. The airport has been able to expand its role as a leading cargo airport once again. Incheon is on the quasi-direct route between the Pearl River Delta in China and Anchorage, making it more convenient for trans-shipments than the airports in Tokyo and Taiwan. In 2001, almost half of the cargo handled at Incheon was transit cargo (Lee and Yang 2003). The cargo area of Incheon International Airport mainly consists of six cargo terminals and five warehouses. The three main terminals A, B and C are highly automated. Terminal A is operated by Korean Air, one of the world’s leading cargo airlines. Another terminal is operated by DHL, which uses it as a gateway for traffic to and from Korea, Mongolia, northern China and eastern Russia. In the next, fourth expansion phase, the airport’s capacity is to be increased from the current three million to seven million tons of cargo. On the apron of the southern terminal, 32 B747s can already be parked at the same time (Mehta 2012).

3.3.5.4 Dubai (DXB, DWC) The city of Dubai has two airports, Dubai International Airport (IATA code DXB) and Dubai Al Maktoum International Airport (Dubai World Central International, DWC). Dubai International has two runways. Dubai benefited from the fact that connections between Europe and Asia required stopovers until the late 1980s. This was partly due to the limited range of aircraft, and the politically motivated closure of Soviet airspace. With the establishment of Emirates Airlines in 1985, Dubai Airport embarked on a self-sustaining recovery. In the 30 years since, Emirates has become the world’s fourth largest airline in terms of passenger kilometers and the largest in terms of cargo kilometers. From Dubai, two-thirds of the world’s population can be reached within an eight-hour flight. The airport is of great strategic importance for the emirate’s economy. Approximately 250,000 people work directly or indirectly at the airport, and its contribution to the gross domestic product is more than USD 20 billion. These figures correspond roughly to 20% of the working population and 28% of the emirate’s economic output (Dubai Airports 2013, 2015). The airport has the capacity to handle 2.5 million tons of cargo per year. An additional expansion will allow the handling of up to three million tons of cargo. The so-called “Cargo Village” is one of the largest of its kind. A special feature is the “Flower Center”, which is essentially a transshipment center for flowers transported from East Africa, especially Kenya, to Europe. The facility has two separate zones where the goods are temporarily stored at an average temperature of 5 ° and 12 °Celsius respectively before being transported further. On the tarmac, perishable goods can be kept cool even at outside temperatures approaching 50 ° in the summer months by means of special ULD and so- called “cool dollies”. Emirates Sky Cargo’s SkyPharma Cool Dollies are designed for transport between the warehouse and the apron, can hold one or more small standard containers and maintain a constant temperature for up to three hours, ranging from −20 to +20 (Emirates SkyCargo 2018).

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A further expansion of Dubai International would only be possible with considerable difficulties, as the population in the vicinity of the airports has increased considerably in the last decade, and the airport borders on the neighbouring emirate of Sharjah. Since the turn of the millennium, construction has been underway on a new Dubai World Central (DWC) airport to complement and, in the long term, even replace the existing Dubai International airport. DWC, officially named Al Maktoum International Airport, is a development in the desert that does not have to take into account existing buildings and infrastructure. The area of the new airport is ten times that of the old site. The first commercial flight of a passenger airline was handled in DWC in 2013. Individual cargo airlines had already been flying to the airport since 2010. The plans envisage DWC increasingly taking over freight traffic and, over time, that for passengers as well. In anticipation of this move, the first freight forwarders, Panalpina and Kuehne + Nagel had already relocated their headquarters from DXB to DWC years ago. However, the financial crisis of 2008 initially delayed the relocation considerably. Al Maktoum is located close to the border of the neighboring emirate of Abu Dhabi, about 50 km south of Dubai International. In the meantime, some cargo has to be trucked between the two airports. Cathay Pacific, for example, flies its freighters to Al Maktoum and passenger planes to Dubai International (Cornwell 2014).

3.3.5.5 Tokyo, JP (NRT) The international airport of Tokyo, Narita International Airport, is located about 60 km east of the city center of the Japanese capital. The airport is named after the adjacent city of Narita. With a population of around 40 million, Tokyo and the neighbouring cities, such as Yokohama, Kawasaki and Saitama in particular, are among the largest metropolitan regions in the world. About one-third of Japan’s population lives in the metropolitan area and thus in relative proximity to Narita Airport. The airport handles about 50% of Japan’s international passenger traffic. Despite the very substantial shift in production from Japan to other Asian countries, such as China in particular, a great deal of air freight continues to be transported to and from Japan. Japan is still a production location for high-quality electronic parts, which are predestined for transport by air freight. Next to Narita, Haneda Airport is establishing itself as the second major international airport. Originally focused on domestic air traffic, Haneda has also offered international connections since 2010. Although Haneda is significantly closer to Tokyo’s city centre, most international airlines still preferred Narita for a long time, as only unfavourable slots were offered at the airport. Political pressure, however, has led to Haneda also being available to American and European airlines at attractive times. To what extent this will lead to a shift of air cargo volumes from Narita to Haneda remains to be seen. Haneda does not yet have anywhere near the infrastructure necessary to handle air cargo efficiently. The main reason is that in Haneda, due to its proximity to Tokyo and Yokohama, land prices are many times those of Narita. Cargo airlines and freight forwarders already established in Narita are therefore reluctant to move. Until the critical infrastructure is in place, much of the cargo arriving at Haneda will likely continue to be transported to Narita for

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deconsolidation. However, Haneda has the potential to replace Narita as the most important cargo airport in Japan in the medium term due to its size – the airport has four runways – its geographical location and 24-h operations.

3.3.5.6 Taipei, TW (TPE) Taoyuan International Airport is located about 40 km west of Taipei and borrowed the 3-letter code TPE from it. The airport replaced the Taipei Songshan city centre airport from 1979, which reached capacity limits and is now mainly used only for domestic flights and regional connections. Since opening, it has grown by an average of more than 20% each year in cargo and passenger sectors (Wang and Hong 2011). Even recognizable to the traveler, the first terminal is already outdated and hardly competitive compared to the infrastructure at other major Asian airports. In 2000, the infrastructure was expanded with the construction of a second terminal, and a third terminal is under construction. Until 2006, the airport operated under the name Chiang Kai-Shrek, named after Mao’s opponent in the Chinese Civil War and long-time president of the Republic of China. The airport is the home base of the two Taiwanese airlines Eva Air and China Airlines. Similar to Korea, Taiwan has been focusing on the production of higher value products, especially from the electronics, entertainment and telecommunications sectors, at least since the turn of the millennium (Hsu et al. 2009). These are also the products that are predestined for air transport due to their commodity value, it explains the continued prominent role of the airport. Despite Taiwan’s problematic diplomatic situation – it is only officially recognized by some 20 countries – the island is economically strongly involved in world trade. For example, the airport is connected by direct flights to Dubai, Amsterdam, Frankfurt, New York and Los Angeles. Relations with the People’s Republic of China are more complicated. Since the end of the civil war, there had not been direct connections from the mainland until 2003. Travellers mostly flew as transfer passengers via Hong Kong. Since then, the ban has been gradually relaxed and there are now around 30 direct connections between the People’s Republic and the Republic of China. Since the early 1980s, Taiwanese companies have established large-scale production facilities on the mainland, particularly in the Shanghai and Beijing metropolitan areas (Zhang et al. 2004). Although declining, Taiwan’s direct investment in the PRC was about US$9 billion in 2017 and represented the bulk of outward investment. Mainland companies have also been able to invest in Taiwan since 2009. In each case, the high-tech sector is the one with the most significance. (Lee, Chun-yi Yin, Ming-xi 2017). The best known Taiwanese company is Foxconn Technology with 1.2 million employees worldwide (actually Hon Hai Precision Industry). It manufactures for Apple, Nokia and Microsoft, among others, at its 12 or so production facilities in the PRC. Conversely, mainland companies are increasingly investing on the island (Lee, Chun-yi Yin, Ming-xi 2017). The airport is a leader in cargo in particular, and somewhat less significant in passenger traffic. In addition to its favourable location on the North Asia – North America trade route, the airport benefits from personnel and real estate costs that are cheaper than those of its competitors Hong Kong, Singapore and Tokyo (Chen and Chou 2006). The main terminal operator is TACTL (Taiwan Air Cargo Terminal Ltd.), handling close to half of

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the cargo volumes. The company provides services in temperature-controlled logistics, dangerous goods and heavy cargo, among others. At TPE Airport, it has an area of more than 130,000 m2.

3.3.5.7 Singapore (SIN) Singapore International Airport is located in Changi in the east of the city-state, less than 20 km from the city centre. The airport replaced Paya Lebar Airport in 1981, which is still used as a military base today. When the airport was built, it was necessary to artificially reclaim land through fill. In satisfaction surveys, the airport consistently scores tops in passage, despite increasing competition from Asia and the Middle East. Skytrax even named the airport the world’s No. 1 airport for the sixth year in a row in 2018, with flights from Singapore to 330 cities in some 80 countries. For a long time, the airport owed its success to the fact that it was an important stop on the route between Europe, especially the United Kingdom, and Australia. Colloquially, the route was known as the kangaroo route, with airlines making only a brief technical stop in the city-state. With the advent of carriers from the Middle East, Singapore has become somewhat less important in that regard. The airports on the Arabian Peninsula are more convenient for connections between Europe and Australia. Here, in any case, stopovers are technically and economically necessary for the time being. Singapore has succeeded in more than compensating for the loss of volume with other traffic. In the 10-year period between 2008 and 2018, the number of passengers at the airport rose from 38 million to 59 million. The high quality standards that the airport has imposed on itself in the passenger sector also apply in a similar form to cargo. The operators have set themselves the target that 90% of belly cargo is ready no later than 3.5 h after landing. For cargo from all-cargo aircraft, the target is 90% within as little as 5.5 h (Changi Airport 2018). In addition to Singapore Airlines, the carriers that pick up the most cargo in Singapore are mainly Cathay Pacific, FedEx and the two Taiwanese carriers China Airlines and EVA Air. Relations between Singapore and Taiwan have traditionally been close, both militarily and economically, which explains the prominent role of Taiwanese airlines. 3.3.5.8 Frankfurt Am Main (FRA) Together with Paris-Charles de Gaulle, Frankfurt Airport is one of the most important cargo airports in Europe. The current location of the airport southwest of downtown Frankfurt has been in operation since 1936. The airport extends to several towns, in addition to the city of Frankfurt, Rüsselsheim, Mörfelden-Waldorf and Kelsterbach. After the end of the war in 1945, the airport initially served the armed forces of the USA as a base for their air force. In 1948/49, Berlin was supplied from Frankfurt via the airlift. In the early 1950s, civil air traffic picked up again. Since that time, there has been continuous investment in the infrastructure. Major events in the airport’s history were the first non-stop connection to the USA in 1957, the introduction of wide-body aircraft in the early 1970s and the opening of the new Runway West in 1984. Although the airport’s direct proximity to downtown Frankfurt allows for short transit times – Frankfurt’s Römer

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Air freight volumes Frankfurt Airport (on, off and transit, in t.) 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Fig. 3.8 Development of cargo volume at Frankfurt Airport (1999–2015)

in downtown is only 12 km away – it has been a stumbling block to further development. The administrative courts have ruled on almost all expansion projects in recent decades. Two areas are designated for air cargo at the airport, the larger Cargo City South and Cargo City North. Numerous airlines with their cargo activities and freight forwarders have settled in Cargo City South, such as the companies DHL (Fig. 3.8).

3.3.5.9 Anchorage, Alaska Anchorage is special in the context of other major airports. Probably none of the other locations has such an economically insignificant hinterland as Alaska’s capital. In the passenger sector, the airport has just about two million passengers, about one sixth of what Cologne/Bonn Airport records per year (DoT). Until the 1980s, American, Asian and European airlines used Anchorage as a stopover before or after a Pacific crossing. Until then, Soviet airspace was closed to most Western airlines. Connections between Europe and North Asia were primarily possible via the longer southern route via the Middle East or the shorter polar route via Alaska. Older generation aircraft did not have the range to cover the total distance without a stopover. The long distances between Asia and North America are also the reason for Anchorage’s continued importance as a cargo airport. The city is located about halfway between New York and Tokyo. It makes more business sense for cargo aircraft to make a technical stopover on the Asia-America route. About 80% of air cargo between Asia and the Americas is transferred via Anchorage. The two integrators FedEx and UPS maintain major hubs with automated sorting facilities in Anchorage. The detour via Anchorage compared to the

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direct route is only a few 100 km. By not being fully fueled at takeoff, which it would need for a non-stop flight, the aircraft can pick up additional revenue-generating cargo. On the Shanghai to California route, this can mean additional revenue of about $90,000 (O’Grady 2010). On average, the stopover takes only two hours, aided by innovative infrastructure. Aircraft can be refuelled directly through an underground pipeline system rather than by tanker trucks (Ken Wysocky 2015). The airport also benefits from a privilege unique in the US. Normally, American airlines are not allowed to transfer shipments destined for the US to non-US airlines. Cargo handled in Anchorage has been exempt from the ban on cooperation between American and foreign airlines since 1990.

3.3.5.10 Hamad International Airport, Doha (DOH) Hamad International Airport has been Qatar’s capital airport since 2014. It replaced the previous Doha Airport and took over its IATA designation DOH. In 2019, the airport has only one terminal, with another in the planning stage. The two runways are each over 4 km long and are the longest among leading major airports. The airport is designed to handle up to 50 million passengers and two million tons of cargo per year (Farhadi et al. 2014). Even more than at comparable airports, the national airline, Qatar Airways, dominates traffic. European airlines offer only a few connections. For example, in 2018, Swiss did not fly at all and Lufthansa only flew cargo and no passengers to Doha, while Qatar Airways flew to Berlin, Frankfurt, Munich, Geneva and Zurich. Lufthansa cited economic reasons for discontinuing its service from Frankfurt to Doha via Kuwait. After neighboring Saudi Arabia and Bahrain, as well as Egypt, cut ties with Qatar in 2017, Qatar Airways temporarily left the growth path. The closure of airspace meant costly detours to Europe via Iran and Turkey. Higher jet fuel consumption and maintenance costs meant that the year ended with a loss. Nevertheless, for the full year 2017, cargo tonnage handled at Doha increased by another 14.5% year-on-year, compared to 8.2% for the weighted average of the 20 largest airports. 3.3.5.11 Paris, FR (CDG) In the Paris region, Charles de Gaulle (CDG), Orly and Le Bourget airports are operated by Aéroports de Paris. Orly replaced Le Bourget as the main airport in the 1950s. Since the 1970s, it has been the new major airport Charles de Gaulle. Le Bourget is now used only for business air traffic, Orly primarily by low-cost carriers. 95% of the freight volumes handled by the three airports are at Paris CDG. CDG benefits from the fact that the airport was planned on the drawing board and, unlike Frankfurt Airport, for example, has not grown organically. The airport has four runways. While Frankfurt’s growth was limited by its location in a conurbation, Paris airport, which is located further out, was still able to expand for a long time. In terms of passenger volume, CDG also still ranks ahead of Frankfurt and only behind London Heathrow in Europe.

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Past efforts to develop Vatry (XCR) in Champagne into a veritable cargo airport and to divert cargo volumes away from Paris have failed. The former military airport Vatry is located about 150 km from the city centre of Paris. In 2004, Vatry competed with Leipzig to replace Brussels as the hub for DHL – but was unable to beat the eastern German location. In 2017, only occasional flights by Ryanair and Atlas Air were recorded.

3.3.5.12 Miami, Florida (MIA) Although Florida is geographically part of North America, Miami Airport is the main gateway to Latin America and the Caribbean. Nearly half of the tonnage that touches Miami is international transit. Cargo that is transported to or from South America usually goes through this airport. This is partly because the technical stop allows it to take on jet fuel. On the other hand, because the infrastructure in most Latin American countries is underdeveloped, and often barely meets even passenger demand. The continent lacks a major airport in the north, which would be a consolidation point for the region. In perspective, this could be the airports in Bogota or Panama City, but so far they have not been sufficiently developed. An expansion project in Mexico City was cancelled due to pressure from the population. From Miami, approximately 150 cities are reached worldwide, about 100 of them with dedicated freighters. The most important import products are flowers, fish and seafood, and other perishable goods. In this sector, Miami covered about 70% of imports in 2014, far ahead of New York (JFK) with 12% and Los Angeles (LAX) with 9%. Major export products include computers and computer parts, machinery, and telecommunications products (MIA 2015–2016). Recently, some carriers from the Middle East have added Miami to their flight schedules, while others have increased their frequency there. Qatar Airways, for example, serves the airport as a stop on its route from South America to Doha. Important products transported on the US-Middle East tradelane include medical products, pharmaceuticals, electronics, spare parts for the aerospace and shipbuilding industries, and perishable goods (Haug 2017, 2018). With Fort Lauderdale, which is served by Emirates Skycargo, for example, there is a competitor in the immediate vicinity that is able to draw off volume.

3.4

Ground-Handling Agents (GHA)

Cargo handling is rarely carried out by airline staff, but mostly by ground handling agents (GHAs). These are companies that perform various tasks on the ground that are necessary for flight operations. In IATA’s definition, GHAs are entities “authorized” to act for and on behalf of the airline, by receiving, handling, loading, unloading, transiting or dealing with cargo, passengers and baggage (IATA 2008). The main cargo activities are handling in the hangar and on the apron, supplying the aircraft and document handling.

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Table 3.23 Competitive structure in ground handling in leading non-European cargo airports Airport Memphis Int’l Ted Stevens Anchorage Louisville Int’l Viracopos Int’l Taiwan Taoyuan Int’l Narita Int’l Singapore Changi Hong Kong Int’l Pudong Int’l Doha Int’l Dubai Int’l

Country USA USA USA Brazil Taiwan Japan Singapore Hong Kong Shanghai Qatar V.A.E.

Number of suppliers 4 2 1 1 6 5 1 10 1 1 5

Tomovà et al. (2015)

Some of these companies have emerged from airport companies, others from airlines. European Community law requires that private competitors be allowed at larger airports. After an initial liberalisation in 1996, the existing regulations were tightened again. At airports with more than two million passengers or 200,000 tonnes of cargo per year, at least three GHAs must be allowed to offer their services (European Parliament 05.02.2016). In Germany, the airports Berlin-Tegel, Schönefeld, Bremen, Düsseldorf, Frankfurt-Main, Hahn, Hamburg, Hannover-Langenhagen, Cologne-Bonn, LeipzigHalle, Munich, Nuremberg, Stuttgart and Weeze are affected by the regulation. Outside Europe, the situation is even more determined by monopolies. In Asia in particular, with the exception of Hong Kong, there is little competition in the ground handling sector (cf. Table 3.23). The services which have been transferred to handling companies, not least in the context of this liberalisation, interfere deeply with the original core business of airports. Even larger airlines, which actually have sufficient volume to carry out handling services themselves, have recourse to these specialised companies for cost reasons: the handling of air passengers by third parties, such as Swissport, Fraport or Dnata, is best known to the wider public. However, these companies also offer a variety of other services, such as the operation of lounges for frequent flyers, de-icing and refuelling of aircraft, as well as cargo activities (Table 3.24). The market for ground handling services is increasingly dominated by international groups (CAPA 2014a). The world’s leading competitors include Swissport, headquartered in Zurich; Worldwide Flight Services, Paris; DNATA, Dubai; and Menzies, Edinburgh. Each of these four companies reports revenues in excess of $1 billion. The industry leaders have grown mostly through mergers with competitors. For example, in 2015, Dnata acquired AviaPartner’s cargo operations in Amsterdam and WFS acquired 51% of Fraport Cargo Services.

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Table 3.24 Overview of leading ground handling agents with freight activities Company Swissport Worldwide flight services (WFS) Dnata Menzies AlixPartners

Cargo volume handled (million tonnes) 4.3 Approx. 4 Approx. 2 1.7 Approx. 1

Headquarters Zurich Paris Dubai Edinburgh Brussels

Company information

3.4.1 Air Cargo Services The services that ground handling agents provide in the context of air cargo can be divided into five groups: Warehousing and handling, document preparation, handling of special cargo, transportation between the ramp in the terminal and the tarmac, and transportation by truck (road feeding) (Morrell 2013, p. 167). In doing so, they work closely with airlines, freight forwarders, and airport (Sales and Hulsman 2016). GHAs usually work more economically on the ground than airlines because they can better utilise equipment, staff costs are often lower and employees are better specialised.

3.4.2 Success Factors The success of a ground handling agent (GHA) is primarily determined by the volumes handled at a location. The local economies of scale are more significant than those of the entire network, which explains why local providers compete at certain airports. Local economies of scale are effective in both the passenger and cargo sectors. The costs of a handler consist first and foremost of personnel expenses and secondly of rent and other administrative costs. At the Swiss GHA Swissport, staff costs accounted for approximately 68% of total costs in 2017 (Swissport 2018). Another indication of the cost structure comes from WFS’s unaudited financial information published for the 2015 reporting year in connection with the issuance of bond securities. According to this information, personnel costs were approximately 54% of revenue in the reporting year. As volumes increase, the cost per tonne of cargo handled decreases as staff and handling space can be better utilised. Key productivity indicators that are tracked are the tonnage handled (kg per worked hour) and the number of air waybills handled, both per worked hour (Schäfer 22.03.2019b). Given their importance to the company’s success, handling agents constantly strive to control personnel costs. The personnel deployed at the airports are specially and extensively trained, especially in the prevention of hazards, in respect to cargo specifically in maintaining the secure supply chain and in the handling of dangerous goods. Every single employee is approved by the airports before being allowed access to security-relevant areas. At the same time, employees are more likely than average to be unionized. The result of these factors is that personnel costs can be regarded as far less flexible than in other logistics

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sectors. Productivity gains can arise where it is possible to smooth out fluctuations in capacity utilisation, for example by ensuring that freight is not only delivered at peak times.

3.5 Freight Forwarding Companies Freight forwarders play an essential role in the provision of air cargo services. They act as intermediaries between shippers, consignees, carriers and other service providers, such as ground handling agents. According to industry estimates, about 85% of freight volumes are handled by freight forwarders (Panalpina 2009; Hellermann 2006; Clancy et al. 2008), and only the remainder is handled directly between shippers and airlines. The literature supports these estimates and in some cases assumes even higher percentages (Reis and Silva 2016; Hellermann 2006). This high percentage is in no way comparable to ocean shipping, where only about one third of container volumes are handled by forwarders. There are a number of reasons for the dominance of forwarders in air freight: First, freight forwarders are more likely than airlines to be able to offer the time-critical pre- and on-carriage services at low cost. Their business model makes it easier for them to organize shipments from the shipper’s ramp to the consignee’s ramp. Second, their sales organization is more focused on smaller and medium-sized customers, which is generally not efficient for airlines to service. Thirdly, the carrier can in principle bundle shipments for air freight with those for surface transport at pick-up or delivery and thus offer them more cost-effectively than a carrier. This is at least possible if the shipment is x-rayed at a later date.

3.5.1 Activities In addition to arranging the main run, i.e. the actual air transport, the forwarder undertakes a number of other activities (Lillie and Sparks 1993). When the forwarder becomes active, his role is initially limited to organising the transports, not to carrying them out. The German Commercial Code regulates in § 453 HGB, para. 1: “By the forwarding contract the forwarder is obliged to arrange for the shipment of the goods.” In principle, it is open to him to carry out a transport himself. In this case, he becomes the carrier within the framework of the so-called self-employment. He then assumes the rights and obligations of a carrier with regard to the transport (§ 458 HGB).

3.5.1.1 Organisation of Pre-Carriage and Onward Carriage A major reason for the forwarder’s success is that in most cases he can offer the pre- carriage to the airport or the on-carriage from the airport more cost-effectively than an airline. Where a forwarder also offers other services such as groupage by road or sea, there are bundling advantages due to lower stop costs. In such cases, the shipments can be picked up or delivered together with the air freight. Ideally, the costs of the transport can be allocated to several lots.

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3.5.1.2 Organisation of Main Legs as IATA Agents The vast majority of forwarders who handle air cargo are official IATA cargo agents. Most airlines also only accept bookings from such agents. As an agent, the freight forwarder arranges the freight contract that is concluded between the consignor and the consignee. He acts on behalf and for the account of the airline and receives a commission for his efforts. As an agent, he is allowed to book freight space with an IATA airline, prepare the consignments for shipment, prepare the documentation and issue waybills (Schramm 2012, p. 69). Any person or organisation can become an IATA agent under certain conditions. The essential requirements to become an agent are, firstly, that the applicant has qualified and trained staff, particularly with regard to the handling of dangerous goods; secondly, is soundly financed; thirdly, has adequate service premises and handling space; and fourthly, actively promotes and sells international airfreight. Approximately 5000 forwarders worldwide meet these requirements and are registered as IATA agents. 3.5.1.2.1 Individual Transport (Direct Shipments) In cases where the forwarder merely arranges the transport, he acts as an agent of the airline. He is not a contracting party with regard to the air transport (Bernecker and Grandjot 2012, p. 87). In such cases, the freight forwarder acts as a broker and receives a commission for arranging the freight. However, this construct is the exception and appears mainly in the following cases: • in the case of small forwarders who handle airfreight consignments only on an irregular basis, e.g. in developing countries, • if no groupage is offered on certain routes and the volume is therefore low, • in the case of consignments under letters of credit, if the banks involved require the submission of the air waybill drawn up by the operating airline or, what is relevant here, its IATA agent. For the shipper, individual transport is usually a more expensive solution than leaving it to the carrier to bundle his consignment with those of other shippers. 3.5.1.2.2 Carriage of Consolidated Air Cargo Consignments As a so-called consolidator, the forwarder offers its own air freight consolidation services. He passes on part of his purchasing advantages to his customers. He also benefits from the intelligent mixing of heavy and bulky freight, for example when he bundles machine parts with e-commerce or textile consignments. The consolidation advantage (consol benefit) is on average about 15%. This means that a freight forwarding company can charge 15% more than the actual weight. The consolidator creates a separate waybill, the House Airway Bill (HAWB), for each shipment. The actual or authorised consignors and consignees appear in this HAWB. It is signed by the forwarder (Table 3.25).

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Table 3.25 Relationship between MAWB and HABW MAWB – HABW 1 – HAWB 2 – HAWB 3

Sender Spedition Hellmann Hamburg Bosch Stuttgart VW Wolfsburg Boss

Receiver Hellmann freight forwarding New York Bosch New York VW Chattanooga Macy’s New York

Content 1 ULD with 8 cartons of consolidated goods, 750 kg 1 carton, with car parts, 50 kg 2 boxes with spare parts, 200 kg 3 cartons with textiles, 500 kg

Own representation

If the freight forwarder offers consolidation services, this has implications under liability law. In this case, the freight forwarder acts contractually as contracting carrier, even if the actual air transport is carried out by the airline. The freight forwarder is liable depending on the regime to which he submits as a carrier, e.g. the Montreal Convention.

Bundling Advantages for Groupage Consignments

Purchasing favorable rates based on higher weights or ULD allows the air freight forwarder to earn profits by consolidating shipments (Doganis 2007). A fictitious example will illustrate this: A. Rate structure of the airline – Minimum rate according to TACT: – Normal rate acc. To TACT: – FAK rate

$ 75.00 $ 4.00/kg $ 1.00/kg

B. Rate structure of the freight forwarder – minimum rate – 100 kg rate

$ 50 $ 2.00

C. Profit of the forwarder – Proceeds consignment customer A (5 kg) – Revenue consignment customer B (120 kg) – Total proceeds – Effort 125 kg – Profit

$ 50 $ 240 $ 290 $ 125 $ 165

(minimum rate) (120 kg ∗ $2.00/kg) (125 kg ∗ FAK rate of $ 1/kg).

Notes: The return to the forwarder is even higher if he manages to combine heavy shipments with those that are billed on the basis of their volume. For shippers, the advantage of using the forwarder is that they enjoy lower rates. They would alternatively have to pay $75 (minimum airline rate) or $480 (normal rate) if they booked directly with the airline

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For the consolidated shipment itself, which may include one or more ULDs, an air waybill, a Master Airway Bill (MAWB), is issued in turn, signed either by the airline or its agent. In the master, the carrier is the consignor and its partner at the receiving airport is the consignee. 3.5.1.2.3 Buyer’s Consol A niche solution is the consolidation of several shipments from different shippers for one consignee, also known as “Buyer’ Consol”. The concept is already established in the sea freight sector. Here, particularly on the Asia – North America trade lane, shipments from a large number of local producers are consolidated, packed into containers and routed through to the destination, for example a distribution centre. If necessary, the consignments are treated before dispatch, for example by repackaging, attaching labels, quality control, etc., taking advantage of the lower labour costs in Asia. Since it is not necessary to break open the consolidated shipments at the port of receipt, transit times are shorter and the risk of damage is lower. Transferred to air transport, a forwarder can consolidate shipments from various European suppliers into one consolidated shipment and transport it to an automotive group in the USA. The advantages here are once again the consolidation advantage, which benefits the consignee, and the shorter transit time compared to conventional consolidated air freight shipments. The consignee typically has better access to rates than the multitude of suppliers for this form of shipment, which justifies the inherently more costly shipping option of cash on delivery. 3.5.1.2.4 Back-to-Back Transports Under certain circumstances, shippers decide to post air freight as a so-called back-to- back shipment. In these cases, only one house waybill is created per master ABW. These are quasi groupage consignments consisting of a single shipment. Compared to direct shipments, the shipper benefits from the lower rates that the forwarder usually offers compared to the airlines. Nevertheless, the rates are usually above the level of comparable groupage shipments, as the consolidation advantage of the forwarder does not apply. A key reason for back-to-back shipments is the shorter transit time. Back-to-back shipments are mostly faster because they are handed over directly to the airline or its agent and do not have to be consolidated first. There is also no dependence on fixed departure times. For example, a freight forwarder may operate the Frankfurt – New York route three days a week. A groupage shipment might have to wait one or two days for the next departure, while a back-to-back shipment could be loaded on the next suitable aircraft. Voluminous or heavy shipments, such as machine tools, which cannot be consolidated in an air freight container or pallet anyway, are also suitable for back-to-back shipments for these reasons. Another reason for using back-to-back traffic is the possibility of circumventing certain restrictions on direct shipping. According to the TACT, “collect” shipments are prohibited on some routes, e.g. to Africa. The forwarder, who is listed as the consignor in the Master AWB and pays in advance, can allow his customer to pay in arrears and issue the HAWB accordingly. In such a case, the forwarder’s branch office or agent in the receiving country

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collects the freight. However, it should be noted that most countries that exclude collect shipments are only marginal destinations for air freight shipments. 3.5.1.2.5 Charter Traffic Some shippers offer to charter aircraft on their behalf for customers. There are many reasons why shippers request charters: • Firstly, there is the need for particularly urgent consignments that would not reach their destination in time with scheduled services. Automobile manufacturers repeatedly request charters when urgent delivery parts are needed at foreign production facilities. For example, delays in deliveries from a Japanese supplier following the volcanic eruption in Iceland and the closure of airspace led to a standstill at a German car plant. With the help of the charter of a wide-bodied aircraft, the bottleneck was eliminated relatively quickly after the airspace was cleared. • Secondly, there is demand for charters when oversized or very heavy machines and equipment are to be made available to an end customer at short notice. The aircraft used in such cases is primarily the B747 or the Antonov AN-124. Numerous examples can be found on the Internet of how such aircraft have been loaded for intercontinental transport (Concrete Equipment Inc. 2011). • Thirdly, charters make it possible to reach destinations that are not served by suitable aircraft on scheduled routes and where transport by sea is not a suitable alternative. • The fourth important reason for using charter flights is found in the area of emergency aid after disasters and humanitarian support. Three freight forwarders that have established themselves as service providers for UNICEF are Scan Global Logistics, DHL Global Forwarding and Kühne + Nagel (UNICEF 2015).

3.5.2 Market Structure Although the global market for forwarding air freight shipments is fragmented in view of the 5000 IATA agents mentioned above alone, a few large companies nevertheless play a significant role. The tonnage handled by a forwarder as air freight has become widely accepted as an international benchmark. Basically, the air freight forwarding market can be divided into three segments. On the one hand, there are the multinational players, local providers with a strong domestic market and niche providers specialising in certain routes or the transport of certain products. Among the world’s largest freight forwarders, a certain dominance of European players can be observed. Following the takeover of UTi by the Danish DSV, only two representatives from the USA remain in the list of the top 10 air freight forwarders, namely UPS Supply Chain and Expeditors of Washington. Most freight forwarding companies are not listed on the stock exchange and do not publish sales and earnings data at product level. The tonnages transported in air freight and container units (TEU) in sea freight have become established as benchmarks. Although

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Leading Air-Freight Forwarders

(Transported Tonnage, in thousands, 2015) 2,109

1,250

1,128

935

872

836

711

580

561

523

457

451

Fig. 3.9 Air freight volumes transported by the leading air freight forwarders (Armstrong & Associates 2018)

these figures are not usually audited by auditors, but are merely internally calculated figures, they are nevertheless a significant indicator of the market power of the individual providers. These figures are preferable to those of IATA, as they also include the volumes carried on charter flights by carriers that do not belong to IATA. One source in which these volumes are published in aggregated form is the US consulting firm Armstrong Associates (2016). Figure 3.9 shows a ranking of the world’s leading air freight forwarders based on the published data.

3.5.2.1 DHL Supply Chain and DHL Global Forwarding, Freight The history of Deutsche Post AG Group dates back to the end of the sixteenth century. In 1597, Emperor Rudolf II declared the Postregal (postal law), which granted the state alone the right to establish and maintain postal facilities. Today’s Deutsche Post AG took on its present appearance in the years following privatization in 1995. Today, the Group operates under the name Deutsche Post DHL Group (DPDHL), which includes the mail and parcel business as well as the international logistics business. The logistics activities are based on a whole series of acquisitions made by the Group in the years following privatisation in order to become less dependent on the national mail and parcel business. The most important acquisitions were the takeover of Swiss freight forwarder Danzas in 1999, courier service DHL (completed in 2002) and Exel in 2005. In the meantime, DHL has largely abandoned both the Danzas and Exel brands, with the exception of the Middle East, where a joint venture continues to operate under the name Danzas AEI Emirates LLC. The activities of the various companies once acquired are now bundled under the family brands DHL Forwarding, Freight as well as DHL Supply Chain.

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In air freight, Deutsche Post DHL is the world’s leading 3PL. The Forwarding, Freight business unit benefits from the network of its sister company DHL Express, partly by using its free freight capacity, but also by purchasing capacity on the open market.

3.5.2.2 Kuehne + Nagel Based in Schindellegi, Switzerland, Kuehne + Nagel AG dates back to a foundation in Bremen in 1890. In 2016, Kuehne + Nagel generated a turnover of 22 billion Swiss francs (CHF). The company’s core competence lies more in sea freight, where it is the world’s leading forwarder. However, air freight is emerging as a second important pillar. According to figures from Armstrong Associates, the company is the world’s number 2 in 2015, with 1.25 million tonnes of air freight transported. Just ten years earlier, in 2005, it ranked only fourth, with 654 thousand tons. The average annual growth of around 7% in these ten years was achieved primarily organically, through the company’s own activities, and to a lesser extent through acquisitions. In 2011, for example, K + N acquired specialists in the transport of perishable goods in Ecuador and Colombia with approximately 75,000 tonnes of air freight (Kuehne + Nagel 2012). 3.5.2.3 DB Schenker DB Schenker, headquartered in Essen, North Rhine-Westphalia, bundles the logistics activities of Deutsche Bahn AG Group. The company was founded in Vienna by the Swiss Gottfried Schenker and two other shareholders. The company rapidly expanded within Europe. In 1931 it was taken over by the Deutsche Reichsbahn and remained in state ownership until 1991, when it was sold to Stinnes AG. Just eleven years later, in 2002, Veba AG, which in turn had taken over Stinnes in 1992, parted company with Schenker. The company went back to Deutsche Bahn. Schenker employed around 68,000 people in 2016, generating sales of €15 billion (DB Schenker). As DB Schenker is only a subsidiary and Bahn AG is not subject to the publication requirements of a listed company, only a few key figures are available to the public. An annual report is published at group level, not least because bonds have been issued that are subject to a rating. What is known is that Schenker generated revenue of EUR15 billion in 2016 with around 68,000 employees and transported more than 1.2 million tonnes of air freight. The company’s air freight network comprises 700 locations in 130 countries. The extent to which the subsidiary of a state-owned company should compete with private competitors is the subject of ongoing debate. In 2016, the parent company examined a partial sale of Schenker in order to reduce its debt burden with the proceeds of the sale. However, the plan was halted. 3.5.2.4 Panalpina Headquartered in Basel, Panalpina’s roots essentially go back to the Schweizerische Schleppschifffahrt-Genossenschaft in the 1930s (Panalpina Connect 2004). From 1938 onwards, the company operated under the name of Schweizerische Reederei (SR). In view

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of the shift in transport volumes from inland waterways to rail, it endeavored to build up a forwarding division. The company expanded in the United Kingdom, the United States, Italy and Eastern Europe by means of cooperation agreements and the acquisition or establishment of subsidiaries. After the Second World War, the forwarding activities were spun off. Since 1954, the company has been trading as Panalpina. Panalpina is primarily perceived as an air freight specialist. A predecessor company obtained an IATA license as early as 1946. In the wake of the 1973 oil shock, the oil and gas industry invested heavily in building infrastructure in producing states such as Nigeria. In close cooperation with Cargolux, a regular service was established in the West African country. In 1999, Panalpina’s only major acquisition to date was airfreight specialist Jacky Maeder. Since then, Panalpina has acquired smaller companies around the world. Since 2015, the special focus has been on acquisitions of specialists in the transport of perishable goods. Compared with the leading forwarders such as Schenker, DHL and K + N, Panalpina occupies a special position, offering only a small amount of logistics and virtually no overland transport in addition to air and ocean freight. In 2016, Panalpina generated revenues of around EUR 5 billion with approximately 15,000 employees in 500 branches. At the beginning of 2019, it was announced that Panalpina was to be acquired by Danish competitor DSV.

3.5.2.5 Nippon Express The Nippon Express Company was founded in 1937 as a semi-public transport company. With the foundation, the activities of small railway companies and forwarding agencies were combined. In 1958, Nippon Express expanded into the USA for the first time. After initially focusing on air freight and travel, the company later expanded into ocean freight as well. However, air freight remains by far the most important segment. More than half of the company’s sales are generated within Japan. Japanese air and ocean freight is dominated by domestic suppliers to a far greater extent than is the case with comparable developed economies. The remaining air freight handled by European or US freight forwarders is generally contracted by major principals. Mirroring this, Japanese freight forwarders, which include Kintetsu World Express (KWE) and Yusen Logistics in particular, are primarily active where Japanese customers have trading relationships. Nippon Express, for example, has branches in just over 40 countries outside Japan, significantly fewer than comparable European and American competitors of this size. 3.5.2.6 Mergers of Forwarders Given the increasing importance of economies of scale, the pace at which medium-sized freight forwarders have been acquired by competitors has accelerated. While an average of around four acquisitions with a transaction value of more than USD 100 million were recorded over the years in the period 2000–2014, there were already more than ten in 2015 (Armstrong & Associates 2015). An overview of significant transactions can be found in Table 3.26.

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Table 3.26 Selected mergers in the freight forwarding industry Acquiring entity DSV FedEx KWE Toll group

Destination UTi TNT express APL logistics Japan post

Core business of the acquired company International freight forwarding Express

Acquisition amount (US$, billion, estimated) 1.35 billion

Year 2015

4.8 billion

2015

Sea freight

1.2 billion

2015

International freight forwarding

6.5 billion

2015

Durkin (2017), Armstrong and Associates (2015)

A major reason for the mergers is that in many cases smaller haulage companies produce less productively and are not in a position to finance investment projects, especially in the digitalisation of their business processes, from their cash flow.

3.5.3 Success Factors There is little empirical evidence in the literature on the factors that successfully differentiate freight forwarders from their competitors. Financial success can be read for some listed freight forwarding companies and aligned with their business strategy. These companies are required to publish their balance sheet and income statement figures. Due to their market presence, Kuehne + Nagel, based in Schindellegi, Switzerland, and Panalpina, based in Basel, are benchmarks. A number of well-known logistics groups publish the figures for air and sea freight as a single unit. This means that they can only be interpreted to a limited extent. These include, for example, the performance statements of the business segments DHL Global Forwarding or DSV Air & Sea. The performance figures of companies listed on stock exchanges with less stringent transparency requirements, such as Agility, which is listed on the Kuwait stock exchange, are even more difficult to interpret. The population of companies is too small for a valid statistical analysis of the success factors. Under the impact of the financial crisis of 2008, which also manifested itself in a severe crisis in the air freight industry, the US consulting firm Merge Global published a much- noted analysis of the value drivers of international freight forwarders (Clancy et al. 2008). The three central value drivers – revenue growth, increased revenue margin and increased capital efficiency – were broken down into a total of 15 individual control variables (Table 3.27). The presentation of value drivers can be summarised into an overarching group of three success factors: size, which allows economies of scale to be exploited; customer mix, through which excess returns can be achieved; and information technology (IT) skills.

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Table 3.27 Value drivers for international freight forwarders Revenue growth

Operational driver Geographic scope of network

Mechanism Network coverage in largest export markets

Service types offered

Operating margin expansion

Balanced mix of air, sea and ground services Sales force vertical Intimate knowledge of specialization customer industries leads to customer wins in complex segments Medium and small Smaller customers have less customer account buying power and need for penetration comprehensive services Customer facing IT Enables high-value-added functionality services like origin consolidation Relative market share on High shares on specific specific front haul O&D routes improves buying lanes power Air freight customer Need a balanced mix of high freight density mix and low-density freight on specific O&Ds Core carrier program

Capital efficiency

Concentrates transport spend with smaller carrier base Regional customer local Creates regional P&D origin and destination delivery density and reduced density one-way trips Balance mix of high and Minimizing demand volatility low demand volatility improves freight handling customers productivity Forced consolidation Economies of consolidation gateway structure in facilitate scale and RFS lane [North America & density Europe]. Integrated operations IT Single platform reduces key platform strokes and data entry errors while providing high value data Higher share of medium Customer payment terms and small size customers Use purchased Outsourced line-haul transportation for P&D transportation operations Large customer of Supplier payment terms transportation provider

Clancy et al. (2008)

Impact Enables faster growth due to high growth market exposure Enhances customer life cycle management Enables capture of high-margin accounts and reduces attrition Higher prices and sale of value added services Reduces price elasticity and creates switching costs Reduces line-haul transportation unit costs Expands margin by reducing volumetric surcharges paid to carriers Leads to preferential access to peak capacity Generates lower P&D unit costs Lower freight handling unit costs and increases peak capacity Reduces freight handling and P&D unit costs Reduces administrative staffing and associated costs Lower net working capital required Lower net PP&E employed Lower net working capital required

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3.5.3.1 Customer Mix and Sector Specialisation Marketing involves creating offerings “that have value for customers, clients, partners, and society at large.” (AMA 2013) Assuming that the needs of shippers differ, it is important to adapt the air freight services offered to suit the target group. Based on different but in their entirety largely homogeneous needs, the market for air cargo services can be divided into segments (Mentzer et al. 2004). The main distinguishing features of the customer groups are their industry affiliation, their shipment volumes and their geographical affiliation: Depending on the industry to which a shipper belongs, the requirements for handling an air freight shipment vary considerably. One industry that generally has particularly high requirements is the pharmaceutical industry, whose products often have to be transported refrigerated throughout. As a rule, no order is placed with the offer of standard services. In order to operate successfully in such segments, an air freight forwarder must prove his experience in handling the products. He must prove his competence in distribution and handling – both at the point of departure and in the relevant destinations. Thus, a minimum requirement for the forwarder’s geographic presence is also derived from the industry offering. For example, a freight forwarder operating in the high-fashion segment must be represented primarily in the departure stations in northern Italy, the greater Paris area and the receiving stations in New York, London, Dubai, Singapore, Beijing and Hong Kong. As a rule, the service provider has its own branches. In exceptional cases, it is represented by efficient agents. One industry with comparatively low requirements in the handling of airfreight shipments is the high-tech industry. However, this customer segment is characterized by a very high, mostly concentrated volume of shipments. Particularly in the high-volume months before Christmas, a forwarder must be able to transport the produced quantities even in the face of tight freight space. In their approach to customers, shippers in the high-tech sector differ from those who only ship smaller quantities. The former are very experienced in dealing with airfreight providers and require less advice, but at the same time are very price-sensitive. Large orders are usually awarded solely on the basis of freight rates and the shippers’ proven ability to handle large orders. In this respect, shippers with an irregular volume of shipments require more support. Measured in terms of freight rates, however, they are more profitable and generally do not demand unusual payment terms, which has a positive effect on the forwarder’s liquidity. In order to make the best possible use of branch infrastructure and keep costs low in delivery and collection, a forwarder will strive to keep export and import volumes in balance. Shippers in certain regions of the world are more willing to work with foreign service providers than in other parts of the world. One important market where international providers are underrepresented is Japan. Japanese conglomerates such as Sony prefer to work with their own subsidiaries specializing in logistics or with Japanese air freight forwarders. In this respect, the major European freight forwarders have already succeeded in siphoning off the North American market in the decades following the Second World War. The main advantage of addressing a specific industry is the better skimming of yields in the respective segments. The broader additional benefit is better utilization of cargo space on a single flight. If a freight forwarder manages to combine heavy shipments, such

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as spare parts, and light goods, such as high-priced clothing items, in an air cargo container, he leverage the consol benefit in the short run (Leung et al. 2009). In the medium term, he also benefits by smoothing volume fluctuations throughout the year. He can better utilise his network structures, as sectors are subject to different cycles. Organizational knowledge, which is anchored in the structures and processes of a company, is independent of the individual employee (Mescheder and Sallach 2012, p. 16). This knowledge, insofar as it can be used in a value-adding manner, cannot be easily copied or readily recruited from a competitor and thus offers a sustainable competitive advantage. One company that has established itself in a niche in the sea freight sector by building up industry knowledge is J.F. Hillebrand, headquartered in Mainz. With the knowledge built up over decades in the field of beverage logistics, it is one of the market leaders for the sea transport of wine and spirits. In the field of chemical logistics, the company BDP International, headquartered in Philadelphia, has a comparable niche advantage.

3.5.3.2 Size of Enterprise Strategy consultant and Harvard Business School professor Michael Porter described companies that are too small to generate cost advantages and too large to differentiate themselves in a market niche as “stuck in the middle” (Porter 2008b, p. 75 ff.). As a result, companies that are stuck in the middle generate returns that are significantly lower than those of their large and small specialized competitors (Fig. 3.10). Large providers benefit from economies of scale and better utilization of their networks. A provider that is a leader in a regional market can allocate its fixed costs, for administration, infrastructure, licenses and IT over more shipments than its competitors. Thus, a carrier present in a limited market like Algeria has certain costs that do not depend on size. He will have to appoint a managing director for the country, as well as an air freight manager, he will have to acquire the licenses and have the financial statements audited. Another advantage of size is the possibility of becoming a preferred partner of the leading cargo airlines. Participation in such a program allows to concentrate its purchasing Return on invested Capital

Market Share

Fig. 3.10 Profitability and market share (Porter 2008b)

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power and reduce operational costs in handling (Opgenhoff 1997, p. 207 f.). In addition, he runs less risk that his shipments will only be loaded with delays in times of high demand, the peak season. Shippers of air freight trust that large forwarders will be given preferential treatment by the airlines. The benefits of scale or specialization enjoyed by providers at the two upper ends of the U-curve can be illustrated by the example of investments in IT. The world’s leading freight forwarders in terms of volume and turnover are more likely to be able to use their own expertise and liquidity to implement a generational change in IT. The costs for the implementation of new production software at DHL Global Forwarding – which subsequently failed – amounted to several hundred million euros (van Marle 2015). Very few medium- sized competitors would have been able to easily finance such an investment. Smaller providers on the other hand can implement standard software without major adaptation efforts. The use of such software is often remunerated on demand (pay per use) and does not require any substantial investment. Such software offers are often unsuitable for the needs of medium-sized haulage companies because they are too standardised and do not offer sufficient interfaces to their existing systems. The development of own solutions, on the other hand, often overtaxes the capacity of the companies.

3.5.3.3 IT Skills Freight forwarders, by definition, do not rely on any fixed assets of their own to “procure” air cargo shipments, they are “asset light”. They need access to carriers and handling warehouses, but do not have to own them. One of the few assets commonly owned by freight forwarders is the software used to operationally handle shipments, even though more and more logistics companies are using pay-per-use (SaaS) models. Superior systems enable companies to deliver significant value to their customers, fulfilling the critical requirement to qualify as a core competency (Hamel and Prahalad 1994). With the help of appropriate software, customer-specific requirements can be mapped and errors in data entry can be detected or even avoided at an early stage. With this, and with the intelligence of the application, significant productivity benefits can be realized, which translate into lower personnel costs. Through the intelligent analysis of large amounts of data (Big Data), trends can be identified at an early stage and solutions can be tailored for customers. These are the fields in which companies can set themselves apart from the competition. For freight forwarding companies, information technology is an even more sustainable success factor than the trained employees who use these systems. Software is not transferable per se, unlike those specialists and managers who can be poached by the competition at any time.

3.5.4 Value Added Services Given the increasing transparency of rates offered by freight forwarders and the resulting price pressure, margins in the core business have been under pressure for some time.

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Offering value-added services (VAS) is an opportunity for LSPs to escape commoditization (Soinio et al. 2012). Typical services offered by LSPs in addition to arranging and organizing air freight shipments are customs clearance and insurance of shipments, in addition to arranging pre- and on-carriage. In the following, additional services are described from the perspective of the freight forwarder or integrator. Although they are also offered by the airlines themselves, this is rarely the case.

3.5.4.1 Customs Clearance The most important field for value added services has always been related to export clearance or import customs clearance (Lillie and Sparks 1993; Murphy et al. 1992). Since most air cargo shipments cross national borders, subsequent customs clearance is required. Usually, customs clearance is provided by a freight forwarder. In some countries, the use of an independent licensed customs broker is common (Sales 2013). To ensure the necessary independence and professionalism of the broker, the broker should have one or more executives with at least three to five years of professional experience, have completed appropriate training, and have not received any criminal convictions in international trade matters. The firm should also demonstrate sufficient financial stability (West 2000). Sometimes, customs clearance activities are the very foundation of the LSP especially in countries where they are relatively demanding. For example, at Expeditors International of Washington (Expeditors for short), the world’s fifth-largest air freight forwarder in 2017, “brokerage and other services” accounted for approximately 44% of net sales (Expeditors 2018). The company has succeeded in making its own customs clearance systems so user-friendly that even newly trained employees can operate them safely without any special expertise. 3.5.4.2 Insurance Both the carrier’s and the freight forwarder’s liability for loss or damage is limited and regularly disproportionate to the value of goods normally involved in air freight. In addition, the basis of liability is the sometimes difficult to prove culpable conduct of the forwarder or the carrier. The shipper has the option of declaring a higher value of goods on the air waybill (AWB) and thus also increasing the liability, but pays for this with a considerable surcharge. A cheaper alternative is to take out insurance with a financial service provider, its agent or the forwarder. It is possible to take out a policy for a single shipment or a global policy on an annual basis. Large forwarding companies with group structures are able to offer competitive conditions for two reasons, although the insurance business is not actually part of their core business. This is made possible by the use of a captive insurer. This company bears a certain basic risk itself, whereby the sum of the premiums should at least cover that of the claims and the administrative costs, and transfers the remaining risk to a reinsurer. 3.5.4.3 Organisation of Pre-Carriage and Onward Carriage As a rule, the forwarder, if he has organised the air freight transport, also makes an effort to arrange the pre-carriage and on-carriage. In individual cases, the airlines also offer

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corresponding services. The range of services offered by the forwarder mirrors the Incoterms to a certain extent: • Airport – Airport: is the actual core business of the airlines, where a forwarder can only generate limited added value • Door – Airport: The exporter’s forwarding agent organizes the transport to the airport of departure and arranges the preparation of the necessary documents. • Airport – Door: Here the consignee’s forwarder organises the on-carriage of the consignment and, if necessary, its customs clearance. Such a division makes sense where a consignor can organise the pre- and main leg better and more cost-effectively than the consignee. • Door to Door. Door-to-door delivery is when the 3PL organises the entire transport, including the pre- and on-carriage, from the shipper’s ramp to the recipient’s ramp. This business is the special domain of integrators, in that they integrate the various modes of transport into one service, but also of forwarding companies with a corresponding global presence. If a freight forwarding company does not have its own branches in a country, it will rely on the support of agents for customs clearance and the organisation of pre-carriage and onward carriage. For example, the world’s second largest air freight forwarder in 2017, Kuehne + Nagel has 1300 branches in 100 countries (Armstrong & Associates 2018; Kuehne + Nagel 2018). In a large number of the world’s remaining 95 countries, the company maintains exclusive business relationships with independent, and in rarer cases stateowned, partner companies to provide end-to-end services from the shipper’s ramp to the consignee’s. The partners either also receive a commission or a portion of the proceeds to cover their own handling costs. They also benefit from being able to charge a shipper for document preparation and pickup or, in the case of an import shipment, the cost of customs clearance and delivery. Another advantage of the cooperation is that the global air freight forwarder regularly receives better conditions from the carriers than the local partner, and these purchasing advantages can be shared.

3.5.4.4 Multi-Modal Offers The combination of air freight in the main leg with road has been a widespread standard since the 1970s. Road feeders are primarily carried out by airlines. The combination of airfreight with sea freight is the domain of freight forwarders. In this case, part of the main leg is carried out by sea and another part by air (cf. Sect. 12.2.4.3.). 3.5.4.5 Offer of Time-Definite Air Freight Products The fact that there is potential for improvement in the area of transit times is demonstrated by a comparison with express shipments, whose door-to-door transit times often take only half the time. This deficit is also not denied by the parties involved. Since conventional airfreight involves considerably more parties than express, the number of interfaces is greater, each of which brings with it the risk of delays.

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Table 3.28 Term-linked products of leading air freight forwarders Freight forwarding Kuehne + Nagel DHL global forwarding Schenker Panalpina UPS supply chain solutions CEVA Agility

Premium KNExpress Air priority

Standard KNExpert Air connect

Spar KNExtend Air economy

DB SCHENKER jetcargo first PanExpress UPS air freight direct

DB SCHENKER jetcargo business PanPremium UPS air freight consolidated Air premium Premier

DB SCHENKER jetcargo economy PanBasic

Air now Expedited

Air value Value

Own representation

Like the airlines, freight forwarders have also reacted to the competition from express service providers by offering higher-quality and cheaper products in deviation from a standard (Table 3.28). A three-way split into a standard, premium and a low-cost savings offer is widespread. The terms of the premium products are similar to those of the express products offered by integrators. For example, Kuehne + Nagel guarantees a transit time from the shipper’s ramp to the consignee’s ramp of one to three days for the KNExpress product.

3.5.4.6 Securing Due to tightened security regulations following the terrorist attacks of September 11, 2001, cargo, unless it comes from a secure supply chain, must be screened prior to shipment. Many carriers have purchased their own x-ray equipment for this purpose and charge on a weight basis to screen shipments for the presence of explosives. 3.5.4.7 Packaging The packing of shipments and the handling of dangerous goods also offers the opportunity for additional revenue. Smaller customers with only irregular airfreight needs often do not have the necessary experience to pack shipments properly. For known shippers, on the other hand, in terms of the secure supply chain, this is not a suitable service. 3.5.4.8 Cash-on-Delivery Results For the effort involved in collecting the freight charges from the consignee and the risk that the consignee will not meet his obligations, the forwarder charges a fee for “collect” shipments. In certain cases, a consignee refuses the goods and the carrier is not compensated for the freight charges. This is the reason why airlines, for their part, exclude the freight term “collect” on certain routes. 3.5.4.9 Support for Export Financing Dealing with letters of credit and other means of securing payment is time-consuming and ties up personnel resources. The effort therefore incurs costs for the freight forwarder, which the latter is remunerated for.

4

Institutions and Associations

Abstract

In view of the considerable inherent risks posed by the aircraft as a mode of transport, the legal barriers are high and cooperation between the players is intensive. The legal framework is primarily set by international standards. These are later incorporated into supranational and national law.

4.1 International Institutions The aviation organization is the “totality of all institutions that provide the legal and processing framework for the implementation and production of the aviation industry” (Pompl 2002, p. 17).

4.1.1 International Civil Aviation Organisation (ICAO) The International Civil Aviation Organization (ICAO), already described in Chap. 1, is a specialized agency of the United Nations. Founded in 1944 and headquartered in Montreal, the organization is committed to implementing and monitoring the Chicago Convention (ICAO n.d.). It formulates standards and recommended practices (SARPs) for air transport in cooperation with the nearly 200 member states of the United Nations and industry associations. They can be found in the 18 annexes to the Chicago Convention (cf. Table 4.1). The primary purpose of SARPs is to support the safety, efficiency and environmental responsibility of the sector. In addition to the development of SARPs, ICAO assists Member States in, among other things, air traffic promotion, intergovernmental © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_4

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Table 4.1 The Annexes to the Chicago Convention 1 2 3 4 5 6 7 8 9

Licensing of personnel Rules of the air Meteorological services Aeronautical charts Units of measurement for use in the air and on the ground Aircraft operation Flag and registration of aircraft Airworthiness of aircraft

10 11 12 13 14

Air transport communication Air traffic control Search and rescue Investigation of accidents and incidents Airfields

15 16 17

Simplification and approximation of regulations and laws

18

Aeronautical Information Service Environmental protection Security: Protection against unlawful interference with air traffic Transport of dangerous goods

Own representation

cooperation in air traffic control, data collection and auditing of national competencies with regard to air traffic control and safety. Member countries of the United Nations are required to transpose the SARP into national law. With the exception of the Caribbean ministate of Dominica, all member states of the United Nations have also joined the ICAO. Liechtenstein did not sign the agreement itself, but is a de facto member through Switzerland, which safeguards the Principality’s foreign policy interests.

4.1.2 European Civil Aviation Conference (ECAC) The European Civil Aviation Conference (ECAC) has the task of promoting “the development of a safe, efficient and sustainable European air transport system” (ECAC 2016). The organization as a regional association of aviation authorities was founded in 1955. Germany, Switzerland and Austria are among the founding states. The objectives of ECAC are largely congruent with those of ICAO. The two organisations are formally independent of each other, but in practice work very closely together. (Fritzsche 2010). For example, ECAC and the ICAO regional office also share their offices. More than 40 member countries are represented in ECAC, including all EU member states. The conference cannot make any binding decisions. However, its decrees are usually incorporated into the national law of the respective countries. The ECAC has set itself three priorities. Firstly, it sees itself as a pan-European think tank. Secondly, it wants to support the member states in developing harmonised positions on solutions. Thirdly, it makes its expertise available to interested parties.

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4.1.3 European Aviation Safety Agency (EASA) The European Aviation Safety Agency (EASA), based in Cologne, is the aviation safety authority for civil aviation in Europe. In addition to the EU member states, it also includes Iceland, Norway, Switzerland and Liechtenstein. More than 800 people work for the organisation (EASA 2018). It is responsible for ensuring safety and environmental protection in European aviation. Its tasks include in particular • • • • •

The harmonisation of rules and certification The development of the EU internal aviation market The preparation of technical rules for air transport The type certification of aircraft and components; the approval of undertakings To design, manufacture or maintain aeronautical products; to provide safety oversight and assistance to EU countries • The promotion of European and international safety standards; and • Cooperation with international actors to improve security in Europe EASA has largely taken over the tasks of the Joint Aviation Authorities (JAA), which were dissolved in 2009 (BAZL 2018). The latter was an association of the civil aviation authorities of, at last count, 40 European countries. EASA currently has fewer members.

4.1.4 Eurocontrol The European Organisation for the Safety of Air Navigation, based in Brussels, is better known as EUROCONTROL. With a budget in 2016 of approximately EUR 500 million and around 2000 employees, the organisation strives to ensure an overlap-free and safe airspace in Europe by planning and coordinating its control (EUROCONTROL 2017). Eurocontrol’s members include more than 40 European countries as well as Israel and Morocco. EASA and Eurocontrol cooperate closely, and in some cases their areas of responsibility overlap, although the agency primarily sets the standards and Eurocontrol takes care of the technical implementation. The organisation has been pursuing the goal of creating a Single European Sky for years. In the 1990s, the European Commission made its first attempts at this. The project is intended to help reduce the costs of air traffic and improve safety (Baumgartner and Finger 2014). Until then, airspace has been fragmented due to the respective national borders of the member states. Air traffic control is mostly provided by governmental organizations such as the German Gesellschaft für Flugsicherung. In total, more than 60 air traffic controls with more than 50,000 employees are in charge of this task in the European Union. The European Parliament is self-critical about the progress of the measures – despite some measurable successes such as the reduction of delays. It expects that the initiative will not be completed before 2030.

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The Commission’s expects that the creation of a unified Air Traffic Management (ATM) will improve safety, lower costs and reduce environmental impact (European Commission 2015). The current fragmentation of responsibilities leads to numerous delays and flight cancellations during peak periods, as during the summer of 2018. The need for improved cooperation in air traffic control was tragically illustrated in 2002 when a passenger plane of the Russian Bashkirian Airlines collided with a DHL cargo plane in the airspace over Überlingen, Germany, resulting in the loss of 71 lives.

4.2 Selected Government Bodies in Germany Aviation is regulated by numerous international agreements, which are subsequently incorporated into national legislation. International legal regulations can be found at the level of international law, private international law within the framework of international agreements and conventions, as well as supranational law, such as European Community law. The following representation of German institutions serve as an example how international agreements have been translated into national law.

4.2.1 The German Federal Ministry of Transport The Federal Ministry of Transport and Digital Infrastructure is the supreme federal authority responsible for the mobility of people, data and goods. As of 2017, the majority of the ministry’s 1300 employees work in Bonn, although the authority’s first office is in Berlin. The more than 60 authorities that are subordinate to the ministry employ a further 25,000 people. Until 1998, there was a pure Federal Ministry of Transport. Since then, the tasks have been combined with other tasks: In the years until 2005 in a Federal Ministry of Transport, Building and Housing, from 2005 to 2013 the Federal Ministry of Transport, Building and Urban Development and since 2013 the Federal Ministry of Transport and Digital Infrastructure. In the period from 1949 to 2017, the authority was headed by a total of 17 federal ministers. This corresponds to an average length of stay of only 4 years, which sometimes made it difficult for the authority to work sustainably. The post of transport minister has been called an ejector seat in the trade press (DVZ 2013). The Ministry’s tasks include, in particular, the development and maintenance of the transport infrastructure, insofar as it is owned by the Federal Government, such as the motorways and federal waterways. The interests of aviation and aviation policy are assigned to a separate department within the Ministry. The ministry also represents German aviation interests in international bodies and organisations (BMVI 2017).

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4.2.2 Federal Aviation Authority (LBA) The Luftfahrt Bundesamt (LBA) is directly subordinate to the Federal Ministry of Transport. It is located in Braunschweig and has local offices in Düsseldorf, Frankfurt a. M., Hamburg, Munich, Stuttgart and Berlin – cities with major commercial airports. The LBA is responsible for ensuring the safety of air traffic in Germany. For this purpose, it is divided into four departments: Operations, Technology, Personnel and Aviation Security (LBA 2013). The fact that safety can only be ensured, but not guaranteed, became clear not least in the reappraisal of the Germanwings crash in France in 2015. This was presumably caused intentionally by the co-pilot – a scenario that was considered unthinkable beforehand. But the federal agency can develop rules to help ensure safety and verify that the rules are being followed. In total, more than 100 licensing, approval and supervisory functions fall within the office’s remit. The most essential tasks from the point of view of air cargo are located in Department S (Aviation Security). They mainly concern the approval of regulated agents and known consignors as well as the supervision of the participants in the secure supply chain.

4.2.3 Federal Supervisory Authority for Air Navigation Services (BAF) In 2009, the Federal Supervisory Authority for Air Navigation Services (BAF) took over the task of supervising civil air navigation service providers from the then Federal Ministry of Transport, Building and Urban Affairs. It is based in Langen, in the immediate vicinity of Frankfurt Airport. It operates on the basis of the European Union’s Single European Sky (SES) regulations, which have been in force since 2004. The BAF is primarily responsible for ensuring that air navigation service providers comply with the regulations and safety standards applicable to them. The office works in close coordination with its European partners. It certifies the air navigation service provider organisations and checks their functionality within the scope of regular inspections.

4.2.4 Federal Bureau of Aircraft Accident Investigation (BFU) Regulation 996/2010 of the European Parliament and of the Council of 20 October 2010 on investigation and prevention of accidents and incidents in civil aviation stipulates that each Member State in the EU must establish a national safety investigation authority. In the Federal Republic of Germany, this is the responsibility of the Federal Bureau of Aircraft Accident Investigation (BFU). The Federal Bureau is an independent authority that reports directly to the Federal Ministry of Transport, Building and Urban Affairs.

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The Federal Aircraft Accident Investigation Bureau reports in a study on two incidents involving cargo aircraft in 2011. They illustrate the difference between incidents and serious incidents. Severe disturbance Near Frankfurt/Main, an Antonov AN-124 was flying in FL320 in a westerly direction. An Airbus A380 was flying in the opposite direction at FL330, followed by a Boeing B747–400 about 20 NM apart. One minute after passing the A380, the AN-124 first lost 200 feet of altitude within 15 s and then climbed 700 feet during another 15 seconds. Thereafter, a close approach to the B747–400 occurred and a TCAS RA “ADJUST VERTICAL SPEED ADJUST” was generated in the AN-124. All three flights continued as planned. Malfunctions During the approach of an MD-11 to runway 25C at Frankfurt/Main Airport, a Boeing B777 was in the take-off run. The crew of the MD-11 decided to take off. During the take-off procedure, the two aircraft came within approx. 1700 m of each other.

The Federal Office investigates accidents, so-called serious incidents and incidents. Serious incidents are those events in which an accident almost occurred. They are mostly caused by small aircraft, in rarer cases by commercial aviation aircraft. Ultralight aircraft and gliders are relatively difficult to detect with the human eye and with technical equipment such as radar. They are piloted by comparatively less experienced pilots and according to rules of visual flight.

4.2.5 German Air Navigation Services (DFS) The Deutsche Flugsicherung GmbH (DFS) emerged from the Federal Administration of Air Navigation Services in 1993 and is also based in Langen. It is exclusively owned by the Federal Government. A previous attempt of a partial privatisation failed due to the veto of the Federal President (SZ 2010). The GmbH is managed like a business enterprise, i.e. the employed air traffic controllers are not subject to the tariff structure of the public service. However, profits generated in the regulated area are to be returned to the airspace users. The tasks of DFS are defined in Article 27c LuftVG, paragraph 1: “Air navigation services ensure the safe, orderly and smooth handling of air traffic”. The tasks include air traffic control, airspace management and aeronautical information services. Every pilot who flies according to the rules of instrument flight is controlled by the air traffic controllers of DFS. For this purpose, DFS operates towers and five control centres at the 16 major commercial airports. In addition to its regulated business, which is

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governed by Article 27c of the German Aviation Act (LuftVG), DFS also operates a small, non-regulated third-party business. This includes projects, consultancy services and training (DFS 2017).

4.2.6 Federal Office of Economics and Export Control Export control is one of the many tasks performed by the Federal Office of Economics and Export Control, which is based in Eschborn near Frankfurt. It is subordinate to the Federal Ministry for Economic Affairs and Energy. Certain goods, especially from the armaments sector, must not be exported to certain countries without a licence. The Federal Office monitors embargoes (BAFA 2017). While control is easy to ensure for military goods, it poses a greater challenge for so-called dual-use goods. These are goods that can be used for both civilian and military purposes and whose potential for misuse is not apparent to the staff responsible for shipping them.

4.3 Interest Groups and Associations In addition to IATA, which has assumed a prominent position, a number of other international and national institutions have dedicated themselves to the interests of air freight.

4.3.1 International Federations In countries involved in world trade such as Germany and the USA, but also in many smaller countries, companies and individuals have organised themselves into associations in order to see the interests of the transport industry in general and air freight in particular represented. In many cases, these associations have formed international umbrella organizations in which their concerns are bundled.

4.3.1.1 International Air Cargo Association (TIACA) The International Air Cargo Association (TIACA), based in Miami, aims to promote an efficient, modern and united air cargo industry (TIACA 2018). Members include a wide variety of industry players, such as cargo airlines, freight forwarders, airports, ground handlers, shippers, customs agents, IT companies, aircraft manufacturers, as well as schools and universities. The objectives of TIACA are quite extensive. The association promotes and accompanies the introduction of e-commerce in air freight. It supports security measures that enable air shipments to run as smoothly as possible and initiatives that address the public’s “legitimate” concerns about environmental standards. Other initiatives concern customs and the promotion of free trade.

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4.3.1.2 Global Air Cargo Advisory Group (GACAG) The International Freight Forwarders Association (FIATA), the Global Shipper’s Forum (GSF) as the representative organisation of shippers, IATA and the International Air Cargo Association (TIACA) founded the Global Air Cargo Advisory Group (GACAG) in 2010. The association has its headquarters in Geneva, Switzerland, close to IATA. GACAG focuses on air cargo security, e-commerce, customs and trade, and the sustainability of the air cargo industry. The four topics were determined by the four member organisations. They are supervised by respective working groups. The purpose of the association is to ensure that the air cargo industry has a “strong, unified voice [to] regulators whose decisions affect air cargo” and that the “industry is more effective, competitive, sustainable and profitable.” (GACAG 2014). The e-commerce section illustrates how the association works. Chaired by a FIATA General Secretary, the working group develops recommendations on how modern technologies can be used to make the booking, carriage, documentation and tracking of air cargo shipments more efficient. 4.3.1.3 Global Shippers’ Forum (GSF) The Global Shipper’s Forum, which represents the interests of shippers and is headquartered in London, was established in 2011 (GSF 2015). It describes itself as the world’s leading lobby for shippers engaged in international trade. Its immediate members are primarily the transport associations of the USA, Canada, Europe and Africa. European interests are represented by the English Freight Transport Association (FTA). The association is accredited with major UN agencies, such as ICAO, and has consultative status. However, issues relating to airfreight are dealt with by GACAG. 4.3.1.4 Airports Council International (ACI) The Airport Council International (ACI), based in Montreal, has represented the interests of international commercial airport operators since 1991. Its members (as of 2017) are 641 companies in 176 countries that operate nearly 2000 airports. The ACI advises the most important aviation organizations, namely ICAO and IATA. 4.3.1.5 International Federation of Freight Forwarders Associations (FIATA) The International Federation of Freight Forwarders Associations (FIATA) is the international umbrella organisation of freight forwarding associations with headquarters in Glattbrugg near Zurich Airport. This International Federation of Freight Forwarders Associations was founded as early as 1926. Part of FIATA is the Airfreight Institute (AIF), which represents the interests of the freight forwarding industry on a global level vis-à-vis organisations such as IATA or ICAO. On the German side, the Bundesverband Spedition und Logistik (DSLV) is a member, and on the Swiss side, Spedlogswiss. It is divided into institutes, advisory boards and working groups.

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4.3.2 Associations in Germany and Switzerland In Germany and Switzerland there are a large number of interest groups and associations that are partly or exclusively dedicated to the promotion of air freight.

4.3.2.1 Interest Groups The Federal Logistics Association (BVL), based in Bremen, was founded in 1978 and has around 10,000 members from all areas of industry, trade and teaching. It is a non-profit association and is organised into nearly 40 regional groups. These conduct discussion forums and visits to companies. The regional groups are distributed mainly in Germany, but also in logistically interesting foreign markets such as Turkey, the USA and China. Contact with the next generation is ensured by student regional groups. The German Freight Forwarding and Logistics Association, based in Berlin, represents the interests of freight forwarders in Germany. It is organised in 16 regional associations. Approximately 3000 companies are members of these associations. In Switzerland, Spedlogswiss represents the interests of internationally active forwarding and logistics companies in a similar way. It is neutral with regard to the mode of transport. 330 companies are members of this association. Both organisations participate in transport policy discussions and are members of FIATA. The German Association of Materials Management, Purchasing and Logistics e. V. (BME) is, in its own words, the trade association for buyers, supply chain managers and logisticians in Germany and continental Europe. It has around 9600 members (as of 2017). 4.3.2.2 Other Interest Groups The Aircargo Club Deutschland (ACD), founded in 1963, sees itself as an interest and discussion platform (ACD 2017). The approx. 250 members are made up of representatives from the shipping industry, airlines, freight forwarders, ground handlers, teaching, etc. In Switzerland, the Propeller Club, Port of Basel is a comparable platform, but is more broadly based in that it represents the various means of transport such as ship, aircraft, truck and rail.

Part II Processes

While the previous explanations dealt with who is directly and indirectly involved in the handling of an air freight shipment, the following chapters deal with how the transport is carried out. Air freight is, as is obvious, transported in aircraft.

5

Means of Transport in Air Freight

Abstract

The product air freight has already been described as a complicated work in which many different wheels mesh together. But how does this movement work? Most watches have a hand, a movement and a bracelet, but a multitude of variations can be found in the display of every jeweller. And a similar number of paths lead to the customer. What most air freight shipments have in common is that they are picked up or delivered in a road vehicle and flown in an airplane, that a multitude of different documents are created and that this service has to be paid for.

Aircraft differ mainly in terms of size and capacity, propulsion, age and operational history. The two most important manufacturers are Boeing, followed by Airbus. The airfreight container (ULD) is the most important tool here; without it, efficient and economical airfreight transport isalmost inconceivable. To transport air freight, an aircraft is required first and foremost. However, medium distances are preferably covered by road in substitute transport.

5.1 Cargo Aircraft The first aircraft had a very limited capacity to carry cargo. Their main purpose was to carry the pilot. Until the Second World War, aircraft were primarily used to transport mail. Only later the focus shifted to carrying passengers. The first jet aircraft, i.e. the Boeing 707, had very limited capability to carry cargo in addition to passengers and their baggage. This equation did not change until the introduction of the first wide-body aircraft in the late 1960s. © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_5

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5.1.1 Types of Construction Although cargo aircraft differ considerably in shape and size, they share some basic design features. These include in particular the aircraft fuselage, the arrangement of the wings, the landing gear, the pilot cockpit and the rudder. In these manifestations, certain ideal types have emerged since the days of the Wright brothers, which are difficult for the layman to distinguish. Remarkably yet, the very types of aircraft in which much of the air cargo is loaded are distinctive. Some have a quasi-iconic character, such as the design of the MD-11, the Boeing 747 or the Antonov AN-124. And so aircraft can be distinguished on the basis of a number of design features, such as the engine, the fuselage shape, the possibilities for placing cargo and the range.

5.1.1.1 Propulsion Until the first jet aircraft, such as the B707, entered service in the 1950s, commercial aircraft were almost invariably accelerated by means of propellers. The propeller turbine, or turboprop, is a further development of conventional propellers. It is no longer driven by an Otto engine, but by a gas turbine. Propeller-driven aircraft can be operated with less kerosene, especially on short-haul routes, and only require relatively short runways for take-off and landing. However, due to their design, they also have some disadvantages: they are comparatively noisy and slow. At speeds above 700 km/h the propeller tips reach the speed of sound, which increases drag and decreases efficiency (Rathjen 1990). Nowadays, propeller-driven aircraft are mainly used for short-haul flights, where the speed disadvantage is less important (Table 5.1). Today’s more important form of propulsion is the turbine jet engine. To generate thrust, a fuel is burned that consists of kerosene and compressed air that is sucked in. The exhaust jet drives the turbine. Turbines are among the most expensive components of an aircraft, costing between US$12 million and US$35 million (KLM 2017). 5.1.1.2 Distinctions According to the Shape of the Aircraft Fuselage Probably the most crucial distinguishing feature from the shippers’ point of view is the shape of the aircraft fuselage. Until the late 1960s, aircraft were designed so that passengers ascended to their seats through only one aisle. A maximum of six seats can be found Table 5.1 Overview of cargo aircraft with turboprop propulsion (as of 2014) Version ATR42F ATR72F ATPF F50 Saab340F Q400F

Max. Payload in tons 5.6 8.4 8.3 7.7 3.8 8.8

(Budd and Ison 2017; Harris 2014a)

Aircraft in active service (as of 2014) 43 49 35 13 36 3

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here, three on each side of the aisle. This type of aircraft is therefore also known in English as a “single aisle” or “narrow body”. They usually have a maximum width of 4 m. The best-known current aircraft of this type include the Airbus A320, the Boeing 737 and the 757. As passenger aircraft narrowbodies usually accommodate loose cargo only below deck and not the standardized air cargo containers known as unit load devices (ULDs). The A320 is a notable exception. The segment of pure narrowbody freighters is a domain of Boeing. Only with the conversion of passenger versions of the A320 into freighters will Airbus also be represented in this segment. Narrow-body freighters are used primarily by express service providers, less frequently by traditional airfreight companies (Table 5.2). For the transport of conventional air cargo, the wide-body aircraft are far more suitable. The first and to this day probably best known representative of this type of aircraft, the Boeing 747, was developed in such a way that passengers could be seated to the right and left of two aisles. In this way, up to ten seats in the tourist class could be seated per row. The aircraft, dubbed as “double-aisle” or “widebodies”, are able to accommodate considerably more cargo due to their cross-section of 5–6 m. This advantage is obvious to passengers, the cabins appear much more spacious due to their height. From the point of view of shippers, wide-body aircraft are particularly interesting. They are predestined to accommodate airfreight containers below deck. Most narrowbodies, on the other hand, are not designed to accommodate such containers below deck.

5.1.1.3 Passenger, Cargo and Combination Aircraft As a rule, cargo travelling in passenger aircraft is transported below the main deck as “belly freight”, in the proverbial belly of the aircraft fuselage. The situation is different in pure cargo aircraft, the so-called “freighters”. Here, cargo can be placed both in the belly and as “main-deck cargo”. This is of particular interest to shippers of larger cargo items. Table 5.3 provides an overview of the height of the cargo holds of selected aircraft. Two aircraft in particular stand out in the overview, the B747 and the AN-124. Both aircraft can be loaded not only through the side door. The Boeing has a hinged nose loading hatch, the Antonov a hinged tail loading hatch with ramp. The design allows both Table 5.2 Overview of major Boeing and Airbus freighter aircraft and the number of aircraft in operation in 2017 (in brackets) Narrowbodies (up to 5 m wide) – A320-200F (planned)

– MD-80 – B737–300F/300F/400F – B757–200F (Harris 2017)

Medium-sized widebodies (5 m–6 m wide) – A300–600F (170) – A310–200F/300F (11) – A330–200F (36) – B767–200F/300F (224) – DC/MD10–10F (26)

Large widebodies (over 6 m wide)

– B747F (262) – B777F (129) – MD-11F (116) – DC/MD 10–30F (17)

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Table 5.3 Maximum height of the cargo hold of selected aircraft Aircraft type Boeing 727 Airbus 320 Airbus 330/340/380 Boeing 747 (passenger version) MD-11 cargo version Boeing 747 cargo version Antonov An-124

Maximum height of the cargo compartment 111 cm 114 cm 160 cm 160 cm 240 cm 300 cm 440 cm

(Schenker & CO AG 2013)

aircraft to load much larger consignment items than aircraft that only have cargo doors along the fuselage. The ability to accept oversized cargo is a major selling point for airlines operating cargo-only aircraft. Cargo-only aircraft are regularly equipped with roller-beds on both decks, which makes it much easier to position the cargo inside the fuselage. Even heavy ULDs can be brought into position with little personnel and no special effort. To ensure that the aircraft can also carry heavy loads, the main deck is additionally reinforced. The rule that passenger aircraft do not accommodate cargo in the main deck has exceptions. These are found primarily in the combi variants of the B747, in which the rear portion of the main deck is reserved for cargo (Peoples and Sweetland 1982, p. 7). This type of aircraft has a large cargo door on one side. Due to stricter safety requirements and design disadvantages, both aspects that translate into higher costs, the combi versions are less in demand today than in the past. While combi versions of the Jumbo were built with the 747-200C, -300M and -400M, there is no comparable version for the latest 747-8. In the narrowbody sector, the demand for combi versions is now greater than for widebody aircraft. For example, aircraft manufacturer ATR offers its ATR-72 turboprops as a combi version (Bonnassies 2015). The cargo cell is positioned in the front part instead of the first seven rows of seats. Such aircraft types are used, for example, to serve more remote settlements in northern Canada and Alaska. On these routes with lower volumes, the combination of a small amount of freight and few passengers is more economically viable (Becker 1999) (Table 5.4). In addition to purely cargo or passenger aircraft, there is also another intermediate form. Convertible and quick change aircraft are aircraft that can relatively be easily reconfigured and used either as passenger or cargo aircraft depending on demand. For example, passenger aircraft are sometimes used at night on behalf of postal companies (Radnoti 2002, pp. 392–393). These types of aircraft also have significant disadvantages and are less in demand today than when kerosene prices were lower. They have a disadvantage because certain devices for passenger transport cannot be removed. This reduces the payload and increases consumption.

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Table 5.4 Cargo capacity of selected passenger aircraft Aircraft type (short) B773 A333 B772 B744 A332 B738 B737 B739 E190 F70 RJ80

Manufacturer, variant B777-300 A330-300 B777-200 B747-400 A330-200 B737-800 B737-700 B737-900 Embraer 190 Fokker 70 Avro regional jet 85

Cargo capacity (kg) 23,700 17,400 12,700 12,500 10,900 2000 2000 2000 1000 1000 1000

(Mujica Mota et al. 2017)

5.1.1.4 Distinctions of Capacity Usually, aircraft are divided into three categories in terms of payload: small cargo aircraft up to 30 tons, medium-sized ones between 30 and 80 tons, and large ones with over 80 tons capacity (von Tronchin 2016). Compared to trucks, the ratio of payload to gross vehicle weight is unfavorable for aircraft (Hoepke 1997). A large tractor with trailer has a typical payload of 27 tons with a maximum permissible gross weight of 40 tons. A B747-400, on the other hand, has a gross vehicle weight of around 450 tonnes and a payload of 133 tonnes. In the case of the truck, 67%, and in the case of the jumbo less than one third of the total weight is available for cargo (Fig. 5.1). The capacity of an aircraft is calculated according to a complicated procedure. It has to be calculated individually for each flight and depends on factors such as the altitude of the departure airport, the weather conditions during the flight, the flight route, etc. The most important starting point is the framework data calculated by the aircraft manufacturer, which was determined during the certification of an aircraft type. The maximum take-off weight (MTOW) is the weight at which an aircraft may take off without violating safety standards. It is determined in such a way that the construction of the aircraft is not damaged and that it is fully airworthy. To determine the payload, the following factors must be subtracted from the MTOW with their weight (Ackert 2013): • the kerosene required for the journey to the runway (taxi-out fuel), for the actual flight (trip fuel) and as a reserve, • the passengers and their baggage (in the case of passenger aircraft), • standard items, if they are not part of the aircraft, such as additional electronics, liquids for toilets, fire extinguishers, • the equipment of the operator (operator items), such as the crew, their luggage, life jackets, catering.

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5 Means of Transport in Air Freight Taxi-Out Fuel

Trip Fuel

Std. & Operator's Items

Mfg. Empty Weight

Operang Empty Weight (OEW)

Passenger & Baggage

Max. Take-Off Weight (MTOW)

Cargo

Max. Zero Fuel Weight (MZFW)

Reserve Fuel

Fig. 5.1 Weight components of an aircraft. (Ackert 2013)

The MTOW is rarely exhausted. Some airlines limit the capacity in order not to stress the performance of the turbines. This measure reduces the cost of maintaining the turbines and extends their service life.

5.1.1.5 Number of Engines Modern jet aircraft usually have two, and only in rare cases four engines. The number of engines increases kerosene consumption. But it may be necessary to install more engines to develop the necessary thrust. The presently most powerful engines are the GE90s from GE Aviation, which lift the B777. Four engines are required for the larger A380. In the past, international safety requirements dictated that aircraft be designed with three or four engines. ETOPS (abbreviation for Extended Operations, originally abbreviation for Extended Range Operation with Two-Engine Airplanes) are ICAO regulations that allow a shorter, more direct route to be flown. Similar regulations, differing only in details, have been developed by the FAA and the European ASA. In the early days of the jet age, a twin-engine aircraft was required to be able to reach a suitable airfield for landing within 60 min, should an engine fail. Thus, for flights over the North Atlantic, airlines were forced to choose a route along Newfoundland (YQX), Greenland (SFJ) and Iceland (KEF) if they wanted to use twin-engine aircraft. Over time, aircraft engines have become increasingly reliable. With a corresponding ETOPS certification, it has been possible to extend the time buffer since the mid-1980s. The use of twin-engine aircraft became operationally valid. The applicable unit is minutes

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to reach an airfield. Common certifications are ETOPS 120 or 180. With this safety buffer, the Atlantic can be crossed almost directly. The A350-900 is the first aircraft to receive ETOPS 370 certification. This means that the aircraft could be flown for more than 6 h with only one engine (Airbus 2014b). This opens up the possibility of serving routes, particularly over the South Pacific, that could not be economically justified with the larger four-engine aircraft due to lack of demand. Air New Zealand flew an ETOPS 330 certified B777-200ER directly from Auckland to Buenos Aires for the first time in December 2015 (Carey 2015). To obtain such certification, an aircraft type must be adapted through numerous measures. In the case of the B767, for example, these include safety measures in the cargo hold to prevent the spread of fire and the installation of a generator for independent power generation (ICAO 2014). The regulations meant a crowding out of the less efficient trijets, such as the DC-10, MD-11 and B727 and the four-engined A340. Second-generation jet aircraft were often equipped with three engines, with one positioned below the rudder. This design feature brought with it another significant disadvantage in addition to higher fuel consumption. Three-engine aircraft have a reputation for being less controllable. In fact, the DC-10 frequently crashed. In the passenger aviation sector, there are no longer any new developments of trijet aircraft, with the exception of the small segment for business jets. Almost all trijets that are still in service are freighters.

5.1.1.6 Distinctions by Scope In view of the lack of a consistent definition, flights of up to 3 h duration are to be described as short-haul, between 3 and 6 h as medium-haul and those over 6 h as long-haul. Ultra- long-haul flights (ULHF) last longer than 12 h. For most goods, the transport of airfreight on short-haul routes is rarely economically viable. The aircraft types used in Europe and North America for short-haul routes are usually too small and too short on the ground for loading airfreight. On shorter routes, especially in Europe, substitute transports by truck are used for regular airfreight and the more mobile vans for express goods. Only for distances that require more than about 4 h of transit time by vans are cargo aircraft, such as the Fokker, used. Most cargo is carried on medium and long-haul routes, only very rarely on ultra-long- haul flights. The reason is that on these flights the capacity is already exhausted by the weight of the passengers, their baggage and the large amount of kerosene and is no longer available for cargo. In 2016, the longest regular service was between Auckland in New Zealand and Dubai. With a flight duration of 18:30 h in 2019, the flight is the one from Newark (EWR) to Singapore. An Airbus A350-900ULR will be used. Many airlines are planning comparable or even longer services, including Qantas a direct flight from Sydney to London (LHR). A number of ULHFs appear to be more for prestige, and not motivated solely by business considerations. After all, a lot of fuel is burned on takeoff to carry the jet fuel needed for the long flight. Singapore Airlines (SQ) temporarily terminated the 18-h service between the city-state and New York in 2013, citing the lack of economic viability (Table 5.5).

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Table 5.5 Payload parameters and maximum range of selected cargo aircraft (Filippone 2012, pp. 46–47) Airplane Airbus A380F Airbus A400M (grizzly) Antonov AN-225 Boeing C-17, Globemaster Boeing B747–400F Boeing B747–400 ERF Boeing B747–8F

MTOW 560 142 600 265 397 413 442

Payload/MTOW 0.268 0.260 0.370 0.288 0.284 0.290 0.303

X (km) n/a n/a 4500 4700 8240 9200 8130

In many cases, cargo transported non-stop over the long-haul is ancillary cargo in passenger aircraft. Long-haul versions of all-cargo aircraft are the exception. Freighter aircraft usually do not operate over nearly the distances for which their passenger versions were designed. On their way from Asia to Europe, for example, they stop in Central Asia or the Middle East. On flights between North America and Asia, Anchorage is a frequent stopover. Compared to non-stop flights, these stopovers mean only a small loss of time if it is along the great circle distance. Shippers of cargo are willing to accept the time loss if it means lower freight rates. The cost saving results from the fact that the cargo aircraft has to refuel less kerosene and can load more cargo instead. Table 5.6 shows that a stopover of a B747-400F at the Cape Verde airport Ilha do Sal means a time loss of less than 90 min, with a detour of 17 min in the air and an additional hour on the ground to position and refuel the aircraft. Thanks to the stopover, the aircraft can carry 21 tons of additional cargo (+23%), while the additional fuel requirement is minimal (+1.2%). Supposedly lower kerosene prices are no reason to stop. It is true that an analysis by the Center for Aviation from 2014 shows that Emirates has approximately 16% lower kerosene costs per ATK than Virgin Atlantic (CAPA 2014a, b). However, the advantages of Middle Eastern airlines over European carriers in terms of fuel costs are not so much based on lower purchasing costs, but on the use of more efficient, because more modern, aircraft. Internationally, jet fuel prices are at the same level because jet fuel is generally tax exempt. Taxes on jet fuel are only allowed under ICAO rules for flights within a country, not for international flights. Figure 5.2 uses the example of a wide-body aircraft to illustrate how the maximum range depends on the payload. The maximum take-off weight is given by the design of the aircraft, i.e. the carrying capacity of the fuselage, wings, engines, etc. (Radnoti 2002, pp. 80–84). For example, a B747–400 freighter with a maximum payload of 113 tons can fly 4500 km. Provided that the aircraft is to cover a distance of 6500 nm without a stopover, the payload is only 75 tons. The curve in Fig. 5.2 is bent at several points: • The curve is initially flat, i.e. the maximum payload does not change for the first 1000 km. Where the curve bends at point B, in the example at approx. 4000 nm, the

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Table 5.6 Comparison of direct flight and flight with stopover on the route Frankfurt – Sao Paulo Payload (t) Kerosene consumption (t) Flight duration (h) Frankfurt – Sao Paulo 90.7 130.8 11:37 Frankfurt – Ilha do Sal – Sao Paulo 111.4 132.5 11:54 (Morrell and Klein 2018, p. 161)

Payload (tons)

125

B

A

100 C 75

Maximum Payload

50

Tradeoff between Payload and Range

Tradeoff between Fuel and Payload

25

D 1

2

3

4

5

6

7

8

9

Range (kms, k) Fig. 5.2 Ratio of payload and range using the example of a wide-body aircraft (Ackert 2013)

range with maximum payload is reached (range of maximum payload). The point results from the maximum permissible take-off weight. In this case, the maximum payload consists of the empty weight of the aircraft, the crew, the passengers, the baggage, the cargo and the kerosene. In this case, the aircraft tanks are only partially filled in order to load as much payload as possible. • Point C represents the maximum range that can be achieved with full aircraft tanks. In this case, the amount of cargo must be reduced. • Beyond point C, the range can only be extended by further reducing the payload, since the maximum amount of fuel has already been loaded. This is the range in which a flight purely with conventional airfreight can rarely be justified from an economic point of view. In the higher-priced express segment, however, such long-haul flights do take place. Such diagrams, the so-called range-payload diagrams, are available for all types of cargo aircraft. They are especially interesting for charters, when it has to be estimated how far a cargo can be flown.

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5.1.1.7 Factory Built Aircraft and Conversions Air cargo is transported either in passenger aircraft, combi versions or pure cargo aircraft. The majority of freighters are converted passenger aircraft. Factory-built freighters, which have no previous life as passenger aircraft, are almost exclusively widebodies. The two most important factory-built aircraft types for cargo operations are the B777-200F and the even larger B747-8F. In this sub-segment of the larger widebodies, new builds even predominate. Factory-new freighters are more fuel-efficient than converted passenger aircraft. The latter were designed for passage. The conversions result in efficiency losses. The main disadvantage of brand-new aircraft is their high purchase price, which can only partly be justified by lower operating costs. Unlike wide-body aircraft, narrow-body freighters are primarily conversions. Typically, conversions take place after approximately 20 years of service (Morrell 2011). During periods of economic downturns, when passenger aircraft are withdrawn from service due to lack of demand, conversions also occur earlier, possibly as early as 12 years of service. The alternatives to a conversion are to continue operation as passenger aircraft or the cannibalize valuable parts. The turbines and landing gears are particularly suitable for further use (Table 5.7). The conversions are carried out either by the aircraft manufacturers themselves, their partners or by third parties such as AEI in Miami, Pemco in Tampa or Israel Aerospace Industries (IAI) (Davies 2013). When assessing whether a conversion is more economically justifiable for an operator than a new acquisition, it is important to consider not only the purchase price, but also the costs of the conversion and the higher maintenance costs (Holloway 2008, p. 482 f.). New aircraft turbines are significantly more efficient. Older aircraft also consume more kerosene because the fuselage becomes more uneven over time, resulting in higher drag. Weight increases as dirt and humidity collect in hard-to- reach places. Modifications to the aircraft and new paint jobs also lead to an increase in weight. Another significant aspect is the significantly higher maintenance costs of older aircraft.

Table 5.7 Overview of specialists for the conversion of narrow-body passenger aircraft into freighters Aeronautical engineers Bedek Boeing EFW PEMCO Precision ST Aeroscpace Total (Harris 2018a, b)

737-300 737-400 737-700 737-800 A321 █ █ █ █ █ █ █ █ █ █ █ █ █

MD-80 B757-200 █

3

2

3

2

3

2

█ █ 2

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The conversion of a wide-body aircraft, such as a B747, takes several months. As part of the conversion from passenger to cargo aircraft, the cabin equipment (seats, baggage racks, washrooms, galleys, windows, etc.) is removed. Special effort is required to install cargo doors and upgrade the main deck (Littek 2006). The door in the freighter version of the B747-400F is about 340 × 310 cm, while the doors in passenger aircraft are much smaller. Due to the higher dead weight of the door, the fuselage must be reinforced accordingly during installation. The same applies to the main deck, which must be able to carry significantly higher weights. In order to position the cargo inside the aircraft, special rail systems, the so-called rollerbeds, are required. These are rollers firmly embedded in the floor, which allow heavy loads to be moved within the fuselage with little effort (Table 5.8). The air conditioning of the used aircraft must also be strengthened: Cargo often has higher cooling requirements, such as food or pharmaceutical products. According to IBA, a consultancy specialising in the aviation industry, the cost of a conversion ranges from US$2 million for a narrow-body to US$15 million for a wide-body (IBA 2017). These costs add up to the purchase price of the used aircraft, of, for example, US$8 million for a B737-700 or around US$10 million for an A320. Under favorable circumstances, the conversion extends the economic life of the aircraft by another 15–20 years (Jiang 2013). An alternative to the complete conversion of passenger aircraft could be low-cost freighter conversions in the future. They would forego reinforcing the main deck and installing larger doors. Cargo would be carried between the lower deck and the main deck using elevators. The cost of such adaptations would be about half of a full P2F conversion (N.N. 2014). However, such aircraft could also carry less cargo, as all shipments would have to pass through the smaller cargo door in the fuselage (Fig. 5.3). The B747 is the aircraft type among wide-body aircraft that was most frequently converted into freighters in the past. The demand for conversions has decreased significantly since 2015 for the reasons mentioned above. The B777s can potentially provide a replacement for those specializing in conversions. The older versions of the B777-200 are less suitable for conversion than the -300ER due to the lower number of units the aircraft was built with and the design of the fuselage. Boeing is looking at offering conversions of the aircraft type in-house. However, this would likely cannibalize the factory-new B777 Freighter program. Table 5.8 Costs of converting selected passenger aircraft into freighters Aircraft type B737-300 B737-700 B757-200 B767-300 ER A321 A330-200/300 B777-300ER (IBA 2017)

Typical conversion costs (US$ million) 2.5 3.5 5.0 13–15 6 15–16 n/a

Note

Program planned for 2019 2018 feasibility studies only

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Fig. 5.3 View into the cargo hold of a Cargolux B747 through the opened bow door. (Cargolux 2017)

5.1.2 Boeing Most of the freighters in service are made by the US manufacturer Boeing, based in Seattle/Washington. With the B747, it is also the manufacturer of what remains the most popular cargo aircraft. Boeing estimates that it holds a market share of 90% in the freighter segment (Sander 2018) (Table 5.9). The current major freighter aircraft manufactured by Boeing are the 747-8F, the 777F and the 767F. McDonald Douglas, itself a merger of Douglas Corporation and McDonald Aircraft, was acquired by Boeing in 1997. The aircraft of these three companies are therefore attributed to Boeing at this point.

5.1.2.1 DC-10 The DC-10 is a three-engine commercial aircraft that has been in service since the early 1970s. With a width of six meters, the DC-10 is one of the wide-body aircraft. The aircraft was developed and built by McDonald-Douglas. The company was a merger of the two aircraft manufacturers McDonald Aircraft and the Douglas Aircraft Company in 1967, and the DC-10 was the first jointly produced commercial aircraft (Table 5.10). The reputation of the plane suffered from the relatively high rate of serious accidents. A major problem was in the design of the cargo door. The design has advantages during loading, but if the door is not fully closed, it could cause an explosive pressure drop

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Table 5.9 Comparison of the payload of important cargo aircraft of the Boeing Group Aircraft type DC-8-63F DC-10-10F DC10-30F MD-11F B737-800 B767-200 B767-300 B777-200 B777-200F B777-300 B777-300ER B747-200F B747-400M B747-400 B747-400F B747-8F

Construction type Freighter Freighter Freighter Freighter Belly Belly Belly Belly Freighter Belly Belly Freighter Combi Belly Freighter Freighter

Freight capacity (tonnes, rounded) 49 57 76 85 20 31 44 60 104 64 70 113 45 65 113 134

Payload figures are indicative and may vary, among other things due to the engine used (own presentation). Table 5.10 Performance data of the aircraft type DC10 Aircraft type DC10-10 DC10-30

Cost per block hour (US$) 11,530 11,567

Cargo volume (m3) 434 459

Payload (tons) 57.5 73.9

Range (nm) 2764 3168

(Lo Storto 2017)

(Richardson 2014; Dwyer-Lindgren 2014). Databases record 33 total losses with approximately 450 sold units (ASN 2018). The last aircraft of this type was produced in 1989, production ended after three decades. In view of the high fuel consumption of the DC-10 and the resulting lack of demand, it was no longer economically feasible to maintain production. As a cargo version, the DC-10-30AF (All Freighter) version with a payload of 79 tons is worth mentioning. The largest fleet of DC-10s is maintained by FedEx. In view of an average age of over 40 years and the high consumption, these machines of the integrator are successively replaced, i.e. by the B767-300F.

5.1.2.2 MD-11 The MD-11 was a valued “workhorse” for many airlines, such as Lufthansa Cargo, for many years. The aircraft, one of the few remaining commercial aircraft types with three engines, was designed by McDonald-Douglas as a further development of the smaller DC-10. It first entered service in 1990, at a time when three- and four-engine aircraft were already being displaced by twin-engine aircraft. The manufacturer McDonnell Douglas

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Table 5.11 Performance data of the aircraft type DC10 Aircraft type MD-11F

Cost per block hour (US$) 13,081

Cargo volume (m3) 597

Payload (tons) 90.8

Range (nm) 3952

(Lo Storto 2017)

Corporation (MDC), unlike Boeing and Airbus, no longer had the resources and financial means to design a completely new twin-engine successor model, virtually on the drawing board. In 1997, MDC was taken over by Boeing, and production of the MD-11 ended 3 years later. Despite the small number of only 200 units ever built, the MD-11 was a very important means of transport for air freight and more successful in the cargo version than as a passenger aircraft. The two integrators UPS and FedEx were among the largest operators of MD-11 fleets (Table 5.11). More than fifty times it was newly built as a freighter, more than 100 times converted from a passenger aircraft to a freighter. The aircraft is smaller than the B747, its payload is up to 85 tons, about two-thirds of a more modern B747. Its advantage is the lower fuel consumption and better use of space. Especially the hump of the B747 is usually not filled with cargo. The range of the freighter, when nearly fully loaded, is about 6–7000 km. Thus, it can reach India or the east or north of the USA from Frankfurt without a stopover (Boeing 2008). Sales of the aircraft suffered from a lack of acceptance among pilots, who expressed safety concerns in light of the high accident rate. Pilots sometimes euphemistically described the MD-11 as “challenging to fly,” especially on landing. The aircraft was not a new design, but primarily an extension of an established aircraft type – the DC-10. The designers of the MD-11 did not change the size of the wings and reduced the size of the tail to save weight. On landing, the planes are significantly faster than other aircraft, more susceptible to crosswinds, and thus more difficult to control (Flottau 2010). Among the 200 MD-11 ever built, there have been ten total losses (hull losses), including Swissair Flight 111 from New York to Geneva, which crashed off Halifax with 229 people on board. The MD-11, which once formed the backbone of Lufthansa Cargo, have been gradually phased out since 2014 and replaced by brand-new B-777 s. Despite the high purchase price, the replacement is justified, as the newer aircraft consume around 20% less fuel than the MD-11 s.

5.1.2.3 B727 Based on the B707, one of the first long-haul jets, Boeing developed the three-engine B727 as a short- and medium-haul aircraft in the late 1950s. With more than 1800 examples, the B727 was one of the most frequently built commercial aircraft for a long time. The aircraft was built in two series, the B727-100 from 1963 and the extended version as the B727-200 from 1967. As the 727-200F it had a capacity of 29.5 t with a rather limited range of only 2500 km. From the B727-100 also more than 150 machines were produced in the combi version. It could be converted within a few hours (100-C) and as

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Quick-Change (100QC) version even faster, from cargo to passenger operation or vice versa. Due to its design (narrow fuselage, short range), the B727 was primarily suitable for integrators. Cargo is mainly transported on pallets on the main deck. Production of the aircraft type ended in 1984. Most of the aircraft are out of service, with hardly any still in passenger service and some still in service as freighters. FedEx, which at its peak had up to 170 aircraft of the type in service, replaced the B727s with more modern, quieter aircraft between 2007 and 2013 (FedEx 2013).

5.1.2.4 B737 With more than 10,000 sold, the Boeing 737 is the world’s most produced jet-powered commercial airliner. It is a twin-engine narrow-body, and after the termination of the B757 program, the only type of narrow-body aircraft still offered by Boeing. The aircraft was first delivered in 1967 and remains in production today, now in its fourth generation of aircraft. The second generation of the B737, launched in the 1980s and now called Classic, includes the -300, -400 and -500 variants. The third “Next” Generation (NG) followed in the 1990s with the -600, -700, -800 and -900 versions. In response to Airbus’ neo program, Boeing launched a fourth generation for the B737, the B737 MAX family. This enables slightly more efficient and quieter flight operations (Table 5.12). In terms of capacity and range, the B737 competes with the A320. Originally designed as a short-haul aircraft, the B737 is now also in service as a medium-haul aircraft following a number of design changes. Given the high number of B737 aircraft produced since the late 1960s, it was not a surprise that the established specialists would offer conversions to freighters. Of the Classic generation, all B727-200s have since been retired from service. Of the -300 and -400 variants, more than 100 former passenger aircraft each converted to freighters were still in service in 2017. The two variants of the -300 and -400 are largely identical except for the number of pallet positions, 8.5 instead of 10.5 positions on the main deck. This allows the -400 to be operated about 20% cheaper than its smaller sister (Fortune circa 2017). The fact that more -400s were not converted initially was due to the limited availability of the aircraft type. After 20 years in service, a large number of the third generation (737NG) will reach the end of their economic life as passenger aircraft. Such aircraft are depreciated and have little resale value. Although narrow-body aircraft are only suitable for air freight transport to a limited extent, Boeing sees great potential for this type of aircraft as a freighter: This is particularly the case in the domestic Chinese market. Boeing has launched a program to

Table 5.12 Performance data of the B737 Aircraft type B737-200F B737-300SF B737-400F

Cost per block hour (US$) 4275 4357 5080

(Lo Storto 2017)

Cargo volume (m3) 113 130 150

Payload (tons) 17.3 19.7 20.5

Range (nm) 1210 1635 2060

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convert passenger versions of the B737-800 into freighters, as the -800BCF (Boeing Converted Freighter). More than 4000 of the -800 have been delivered since the mid-1990s. The aircraft should be able to carry up to 24 tons of cargo in the form of containers, with an intended range of 3700 km. The performance data makes it particularly suitable for the booming e-commerce market in China (Zhang et al. 2018). An advantage for carriers that maintain both passenger and cargo aircraft of the B737 is that pilots can flexibly be deployed on both types of B737 aircraft. For example, Air China and China Southern each operated more than 100 aircraft of this type in 2018. The advantage of flexible staffing and lower maintenance costs explains Boeing’s optimism in its 737-BCF program. The first European customer is Bulgaria’s Cargo Air, which operates on behalf of DHL and UPS, among others. Other conversion specialists, such as Israel’s IAI, are also planning or have already launched P2F programs for the B737 (Davies 2013).

5.1.2.5 B747 The Boeing 747 is probably the world’s best-known commercial aircraft – and not just because of the unusual shape of its fuselage. The B747 owes its nickname, the Jumbo, to its hump. In addition to the characteristic hump, the freighter version of the B747 has an almost unique design feature: the pop-up nose. Due to the elevated arrangement of the cockpit, loading cargo through the nose of the aircraft had been taken into account from the very first design considerations. The aircraft is powered by four engines and has two decks. When it entered service in 1969, the B747 was the first widebody aircraft; a year later, another widebody, the DC-10, came onto the market. In the following four decades, the original jumbo model was further developed in numerous variants (Table 5.13). When developing the aircraft type in the 1960s, Boeing assumed that the B747 would soon be superseded by supersonic aircraft in the passenger sector. While the best engineers devoted themselves to developing such a supersonic transport (SST), the B-Team designed the B747 in just 16 months. The design was geared from the start to carry cargo, hence the elevated cockpit and adjoining upper deck. Once supersonic aircraft became common on intercontinental journeys, the thinking went, the B747s could be converted to cargo planes (Reed 2015). In fact, commercial aircraft, which flew supersonically, never occupied more than an exclusive niche. When the oil crisis of the early 1970s hit, Concorde’s business

Table 5.13 Performance data of the B747 Aircraft type B747-100SF B747-200F B747-400F B747-8F

Cost per block hour (US$) 7654 7445 12,298 7227

(Lo Storto 2017; IAL Cargo 2003)

Cargo volume (m3) 600 759 778 855

Payload (tons) 95,346 111,250 112,630 140,590

Range (nm) 2656 3615 4444 4420

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Fig. 5.4 Loading of a B747–8 with raised nose flap (Copyright Panalpina)

model had become obsolete. The B747 proved to be much more successful and durable than originally expected. Instead of the 400 aircraft of the type initially expected, more than 1500 were built in the following decades (Fig. 5.4). Five generations of the airliner exist as -100, -200, -300, -400 and -8. Boeing did not offer any new freighter versions of the -100, but later numerous passenger aircraft were converted to freighters (-SF). The situation was different for the -200, which was produced as convertible (-200C), combi (-200M) and freighter-only versions in addition to the standard version. The most commercially successful generation is -400, in service since 1989. A standard freighter version was built as well as a combi version (-400M) and an extended range freighter (ERF). The first conversion of a -400, a B747-400 BCF (Boeing Converted Freighter) was delivered to Cathay Pacific in 2005. The B747-400F has a maximum permissible load of 128.5 tons and a range of about 6000 km, only about half the distance that the passenger version can cover. The further development of the -400, the Boeing 747-8, known as the Dash-8 for short, was less successful from an operational point of view. It was not delivered to the launch customer until 2012, a full 23 years after the delivery of the first -400. By comparison, the gap between the -300 and the -400 was a mere 6 years. Remarkably, more new freighters were produced of her than passenger versions. As a very large passenger aircraft, it suffers from the same problems on the effeciency as the A380.

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5.1.2.6 B757 With the B757, Boeing launched a successor to the successful B727 in the early 1980s. Compared to its predecessor, modern materials such as carbon fiber composites are used. The cockpit was fundamentally redesigned. Like its predecessor, it is designed as a medium-haul aircraft; after some modifications, more modern variants of the aircraft type can also be used on long-haul routes. The B757 type was in competition with the very successful Airbus A320-100. With a fuselage diameter of 3.76 m, it is a narrow-body aircraft. Nevertheless, the B727 has developed into an important cargo aircraft. As with most narrowbodies, ULDs cannot be loaded below deck, but they can be loaded on the main deck. Variants of the B757-200PF (Parcel Freighter) are used primarily by UPS and DHL. The confidence that integrators have in the aircraft type is expressed not least by the fact that DHL is replacing 32 of its older B757s with newer aircraft of the same type (Harris 2015) (Table 5.14). The design of the B757 was very similar to the B767, so pilots with the appropriate rating can fly both aircraft types. In addition, maintenance costs are lower for airlines that operate both aircraft types. Despite these advantages, production of the B757 ended in 2004, after 23 years and just over 1000 units produced. The B757-200SF (Special Freighter) are converted passenger aircraft and have a payload of around 33 tonnes over the average distance of 5800 km. The aircraft accommodate standard pallets up to 88 × 125 inches (340 × 218 cm) on the main deck. As conversions, they can carry only 14 pallets, one less than the -200PF. And yet such conversions are quite marketable, for example Fedex is the third major integrator to add the aircraft type to its fleet. Most are conversions of older planes United Airlines used in passenger operations (Sechler 2013). 5.1.2.7 B767 The B767 is a twin-engine wide-body aircraft that has been in production since 1981 and is used primarily on long-haul routes. The aircraft type is in direct competition with the Airbus 310, which initially proved to be more modern and thus commercially more successful. Boeing subsequently changed the design and performance characteristics. A whole series of variants such as the B767-200, -300 and -400 were launched. With the B767-300ER (Extended-Range), flight distances of more than 11,000 km can be achieved in the passenger version. The freighter version of this aircraft is used by UPS, Table 5.14 Performance data of the B757 Aircraft type B757–200F

Cost per block hour (US$) 8276

(Lo Storto 2017; Boeing 2007)

Cargo volume (m3) 239

Payload (tons) 39.8

Range (nm) 3148

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169

among others. Here the range with a maximum payload of 57 tonnes is just over 6000 km (Table 5.15). The aircraft is considered very reliable, not only in terms of accidents, but also in terms of other incidents and malfunctions (Littek 2006; Putzger 2016a, b). UPS as well as the competitor FedEx are among the main customers of the B767.

5.1.2.8 B777 The “Tripple-7” was developed in the late 1980s, when it became apparent that the DC-10 would reach the end of its life cycle. Unlike other aircraft types, it is a completely new development, not based on the evolution of older models. It fills the gap that existed between the B767 and the B747, and is used on routes where there is not enough demand to fill a B747 or an A380. It is capable of carrying passengers and cargo over a long distance with just two engines, which has a positive impact on operating costs. To achieve these performance characteristics, Boeing had to develop wings with a very large wingspan and reduce the weight of the aircraft compared to older aircraft types. This was made possible by the use of newly developed materials such as composites, aluminium compounds and titanium alloys (Smith 2003) (Table 5.16). The B777-300 is an extended model of the basic version -200. The abbreviations ER and LR stand for extended range and long rage, respectively. By 2018, more than 1500 B777 aircraft had been delivered by Boeing, including more than 130 freighters. As with the B767, it is attractive for combination carriers to deploy the Tripple-7 in the freighter version if the aircraft type is also used in passage, as this allows flexible deployment of personnel for operations and maintenance. The cargo version made its maiden flight in 2008 and has been specially developed on the basis of the -200LR to meet the needs of cargo customers. For example, a special cargo barrier is installed in the front part of the cargo compartment and the fuselage has been upgraded to allow the installation of a large cargo door. The advantages of the passenger version, especially in terms of range and lower fuel consumption, also apply to the freighter. Compared to the B747-400, 24% less fuel is required per ton of cargo weight. The aircraft is also significantly quieter than older aircraft types. These advantages are particularly attractive to Table 5.15 Performance data of the aircraft type DC10 Aircraft type B767-200F B767-300F

Cost per block hour (US$) 6627 6493

Cargo volume (m3) 377 451

Payload (tons) 44.9 57.7

Range (nm) 3000 3269

Cargo volume (m3) 636

Payload (tons) 103.3

Range (nm) 4968

(Lo Storto 2017; Boeing 2014a, b) Table 5.16 Performance data of the B777 Aircraft type B777-200

Cost per block hour (US$) 10,333

(Lo Storto 2017; Clark and Kirwan 2009)

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Table 5.17 Comparison of payloads of major Airbus Group freighter aircraft Aircraft type A300F A300-600F A310-300F A320 A320F A330-200 A330-200F A330-300 A340-300 A340-600 A350-900 A350-1000

Construction type Freighter Freighter Freighter Belly Freighter Belly Freighter Belly Belly Belly Belly Belly

Freight capacity (tonnes, rounded) 44 48 39 19 20 51 65 47 47 63 53 64

Payload figures are indicative and may vary due to, among other things, the engine used.

integrators such as FedEx and DHL. FedEx uses the B777F to reach destinations in the Middle East, China and Japan directly and without a stopover from the USA.

5.1.3 Airbus Airbus and Boeing operate roughly on a par in the production of passenger aircraft in terms of revenue. In the 2017 financial year, Boeing reported revenues around EUR 83 billion, while Airbus’ around EUR 67 billion. In the short- and medium-haul aircraft segment, Airbus’ offering is considered more modern. The best-selling B737s first entered service in 1968 and 1987, respectively (Kort and Koenen 2018). However, Airbus is significantly lagging in the cargo-only segment, the conversion of passenger aircraft into freighters. Overall, in 2017, with the A300, A310 and A330, there were approximately 200 medium widebodies and not a single large widebody in service from Airbus, while Boeing offers several aircraft types in this segment with the MD11, B747 and B777 (Harris 2017) (Table 5.17). The hope of launching the A380 as a brand-new freighter in competition with the B747-8F must be considered fruitless.

5.1.3.1 A300 and A310 When Airbus launched the A300 in 1972, it was the first twin-engine widebody aircraft. It successfully filled a niche, making it possible for the first time to transport a large number of passengers over short to medium distances. With its two engines, it could be operated more economically than the B747. More than 500 aircraft of this type were produced until 2007. Its sister aircraft, the A310 with a shorter fuselage and extended range, made its debut 10 years later. The latter, unlike the A300, can also be used on the transatlantic route. Approximately 250 units were produced between 1982 and 1998 (Table 5.18).

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Table 5.18 Performance data of the B777 Aircraft type A300-600F A310-200F

Cost per block hour (US$) 11,387 8231

Cargo volume (m3) 340 292

Payload (tons) 55.0 42.9

Range (nm) 2950 1987

A300 and A310 performance data. (Lo Storto 2017; Airbus 2019).

The A300/A310 was built in numerous variants. From an air cargo perspective, the A300-600 and A310-200 conversions are of particular interest. The performance characteristics, a large capacity at a medium to long distance, makes the aircraft type interesting especially among integrators. The A300/310 is even the most successful wide-body aircraft in the integrator segment. The version of the A310-200F exists only as conversions of passenger airplanes, factory-new it was never manufactured by Airbus. The chunk was taken by Fedex, other users are Royal Jordanian Airlines and Qatar Airways. A prominent feature within the A300 family is the A300-600ST. The aircraft became known as the Beluga due to its inflated fuselage. A total of only five aircraft of this variant were produced. They are used by Airbus to transport parts of aircraft fuselages, occasionally chartered out to third parties. Due to their unfavourable aerodynamic characteristics, their range is only 1660 km. It is being successively replaced by the Beluga XL, a modified A330-200F, with another 30% higher capacity (Airbus 2018c).

5.1.3.2 A320 Family The Airbus A320 is a twin-engine narrowbody, which is mainly used over short and medium distances. The A-318, A-319 and A-321 are variants with shorter and longer fuselages respectively. Although the design was already 25 years old at the time, Airbus decided in 2010 to launch new versions of the Airbus A320 family with improved engines. These are branded as “neo” (New Engine Option), in distinction to the existing program “ceo” (Current Engine Option). In contrast to other aircraft with a narrow fuselage, the A319, A320 and A321 variants can also accommodate air cargo containers, but only in the special version. The ULD with the IATA ID AKH is a variation of the type LD3 with a height of 45 instead of 61.5 inches. In terms of capacity and range, it is positioned against the Boeing 737. The performance characteristics of the two aircraft types are very comparable. The future prospects of the A320 as a freighter are promising. It is one of the best selling commercial aircraft in the world. Since 1998, more than 6000 A320 aircraft have entered service, with another 5000 on order. A larger number have already reached the end of their life cycle as passenger aircraft. These are predestined to be converted into freighters (P2F). Airbus initiated a “Freighter Conversion” program for the A-320 in 2015, in anticipation of high demand, especially for the Chinese market (Buyck 2016). The A320 P2F is said to be capable of carrying 21 tonnes of cargo up to 2100 nm/3900 km and the A321 P2F 27 tonnes up to 1900 nm. The development of the freighter version was challenging mainly because the installation of a cargo door in the rear part would have had an unfavourable effect on the centre of gravity of the aircraft. It is now installed in the front part.

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The A321LR (LR for Long Range), a long-haul version, made its maiden flight in 2018. It is positioned to directly connect less frequented routes where the use of wide-body aircraft cannot be justified. By directly connecting secondary airports, passengers are spared the need to change planes at a hub. With its range of max. 7400 km and a capacity of about 200 passengers, it can be used for example for North Atlantic traffic (Airbus 2018b). It fills a gap left by Boeing with the discontinuation of the B757.

5.1.3.3 A330 The A330 is a widebody aircraft designed for medium to long haul, replacing the A300–600. The aircraft type shares many parts with the smaller A-320, with a maximum range of about 13,000 km. In the passenger version, it can carry about 20 tonnes of cargo, depending on the load of passengers, baggage and travel distance (Table 5.19). In 2010, a freighter-only version of the A330 entered service for the first time. The A330-200F can carry up to 70 tonnes over a maximum distance of 3600 nm. Converted versions have a maximum capacity of 60 tonnes. According to Airbus, a major advantage of the A330 over older and larger widebodies is its significantly lower operating costs (Airbus 2014a). Due to the performance data, it is suitable where new routes are to be developed. Once sufficient demand is generated on such a route, the B777 is the more suitable aircraft according to market participants (Putzger 2018). More than 1400 aircraft of the A330 have been built. There is thus a sufficiently large fleet of passenger aircraft that could still be converted. Nevertheless, the aircraft type has met with low demand so far. Due to the shape of its fuselage, it is probably better suited for express transport than for pure cargo (Putzger 2018). 5.1.3.4 A340 With the A340, Airbus brought a four-engine long-haul aircraft onto the market at the beginning of the 1990s, which was to replace the older Boeing 767 for many airlines. Due to the safety regulations in force at the time, the B767 always had to fly relatively close to the mainland in order to be able to fly to an alternative airport in the event of a failure of one of the two engines. The four-engine design, as mentioned elsewhere, had some disadvantages, such as higher fuel consumption and maintenance costs, but allowed it to fly at a greater distance from the mainland on the North Atlantic route. Until then, the Boeing 747 was the only wide-body aircraft allowed to take the shorter, more direct route due to FAA safety requirements. Shortly after Airbus began development of the A340, those requirements changed. Virtually as soon as it entered service, the A340’s main selling proposition was already obsolete. Given its high fuel consumption, many airlines decided against the aircraft (Beutelsbacher 2016; Harris 2011). Of the older generation A340-200/-300, only 145 of the 246 aircraft once delivered were still in service in 2018. Table 5.19 A330 performance data Aircraft type A330-200F

Cost per block hour (US$) 7772

(Lo Storto 2017; Airbus 2014a; EFW 2015)

Cargo volume (m3) 445

Payload (tons) 69,300

Range (nm) 3666

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In view of the high fuel consumption, airlines, such as Thai and China Eastern, decided to part with these aircraft types and accept high depreciation. Even the newer variants, the A340-500 and -600 could not bring the hoped-for turnaround. Due to the lack of profitability, the production of the A340 was already discontinued in 2011, only two decades after the first entry into service. Compared to the twin-engine B777, the A340 was not competitive. The A350 was launched as its successor. Given the low residual values, it does not seem out of the question that older A340s will be converted into freighters. In the freighter version, the A340 would have the capacity to carry 60 tons of cargo over a distance of about 9000 km. It would be particularly suitable for destinations that are “hot and high” like Mexico City, Bogota, Quito and Addis Ababa, i.e. have high average temperatures and are more than 2200 metres above sea level (CAPA 2015).

5.1.3.5 A380 With a seating capacity of up to 853 passengers, the A380 is the largest commercial aircraft in production. The seating capacity is so high because the aircraft has continuous seating on two decks. The closest to this concept is the B747, which also has a second deck in the forward part of the fuselage. This design is the real reason why the A380 is effectively irrelevant from an air cargo perspective. Compared to “normal” aircraft, the ratio between cargo space and passenger space is thus only half. The cargo hold of a well- occupied A380 is thus already filled with baggage, leaving very little space for freight. Skycargo, the cargo subsidiary of Emirates, states that the capacity of the A380-800 is only eight tonnes (Emirates SkyCargo 2016). As of 2019, approximately 250 of the aircraft type, which entered service in 2007, have been produced, with close to half being purchased by a single airline Emirates at deep discounts. The program ended back in 2012, after only 14 years. Market observers agree that the program has not been a success for Airbus. When the A380 was developed, Airbus had expected that as passenger numbers increased, major hubs such as London or Frankfurt would reach capacity limits. The A380 is capable of carrying very large numbers of passengers efficiently from one hub to the next. Instead, there has been a fragmentation of flight routes. There is an increased demand for direct connections served by smaller widebody aircraft or even narrowbodies (Ewing 2018). There were feasibility studies for the cargo version of the A380, and there was initial interest, e.g. from FedEx. As this type of aircraft can carry a relatively large volume in relation to its payload, it would have been particularly attractive to integrators. An A380F would have had a long range combined with a high payload of 150 tonnes. However, production of new A380Fs never started, nor is it likely to given the cost. One reason was the challenge of loading three decks at different heights in a short time. The situation may be different with regard to the possible conversion of passenger aircraft. The first A380, which reached the end of its life cycle prematurely in 2018, was put into storage and the engines returned to Rolls-Royce (Knupfer 2017). It is doubtful that aircraft as large or larger will ever be built. Plans by Lockheed and Boeing in the 1970s to build aircraft that would have been twice or three times the weight of the A380 never made it past the design stage (Filippone 2012).

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5.1.4 Antonov Family While in the Western world hardly any dedicated civilian cargo aircraft were constructed, but these were almost always derived from passenger aircraft, the situation in the former Soviet Union was different (Davies 1996). In North America, even remote areas were accessed early by rail and later via highways. Comparably remote areas in the Soviet Union, on the other hand, always dependended on air transport. Within the controlled economic organization COMECON, nation states specialized in the production of certain goods. In the area of transport equipment production, for example, the CSSR was the leader in the manufacture of heavy trucks and the Ukraine in aircraft construction (Turnock 2004). The Ukrainian state-owned company Antonov has produced more than 20,000 aircraft since its foundation in 1946. The headquarters and production are located near Kiev. In June 2016, it was decided to bundle the aircraft activities in Ukraine in the newly founded Ukrainian Aircraft Cooperation. Here, Antonov forms the core of the company with the new construction and conversion of older aircraft. The structure of the new group mirrors that of its western competitors Boeing and Airbus. The revitalization of the aircraft industry is one of the strategic goals set by the government of Ukraine. Traditionally, the Soviet Union and its successor states, especially Russia, have been the main buyers of Antonov aircraft. Due to the political tensions between Russia and Ukraine, this sales market has been significantly affected. Conquering new markets in the West and in Asia is crucial for the company’s continued existence.

5.1.4.1 Antonov AN124 (Ruslan) In 1986, before the fall of the Iron Curtain, the Antonov AN124 was first delivered. The aircraft, also called the Ruslan, was designed as a transport aircraft for the Warsaw Pact and thus closed a strategic gap. Until then, the troops of the Eastern defense alliance had difficulty moving large quantities and heavy goods by air. In design, it resembles the American Galaxy, the troop carrier manufactured by Lockheed, but has an even greater capacity. It is less geared to transporting standardized ULD – these can be carried more efficiently in normal wide-body aircraft – than heavy cargo. The aircraft is capable of carrying loads of up to 120 tonnes, and even up to 150 tonnes in individual versions of the aircraft. Parts up to 120 tons can be pulled into the fuselage with the help of a winch. The size of the cargo hold is 36.9 × 5.8 × 4.1 m (Table 5.20).

Table 5.20 Performance data of the AN124 year of commissioning 1986

Units produced and units in service (2019) 56/47

Cargo load/ range 120 t/2800 nm

(Volga Djnepr Group 2019a, b; Planespotters 2019a, b)

Pallet positions −/−

Major operators (cargo) Antonov airlines, Volga-Dnepr airlines

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More than 50 aircraft of the type were built. Today, this aircraft is used even by member states of NATO for transport. However, its use for civil air freight is also significant. Due to its load capacity, the aircraft is highly valued by some shippers, especially in the oil and gas sector and the engineering industry for ad hoc transports. The aircraft is also frequently chartered for humanitarian missions. The rather short distance can prove to be a disadvantage. With a payload of 120 tons, the range is less than 3000 nm. Figure 5.5 shows the loading of a single-weight oil production plant into an AN124 under the management of Panalpina. The equipment was transported from Malaysia to Trinidad and Taboga. Due to the heavy weight of the plant and the already limited range of the AN124, a total of 7 days and ten stopovers were required on the way to the Caribbean – in Thailand, Bangladesh, Pakistan, Turkmenistan, Bulgaria, Germany, Iceland, Canada (Goose Bay), Washington and Miami (Panalpina 2016a, b). Antonov plans to subject its aging aircraft to a modernization program. This includes, above all, an increase in range and a reduction in fuel consumption as well as a conversion from the mechanical control of the aircraft to an electronic one (Siegmund 2015).

5.1.4.2 Antonov AN225 (Mrija) The Antonov An-225 Mrija (“Dream”) is a speciality. With its six engines and 32 wheels, it is known beyond expert circles, although only one aircraft of this type is used. It is the

Fig. 5.5 Loading an oil production unit into an AN124 (Copyright Panalpina)

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Table 5.21 Performance data of the AN225 Year of commissioning 2001

Units produced (2018) 1

Cargo load/ range 250 t/1500 nm

Pallet positions −/−

Major operators (cargo) Volga Dnepr, Antonov airlines

longest and heaviest aircraft ever built. It was originally designed to carry the Russian Buran space glider. The Buran was equivalent to the US space shuttle. However, it only completed a single space flight before falling victim to austerity measures following the collapse of the Soviet Union. The construction of the AN225 is based on the An124, which was lengthened by 15 m. The AN225 is a smaller space shuttle. Compared to its smaller sister aircraft, the Mrija has two additional engines, a longer fuselage and wider wings. The cargo hold is approx. 43 m long. 6.4 m wide and 4.4 m high. The aircraft can carry a payload of up to 250 tons. After being out of service for a number of years, the AN-225 is now flying again on charter for Antonov Airlines (Table 5.21). The heaviest cargo ever transported by air, a generator weighing 190 t, was transported from Hahn to Armenia in 2009 on the An-225. Like the An-124, the aircraft is used in particular to transport heavy machine parts, aid supplies and military equipment. As of 2019, a second aircraft has not been completed. A revival of the program under Chinese leadership seems possible. Antonov sold the blueprints and technological sketches of the AN-225 to a Hong Kong-based company in 2016 (Ballin 2016; aero Tele 2016).

5.1.4.3 AN132 Antonov is developing a smaller turboprop-powered cargo aircraft, the AN-132, in cooperation with a Saudi Arabian partner company. The aircraft will have a capacity of 9 tons (Air Cargo News 2016). It is primarily designed to meet military needs and, for example, unlike normal cargo planes, can land on dirt runways and take off in temperatures of 55 ° heat (Odrich 2015). Whether the aircraft type will also find civilian customers remains to be seen.

5.1.5 Ilyushin The company Ilyushin is an aircraft manufacturer from Russia, which was founded in 1933. In the past, it offered an unusually wide range of products compared to Airbus and Boeing, from regional aircraft with turboprop engines to wide-body aircraft.

5.1.5.1 IL114 The IL-114 is a regional aircraft with two turboprop engines. It has been in production since 1990. It is planned to produce up to 12 aircraft per year of the IL114-300 version (ruaviation 2018). Very few examples of the freighter version of the IL-114 are in service.

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5.1.5.2 IL76 The Il-76 of the Russian aircraft manufacturer Ilyushin is a heavy four-engine wide-body aircraft that was introduced into service in the Soviet Union in the early 1970s. Nearly 1000 aircraft of this type were produced and most of them are in military use today. However, numerous aircraft of the type can also be found with private charter operators, such as Volga Dnepr Airlines, which operated five of the modernized version IL-76-90-VD in 2016. After production was initially discontinued after the collapse of the Soviet Union, the aircraft type has been in production again in modified form for several years. Characteristic for the IL-76 are the windows on the lower half of the nose, which provide a better view. It was designed as a civil transport aircraft to supply remote parts of the then Soviet Union. The requirement profile was to transport up to 40 tons of cargo over a distance of up to 5000 km. With a load of max. 50 tons the range is still about 4000 km. Cargo can be moved into the fuselage of the aircraft using on-board winches and a hydraulically lowerable tail ramp. Due to its relative independence from airport infrastructure, the IL-76 is often chartered on relief missions. 5.1.5.3 IL96 In addition to the IL76 cargo aircraft, Ilyushin also produced the IL-96, a four-engine wide-body aircraft. The aircraft type is among others in use as Russian government aircraft, like the B747 for the American president. Almost all IL-96 s are in service in Russia. Only about 30 examples of the aircraft have been produced since 1992. The IL96-400 T is the extended cargo version of the passenger aircraft. Its maximum payload is 92 tonnes (Ilyushin 2019). As of 2019, no cargo aircraft of the type is in civilian service, probably due to the lack of economic viability.

5.1.6 Other Aircraft Types With Boeing, Airbus, Antonov and Ilyushin, the most important remaining manufacturers of aircraft used for the transport of air cargo are listed. However, in order to meet the demands in terms of transit time, integrators also rely on smaller aircraft types. Since express shipments are usually relatively light and not very bulky, propeller planes and turboprops can be used here. They serve such routes that cannot be reached quickly enough by gateways with trucks and light commercial vehicles. Important aircraft types that perform feeder services for UPS, Fedex and DHL Express are summarised in Table 5.22 (Harris 2014a): In use for express service managers, the advantages of turboprops, such as the relatively low purchase price and manageable operating costs, outweigh the disadvantages. Although the cruising speeds of turboprops are lower than those of jets, this disadvantage is of little consequence on short-haul routes.

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Table 5.22 Small cargo aircraft Drive Aircraft type Turboprops Saab 340F ATR42F F50-F BAe ATPF ATR72F

Jets

Q400PF CRJ200 BAE 146-300QT

Manufacturer Saab Avions de transport Régional Fokker British aerospace Avions de transport Régional Bomardier Bombardier British aerospace

Max. Payload (tons) 3.8 5.6

Range with maximum payload 335 450

7.7 8.3 8.4

980 530 500

8.4 6.9 12.1

1200 1100 960

(Harris 2014a)

5.1.6.1 ATR The Italian-French manufacturer consortium Avions de Transport Régional (ATR) is the most important remaining manufacturer of turboprops. The ATR 72 is a further development of the smaller ATR 42. The manufacturer of the aircraft is the French-Italian Aerei da Trasporto Regionale. The two aircraft types first entered service in 1985 and 1989 respectively. As a turboprop, it serves short-haul routes, with a maximum range of 1400 km. The only competitor in this segment is Bombardier with the Q400. On short-haul routes, jets can hardly exploit their speed advantage, but consume considerably more kerosene than turboprops. These are also the reasons why both versions, the ATR 42 and 72 enjoy great demand by integrators. ATR itself has been offering two conversion options since 2002, the “Light Tube” for heavy cargo and the “Structural Tube”. The latter requires more complex modifications to the aircraft fuselage, but can thus also provide more volume (ATR). Maximum cargo capacity is approximately 6 tonnes for the -42 and 8.5 tonnes for the -72, and the addition of a larger cargo door can accommodate up to five or seven LD-3 containers. Since 2017, ATR has announced it will launch a redesigned cargo version, the -600F. The first customer is FedEx, with 30 firm orders and 20 further options. 5.1.6.2 Bombardier CRJ100/200 The CRJ100 (Canadair Regional Jet) and its more powerful sister CRJ 200 are developments of the former aircraft manufacturer Canadair, which was merged into Bombardier in 1986. More than 1000 aircraft of this type were produced in the years 1991–2006. Since 1999, the successor product, the CRJ 700, has been delivered in series. In the small regional aircraft segment, the jets are superior to the turboprops in terms of flying speed and range, but this is more interesting for passengers than for cargo. Given the success of the aircraft type as a passenger aircraft and the high number of units in which they were produced, it was nevertheless obvious to consider converting them into cargo

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aircraft. As of 2018, the cost of acquisition was around US$2–3 million and that of conversion around US$1.8 million. Conversion vendor AEI reported surprisingly high demand for the CRJ200F. The P2F version has a cargo capacity of 6.7 tonnes and a maximum range of 750 nm, up from 1200 nm for the passenger version. Cargo can be loaded as loose freight (bulk) or in containers. Given the limited range and capacity, the aircraft type is particularly suitable for express service providers (Harris 2014b).

5.1.6.3 British Aerospace British Aerospace, based in Farnborough, manufactures not only combat aircraft but also commercial aircraft. Passengers are most familiar with the four-engine BAe 146 or, in the second model series, the Avro RJ. The jet was used for a long time by the German Lufthansa for short-haul flights. Its particular popularity was due not least to the fact that it was quiet and was therefore also allowed to land at inner-city airports such as London City. The ATP aircraft type, on the other hand, is a turboprop, produced in relatively small numbers of only 64 between 1988 and 1996. Freighter versions of it are also in service, including with West Air Atlantic, which operates on behalf of DHL and FedEx (West Atlantic 2019). 5.1.6.4 Cessna/Textron Aviation The Cessna Aircraft Company, based in Wichita/Kansas, is primarily known as a former manufacturer of small propeller aircraft. Since 1992 Cessna is owned by Textron Aviation, Cessna exists only as a brand. A characteristic feature of Cessna aircraft is that the wing is located at the upper edge of the fuselage. These aircraft are therefore also referred to as whoulder wing aircraft. This design is advantageous for loading cargo and, as with the Cessna 408, facilitates the arrangement of the propellers below the wings. The single-engine Cessna 208 “Cargomaster” and, as its successor, the twin-engine 408 “SkyCourier” were designed to carry both passengers and cargo. FedEx was closely involved in the development of the aircraft, and the company was and still is the main customer for these aircraft types. The SkyCourier is designed to carry up to three LD3 ULDs. The aircraft, with a payload of 1–3 tons, is used by FedEx as feeders. 5.1.6.5 Fokker F50 and F60 The Fokker aircraft factory, founded by the Dutchman Anton Fokker in Germany, was the world’s leading manufacturer of commercial aircraft in the 1920s and 1930s. With the collapse of the economy after the end of the Second World War, Fokker only slowly resumed operations, but without being able to build on old successes. Fokker became insolvent in 1996. The Fokker 50 or its extended version, the F60, were produced in the period from 1987 to 1997. The machine, of which a little more than 200 copies were produced, had a turboprop engine. In its cargo version, the F60 could carry about 7 tons of cargo. As of 2018, the F50 was still in service with a number of African, Asian and South American airlines.

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5.1.6.6 Saab 340 The Saab 340 is a regional aircraft developed jointly with the US manufacturer Fairchild. Saab is a Swedish manufacturer of aircraft and defence equipment. The Saab 340 also has two turboprop engines. More than 450 examples were produced before it in the period from 1984 to 2005. When fully loaded, the cargo version, the Saab 340AF, can fly up to 475 nm with 3.8 cargo (Saab 2009). The Estonian airline operated nine aircraft of the type in 2019, also for UPS and TNT. 5.1.6.7 Business Aircraft The world’s three leading manufacturers of aircraft for business travellers and high net worth individuals are France’s Dassault Aviation, Gulfstream Aviation and Canada’s Bombardier Aerospace. These three suppliers alone account for more than 80% of global sales of new large and medium-sized private jets and business jets. These small jets are rarely used as cargo aircraft, as the cost of transporting a tonne of payload is comparatively high compared with larger aircraft types. In addition, numerous modifications, especially to the fuselage, are required to accommodate cargo. A rather cautionary example is the extensive modifications to the aircraft door and cabin floor of the Dessault Falcon 20 that FedEx had to have made before they could use the aircraft to transport cargo.

5.2 Air Cargo Containers (ULD) Unit Load Devices (ULD) are containers and pallets used for the transport of air cargo. Containers are generally defined as transport units of min. 1 m3 which can be used repeatedly, are easy to handle and are intended to facilitate transport by one or more means of transport without transhipment (ISO Standard 830:1999). IATA estimates that approximately 900,000 ULDs are in use with a replacement value of USD 1 billion (IATA 2018d). Major manufacturers of ULDs include Cargo Composites, Granger Aerospace and Satco in the USA, Nordisk Aviation in Norway and VRR-Aviation. German manufacturers are DoKaSch in Staudt near Montabaur and PalNet Air Cargo Products in the Eifel.

5.2.1 Advantages of Using ULD The advantages of using ULD are that the cargo space can be better utilized than with manual loading, and the loading and unloading of the aircraft is much faster and thus more cost-effective. The loading and unloading of a B747-8F can be completed within just 1 h, provided it is done through the nose and side doors at the same time (Ashford et al. 2013, p. 308). Goods are also better protected against damage or theft in the ULD (Dobberkau et al. 1971; Rath 1973).

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In terms of its functions, the ULD is similar to the better-known sea freight container. The most important means of transport for the international movement of goods is the sea freight container, as developed by Malcolm McLean in the 1950s. The idea of transporting things in containers is almost as old as transport itself. The barrel, for example, is a forerunner of today’s container. It was used to transport not only liquids but also dry goods such as textiles, grain, ceramics and the like. The first modern container ship, the MV Ideal X, set sail from Newark, New Jersey in 1956 and transported 58 containers to Houston in Texas (for a comprehensive history of the sea freight container, see Levinson 2009). The Ideal X was a converted World War II tanker that McLean was able to acquire cheaply from the U.S. Navy, which no longer had any use for it. The idea of transporting goods in containers came to McLean when he was a freight forwarder frustrated by a time-consuming unloading operation a year earlier. The container’s breakthrough finally came with the Vietnam War. By 1969, American troops had over half a million troops stationed in the country, but only two sufficiently functional seaports to land their materials. The use of containers greatly improved the capacity of the ports by massively reducing turnaround time and allowing larger ships to be used. A pleasant side effect was that the loss of material was limited at the same time. In 1969, the first container ship arrived in the Port of Hamburg. In view of the many advantages that shipping by container brought, ports around the world adapted to this transport aid. In 2018, approx. 9 million containers were moved in the Port of Hamburg.

5.2.2 History of the Air Cargo Container The development of the airfreight container ran parallel to that of its sea freight counterpart. The first attempts to bundle goods in containers made of corrugated board can be found at the end of the 1950s. ULDs in their present form found their origins with the introduction of the combi versions of the B707 and DC-8. The breakthrough came when IATA decided to offer uniform tariffs for ULDs, regardless of the type of contents (Allaz 2004, p. 219 f.). A patent specification from 1971 clarifies the purpose of the air cargo container. According to this, the primary objective is to make optimum use of the aircraft’s cargo space and to avoid empty stowage space (Dobberkau et al. 1971). The loading of the container is done or gateway, which significantly reduces the time the aircraft has to be on the ground for loading. Manual stowage of the aircraft takes longer because the individual consignments have to be moved individually on a conveyor belt into the aircraft and be put into position.

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5.2.3 Categorisation of Standard ULDs Each ULD is assigned a unique ten-digit identifier that can be read from the outside. IATA regulates the way in which the identifier is assigned. The first three digits indicate the type of container. In 1984, IATA replaced the previously prevailing system of categorising ULDs with a new one. This sometimes leads to a confusing parallelism of designations. For example, the frequently used container type LD3 (LD for Lower Deck, Type 3) has the IATA designator AKE. In this logic, the first digit, a letter, designates the category of the unit. The most important abbreviations are A for certified container, P for certified pallet and R for certified reefer container. The second digit describes the base area, e.g. K stands for an area of 1534 × 1562 mm. The third digit designates the shape of containers and the certification of pallets. Most containers are beveled in the upper or lower part in order to better reproduce the shape of the hull. The following fourth to eighth digits indicate a serial number, the last two letters or numbers an identification of the owner, usually an airline. Thus, the container with the number RAP10008LH is a certified reefer container with a floor area of 88 × 125 inches, which is not contoured and is owned by Lufthansa.

5.2.3.1 Air Cargo Containers The structure of the containers is mostly made of aluminum, the side walls of aluminum or polycarbonate. The walls merely give the container structure; the ULD may only be touched by the base plate – unlike the much more stable sea freight containers, which are moved with the aid of cranes. The walls replicate the shape of the hull and are also known as igloos (Igloo) (Smith 1974). The walls are designed to dissipate some of the forces acting on them through the floor. However, the walls are not designed to absorb violent impacts. The most commonly used air cargo container is the so-called LD3 (IATA code AKE). Morrell estimates that around half of all ULDs loaded below deck on passenger aircraft are such LD3s (2011, p. 162). This type of container as well as the LD6 and LD11 fit with their contours into the most important cargo aircraft such as the B747, the MD11, the IL96 and all Airbus wide-body aircraft. The letter “L” indicates that these ULDs are for the lower deck. The LD3, like most lower deck containers, are sloped on one side to conform to the round shape of the aircraft fuselage. Depending on the design, the LD3s have a tare weight of only about 80 kg and can thus be moved empty by hand by one person in a cargo hangar equipped with rollerbeds. 5.2.3.2 Air Cargo Pallets Certified air freight pallets are identified by the fact that their designation begins with the letter “P”. Compared with containers, pallets have the advantage that they weigh less and are cheaper to buy and maintain because they have no side walls. They can also be transported and stored more efficiently. The goods are generally secured with plastic sheers and nets. The pallets have securing rails at the edges into which the nets can be clamped.

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During transport to and from the aircraft, the goods are exposed to a potentially higher risk of damage from the weather. Due to their shape and size, they are primarily suitable for transport on the main deck of combination or all-cargo aircraft. In order to make optimum use of the cargo space, the pallets should be packed in such a way that, as with igloos, the contour of the aircraft is mimicked. Cargo is most commonly transported on PMC and PAG type pallets, which are suitable for transport in major cargo aircraft such as the A300, A310, A340, B747, B767, B777. The PMC pallet has a length of 3.17 m and a width of 2.43 m (125 × 96 inches) and a tare weight of 120 kg. It has a load capacity of up to 6.8 tonnes. The PAG pallet type is also 317.5 cm long, but is slightly narrower at 223.5 cm and 110 kg deadweight, lighter and has a reduced maximum payload of 6 tonnes. An overview of important pallets and containers can be found in Table 5.23.

5.2.4 Special Air Cargo Containers and Loading Equipment General cargo, is goods whose transport does not entail any special requirements. It can be shipped on normal pallets or in standard containers. However, some shippers have needs that cannot be met with normal shipping containers. A non-exhaustive list of industries that have special requirements for air transport includes the pharmaceutical industry, trade in perishable goods and live animals, and the automotive industry. For these market segments, the industry has developed special air

Table 5.23 Overview of important containers and pallets in air freight (Boeing 2012) ULD type (IATA code) Loading LD-1 (AKC) Lower deck LD-3 (LFS) Lower deck

Suitability aircraft types B747, B767, B777, 787, MD11 A300, A310, A330, A340, B747, B767, B777, MD11 A300, A310, A330, A340, B747, B767, B777, MD11 A300, A310, A330, A340, B747, B767, B777, MD11

Internal volume 4.8 m3 4.3 m3

Max. Payload 1588 kg 1588 kg

3.0 m3

1588 kg

9.1 m3

LD-3 reefer (RKN, RVN) LD-9 (AAP)

Lower deck

LD-26 (AAF)

Lower deck Main deck

B747, 777, 787, MD11 B747F, B747 Combi, 777F

13.3 m3 33.2 m3

4624 kg (LD) 6000 kg (MD) 6033 kg 11,340 kg

Lower & Main deck

A300, A310, A330, A340, B747, B767, B777, B787, MD11

21.2 m3

6800 kg

M-6, 20′ pallet (PGA, PGE) 10′ pallet (P6P)

Lower deck

Overview of important containers and pallets in air freight (Boeing 2012).

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freight containers, without which transport of the goods would not be possible or only with considerable restrictions.

5.2.4.1 Temperature-Controlled Container For the transport of many pharmaceutical products and for most perishable goods, it is necessary to guarantee continuous refrigeration along the entire route. If there are temperature interruptions, the goods usually become unusable. In the worst case, damaged goods are used without achieving any therapeutic benefit. The challenges can be illustrated using the example of a fictitious transport of temperature-sensitive vaccines from Switzerland to Mumbai. The medicines, which are manufactured by a Swiss company in southern Germany, are taken in a refrigerated truck to the forwarder’s warehouse near the Euroairport Basel/Mulhouse (EAP), briefly placed in interim storage and stowed in a ULD. The ULD is handed over to the ground handler at the airport and, if necessary, inspected by the responsible French customs authorities. The ULD is loaded onto the aircraft and flown to Doha (DOH). The flight leaves Euroairport in the late evening hours and lands in Qatar in the early morning of the next day. There, the ULD is unloaded and transferred to the 2500 m2 Climate Control Center, as the onward flight will not take place until the evening hours. The cold store has more than 150 positions for storing ULD, is GDP compliant and guarantees temperatures of +2 to +8 ° and 15–25 ° Celsius in two separate zones. In the evening, the consignment is loaded onto the cargo plane to Mumbai either in the same ULD or in another ULD. After landing, unloading is done by the ground handler, if necessary an inspection by the Indian customs and handover to the forwarder. He deconsolidates the ULD and transports the shipment in a refrigerated vehicle to the recipient.

During a typical pharmaceutical transport, the consignment is reloaded approximately 14 times (IATA 2016a, b, c). The cold chain can still be relatively well guaranteed by means of special trucks and cold storage cells in the transshipment warehouses and on the aircraft. Aircraft fly at altitudes of around 10 km, where the outside temperature is between −30 and − 60 °Celsius. If only to maintain the stability of the aircraft, the air is heated, but not to temperatures that are normal in the passenger compartment. Larger aircraft have the option of differentiated temperature control in various areas of the cargo hold. The far greater challenge is cooling during transport to and from the apron as well as loading or unloading into the aircraft. While the large cargo airports in the Middle East, such as Doha, Dubai, Abu Dhabi, or in Asia, such as Singapore or Hong Kong, have a good infrastructure for cooling the goods, this is less the case at smaller airports in South America or Africa.

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Two methods are used for cooling: • Passive cooling using insulated boxes equipped with dry ice or cooling accumulators. Here, compliance with the required temperature can only be guaranteed to a limited extent. • Active cooling through the use of special temperature-controlled containers. These ULD are able to maintain the temperature independently. The cooling or heating in the container is carried out by its own compressor or a heater, which are operated by a power connection or with the help of batteries. One of the leading manufacturers of temperature-controlled ULD is the Swedish company Envirotainer. The company offers containers with both methods of temperature control. The ULD RKN e1 can maintain a temperature of +5 for up to 30 h at an ambient temperature of −10° to +30°. It is similar in shape to the ULD type LD3 (AKE) and can be loaded into A300, A310, A330, A340, A380, B747, B767, B777, DC10 and MD11 aircraft (Envirotainer 2018). One disadvantage of using these types of containers is that they are very specific to the needs of the customer. There is often the question of what goods the container can usefully be filled with on the return journey.

5.2.4.2 Containers for the Transport of Live Animals Transport boxes of different sizes and specialities have been developed for the transport of live animals. It is estimated that about 2 million pets and about 20,000 horses travel by air each year (Sales 2016, p. 96). Carrying them as hand luggage in the cabin is only allowed in exceptional cases. Lufthansa, for example, only allows dogs and cats to travel in the cabin, and only if they do not weigh more than 8 kg together with the transport box. Emirates does not allow animals in the cabin at all, with the exception of guide dogs and falcons in certain areas of Pakistan. Animals are therefore transported for the most part in the hold. For small animals, such as dogs and cats, normal small animal crates are suitable. For fighting dogs, such as Pit Bull Terriers and Rottweilers, Lufthansa, for example, offers special, reinforced transport boxes. For the transport of up to three horses, stables, the ULD types HMA, HMJ and HYJ are suitable. The horses are accompanied on their journeys by specially trained and safety- checked grooms. They are stalls that are on the P6P standard pallet. The containers are designed so that they can also be used for normal freight for repositioning. 5.2.4.3 Car Racks Due to their high weight, entire vehicles are usually transported over long distances by land or sea. In deviation from the normal case, pre-series models or particularly valuable automobiles are also flown: • Pre-production models are flown to auto shows, and new vehicle models are occasionally flown to dealers for introductions.

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• According to one estimate, 7–10% of the vehicles produced by luxury manufacturers such as Rolls Royce or Bentley are transported by air. Wealthy customers, especially in the Middle East, often source their luxury models by air as well. (Air Cargo World 2013) • A smaller sub-segment relates to the transport of prototypes. For example, German car manufacturers ship vehicles to the deserts of the USA to test them under heat conditions before they are launched. In addition to the material value of the prototypes, the better preservation of secrecy also speaks for the choice of aircraft. For transportation purposes, the industry has developed special racks, so-called car racks, which allow two vehicles to be loaded on top of each other. Since most vehicles have limited height and no goods can be stacked on top of or underneath them, valuable cargo space can be used in this way. The racks used by Cathy Pacific Cargo, for example, can carry vehicles weighing up to 2.5 tonnes on the upper level. Cathay loads the rack exclusively on the upper deck of the B747 (Cathay Pacific Cargo 2012).

5.2.5 Preventing Damage to ULD If handled properly, ULDs can be in use for up to 15 years. In practice, the hectic handling of urgent goods often leads to damage and usually a shorter service life (Sales and Hulsman 2016). Damaged ULD can cause damage to the aircraft skin or cargo doors (LIao 2013). Therefore, IATA treats ULD as aircraft train parts and subjects them to strict regulation, the ULDR (IATA 2018c). The annual cost of repairs to containers is estimated at around US$400 million. One approach to reduce these costs is to track the ULD throughout to identify the perpetrators of any damage (Air Cargo News 2015). Another approach is to transfer the management of ULDs to specialized pooling companies. These provide the ULDs to airlines and arrange for their maintenance (Donnison 2017). Pooling ULDs improves their utilization and reduces significant costs. Unilode, for example, maintained approximately 120,000 ULDs in 2018 for more than 40 customers, including Cathay Pacific, TAP Portugal, and Scandinavian SAS. Jettainer, as part of the Lufthansa Group, also works for Etihad and India’s Jet Airways in addition to the Group’s airlines.

5.3 Road Feeder A significant proportion of air freight is transported by road, and not only in the pre- carriage and onward carriage stages. According to one estimate, this share is around 80% in Europe and even higher in North America (Sales 2016). At Copenhagen Airport, pure air cargo tonnage transported by truck accounted for approximately 28% in 2018 (CPH 2019; Beifert 2016). Unlike ordinary truck transport from an airport, road transport is based on an air waybill and an air freight rate has been agreed. The consignments travel “on” an air waybill.

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From a liability perspective, the transport is little different from that by air. As with air connections, road feeders operate within fixed schedules, i.e. unlike normal groupage transports, they do not wait for consignments should they be delayed or a trailer not yet be fully loaded (Beifert 2016). In its original conception, the so-called air freight replacement service served to transport consignments by road or other modes of transport on an exceptional basis for technical reasons or due to insufficient capacity. In the early days, substitute transport was only permitted if the transporting airline had the traffic rights for the route in question but was unable to transport the goods by air for operational reasons. In today’s view, substitute traffic also exists if air freight is regularly transported on a route by truck (Brinkmann 2009, p. 84). The original term air freight substitute transport, which was used for this service for a long time, is thus obsolete. Meanwhile, substitution, i.e. the exception, has become the rule since the 1980s (Seidelmann 1981; Schüller 2003, p. 63). On intra- European routes, the aircraft is mainly used to transport urgently needed and small consignments (spare parts and pharmaceutical products) and to serve the periphery. The main reasons that have led airlines to transport air freight over short to medium distances by road since the 1980s at the latest can be summarised as follows 1. Lower feeder costs: Transport by air is considerably more expensive and not much faster, considering the effort involved in loading and unloading an aircraft. 2. Lack of capacity of regional aircraft: the aircraft deployed are usually too small to accommodate ULDs. Transporting larger quantities of air freight and bulky packaging units is usually simply not possible. 3. Applicable safety regulations: Certain dangerous must not be loaded on passenger aircraft, trucks are a suitable alternative. 4. Better time windows: Feeders generally leave the airports at a later time than the last regional aircraft. This allows shippers to schedule air freight pickup for later in the afternoon. The so-called road feeder services link the major cargo airports with the regional airports, which in Germany include Düsseldorf, Hanover, Hamburg and Stuttgart, for example. Table 5.24 shows the regular connections offered by Lufthansa Cargo from the cargo airports in Frankfurt, New York, Tokyo and Sao Paulo, among others. Air freight is also regularly transported by road from one major airport to another, such as shipments for Air France that are delivered in Frankfurt and then transported to Paris CDG.

5.3.1 Legal Requirement According to Art. 18(4) of the Montreal Convention (1999), the prerequisite to divert a shipment to the road is consignor’s consent. In its Resolution 507b, IATA defines the requirements for permissible substitute transport quite broadly. Paragraph 1 states that a

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Table 5.24 Road feeder connections of Lufthansa Cargo from Frankfurt/Main (FRA), New York (JFK), Tokyo (NRT) and Sao Paulo (from, as of April 2019) From According to Frankfurt Alicante (ALC), Amsterdam (AMS), Stockholm (ARN), Barcelona (BCN), (FRA) Birmingham (BHX), Bilbao (BIO), Billund (BLL), Bologna (BLQ), Bremen (BRE), Brussels (BRU), Bratislava (BTS), Budapest (BUD), Paris (CDG), Cologne/Bonn (CGN), Copenhagen (CPH), Dresden (DRS), Dortmund (DTM), Düsseldorf (DUS), Eindhoven (EIN), Rome (FCO), Florence (FLR), Münster/Osnabrück (FMO), Glasgow (GLA), Genoa (GOA), Graz (GRZ), Geneva (GVA), Hanover (HAJ), Hamburg (HAM), Helsinki (HEL), Hohenems/Dornbirn (HOH), Krakow (KRK), Katowice (KTW), Lodz (LCJ), Leipzig (LEJ), London Heathrow (LHR), Lille (LIL), Milan Linate (LIN), Lisbon (LIS), Ljubljana (LJU), Linz (LNZ), Luxembourg (LUX), Lyon (LYS), Madrid (MAD), Manchester (MAN), Maastricht (MST), Munich (MUC), Malpensa (MXP), Nuremberg (NUE), Porto (OPO), Bucharest (OTP), Poznan (POZ), Prague (PRG), Saarbrücken (SCN), Sofia (SOF), Stuttgart (STR), Milan (SWK), Strasbourg (SXB), Salzburg (SZG), Tallin (TLL), Toulouse (TLS), Trieste (TRS), Berlin (TXL), Venice (VCE), Vienna (VIE), Valencia (VLC), Warsaw (WAW), Wroclaw (WRO), Zagreb (ZAG), Zurich (ZRH) New York Atlanta (ATL), Hartford (BDL), Boston (BOS), Baltimore (BWI), Charlotte (CLT), (JFK) Newark (EWR), Washington (IAD), Chicago (ORD), Norfolk (ORF), Philadelphia (PHL), Pittsburgh (PIT), Richmond (RIC) Tokyo Tokyo-Haneda (HND), Osaka-Kansai (KIX), Nagoya (NGO) (NRT) Sao Paulo Bela Horizonte (CNF), Curitiba (CWB), Florianópolis (FLN), Rio de Janeiro (GIG), (GRU) Joinville (JOI), Navegantes (NVT) https://lufthansa-cargo.com/web/guest/network/schedule-routings, last retrieved 17.02.2017

carrier may direct a shipment as surface transportation in the first or last leg when there is insufficient capacity on its connections, the size, weight or nature of the shipment precludes air transportation, the carrier refuses acceptance or air transportation would delay the shipment.

5.3.2 Performing Carriers Road feeders are offered both by the airlines and occasionally by 3PL. The freight forwarder Panalpina operates its own feeders both in Europe and in the USA, connecting the major economic centers with the hubs in Luxembourg and Huntsville in the US state of Alabama respectively. A forwarder who has a consignment transported by road under his own air waybill is acting as a carrier (Section 458 of the German Commercial Code).

5.3.3 Importance of Road Feeders for Regional Airports Road feeders allow a regional airport to be linked to the international cargo network even if it is not frequented by freighters and wide-body passenger aircraft.

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189

The importance of road feeders for regional airports can be illustrated by the example of Bremen Airport. In 2016, a total of 14,446 tonnes of freight were handled at the airport. Of this, 13,715 tonnes were declared as “trucking” and only 731 tonnes as genuine “aircraft freight” (Bremen Airport 2017). These feeder services allow important destinations around the world to be reached from Bremen, which is important for the regional economy with its automotive industry. • One of the airlines offering air freight to and from Bremen is AirFrance-KLM. As of 2017, it operated a road feeder service from Monday to Friday, departing Bremen at 21:00 under flight number KL8290 and arriving in Amsterdam at 3:30 the next morning. The early arrival time allows for timely loading onto passenger aircraft departing for North America during the morning. • At 9:30 p.m., Lufthansa Cargo’s road feeder under flight number LH7031 leaves Bremen and arrives at Frankfurt Airport at 5:05 the next morning. Three times a week there is an additional connection with a RFS to Munich. • Emirates SkyCargo operates two feeders, one to Frankfurt and one to Hamburg, each with a departure time of 22:00 and arrival time of 6:00 the next morning. Emirates does not fly to Bremen Airport at all. The aircraft that operate between Bremen and Frankfurt or Amsterdam via Lufthansa and AirFrance-KLM are either Fokker 70 turboprops or narrowbodies such as the A310 or A320. These aircraft carry smaller ULDs at best, and are unsuitable for transporting larger packages (Emirates SkyCargo 2017; Lufthansa Cargo 2017; AFKL 2017).

5.3.4 Importance of Road Feeders for Hubs Feeders also offer several advantages for the cargo gateways. The first and most important is that the feeders guarantee the amount of freight required to maintain a dense network. Frankfurt’s direct hinterland does not demand sufficient tonnage. A positive side effect is the better use of the limited space at airports. By delivering freight by truck, the scarce space at the airport can be used more effectively. Aircraft need runways and space to park when loading and unloading. It also takes longer to load and unload than trucks. If cargo is already loaded in ULD and the truck is equipped with rollerbeds, loading and unloading takes only a few minutes. Finally, the airport benefits from the fact that trucks emit considerably less than an aircraft. Aircraft engines are relatively noisy despite all the technical improvements. In addition, the noise radiates down from above and can thus penetrate into houses. For this reason, night flight bans have been imposed at some airports, such as Frankfurt, which extend into the morning hours. In the time window between midnight and the early morning hours, only deliveries by road are possible.

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5.3.5 No Substitution by Rail Feeders Attempts in the past to divert air freight from road to rail have so far had to be considered a failure. The time it would take to load/unload and transit the wagons proved to be uncompetitive. The “Euro Carex” project was launched in 2006 with the aim of strengthening rail as a competitor for air freight against trucks and short – and medium-haul aircraft (Euro Carex 2017). Private and public providers are involved in the project. Initially, the focus is on connections to the airports of Amsterdam Schiphol in the Netherlands, Liège in Belgium, Lyon-Saint-Exupéry and Paris CDG, as well as Greater London. In principle, the aim is to link the freight centres at the airports. London is an exception, as the airports do not have a rail connection. According to Euro Carex, a train has the capacity to carry 100–140 tonnes, which is the maximum load of a B747. It would thus replace 10–15 trucks. It is planned that loading and unloading will take a maximum of 30 min. The trains themselves are to reach speeds of 200 to max. 350 km/h. A test train launched in March 2012 successfully connected Lyon and Paris CDG airports with London’s St Pancras station. The rolling stock used was trains used in regular operations for the French Post (Railway Gazette 2012). Progress on the initiative has nevertheless been slow. A preliminary economic feasibility study was commissioned for the end of 2016. As of 2017, it remains to be seen whether this study will be able to support the substantial investments made in railcars, modified wagons and sidings.

6

Handling of an Air Freight Shipment

Abstract

An ideal type of air freight shipment involves a forwarder who consolidates it with shipments from other shippers. The following description of a transaction reflects the most common case. It can be found in modified form in most of the leading 3PLs (Lauterbach et al.: Transportation management with SAP TM. based on TM 9.0 and 9.1; plan and optimize: improve service, maximize use, and reduce costs; manage: process orders, schedule bookings, and tender shipments; integrate: utilize the full potential of SAP ERP, EWM, Event Management, and GTS, 1st ed. Galileo Press (SAP Press), Bonn (2014); Ashford et al. (eds.): airport operations, 3rd ed. McGraw Hill, New York/Chicago/San Francisco/Lisbon/London/Madrid/Mexico City/Milan/New Delhi/San Juan/Seoul/Sydney/Toronto (2013)).

6.1 Organisation of Physical Operations Normally, all tasks related to the operational preparation of an air freight export shipment are carried out by the branch of the freight forwarder that has been commissioned with the transport. This is in particular the pick-up of the shipment by a subcontractor, the preparation of the documents, the booking of the capacities, the handover of the freight to the airline and the invoicing. The branches also provide sales support to local customers. Larger air freight forwarders, which have several branches, have centralised key operational and strategic processes along the value chain. In operational terms, they have set up their own gateways on the various continents, where shipments are consolidated for exports and handed over to the airlines. In a mirror image, these gateways take over

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_6

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shipments in import and break up the ULDs. Such gateways can be found, for example, at Frankfurt, Paris Charles de Gaulle and New York airports. The strategic dimension, which is usually handled centrally, is the selection of airlines, partnership development, purchasing and securing capacity, and quality assurance. In most cases, the management of the 3PL’s key customers (“key accounts”) is also centralized. The advantage of centralisation is that the forwarder has better negotiating power than when capacities are purchased and booked locally by the branches in an uncoordinated manner. The head office also usually takes better account of which consignment is loaded onto which carrier and how. Disadvantages of centralization are that they are usually less flexible to market changes and tend to become bureaucratically bloated (Parkinson’s Law 1955). In such a case, the costs of central administration may outweigh the savings from central purchasing. The division of labour between central gateways and local branches described above naturally does not apply to freight forwarders who are organised on a decentralised basis.

6.1.1 Capacity Assurance and Flight Planning Typically, larger shippers and forwarders purchase capacity over a period of several months. Based on medium-term planning, the person responsible for purchasing estimates the capacity requirements for specific routes and puts them out to tender. Interested carriers participate in this tender, provided they are admitted to the tender. For example, it may correspond to the planning of any freight forwarder to transport five tons of air freight per week from Frankfurt to Chicago in the months of June and July and seven tons in the month of August. Planning is usually based on empirical values from the comparable months, such as the previous month and the same month of the previous year. These empirical values are calibrated on the basis of current feedback from key customers. The possible loss of tonnage of a major customer, the acquisition of a new shipper or other deviations are taken into account accordingly. The carriers, for their part, now have the opportunity to offer freight rates for these routes. In view of the comparability of the offers and the largely homogeneous nature of the products, this negotiation process is generally perceived as competitive by the parties involved. Since demand can never be reliably planned and unused quantities are subject to contractual penalties, capacities are only booked firmly to a certain extent and a portion is purchased on the market at short notice.

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How can it be that flights heading west usually land only a few hours later, and those heading east seem to take much longer? Consider the example of a Lufthansa flight on the Asia-Europe route. A flight departs Frankfurt at 22:05 in the summer and arrives in Hong Kong at 15:40. On the opposite route, the plane takes off at 23:05 and lands in Frankfurt at 5:40. Of course, the flight does not take 17:40 min one way and 6:35 h the other way. To calculate the exact time, the different time zones have to be taken into account. In summer, Frankfurt is two hours ahead of Greenwich Meantime (GMT + 2 h). Hong Kong, on the other hand, is 8 h ahead of world time throughout the year (GMT +8 h). The time difference is therefore six hours in summer and seven hours in winter. In the above example, this time difference is deducted from or added to the duration of the flight: the flight to Hong Kong takes 11:40 h, the flight to Frankfurt 12:35 h.

Why the different flight duration? The reason lies in the jet stream, strong winds at the altitude in which modern jets travel. These winds blow in a westerly direction over the northern hemisphere and in the opposite direction over the southern hemisphere. They are caused by the rotation of the Earth and arise from the significant temperature differences between the poles and the equator. With the jet stream at your back, the flight is shortened considerably. Aircraft reach speeds close to the speed of sound, depending on the strength of the stream. Unless a pilot on the opposite direction can avoid the wind currents, he must allow for considerable delays and sometimes even make intermediate stops to take on kerosene.

The closer the departure period, the more precisely the forwarder can allocate the purchased quantities to flights. For example, such finer planning can provide that of the weekly five tonnes in June on the Frankfurt-Chicago route, one tonne each is to be handed over to Lufthansa on the Tuesday, Wednesday and Friday flights and two tonnes to Cargolux on the Thursday.

6.1.2 Placing of the Forwarding Order The shipper notifies his customer by phone, fax or electronically that a shipment is destined for dispatch. Ideally, the data is transmitted via EDI or entered in the forwarder’s web-portal, as this saves considerable process costs and better ensures the integrity of the data. Any duplicate entry of shipping data carries the risk of errors creeping in. The essential data that should be transmitted in this step are the names and addresses of the sender, the recipient, any intermediary bank and the receiving carrier. Furthermore, information

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on the consignment is required, in particular on its nature (class of goods) and the number, size, weight and type of packaging units. In addition, further qualitative information is provided, e.g. instructions on the handling of dangerous goods, perishable goods, letter of credit consignments, etc. If the data has not been transmitted electronically, the employee at the forwarder’s departure station enters it into the IT system. As an operational system, 3PL either use in- house developments, like Kühne + Nagel, or third-party systems. Leading air freight forwarders, which include DHL, DSV and Yusen, use the Cargo Wise system from the Australian software group WiseTech Global (DVZ 2017; WiseTech Global 2019). A software solution developed in Germany and used by companies including Schenker and Streck Transport is Scope from Riege Software. Either online or by means of suitable interfaces, it is possible to check electronically in advance whether a shipment is even approved for export to a particular country. For Germany, the Federal Office of Economics and Export Control (BAFA), based in Eschborn, lists the countries for which embargoes exist. At the beginning of 2017, 23 countries were subject to an arms embargo and five countries were subject to more extensive export or delivery restrictions. These five countries were specifically Iran, North Korea, Russia, Syria and Ukraine.

6.1.3 Allocation and Confirmation of Capacity After the order has been confirmed, the shipment can be provisionally assigned to a booked capacity. The required space is thus reserved. If there is no booking for a relation, for example because it is rarely in demand, the capacity must be purchased. It is now the task of the gateway to confirm the allocation of the consignment to a flight booking to the departure station. In most cases, the departure station will confirm the order to the shipper and already provide the customer with a HAWB number. In rarer cases, it will reject the order. Reasons may be, for example, that capacities are overbooked, a shipment is not suitable for air transport, the export of the class of goods to a certain country is prohibited or the forwarder does not have access to suitable contacts at the receiving location.

6.1.4 Collection of the Consignment The shipment can be collected from the sender as soon as it is ready for shipment (“ready for shipment”). This presupposes that the consignment is complete and ready for shipment at the agreed collection address; it has been appropriately packed and the necessary documents have been provided. The forwarding agent’s or carrier’s point of departure will usually organise collection for the same day, or at the latest the next day, and will engage an independent trucking company for this purpose or organise collection within its own

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network. In the case of regular shippers, commissioning is not necessary. It takes place within the framework of routine collections: • If the consignment exceeds a certain volume or weight, it is not transhipped at the departure station but taken directly to the gateway without transhipment. In practice, the rule has become established that consignments requiring more than two loading metres in the truck, equivalent to five Euro pallets, are not transhipped at the forwarder’s local warehouse. These consignments, known as part loads, are transported towards the gateway together with other part loads or with groupage. The same applies to air freight shipments, which alone fill a truck. • Small consignments of less than two loading metres qualify as groupage freight. They are first taken from the local transport vehicle to the warehouse of the dispatching freight forwarder. There, the completeness, condition, weight and size are checked and compared with the information in the freight documents. Since air freight shipments are usually of high value and the transport costs are considerable, this check must be carried out conscientiously. If there are any discrepancies, the forwarder must contact the consignor or customer. If it turns out that the goods are damaged, documents cannot be produced or the delivery is delayed, the reservation of capacity on the intended flight must be cancelled and the consignment returned to the sender if necessary. Normally, the shipment is stored for a short time with the aim of forwarding it as soon as possible.

6.1.5 Preparation of Export Documents For exports from Germany, an electronic export declaration is always required if the shipment is sent to a country outside the European Union, the total value is more than 1000 EUR or the weight is more than 1000 kg (Generalzolldirektion 2017). Both conditions are met for a typical air cargo shipment. The export declaration is therefore the rule, not the exception. In addition to export control, the data is used by the Federal Statistical Office, among others, to compile foreign trade statistics. The declaration is usually made via the customs system ATLAS (Automated Tariff and Local Customs Clearance System), which is used by consignors or forwarders, or via entry on the Internet (Internet-Ausfuhr-Anmeldung-Plus, or IAA-Plus for short). This procedure is harmonised in the other EU member states.

6.1.6 Transport of the Consignment to the Gateway Once the export formalities have been completed, the goods can be taken to the airport. Since air freight is concentrated at a few airports, a longer road transport between the departure station and the departure airport is usually required.

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This road transport is carried out either by the forwarder or on behalf of the airline. In the first case, the forwarder hands over all export consignments to be flown from a particular gateway to a trucking company, who carries them exclusively or together with the export consignments of other forwarders. In the rarer case, the forwarder hands over the shipment to an airline at a feeder airport, such as in Germany Düsseldorf, Stuttgart or Berlin. From there, the airline transports the shipment to the departure airport using its “own” road feeder.

6.1.7 Loading of the ULD and Preparation of the Master AAWB At the airport, shipments are handed over to the gateway for consolidation, sometimes directly to the carrier. These gateways are operated either by third-party service providers or by the freight forwarder itself. An example illustrates the process in the gateways: Shipments for recipients in New York, Singapore and Dubai are delivered from the Stuttgart branch of a freight forwarder. The shipments for the New York area are now bundled with the shipments from the Düsseldorf and Hamburg branches with the same destination. For this purpose, they are taken from the truck to a sorting area within the gateway and then loaded into the ULDs or finished as individual shipments. The reasons why, by exception, a consignment is not loaded in a ULD can be manifold. On the one hand, it may be that the consignment is being transported in an aircraft which, like most narrowbodies, cannot accommodate ULD below deck, but only loose cargo. In other cases, loading of ULD may be possible, but only of container types too small for the package in question. Finally, a carrier may have too little volume for a destination to fill a ULD. In these cases, he will hand over the individual items to the airline or its agent in bulk. The decision as to which ULD is selected or which package is packed in which container and in which position within the container is usually made manually on the basis of the experience of the employee responsible for loading. Little has changed here in the 50 years since the introduction of the ULD. The complexity lies in the fact that: • the stowage space must be used optimally for safety reasons alone. During the flight, the packages must not slip, as this could affect the stability of the aircraft. Ideally, the packages should be staggered like bricks. • the aim should also be to maximize container utilization in order to increase profitability. This also means, among other things, that if more than one ULD is to be loaded onto a flight, both should at least reach the minimum weight or pivot weight. • heavy goods are to be positioned at the bottom and light goods at the top of the container. • the maximum permissible payload weight of the ULD must not be exceeded. Numerous studies deal with the question of how transport costs can be minimized by means of software algorithms (for an overview, see Feng et al. 2015). A somewhat older

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study in Hong Kong estimates that the use of intelligent software algorithms could improve the utilization of air freight containers by around 3% and significantly speed up the creation of loading plans (Lau et al. 2004). If improved utilization were indeed accompanied by a 3% reduction in costs, this would correspond to a doubling of the industry’s usual revenue margin. For the future, it is to be expected that the loading of ULD will be increasingly supported by artificial intelligence. Loading air freight pallets is somewhat easier, as the packages can be stacked more easily and higher. The packages are even more exposed to potentially adverse weather conditions on the pallet than in a ULD and must therefore be protected accordingly. To this end, the packages are wrapped in plastic film on all sides, including the bottom. Finally, the packages are secured with netting to prevent the parts of the shipment from slipping. After the ULD(s) are loaded, the master air waybill (AWB) can be created. The master summarizes all shipments of the forwarder consolidated for one route.

6.1.8 Delivery of the Consignment to the Airline The fully loaded ULD can now be handed over to the airline or the appointed handling agent. The cargo must be delivered in time before the cut-off time agreed between the airline and the forwarder. The airline or the appointed handling agent confirms acceptance. In order for the shipments to be accepted by the airline, a number of requirements must be met. The IATA Conditions of Carriage only indirectly regulate which goods are excluded from transport. The Conditions of Carriage are formulated positively. Unless the carrier’s conditions provide otherwise, consignments are accepted in accordance with Article 3(1) of the chain of custody, provided that: • the transport, export or import of which is not contrary to the laws or regulations of a country from which the export or import is made, or which is overflown; • they are packaged and marked in a manner suitable for transport by air or other means of transport; • the content is accompanied by the necessary documents and corresponds to the description in the ABW; • the contents are not likely to endanger the aircraft, health and property. The above-mentioned requirements are essentially derived from IATA Resolution 600 on AWB and the IATA recommendations on the transport of cargo (Recommended Practices 1601). They are implemented accordingly by the airlines affiliated to IATA (cf. e.g. the requirements of Scandinavian Airlines for the acceptance of cargo). (cf. e.g. the Scandinavian Airlines guidelines for the acceptance of cargo, SAS Cargo 2015). The handling agent, as the airline’s vicarious agent, has the decisive role in the implementation of the specifications. Specifically, he will compare with the acceptance the number of pieces of cargo and their condition with the information provided by the AWB and check them

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for damage. In particular, he will look for any tampering with the packaging by unauthorized third parties that could indicate the introduction of explosives. In this context he will also check the security status of the consignment. He will reweigh the consignment and measure it if necessary (Donnison 2017). If a consignment does not meet the above requirements, acceptance or transport will be refused. From the ramp to which the truck delivers the ULD, the container is brought to an operational height. This corresponds to the height of the dollies, special transport trolleys with which the ULD is finally transported to the aircraft (Ashford et al. 2013). The ULD, if on rollerbeds, can also be moved by a single worker without further mechanical assistance. Modern terminals are automated to the extent that the ULD can be moved with a minimum of personnel.

6.1.9 Loading of the Consignment on the Aircraft and Transport by Air When the aircraft is ready to be loaded, the dollies are driven to the apron and handed over to the ramp handler. The ULDs are now transferred to the aircraft by means of a lifting vehicle. In the case of smaller aircraft, which only take loose packages, these can be transported into the aircraft by hand and conveyor belt trolleys (ramp snake). Optimal loading of containers into passenger aircraft is a more complex task, as the urgency of the consignment, the weight, the size of the containers and the requirements for distribution of the weight on the aircraft all have to be taken into account, and this with a volume that is difficult to forecast accurately and is occupied by the passengers’ baggage (Feng et al. 2015) (Fig. 6.1). Even before the flight, cargo can slip, for example during transport to the aircraft due to the abrupt starting or stopping of a shunting vehicle. The acceleration forces acting on the cargo in the aircraft are stronger than in road, rail and rail transport (GDV 2007). When loading cargo into the aircraft, care must therefore be taken to ensure that the consignment is adequately secured in the fuselage so that it cannot slip even in the event of severe turbulence. Even at the planning stage, care must be taken to ensure that the cargo cannot be placed in the fuselage at random, but that the weight of the ULD must be evenly distributed (Table 6.1). Inside the aircraft, the ULDs are usually positioned and secured using the rollerbeds. All cargo must be secured regardless of size and weight. If the cargo is in a ULD, care must be taken to ensure that it cannot slip in or on the container. The ULDs may be additionally secured by means of pallet locks embedded in the floor. Loose cargo is secured by nets or straps in such a way that it cannot move in any direction. For this purpose, restraining devices such as eyelets are provided in the cargo holds. Metal goods which are not palletized must be protected from slipping by means of wooden boards. In the case of goods which weigh a lot, attention must be paid to the maximum permissible floor load. Boards placed under packages weighing more than 2000 kg/m2 make it possible to

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6.1 Organisation of Physical Operations

Fig. 6.1 Loading a pallet into a B747-8F (Copyright Panalpina) Table 6.1 Acceleration forces of the different means of transport

Airplane Road vehicle Sea-going vessel (worldwide voyage)

Forward acceleration 1.5 g 1.0 g 0.4 g

Reverse acceleration 1.5 g 0.5 g 0.4 g

Vertical acceleration 3 g 0.8 g

IMO (2014); GDV (2007).

distribute the load better by increasing the bearing surface. When loading hazardous goods, the specific regulations must also be observed. After the cargo has been loaded, the pilots receive a report confirming that the loadmaster’s plans and instructions have been followed. The cargo can now be flown.

6.1.10 Unloading of the ULD Until Delivery of the Goods (Import Process) After arrival at the destination airport, the cargo is unloaded and the shipment is handed over by the carrier to the ground handling agent. The goods, which were previously an export shipment, mutate into an import shipment. After payment of any duties, fees or freight charges, the cargo can be forwarded to the consignee. At the gateway, the condition

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of the goods and their completeness are checked. Customs clearance takes place, which usually takes a maximum of 1–2 days. Depending on the selected freight term (Incoterm), the on-carriage is organized either by the sender or by the recipient. If the goods are at a greater distance from the destination, a new road transport is necessary. If this is carried out under the direction of the carrier, it will usually be done by a new road feeder. In this case, the detour via the carrier’s gateway is not necessary.

6.2 Essential Documents While the initial focus was on the physical process of an air freight shipment, managing the flow of information and creating the necessary documents is an equally important dimension of transportation. Compared to other industries, air freight still much depends on the creation of paper-based documents – even though transporting them from an airport is complex, costly and error-prone.

6.2.1 Air Waybill (AWB) The airway bill (AWB) is the standard transport document for air freight. At the same time, it is proof that an agreement on the transport has been concluded. In addition, it fulfils a number of other functions (Fischer 2014, p. 526). For example, it is a receipt or confirmation of delivery, instructions on how to handle the transported goods, can serve as a customs declaration, is often a freight invoice and possibly an insurance policy. The AWB can be drawn up in writing or electronically. If the AWB is created as a physical document, three originals and between six and fourteen copies can be found according to IATA rules. • The first original on green paper is for the issuing airline. It is used for invoicing and as proof of the conclusion of the contract, which is confirmed by the signatures of the carrier and the consignor. • The second (red) accompanies the shipment and is intended for the recipient. • The third original (blue) remains with the sender. It proves that the consignment has been dispatched. • A copy (serial No 4) shall be signed by the consignee as proof of delivery and performance of the contract. • Additional copies (5–7) are for the airlines providing transportation. • One copy (8) is intended for the agent or the operating airline. IATA’s Conditions of Carriage are printed on the back of the waybill. The AWB is not a tradable security, but it can be accredited. In this case, the consignee or the forwarder is usually named as the party to be notified (notify address) and the bank as the consignee.

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201

Table 6.2 Important fields in the air waybill 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Airline code (three-digit IATA code) Three-digit code of the departure airport Eight-digit serial number of the air waybill Name and address of consignor Name and address of the consignee Name and address of the agent Departure airport and the desired routing Destination or first point of transshipment Executing carrier (two-digit code) Destination airport Desired flight connection and date Underlying currency Indication of the method of payment: Cash in advance or cash on delivery Declared value for the transport, if the value is not declared it is marked with “NVD” (no value declared). Declared value for customs, if applicable “NCV” (no commercial value) Insurance information (optional) Information on the handling of the consignment, e.g. if dangerous goods are being transported or if certain persons are to be informed upon arrival of the goods Information on the consignment (number of packages, weight, goods class, rate class, chargeable weight, freight rate and description of the goods) Other fees Freight, ad valorem freight, taxes and other charges to be paid by the consignor or the consignee, as well as the total amount in each case

Important fields in the air waybill

The bank will not release such a consignment until the necessary payment has been made (Table 6.2). In addition to their own forms, most airlines also accept neutral AWBs, such as those usually produced by freight forwarders. However, these must meet exactly the same requirements and specifications as the original.

6.2.1.1 Contract of Carriage The contract of carriage of an airline regulates the obligations to which the carrier and consignor are subject. As one of its recommended practices (RP 1601), IATA has also created a template for the cargo sector, the General Conditions of Carriage for Cargo. In practice, most carriers follow the template, although airlines sometimes deviate from it with regard to detailed aspects. The IATA template only applies to international transports, but not to those between the USA and Canada. In the case of airfreight consignments, the contract of carriage comes into force when the air waybill is signed. With few exceptions, the contract is concluded in favour of a third party, namely the consignee. The consignee, although not a party to the contract, has a claim against the carrier for surrender of the goods (Hofmann and Reschel-Reithmeier

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2013). It should be emphasised that carriage includes not only transport by air but also by other means of transport, regardless of whether it is free of charge or not. This is particularly relevant with regard to substitute air transport by truck, where the chain of custody also applies.

6.2.1.2 Shipper’s Right of Disposition The consignor still has the right of disposition, even after the consignment has been handed over to the airline (Article 7). He may dispose of it at his own expense by withdrawing the consignment at the airport of departure or reception, stopping it during transport, diverting it to another place or person or ordering it back to the airport of departure. Any costs incurred as a result of any of the measures shall be borne by the consignor. If the airline concludes that the disposition order is not practicable, it shall inform the consignor thereof. It is then not obliged to follow the instructions. The shipper’s right of disposition expires at the moment the goods reach the destination or the consignee has taken over the goods.

6.2.2 Master and House Waybills In the case where an air freight forwarder consolidates several consignments into one, different waybills are created, so-called master and house waybills. The two documents are abbreviated as MAWB and HAWB respectively.

6.2.2.1 Normal Consolidations The master (MAWB) is the carrier’s normal waybill. It is signed by him or his agent. The conditions of carriage are printed on the reverse side. Due to the clearly formulated formal requirements, the Master AWB is eligible for accreditation. The house waybill, on the other hand, is drawn up on neutral paper. It may, but need not, follow the rules of IATA. The conditions of carriage are those of the freight forwarder, so it is not usually eligible for accreditation.

6.2.3 Back-to-Back Shipments Back-to-back consignments are also transported in groupage, but separate documents are created, in particular a separate master and house waybill. As the details of the consignment characteristics are identical in the master and house, the consignment is referred to as “back-to-back”. The difference, however, is that in the master the forwarder or his agent is named as consignor or consignee. Such a procedure is chosen for customs reasons or for shipments whose freight is to be paid by the consignee.

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203

6.2.3.1 Direct AWB For a direct AWB, the consignor and consignee correspond to the actual seller and buyer and not to a freight forwarder. If a forwarder has acted as an IATA agent, this will be noted in the appropriate field. A HAWB is not issued, unlike in the case of a back-to-back shipment.

6.2.4 Other Documents In addition to the air waybill, a number of other documents are important (Bernecker and Grandjot 2012, p. 129). The consignor only comes into contact with most of the documents if an accident has occurred or if a consignment does not reach its destination for other reasons.

6.2.4.1 Loading List (Cargo Manifest) The cargo manifest lists all cargo loaded for a particular flight. The document specifies the number of packages belonging to a particular AWB number, their weight, the number of house waybills, the consignors and consignees as well as the property of the goods. The Cargo Manifest is one of the accompanying documents required for the customs declaration when importing cargo. An example of a cargo manifest is that of flight MH17 from 2014, which is publicly available (MH 2014). The plane, a B777, was shot down over Ukraine on its way from Amsterdam to Kuala Lumpur. The manifest can be seen in detail, for example, that some shipments were destined for onward transport to Manila, Perth in Australia, Ho Chi Minh City (the former Saigon, SGN) or Delhi. On board were, among other things, live dogs and pigeons, groupage consignments and equipment for an oil platform. 6.2.4.2 Automated Manifest System (AMS) In traffic with the United States, there are increased requirements (19 CFR 122.48a) regarding the loading list. The US customs authority, the Bureau of Customs and Border Control (CBP), has set up the so-called Automated Manifest System (AMS), in which the airlines carrying commercial air cargo on a flight submit information about the shipments in advance. The information is to be made available to the authority electronically. Details of the consignor and consignee, the master as well as house waybill and the contents of the consignments are to be provided. This is to identify possible risk cases after the aircraft has taken off (“wheels up”) to fly towards the USA (CBP 2014). 6.2.4.3 Load Instruction Report (LIR) As a result of the planning, i.e. exactly where on the aircraft the cargo is to be loaded, a Load Instruction Report (LIR) is produced. It serves as a precise guideline for the ground staff on where to load the baggage and cargo in the aircraft (Avery 2017). Deviations from the plan are to be noted by the employee. They may occur, for example, if more fuel has to be refuelled at short notice due to adverse weather conditions and therefore less urgent

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cargo is unloaded. IATA has made recommendations on the format of the report in its Airport Handling Manual 514.

What can happen when cargo is not adequately secured is illustrated by the crash of National Airline Flight 102 from Afghanistan to Dubai. The aircraft, a B747–400, crashed on 29 April 2013 shortly after taking off from the US military base in Bagram. Investigating authorities determined that cargo slippage was the likely cause of the crash. This slippage resulted in damage to the electronics and hydraulics. The cargo, heavy military vehicles weighing a total of 80 tons, was apparently not adequately secured. On the one hand, the airline had failed to incorporate Boeing’s specifications into its manuals, and on the other, the loadmaster had poorly implemented this already inadequate specification. The entire crew of seven was killed in the crash (Hradecky 2015).

The correct loading of the aircraft according to the instructions is relevant to safety. Failure to do so will result in higher fuel consumption at best, and in a failed takeoff or flight at worst. A significantly overloaded aircraft will not be able to take off because the engine power is insufficient and the landing gear is overstressed. If it is able to take off, it is in danger of lurching, especially if passenger and cargo trim specifications have not been followed. Finally, a heavy load can wreak havoc on the structure of the fuselage (Aerochapter 2018).

6.2.4.4 Load and Trim Sheet The load sheet (or load and trim sheet) shows the weight with which the aircraft has been loaded. While the LIR is addressed to the ground crew, the load sheet is addressed to the flight crew. The pilot is responsible for ensuring that the maximum take-off weight (MTOW) and the specifications for the centre of gravity position are adhered to. Since the composition of the transported cargo, weather conditions and routing change, the load sheet is created anew for each flight. Nowadays, it is transmitted directly to the cockpit via the ACARS (Aircraft communication addressing and reporting system) and can be printed out there. If there are any last-minute changes, for example because an urgent shipment is being added, the changes can be entered by hand as LMC (last minute changes) (Baier 2015). 6.2.4.5 Dangerous Goods Declaration (DGD) In the case of consignments containing one or more dangerous goods, it is the consignor’s duty to draw up and sign a dangerous goods declaration and enclose it with the consignment. It must also be noted on the air waybill that dangerous goods have been loaded. In the Handling Information the note “Dangerous goods as per attached Shipper’s

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205

Declaration” and, if applicable, “Cargo Aircraft Only” must be entered. The format of the Dangerous Good Declaration (DGD) required by the carriers usually follows an IATA specification. In quite a few individual cases, the specifications of the airlines deviate from this standard. In 2018, Lufthansa Cargo processed a digital version of the electronic Dangerous Goods Declaration (eDGD) for the first time (ACN 2018). The long overdue dissemination of the eDGD was delayed for a long time because the parties involved could not agree on a standard. The new process will help make the handling of dangerous goods safer and faster. Until now, the airlines or their appointed agents have only received the dangerous goods declaration with the other documents. Electronic transmission now allows the carrier to check the documents earlier, and the information is more reliable and transparent (IATA 2018a, b, c, d, e, f.

6.3 Calculation of Air Freight Costs Air cargo charges are typically based on either a tariff issued by IATA, known as TACT, or contract rates negotiated individually between larger shippers and airlines. The tariff contains a total of about 5 million rates for about 350,000 city pairings (IATA 2019a, b).

6.3.1 TACT (The Air Cargo Tariff) The TACT, an abbreviation of The Air Cargo Tariff, is published by IATA three times a year. The vast majority of airlines publish rates in the TACT, although these can only be used as a guide. The tariffs are based on city pairs and provide rates for different weight classes and air cargo containers. The most important tariff details are: • • • • • • • • • •

M – Minimum Charge N – Normal rate, mostly for weights under 45 kg (100 pounds). Q – Quantity Rate, for shipments over 45 kg C – Specific commodity rates, for consignments to be allocated to specifically identified commodity groups. R – Reduction S – Class Rate (Surcharge) U – The so-called pivot weight, i.e. the minimum weight that is used as the basis for invoicing when shipping airfreight containers E – The weight exceeding the pivot weight (over pivot weight) and the underlying rate X – Air cargo container (ULD) Y – Discount for ULD

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Date/type

Departure airport Currency basis Destination airport

Performing Carrier

note

item

Min. Weight

Local currency

3-letter code Dusseldorf

EURO Fukuoka

DE

DUS

EUR

KGS

Calculation basis

M

76.69

Min. rate

N

16,52

AF, KL

45

11.90

Normal Rate below 45 kgs

AF, KL

100

8.56

Rate above 45 kgs

AF, KL

200

6.48

AF, KL

300

BA, IB

M

101.00

BA, IB

N

18.45

BA, IB

45

14.19

BA, IB

100

10.52

BA, IB

200

8.23

BA, IB

300

6.85

AF, KL AF, KL

JP

5.22

Fig. 6.2 Structure of the TACT

In the past, the TACT was mostly used in printed form for the calculation of freight charges. It continues to be published in three volumes, one with the rules, one for North America and one for the rest of the world. Nowadays, the printed versions are largely replaced by electronic solutions. The printed form is now mainly used as a reference work. In electronic form, IATA makes the tariffs available online or as an electronic data link. The latter solution is aimed at freight forwarders and airlines by allowing the rates to be integrated into their own operational systems. It continues to be published three times a year, in February, June and October. TACT Online is updated monthly. Online access to TACT costs approximately EUR 500 per year (IATA 2019a, b). Figure 6.2 shows an excerpt of the rates from Düsseldorf Airport (3-letter code DUS) to Fukuoka Airport in Japan. The rates are given in the national currency EURO, the basis of calculation is kilograms and not pounds as in the USA. For shipments on this route, AirFrance-KLM (AF, KL) charges a minimum of 76.69 EUR, even if it’s only an envelope weighing 500 g. For shipments up to 45 kg a rate of 16.52 EUR/kg is charged, for shipments over 45 kg a rate of 11.90 EUR/kg. The rates listed below apply from a weight of 100, 200 or 300 EUR/kg. These weights are the so-called breakpoints above which a more favourable rate applies. Figure 6.2 also shows the rates of the British Airways-Iberia group, which in the example were higher than those of the competitor AF-KLM. It should be noted that the above rates are not discounted, do not receive any surcharges and do not indicate any transit times. As a rule, freight must be paid by the sender or the sender’s agent (pp, prepaid). In deviation from the rule, “carriage forward” (cc: charges collect) is also an option for shipping to many countries. Even if the freight charges are to be paid by the recipient, this does

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207

not release the sender from the liability that these charges are paid. According to the TACT rules and regulations, a prohibited list of countries is not possible in collect shipments. Moreover, for a number of goods, Collect shipments are only possible if security has been provided in advance. These include shipments to government agencies, prison inmates, goods whose value is less than the freight charges, mortal remains and perishable goods.

6.3.2 Tariff Classes In addition to the general freight rates, a number of special rates are listed in the TACT, which are usually lower, but in rarer cases can be higher. The network of tariffs has long since ensured that very few customers calculate freight rates manually, instead relying on technical solutions.

6.3.2.1 Class Rates of Goods (Class Rate) Surcharges or discounts are levied for a defined group of special goods. Section 3.7 of the TACT specifies the classes of goods that are affected by this: • • • • • •

Live animals – 150–175% supplement to the normal rate (GCR, General Cargo Rate) Live poultry up to 72 h old – no additional payment Value cargo – 200% of normal rate, 250% for exports from France, 300% from Russia Books, magazines and audio books for the blind, 50–67% of the normal rate Baggage – normal rate, with exceptions Mortal remains – normal rate, for transport within IATA tariff area II (Europe and Africa), 200% of the normal rate for transport of coffins and 300% for transport of ashes

The structure of these rates is difficult to understand even for the initiated and can at best be justified historically. The fact that IATA charges three times the normal freight for transporting a relative from Africa to Europe, but not when the relative is flown from Asia or America to Europe, seems arbitrary. In both cases a body is being transported, in the first within a single tariff area, in the second outside.

6.3.2.2 Special Rates (SCO, Specific Commodity Rates) Discounted special rates are offered for certain groups of goods in order to better utilize capacities. They appeal to shippers of certain groups of goods in the expectation of better filling the cargo space of passenger aircraft (Holloway 2008, p. 152). The TACT of February 2016 lists rates on the Dar es Salaam to Frankfurt route for a total of eight classes of goods, some of which are significantly reduced. As a rule, minimum weights are prescribed, in this case 100, 250 and 500 kg respectively. Reduced rates are available on the above-mentioned route for the following wagon classes, among others:

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• • • •

6 Handling of an Air Freight Shipment

0300, Fish and seafood 1024, live fish 1190, reptile skins 1400, flower arrangement

Tanzania is a country to which more air cargo is imported in the form of electronic goods and from which relatively few high-value goods are exported. The subsidisation of rates for fish, flowers and the like enables the production and export of goods that would otherwise not be marketable. Commodity rates have long been a tried and tested method to fill space on aircraft, by making concessions on unbalanced routes.

6.3.2.3 Bulk or ULD Rates ULD rates are charged for the shipment of standardized air freight containers. In order for them to be accepted, the containers must already be checked in fully loaded (ready for carriage). They are mostly delivered to the airport by forwarders or their agents, less frequently by shippers. Calculated down to the kilogram, the ULD rates are always considerably cheaper than the normal rates. However, ULD delivery also saves the carrier a large part of its handling costs. Since the volume of the containers is a given, only the weight is taken into account. For each container type, a minimum weight (pivot weight) is taken as a basis, which is charged regardless of the actual weight. If the actual weight is above this minimum, a surcharge per pound or kilo is levied for the difference (over pivot weight). Figure 6.3 shows in the bottom three lines the rates charged by Emirate (EK) for airfreight containers on the route from Düsseldorf to Darwin in the Australian Northern Date/type

note

item

Departure airport Currency

EURO arwin

Des na on airport “Over-Pivot“ weight “Pivot“/ Uniform weight for ULD Type 5 8

Fig. 6.3 TACT extract

EK

NT

Min. Weight

Local currency

DE

DUS

EUR

G

AU

M

84.36

EK

N

14.65

EK

45

10.27

EK

100

6.77

EK

300

5.95

EK

500

5.40

EK

800

4.91

/C

EK

/B

EK

2

4.31

/B

EK

1000

721.00 4635.00

Basis for calcula on

Rate per kg for weight exceeding pivot weight Uniform rate for ULD Type 5

6 6.3

Calculation of Air Freight Costs

209

Territory. As an example it is assumed that a forwarder wants to ship a container of type LD3 (IATA code AKE) with a weight of 1200 kg. The assignment of the ULD types is made in the separate TACT rule band. Class 5 corresponds to ULD type LD7, class 8 to type LD3. The official rate without surcharges is calculated as follows: The flat rate up to a weight of 1000 kg (pivot weight) is 4635 EUR. For the overweight of 200 kg (1200 kg minus the pivot weight) an additional over-pivot weight rate of 4.31 EUR/kg is due. The total price is therefore 5497 EUR for the ULD with a payload of 1200 kg. The calculated rate of 4.58 EUR/kg is thus once again considerably lower than the 800 kg rate of 4.91 EUR/kg. This kilogram-rate would be charged if the forwarder were to deliver the freight loose and not in the ULD. As a rule, the airlines allow the customer 2 days for loading and unloading the ULD. If this takes longer, a demurrage charge is levied. The so-called Block(ed) Space Agreements (BSA) go even further than the booking of ULD. In these agreements, freight forwarders and other companies that load freight (the so-called co-loaders) are provided with freight space or tonnage for a defined period of time on a designated flight route. In contrast to hard BSAs, soft BSAs offer the option of partially cancelling the reservation. Larger forwarders choose hard BSAs at the more favourable conditions for them if they can count on a certain fixed quantity on certain routes. They can purchase any peak demand in excess of this on the spot market at short notice. BSAs are also agreed between carriers, e.g. when the freight subsidiary of an airline books firm capacities with a competitor and sells them under its own name and risk.

6.3.2.4 Contract Rates (Contract Rates) First and foremost, special rates can now only be booked for perishable goods. Otherwise, special rates, which favoured the transport of certain groups of goods, have nowadays been largely superseded by contract rates or so-called FAK (freight all kinds) rates. FAK rates can be based on the use of ULD, but do not have to be. As contract rates, they have a longer duration (Holloway 2008). FAK rates are offered to forwarders when they consolidate larger quantities of airfreight shipments by bundling the goods of different shippers and commodity groups and shipping them as their own consolidated goods. These FAK rates are generally more favourable than the special rates mentioned above. The forwarders, for their part, pass on part of the purchasing advantages to their customers. 6.3.2.5 Special Rates In addition to standard rates, special rates have become common, e.g. in months of low demand. Of particular importance are door-to-door rates, which airlines offer to compete with forwarders and integrators for expedited and express shipments.

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6.3.3 Settlement A key lever of cargo revenue management is to optimize the relationship between booked volume and weight. Therefore, air freight shipments are billed either on the basis of weight, volume or the number of air freight containers. Jet engines have become increasingly powerful over the decades. In contrast to the early days of jet aircraft, the more decisive restriction today with regard to what freight can be transported is the volume of the consignments and less the weight (Hertwig and Rau 2010; Slager and Kapteijns 2004). In order to prevent airlines from transporting light goods without receiving adequate remuneration for this, the so-called volume weight was introduced a long time ago as a basis for calculation. Billing based on volume occurs when the volume in cubic centimetres divided by 6000 is higher than the actual gross weight. In other words, the volume weight is calculated by taking the length x width x height of the consignment and dividing by 6000. An example is a consignment measuring 100 × 60 × 75 cm. If it has a weight of less than 75 kg, the volumetric weight of 75 kg is assessed, otherwise the actual weight is assessed. Volume has become the more important restriction than weight is reflected, in previous decades a ratio of 1:7000 applied (DLH 1967). Examples of low-density consignments are clothing articles or plastic toys. Shipments with a high density include laptops or machine parts. The weight is rounded up to the next half kilo in each case A consignment weighing 31.2 kg is to be billed accordingly at 31.5 kg. Consignments consisting of several packages are to be invoiced according to the total volume or total weight. In each case, the higher value is to be applied (Fischer 2014). Airlines and freight forwarders have the opportunity to increase their revenue by consolidating shipments with different density ratios and charging the shipper the higher freight rate (Chao and Li 2015). An additional complication arises from the fact that in some cases the settlement is displayed according to the next breakpoint, even if it is a fictitiously higher weight or volume weight than the actual one. This is illustrated by the following example: For a relation a normal rate of 1.60 USD/kg and a 100 kg rate of 1.42 USD/kg is charged. For shipments weighing 89 kg or more, it is cheaper to apply a notional weight of 100 kg (89 kg × 1.60 USD/kg = 142.40 USD). Airlines accept this approach. Otherwise, forwarders and shippers would be encouraged to add filling material, e.g. in the form of newspapers or stones, to the consignments in order to achieve the weight of the higher weight class. Moreover, the airlines benefit because they are paid for a higher weight than they actually carry.

6.3.4 Surcharges The calculation of freight costs is further complicated by surcharges. The most important surcharge is the fuel surcharge, which airlines introduced at the turn of the millennium in response to the extremely volatile development of fuel prices. The security surcharge is justified by the increased expense that the carrier has to incur in checking the air freight.

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These surcharges are a fixed amount, albeit one that varies over time, that is added to the base rate. Unlike the base rates, these surcharges are not negotiable with the airlines. The levying of surcharges is a nuisance for the majority of shippers. Due to a lack of transparency, the amount of the surcharges is rarely comprehensible. It is striking that the surcharges of the individual carriers are very similar, although they use different aircraft. This fact has been the subject of criticism by the relevant antitrust and judicial authorities in the past. In 2010, two Cargolux executives were found guilty in a trial in the US state of Florida of having participated in illegal agreements on surcharges for airfreight shipments to and from the USA. A total of 18 airlines and 14 managers were implicated in the investigation (DOJ 28.10.2010c). There are also doubts as to whether the security surcharges, for example, are charged in line with expenses (Air Cargo World 2011). In addition to those mentioned, there are a number of other surcharges that are less controversial, in part because they are not mandatory: • A value surcharge is levied if a value is entered in the AWB that exceeds the liability limit. The surcharge allows the carrier to build up reserves for a possible claim or to insure the increased risk accordingly. In practice, the field usually remains empty and the shipper insures itself directly, usually at more favourable conditions. • With a C.O.D., the carrier is entitled to be compensated for its increased effort and the risk of non-payment after the transport service has been performed. American Airlines, for example, adds a 5% surcharge to the freight rate for international collect shipments (AA 2016). When a freight forwarder is used, the charges are usually lower. The forwarder, in turn, can pay the carrier in advance (prepaid) and claim the freight from the consignee at a lower surcharge. • Demurrage fees are charged for each day that the air cargo container is returned late. For some time now, shippers, especially freight forwarders, have been calling for the introduction of so-called “all-in rates”. These rates would include all direct and indirect costs. Some carriers have already followed this demand, others, such as Lufthansa Cargo as of 2019, have not. Emirates SkyCargo abandoned such composite rates in 2017, just 2 years after their introduction, citing the high volatility of jet fuel prices (DiBenedetto 2018; Lufthansa Cargo 2019a, b; ACN 2017).

6.3.5 Payment of Freight Charges The majority of airline invoices are settled via a central settlement system known as CASS (Cargo Accounts Settlement System). More than 12,000 registered agents and over 500 airlines, GSSAs and ground handling companies (GHAs) participated in the system in 2016. In a single month (November 2014), 1.8 mio transactions were settled through the platform (Fig. 6.4).

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Invoice- and Payment Flows without CASS

Carrier A

Carrier B

Carrier C

With CASS

Carrier A

Carrier B

Carrier C

CASS

Forwarder 1

Forwarder 2

Forwarder 3

Forwarder 4

Forwarder 1

Forwarder 2

Forwarder 3

Forwarder 4

Fig. 6.4 Cash flows with and without CASS

For the companies, participation in the clearing system offers almost only advantages. On the one hand, the number of transactions is reduced. CASS collects all receivables in the system and calculates the sum of all services for the forwarders. Accordingly, the forwarder receives a list of all receivables and settles them collectively via CASS: On the one hand, the risk of default is minimal. CASS has an almost one hundred percent success rate in collecting invoice amounts. In 2011, one of the world’s leading air freight forwarders defaulted on its payment (N.N. 2012a, b). Since the system relies on the reliability of all participants, the airlines and other freight forwarders involved were eager to ensure that such a case would not be allowed to recur. In fact, as far as is known, this failure has remained an exception.

7

Aviation Security

Abstract

The safety of aviation has been in the focus of the interested public since the early days. The fact that aviation entails great risks became clear especially in the early days. To this day, aviation is often perceived as dangerous. An image that has been shaped by spectacular accidents involving the loss of human life. The causes were usually a combination of technical and human failure.

In fact, the aircraft is now a very safe means of transport. In recent decades, the relative number of claims has continued to fall (see Sect. 2.2.2). Aviation benefits from technological progress, which makes it possible to identify hazards at an early stage, and a unique error culture. For example, as part of crew resource management, aircraft crews are systematically trained to communicate without conflict and to minimize the risk of accidents due to human error (Helmreich et al. 1999). Air accidents are systematically analyzed and lessons for the future are derived. In Germany, the Federal Bureau of Aircraft Accident Investigation is responsible for this. While total losses of goods due to aircraft crashes are the exception, other safety- relevant aspects are now coming into focus. On the one hand, these are risks emanating from the goods themselves – because they have been tampered with for terrorist reasons or because they are hazardous goods. The other concerns the risk of a shipment being damaged or stolen. All of these factors affect the reliability of the supply chain (Ekwall and Lantz 2017), and can lead to supply chains being re-engineered.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_7

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7.1 The Secure Supply Chain as a Safeguard Against Terrorism Potentially, any passenger or cargo aircraft can be misused as a bomb. In addition to explosives, the possible movement of chemical, biological, radiological and nuclear (abbreviated as CBRN) materials on aircraft is a cause for concern among experts. As a result of a series of aircraft hijackings in the 1960s and 1970s, measures to protect against terrorist attacks on passenger aircraft were strengthened. Initially, security measures focused on screening passengers and their baggage. Screening of cargo was more an exception than the rule, even when it was carried below deck in passenger aircraft. Table 7.1 summarises some of the terrorist interventions in air traffic up to the events of 9 September 2001. It was only in the aftermath of these events that air cargo came increasingly into the focus of the intelligence community. Their attention was intensified once again after two separate parcel bombs were intercepted on their way from Yemen to the USA in 2010. Intelligence leads allowed the packages to be secured while in transit in Dubai and Mid Eastlands. Those responsible in the hubs became aware of the bombs not because of technical devices, but after a tip-off from Saudi intelligence (Mazetti and Worth 2010). The events of the last two decades have prompted the governments of the United States and many other countries to review and adapt existing security measures (Peterson and Treat 2009). Efforts to improve protection against terrorist activities are aimed at three levers (Singh and Singh 2003): Table 7.1 Overview of major air accidents due to terrorist activities 23.06.1985 Crash of a B747 of Air India Flight 182 after an explosion off Ireland: The plane was on its way from Montreal via London Heathrow to New Bombay. All 329 occupants were killed. A bomb was suspected to be hidden in a suitcase 21.12.1988 Pan Am Flight 103 crashes over Lockerbie in Scotland with 270 people on board after a bomb hidden in a radio explodes. The radio was in a suitcase in the front of the cargo hold. The explosion destroyed key pieces of the plane’s electronics. The flight was en route from London LHR to New York JFK All 259 passengers and crew members, as well as 11 people on the ground at Lockerbie, died as a result of the crash 19.09.1989 Explosion of a UTA DC-10 from Brazzaville/Congo via N’Djamena/Chad to Paris CDG, shortly after take-off. A bomb was presumably placed in the forward cargo area. According to the investigations, the security measures at N’Djamena Airport did not meet ICAO standards and recommendations (ASN 1996) 27.11.1984 Explosion of an EMB-110 of the Alas Chiricanas on the flight from Colon to Panama City. All 21 people on board died 11.12.1994 Explosion of a Philippine Airlines B747 en route from Cebu to Tokyo. Only the terrorist was killed. The pilot was able to make an emergency landing 09.07.1997 Explosion of a bomb in a Fokker 100 of TAM Brazil with one death 09.11.2001 The simultaneous hijacking of four commercial airliners in the USA and the subsequent attack on the World Trade Center and the Pentagon with a total of almost 3000 dead Singh and Singh (2003); Schmemann (2001)

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1. Terrorists should be denied access to airports, in particular through intelligence gathering. 2. Technical means should be used to prevent explosives from being placed on aircraft. 3. Aircraft must be structurally adapted. At Pan Am Flight 103 an explosion of just 300 g of the plastic explosive Semtex caused the crash of an entire aircraft. Overall, the second lever appears to be by far the most significant, but also one that has significantly increased the costs of and slow down the air freight product.

7.1.1 Annex 17 to the Chicago Convention Annex 17 to the Chicago Convention for Safeguarding International Civil Aviation Against Acts of Unlawful Interference sets the safety-related standards and recommendations. This Annex has been in force since 1974 and has been revised several times since then. In 2014, the 14th amendment to Annex 17 was implemented. The events of 9/11 made it clear to all those involved that the ICAO requirements needed to be comprehensively revised in view of the new threats. At the beginning of 2002, a few months after the terrorist attacks on New York and Washington, a further security initiative was launched in the form of the Universal Security Audit Program (USAP). Its aim is to monitor more stringently the extent to which ICAO signatory states are implementing the recommendations for improved security. In a first run, a total of 181 member states were subjected to a security audit between 2002 and 2007. In the follow-up, further visits were made to a number of states by ICAO’s regional offices. In the course of the audits, significant safety-related deficits were identified in some cases. The programme is considered to be a success and has led member states to consolidate their activities. The new programme with the cumbersome acronym USAP-CMA (Continuous Monitoring Approach of the Universal Security Audit Programme) contains elements of integrated risk management. The focus is on the eight critical elements (CE) which, in ICAO’s view, make up a functioning aviation security programme (ICAO 2011b) • CE-1: Aviation safety legislation • CE-2: (National) aviation safety programmes and regulations • CE-3: Designation of an appropriate national aviation safety authority and its responsibility • CE-4: Qualification and further training of personnel • CE-5: Provision of technical guidelines, tools and safety-related information • CE-6: Certification and approval requirements • CE-7: Quality assurance obligations • CE-8: Addressing safety issues

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All signatory states remain subject to continuous auditing and monitoring by ICAO. In the area of the European Union, the ICAO requirements were transposed into Community law in Commission Implementing Regulation (EU) 2015/1998 laying down detailed measures for the implementation of the common basic standards on aviation security.

7.1.2 Cornerstones of Secure Supply Chains It was a paradigm shift, initiated by the US Congress, which led to the practice that freight is now not only checked in exceptional cases, but systematically every single shipment. This approach initially met with considerable rejection in the air freight industry: the cargo terminals at airports were too small to carry out seamless checks, the required procedures were too time-consuming and the screening technologies available were inadequate (Sales 2016, p. 108). The concerns that were voiced did not alter the determination to have every single piece of cargo secured. But in its implementation processes were eased. It has been made possible for shippers or forwarders to guarantee the security of cargo when it is delivered to the airport, omitting the need for complete screening in the terminals. The ICAO, which dedicates itself to the promotion of aviation, faced a conflict of objectives in the development of new safety standards. Safeguards create delays and costs. Limiting these to a level that does not damage the value proposition of airfreight and at the same time does justice to the potential dangers was a balancing act. Taking it to the extreme, only airfreight that is not flown is entirely harmless to aviation. But the collateral damage to the global economy would be incalculable if air freight were to be dispensed with as a product. The consequences for passenger airlines that carry cargo would be bearable. In case of doubt, they could compensate for the loss of revenue by raising ticket prices. More worrying would be the consequences for industries such as the automotive industry, which are hardly conceivable without global supply chains. It is well known from passenger aviation that each passenger and his or her baggage are checked at least once before the flight, or several times in the case of higher risks. In air cargo, such a procedure would be impractical given the nature and quantity of packages, the practice of loading ULDs by agents and the infrastructural characteristics of air cargo terminals. Nevertheless, to ensure security, ICAO has adopted the construct of the secure supply chain. Under the term secure supply chain, all agents and measures are summed up “associated with the shipment of air cargo in compliance with the legal security requirements.” (LBA 2016a). Ultimately, air carriers may only load their aircraft with cargo that has been determined to be “secure.” Cargo security can be established at the airport terminal or at the upstream stages of the supply chain, such as the freight forwarder or even as early as the shipper: If the secure supply chain is not interrupted, air cargo may be loaded onto the aircraft without further screening (cf. Figure 7.1).

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Herstellen der Sicherheit beim „Bekannten Versender“ Air Cargo Database

Air Cargo Database

Know Consignor

Regulated Agent

Carrier

Herstellen der Sicherheit beim unbekannten Versender durch den „reglemenerten Beauragten“ Air Cargo Database

Unkonwn Consignor

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Carrier

Screening

Herstellen der Sicherheit beim unbekannten Versender durch die Fluglinie Non-Regulated Agent

Unknown Consignor

Carrier Screening

Normal LTL Truck

„Secured“ Truck

Fig. 7.1 Ways to determine the security of air cargo. (Leger 2012)

7.1.3 Known Consignors (KC) Known consignors are companies that place air cargo in transit for the first time and whose operating procedures ensure that the cargo can be transported safely by air (LBA 2016a). The known consignor (BV) must produce, package and pack the air cargo at its approved premises. On this basis, he must ensure (DVO (EU) 2015/1998) that 1. the air cargo on its premises is protected against unauthorised access by third parties and against tampering and does not contain any prohibited articles, 2. staff performing security controls or having access to cargo shall be trained in accordance with the requirements, 3. the air cargo is protected from unauthorised access or tampering. In order to be recognised as a known consignor, certification by the competent authority is required. In Germany, this is the responsibility of the Luftfahrt-Bundesamt (LBA) and in Switzerland the Bundesamt für Zivilluftfahrt (BAZL).

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7.1.3.1 Certification Procedure The German Federal Aviation Office (LBA) describes the procedure to become an officially recognised known consignor on its website (LBA 2016a). The application of a company is made by mail, fax or e-mail. The LBA makes the required documents available on its website. As part of the application, the applicant specifies, among other things, the operating locations to which the application applies and provides information on the annual tonnage. In the next step, the applicant must draw up a security programme. In it, he describes in detail the processes “from when, how and where a product […] becomes identifiable air cargo and how this product is protected against manipulation by unauthorised persons”. Manipulation itself cannot be completely prevented, but it should not be possible to overlook it. Tamper protection means that any tampering that has taken place can be detected on the packaging. This does not necessarily require separate storage rooms. Protection can also be provided by separate metal cages. Plans of the building, the premises and the office must therefore be made available to the LBA. The security program shall be audited internally at least once a year. The description of the auditing is also part of the security programme. Furthermore, the company must appoint a safety officer and, if necessary, a deputy. The security officer carries out security checks at the business premises and monitors compliance. He requires a background check in accordance with § 7 Aviation Security Act and must be trained accordingly. Since the implementation of DVO 2015/1998, all other personnel who have access to air cargo must undergo an employment-related review and must also be trained. The employer carries out the employment-related check in accordance with the specifications of the LBA (LBA 2016b). For the time being, the review is still not required for employees who were hired before 30.04.2010 and worked in the security area. In addition to the security officer and the employees with access to air cargo, a third group of persons who must be trained are the persons who carry out security checks. Companies that use their own drivers to transport air cargo must also train them. Provided that all required documents have been submitted in full and checked by the LBA, the information is validated on site. Approval is granted provided that there are no or no significant findings of non-compliance at the site. Validation of the approval shall be carried out at regular intervals not exceeding 5 years. 7.1.3.2 High Effort While in the past companies with a regular volume of air freight mostly had themselves certified, interest is waning due to the changed legal situation. The effort that companies have to make in order to be approved as a known consignor represents a considerable cost factor. In addition to the costs for the documentation within the scope of the approval and the possible modification of existing processes, the costs of the training are in the foreground. The training of the security officer alone – and, if applicable, his deputy – has a scope of 34 teaching units of 45 min each. In addition to the costs of the training, there are

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indirect costs for wages, travel and catering. Training staff with access to air cargo is less costly, but more people usually need to be trained. Finally, there may be costs for building modifications to consider. All of this leads some companies to consider whether the expense of maintaining recognized known consignor status is still justifiable (Reichert 2017). The regulated agents report that medium-sized customers in particular are increasingly handing over unsecured air freight and transferring the security check to the service provider.

7.1.4 Phase out of the Account Consignor An account consignor was defined by IATA as someone “who consigns cargo or mail on his own account and whose procedures comply with common safety rules and standards sufficient to carry the cargo or mail in question by air” (IATA 2013a, para. 2.1). In the past, cargo originating from commercial shippers was allowed to be loaded on cargo aircraft without additional security screening, but not on passenger aircraft. It was given the status “SCO” (“all cargo and all mail aircraft only”). As a commercial shipper in Germany, it was possible in the past to avoid the considerable certification effort required by the authorities, since one was designated as such by a regulated agent and not by the LBA. A prerequisite for being registered was the designation of a security officer who was trained by a regulated agent. The construct of the business consignor was of particular importance in the CEP segment. The integrators have a high number of small consignors in their customer base, such as architects, lawyers and advertising agencies, for whom the effort to become a “known consignor” made little business sense. As of April 2016, the possibility for regulated agents to designate a business consignor in Germany was suspended by the Federal Aviation Authority (LBA 2015). This also removes the possibility of transporting consignments with “SCO” status in cargo aircraft. It is doubtful whether the suspension of the Account Consignor Institute will be withdrawn again.

7.1.5 Regulated Agent Regulated Agents (RA) are freight forwarders, integrators and logistics providers who ensure that air cargo, once classified as secure, is protected from tampering and access during the rest of the transport process. Either the regulated agent takes over cargo already classified as secure from the known consignor or he screens the shipments himself. The advantage of determining security before arrival at the airport is faster handling and better integrity of the goods if they do not have to be unpacked again in the terminal. This is because shipments that do not have security status must be checked before departure. This may require breaking open shipments and repacking them after screening. This process is

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time-consuming and costly, especially since personnel and other overhead costs are higher at airports than at freight forwarders or logistics companies.

7.1.5.1 Acceptance of Secure Air Cargo from Known Consignors The regulated agent accepting secure air cargo from a known consignor must ensure that the consignment cannot be tampered with during transportation, handling and temporary storage. He checks the security status of the known consignor against the consignor’s certification number on the day of clearance. To ensure that the secure supply chain is not broken on the road, cargo handed over to a carrier must be sealed. The truck should be considered a weak link within the supply chain. Trucks are usually operated by a single driver who could either tamper himself or is so distracted that he does not recognize an intervention (VR 2014). 7.1.5.2 Acceptance of Air Cargo that is Not Deemed Secure Unless the validity of the status can be successfully checked against the Union database, the consignment will be classified as unsecure and an additional security check will be required. Such a re-check is also necessary, for example, if the truck used to pick up the shipment arrives at the branch unlocked. Air freight forwarders usually centralize the screening of unsafe shipments in the gateways, in rarer cases it takes place in the branch offices. The advantage of early screening is a further gain in time, but it is only worthwhile with a corresponding volume of shipments. The consignments can be screened in the time window between collection from the sender and onward dispatch to the gateway. They reach the departure airport already with the status “secure” and can be loaded more immediately. 7.1.5.3 Certification Procedure In order to be approved as a regulated agent in Germany, a written application must be submitted to the LBA by an authorised person. The application must be accompanied by a description of the security programme, comparable to the application as a known consignor. This programme describes the planned methods and procedures with which the applicant intends to comply with the legal requirements. The applicant must also submit a declaration of commitment confirming, among other things, that he or she (LBA 2016c): 1 . will adapt the security programme in the light of changes in legislation, 2. the LBA will inform about changes to the security programme in due time, e.g. in case of changes of the responsible persons, 3. inform the LBA in case of security breaches or suspicious circumstances, 4. has its own employees who are affected trained. The regulated agent must appoint at least one safety officer and one deputy for each site. The responsible person and the deputy shall be trained. The success of the training

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measures must be documented by a certificate. A representative may not be deployed at more than one site.

7.1.6 Union Database Upon successful certification, the regulated agent and the known consignor shall be included in the Union database on supply chain security (EU database for short). The database contains the following information: Identification number, name and address of the company, contact telephone number and expiry date. In the database can be • a regulated agent (RA) verifies the status of individual known consignors (KC) and other regulated agents. He has access to a list of all regulated agents, but not to the list of all known consignors (KC), • a Known Consignor (KC) can access his own entry, check the status of an individual RA and view a list of all RAs. However, he does not receive an overview of all Known Consignors. Higher-level competent authorities, administrators and inspectors, on the other hand, have full access to the database. The general public, on the other hand, has no possibility to view data (Lens and Trojanowska 2010).

7.1.7 Technical Means of Verification In the scope of the European Union, only a few procedures are allowed to check the security of consignments according to DVO (EU) 2015/1998 Number 6.2.1.5. Accordingly, cargo and mail must be checked by at least one of the following means or methods of control: Hand search, X-ray equipment, EDS equipment, explosive detection dogs, ETD equipment, visual inspection, and metal detectors. In the LBA’s area of responsibility, the scope of permissible procedures is even narrower. Permitted are the control with X-ray devices (abbreviation XRY), the use of sniffer dogs (EDD), the search by hand (PHS) and the use of trace detectors. Cargo classified as secure is given the status SHR (Secured High Risk Cargo) or SPX (Cargo Secure for Passenger and All-Cargo Aircraft). The control standards for SHR go beyond those of SPX. Cargo may be carried in accordance with the requirements for high risk. The status Secure-SPX can only be awarded by regulated agents and only for consignments that they have either checked themselves or taken over from a known consignor (LBA 2016b). The investment requirements are considerable and sometimes prohibitively high, especially for small airports that only handle a small amount of cargo during the week. The cost of an X-ray system (X-Ray) exceeds EUR 200,000, while that of an explosives

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detector (EDS) is around EUR 50,000. In a 2017 study, it was shown that the cost of security screening at Horta Airport (HOR) in the Azores is EUR 264 per tonne, while in Istanbul (IST) it is only EUR 7.40. Although the annual security screening cost at Horta is only EUR 86,000, this was provided for just 324 tonnes of cargo (Amorim da Cunha et al. 2017).

7.1.7.1 X-ray Equipment (XRY) The most common method of screening freight shipments is the use of X-ray equipment. For this purpose, shipments are usually placed on a taxiway and, as is known from security screening for hand luggage at airports, are screened one after the other. Modern X-ray machines illuminate the consignments from two directions: horizontally and vertically (dual view). The need for unpacking is usually eliminated. This makes X-ray machines a very efficient way to check cargo for security, despite their higher initial cost. Shipments for which no findings were detected and which can be classified as “safe” are given the status “SPX by XRAY”. These shipments are thus suitable for transport in passenger and cargo aircraft. When using X-ray equipment, a further check with another procedure, for example with explosives detectors, is not necessary. However, it is always necessary if the result is doubtful or X-ray is not possible. The main reasons against the use of X-ray equipment lie in the individual nature of the cargo items. One possible factor that makes it impossible to x-ray a freight consignment from the outset may be the weight or dimensions of the consignments. The larger X-ray facilities have tunnel dimensions of 500 × 170 × 175 cm and can accommodate consignments of up to three tonnes. If several individual parts are consolidated in a consignment or if the consignment has a high density, the X-ray image may not be meaningful for analysis and a dark alarm is triggered (Reichert 2017, p. 28). The term dark alarm is from the abbreviation DARC (Dense Automatic Reject Capability). X-ray equipment automatically detects substances with a high density and automatically triggers an alarm, because in this case the detection of explosives is not possible. 7.1.7.2 Explosive Detectors (EDS) and Explosive Trace Detectors (ETD) In the case of packages that are too large or too heavy to fit into an X-ray machine or for which a DARC alarm has been triggered, further inspection steps are required. Sniffers are generally used where the nature of the cargo does not allow reliable X-ray. The approval process for the use of a sniffer is complex (Schlimgen 2014). Regulated agents who do not have their own sniffers hand over the unsafe goods to the airline, which can then check them in the terminal. Two different types of detectors are used. Explosives Trace Detection (ETD) devices are much handier than X-ray machines, they are usually the size of a suitcase. The use of detection devices requires the consignment to be opened to allow a wipe sample and hand search (Bazant 2014). This brings with it the risk of damage, which is why the regulated agent is required to get the prior approval from the shipper. In addition to the potential damage to the goods, the method carries with it the

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risk of the examiner injuring his hand or arm. Shipments whose security has been successfully checked using trace detectors are given the status “SPX by ETD”. Explosive detection systems (EDS) are less common because they are more expensive to purchase. These are relatively large devices and require a lot of space. They are similar to MRI devices, with the differences that they are even larger and that baggage or cargo instand of human beings are scanned. The disadvantages of sniffing are the more complex process, but not the reliability. The detectors correctly detect explosive particles even in the nanoscale.

7.1.7.3 Explosive Detection Dogs (EDD) Sniffer dog screening is another way to check shipments that cannot be x-rayed. They have been used since World War II to sniff out explosives. They are also referred to as “REST dogs,” short for Remote Explosive Scent Tracing. They may be used for security checks on cargo items with a maximum height of 1.30 m and a maximum width of 1 m (Bazant 2014). A prerequisite for the use of a dog at German airports is the approval of the animal and the dog handler by the LBA. The main reason why more dogs are not used worldwide is their limited availability. The American Transportation Security Administration alone has about 1000 dogs and needs 350 new dogs each year to be trained afterwards. Only a few breeds are suitable. The TSA relies on German Shorthairs, German Shepherds, Malinois, Labradors, Golden Retrievers and Hungarian Pointing Dogs. The high demand means that prices for trained dogs can exceed US$25,000 (Murphy 2017). Dogs are allowed to be used for a maximum of eight hours in a 24-hour period. After each search, which may last a maximum of 30 min, the dog must rest for at least half an hour. The reliability of dogs in detecting explosives is not without controversy. Sniffer dogs are usually only able to detect the explosives for which they are specifically trained. Related types of explosives, or those on a different chemical basis, are usually not detected (Lazarowski and Dorman 2014). Sniffer dogs may therefore only be used in addition to other testing methods. In 2014, the responsible Department for Transport (DfT) temporarily banned the use of dogs at British airports. The criticism related primarily to a procedure in which odour samples from the dogs were not checked on the cargo itself, but at another, more distant location (Putzger 2016b). This procedure, RasCargoO, was not permitted in Germany, but was in other countries, such as France or Luxembourg. The more liberal regulations in neighbouring countries sometimes led to cargoes being taken there for shipment instead of being flown off in Germany. 7.1.7.4 Alternatives Not Approved in Germany A less expensive alternative to sniffer dogs in the future may be the use of insects such as honey bees or rats (Caygill et al. 2012). These animals are even more sensitive to traces of explosives. Their response can be interpreted using computer programs. A British

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company, Inscentinel Ltd., attempted to use the method commercially, but ended its business activities prematurely at the end of 2015. Other procedures, such as simulation chambers, which simulate the noise and air pressure of air transports, as well as security storage (“cooling”) are not approved for security clearance in Germany. Due to the relatively high costs, they were also only used to a limited extent.

7.1.8 Security Requirements for Airlines (ACC3) and Airports Since 2014, airlines transporting cargo or mail from a third country to an airport in the European Union for transfer, transit or unloading must be certified. These airlines are ACC3 validated. ACC3 stands for Air Cargo or Mail Carrier operating into the Union from a Third Country Airport. The basis for this is Community law, again Regulation (EC) 300/2008. In order to maintain or renew the status as an ACC3 carrier, the companies require an audit by a recognised auditor (Aviation Security Independent Validator-EUACC3). This recognized validation is offered, for example, by Fraport’s subsidiary FraSec Fraport Security Services GmbH. The aim of the EU’s ACC3 programme is to bring the processes in airports up to Community standards for air cargo transported to the EU, including in third countries. All cargo must originate from a secure supply chain or be physically screened. The equipment used must meet the requirements of the European licensing authorities and the staff must be trained (Wright 2014). This addresses the risk of an aircraft launched outside the EU being blown up over a major European city. Airlines that do not meet the requirements will no longer be allowed to bring cargo or mail into the EU with the implementation of the regulation. Airlines that take off from countries that are not able to use detection dogs (EDD) or detectors (ETD or EDS) have no alternative to determine the safety of the cargo. As a consequence, they are not allowed to bring cargo into the EU (LBA 2014).

7.1.9 Possible Innovations and Limitations in the Detection of Explosives Research has long been concerned with a number of technical alternatives to make the detection of explosives more effective and, in some cases, more efficient. Most of the techniques have been developed for screening carry-on baggage (Singh and Singh 2003), but most can also be applied to cargo. The most important weak point in surveillance is the human factor. Despite all the technical progress, all screening precautions cannot guarantee complete protection against explosives getting on board an aircraft again. X-ray equipment remains the preferred technology because it is relatively easy to use and inexpensive to purchase and operate. However, the goods often cannot be reliably screened for the reasons mentioned above,

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making alternative screening necessary. The prerequisite for this is that the personnel operating the equipment are sufficiently focused on the inspection process and react appropriately in case of doubt. X-ray equipment and sniffers are operated by specially trained personnel. The situation is similar with the handling of explosive dogs. The work is tiring, monotonous and stressful, and is often considered stressful (Yu et al. 2017). Express shipments and much of conventional air cargo are screened during night hours, which places an additional burden on personnel. Relative to the importance to safety and the physical demands placed on skilled workers, the job is generally paid below average. In many countries, hourly wages are close to the legal minimum wages. In countries where higher wages are paid due to mandates, turnover among staff is significantly lower (Singh and Singh 2003). High turnover in the face of modest earnings and inconvenient working hours do not contribute to safety. As a result, the motivation and experience of plant operators is critical to how reliably the supply chain is kept safe. The direct and indirect costs of security screening for technical equipment and personnel are considerable and increase the cost of the air freight product. The cost of an X-ray machine alone is several hundred thousand dollars. Meanwhile, proposals to push for a more risk-based approach to security screening (Amorim da Cunha et al. 2017) seem to miss the security needs of stakeholders and the public. What is required is a level of safety, the guiding principle for many decades in the technical investigation of aircraft, that aims for zero defects. The further risks of an aircraft being shot down by a surface-to-air missile, for example, or of crews on the ground becoming victims of terrorist activity, are to be countered primarily by the work of security forces in the vicinity of airports and by the intelligence services. There are unfortunate precedents for both of these hot spots: In 2003, an Airbus A300 operated by European Air Transport, on behalf of DHL, was hit by a SAM-7 missile shortly after take-off from Baghdad. As a result, the hydraulic system failed and the left wing was severely damaged. The subsequent successful emergency landing is considered an aeronautical masterstroke, and the crew fortunately survived. In 2015, six crew members of a Volga-Dnepr AN-124 were murdered during a raid on their hotel in Bamako, Mali (Muir 2015). Both cases are evidence of the multiple dangers faced by cargo airline crews in crisis areas. One area of danger that is increasingly coming into the focus of ICAO and security authorities is that of cyberterrorism. Air traffic control authorities, for example, are an interesting target for hacker attacks, and even a cyber attack on an aircraft in the air cannot be ruled out (Abeyratne 2011). How many shipments have been intercepted over the past two decades as a result of the successful work of the security authorities is difficult even for experts to estimate, and for outsiders not even to guess. The package bombs sent from Yemen to the US in 2012 were declared as printers. An internal routine that would automatically flag such a shipment as doubtful was apparently not in the carriers’ systems. “Why would anyone spend US$300 to send a $150 printer from Yemen to a synagogue in the US?” (Sales 2016, p. 109). Remarkably, the two bombs were intercepted after intelligence tips from Saudi Arabia.

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7.2 The Special Handling of Dangerous Goods A positive side effect of the introduction of stricter security checks is that, on the one hand, the quality of the packaging and declaration of the transported goods has improved and, on the other hand, undeclared dangerous goods are more easily detected: Indirectly, the measures have not only improved protection against terrorist attacks, but also reduced the risks posed by hazardous substances (Bazant 2014). The transport of dangerous goods is regulated in the Dangerous Good Regulations of the IATA, in short IATA-DGR. The shipper must attach a shipper’s declaration for dangerous goods (DGD) to the air waybill. The uniformity of the processes and forms ensures that airlines and pilots receive all safety-relevant information on the dangerous goods. As soon as the dangerous goods are loaded on the aircraft, the flight captain or pilot in command assumes responsibility. The cockpit crew is informed about the dangerous goods loaded by means of a form or electronically by means of a NOTOC (notification to the Captain) (Table 7.2).

Table 7.2 Hazard classes ICAO class 1 2.1

Description Explosives and articles containing explosives Flammable gases

2.2

Non-flammable, non-toxic gases

2.3 3 4.1

Toxic gases Flammable liquids Flammable solids,

4.2

Substances liable to spontaneous combustion, Substances which, in contact with water, emit flammable gases Inflammatory (oxigenic) substances

4.3 5.1 5.2 6.1 6.2 7 8 9

Organic peroxides Toxic substances Infectious substances Radioactive substances Corrosive substances Miscellaneous dangerous substances and articles

Own representation

IATA code Examples RGX, RXS, Fireworks, ammunition etc. RFG Gas cartridges, cigarette lighter RNG or Fire extinguishers, scuba RCL tanks RPG Carbon Monoxide RFL Inks, printer ink, alcohol, RFS Matches, flammable metal powder RSC RFW

Calcium, barium

ROX

Ammonium nitrate fertilizer, bleach

RPB

Pesticides, disinfectants Bacteria, viruses

RRW, RRY RCM Batteries Vehicles, dry ice, lithium batteries

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This contains information on the type, quantity and position of the dangerous goods on the aircraft. The form clearly identifies the dangerous goods by UN number, hazard class and packing group. The NOTAC also contains information on what to do in an emergency. Late transmission of the NOTOC may be a reason why an aircraft captain refuses to load a cargo or requires it to be unloaded before take-off.

7.2.1 Classes of Dangerous Goods The ICAO distinguishes between nine dangerous goods classes, whereby individual classes are subdivided. This corresponds to an IATA classification. Their system is known as IMP codes (Interline Message Procedure). Many of the codes are self-explanatory due to the English designation of the respective dangerous goods. The first letter of the code, R stands for “restricted”, the second indicates the type of substance. Class 3, for example, has the code RFL (for Flammable Liquid), subclass 5.1 ROC (for Oxidizer).

7.2.1.1 Class 1: Explosive Substances By their nature, explosive substances and articles are not suitable for carriage by aeroplane. Subcategory 1.1 includes articles and substances which are explosive in mass. In addition to the subcategories, there are compatibility groups, each of which is identified by letters. Only cartridges for pistols and rifles are permitted for transport in passenger aircraft; they are assigned to class 1.4 S. In addition, goods of classes 1.3C, 1.3G, 1.4B, 1.4C, 1.4D, 1.4G and 1.4S may be transported in cargo aircraft. During transport, care must be taken to ensure that consignments are not exposed to vibrations or heat, e.g. due to direct sunlight. 7.2.1.2 Class 2: Gases Class 2 is divided into three subclasses: 2.1 flammable gases (IATA code RFG), 2.2 nonflammable, non-toxic gases (RNG or RCL) and 2.3 toxic gases (RPG). Class 2.3 may only be transported in cargo aircraft. As with Class I goods, care must also be taken to ensure that consignments are not exposed to heat. Contact with and inhalation of the gases must be avoided. Unauthorized persons must be kept away from the cargo. 7.2.1.3 Class 3: Flammable Liquids Flammable liquids are found in a large number of goods transported by air, such as perfume or the cartridges used in inkjet printers. Here too, it is particularly important to avoid the effects of heat. The IATA code for these substances is RPG. 7.2.1.4 Class 4: Flammable Solids Class 4 consists of three subgroups: 4.1 for flammable solids (IATA code RFS), 4.2 substances liable to spontaneous combustion (RSC) and 4.3 substances which emit flammable gases when in contact with water (RFW).

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7.2.1.5 Class 5: Oxidizing Substances Class 5 goods also present a hazard when exposed to heat or flame. The class consists of two subclasses: 5.1 flammable substances (ROX) and 5.2 organic peroxides (ROP). Examples of cargoes of Class 5.1 are fertilizers. In the case of organic peroxides, care should be taken to avoid contact with the eyes; serious corneal damage may occur in certain cases. 7.2.1.6 Class 6: Toxic and Infectious Substances Class 6 includes toxic substances (RPB) under 6.1 and infectious substances (RIS) under 6.2. Shippers of such goods are mostly chemical and pharmaceutical companies. 7.2.1.7 Class 7: Radioactive Substances There are no subclasses in Class 7, but three different categories depending on the radiation intensity. Class 7 goods may also be transported in passenger aircraft, but only in limited quantities. The IMP codes for radioactive materials are RRW (Category I, “white”) and RRY (Categories II and III, “yellow”). 7.2.1.8 Class 8: Corrosive Substances Corrosive substances are found, for example, in battery acids. 7.2.1.9 Class 9: Miscellaneous Dangerous Substances and Articles The last, ninth class, is a catch-all for other hazardous substances and articles not covered by the previous eight classes. These include, for example, lithium batteries. They are used in smartphones and laptops, among other things, and have caught fire on board passenger aircraft on several occasions. The crash of a B747-400F of the integrator UPS in Dubai in 2010, which is attributed to a fire of lithium batteries in the cargo hold and in which the two crew members died, has sensitized the entire industry to the dangers (Bitar 2013).

7.2.2 Packagings and Packing Groups Depending on the degree of danger, the cargo must be assigned to different packing groups. Cargo posing a high risk requires group I packaging. Cargo posing a medium or low risk requires packaging of groups II or III. An example of cargo requiring special packaging is the lithium batteries mentioned above.

7.3 Prevention of Damage and Loss The most common causes of damage to shipments are found in a combination of improper handling and inadequate packaging. The recipient has the right to refuse to accept damaged or incomplete goods. It is less common for goods to be stolen in transit.

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Table 7.3 The main causes of damage to air cargo shipments Nature of the risk Vibration

Impact Damage to the packaging or the consignment itself occurs if consignments are dropped during reloading or sorting or collide with other consignments Vibrations Vibrations occur during transport or during reloading with a forklift truck. Usually, the vibrations in the truck are stronger than during flight. The vibrations may cause a shipment to become loose Compression: The pressure on a shipment can be dynamic or static. Static when pressure is exerted by a heavier item above, dynamic when the means of transport is moving Climatic During a flight, for example from China via a hub in the Middle East to Europe, a changes consignment is exposed to considerable temperature fluctuations. Again, the peaks are to be expected on the ground, less so in the aircraft itself. On larger aircraft, cells with different temperatures are usually set up in the cargo hold. Thus, there may be three areas in an aircraft with 5, 15 and 21° – as a result, more moderate temperatures than can be expected during transhipment on the ground Air pressure Large aircraft usually fly at an altitude of about 10,000 m above sea level. Normally, the pressure in the cargo hold corresponds to an altitude of 8000 feet or 2500 m. But this is only if the aircraft has a pressurized cabin. Without pressure, there is a risk of damage, especially with liquids IoPP (2015)

7.3.1 Damage to Consignments Shipments are exposed to various stresses during transport. It should be borne in mind that the greatest risks of damage do not arise during transport by air or truck, but during cargo handling. The pre-collection and delivery of air freight, provided it is transported separately with “secure” status, typically takes place with other consolidated cargo, which is subsequently transported by road or in an ocean freight container. There is great time pressure throughout the transport chain, which translates into an increased risk of damage during transport and handling (Table 7.3). The generally rough handling makes it necessary for the goods to be appropriately packaged. For example, a shipper can hardly rely on the instruction on a label to transport a consignment only upright (“keep upright”) being followed throughout the supply chain.

7.3.2 Theft of Air Cargo Goods Many airfreight goods have an high value relative to their low weight. Goods that are easy to transport and can be resold on the black market are subject to an increased risk of theft. In particular, tobacco products, electronic goods, high-value fashion items, jewellery and other valuables, and medicines are considered “hot products” (Ekwall and Lantz 2017).

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Excluded at this point are cases of criminal behaviour in which a consignor deliberately posts faulty or incomplete goods for transport. The actual air transport is also very safe in this respect. Problems primarily occur during pre-carriage and onward carriage or transhipment. In the analysis of transport thefts, it was found that they occurred on average in six out of ten cases in non-secured parking areas (Ekwall and Lantz 2017).

A particularly spectacular air cargo heist took place in Brazil in March 2018 (Air Cargo News 2018a; Lopes 2018). Five armed criminals gained access to the Viracopos Cargo Airport (VCP) near Sao Paulo using a vehicle similar to that used by the security services. They assaulted two security guards, loaded them into the car and drove onto the apron where LH 8263, a Lufthansa cargo plane bound for Frankfurt via Dakar, was being loaded. They managed to steal bags of cash that were about to be transferred from an aircraft to an armoured car. The robbers left the airport again after only six minutes. The loot amounted to approximately US$ 5 million.

For years, the roads from the airport to the city of Sao Paulo have been considered very dangerous, even by Brazilian standards. A robbery of this magnitude is unusual, but illustrates that criminal activity is possible along the entire supply chain, provided the perpetrators have the necessary insider knowledge.

In 2001, total global losses due to cargo theft were estimated at around USD 30 billion across all modes of transport (Mayhew 2001). They have certainly increased in the meantime. According to an analysis by a cargo insurer, theft is the third most frequent cause of loss after transport accidents and damage during cargo handling. Around 7000 cases were analysed, relating to all modes of transport, in which insurance was claimed for at least US$ 10,000 each (Air Cargo World 2015). The danger comes less from casual theft and more from organized crime, and for the reasons mentioned above it affects airfreight shipments more often than average. Trucks and vans transporting cargo to or from the airport are often attacked or even hijacked. Even GPS systems, which have become standard when transporting valuable cargo, can be externally interfered with and offer only limited protection. Criminal organizations use insiders’ clues as to when and how valuable cargo is being transported and where any security vulnerabilities exist, or obtain the critical information by hacking into computer systems. With the necessary technical expertise, it is even theoretically possible to penetrate vehicle electronics from the outside, manipulate them and cause trucks to brake or accelerate spontaneously. Since air freight is fundamentally dependent on a pre- or post- carriage on the road, these fields of danger must also be taken into account as part of a holistic view of security (Greenberg 2016).

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Table 7.4 Limits of liability of the various contracts Contract Warsaw Convention (1929) Hague Protocol Montreal Protocol (1975) Montreal Convention (1999)

Liability limit 250 gold francs per kg 250 gold francs per kg 17 SDR per kilogram 17 SDRs, since 2009 19 SDRs per kilogramme

Reuschle (2011)

In airport terminals, criminals are facilitated by the fact that there are usually a large number of parties in contact with the cargo – employees of trucking companies, ground handling companies, airlines and freight forwarders. Adding to the confusion is the general hustle and bustle and the high noise level in the areas. Since airlines are subject to very limited liability under the Warsaw Convention, some critics believe they pay insufficient attention to the issue of theft.

7.4 Liability The two main liability regimes in international aviation are the Warsaw Convention of 1929 (WA), which has been further developed by a series of agreements in the form of supplementary agreements and protocols, and the Montreal Convention of 1999 (MÜ99). Both conventions regulate the liability of the carrier in the carriage for reward of passengers, their baggage and air cargo. In the following, reference is made only to the latter aspect (Table 7.4). The Montreal Convention replaces the Warsaw Convention when transport takes place between two signatory states. Not all states have signed or ratified the newer convention, which is why the Warsaw Convention is still relevant for air transport.

7.4.1 Warsaw Convention of 1929 (WA) and Subsequent Agreements The “Convention for the Unification of Certain Rules Relating to International Carriage by Air”, which was signed in Warsaw on 12 October 1929, essentially regulates the liability of the carrier in international transport. First preliminary drafts of the convention were written as early as 1925, a time when international aviation was still in its infancy (Reuschle 2011). The carrier is liable on the basis of presumed fault. He must prove that he was not at fault in the event of damage. If he cannot exonerate himself, he is liable under Art. 22 para. 2 up to a limit of 250 francs per kilogram of freight (WA 1929). The gold franc, weighing 0.29 g of fine gold, was introduced by the Universal Postal Union in the early 1920s as a unit of account independent of currency fluctuations. This limit, approx. EUR 27 in today’s currency, cannot be reduced by the carrier.

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If a shipper declares a higher value on the AWB, the carrier is liable up to this limit. However, the shipper must compensate the carrier for the higher risk. A value surcharge is levied on the freight charges. According to Art. 25, the carrier is liable without limitation if he has “caused the damage intentionally or through negligence” which is equivalent to intent. (WA 1929). In addition to wilful misconduct or gross negligence, the carrier is also liable without limit if it fails to issue an air waybill in accordance with the regulations. This rule proved to be an obstacle when electronic waybills were introduced.

7.4.1.1 Hague Protocol of 1955 (HP) In 1955, a conference in The Hague dealt with a revision of the controversial passages of the Warsaw Convention. The Protocol to Amend the Convention for the Unification of Certain Rules for International Carriage by Air (Hague Protocol) is a treaty signed by the vast majority of the Warsaw Convention signatory states. In the USA, the Protocol did not enter into force until 2003 (ICAO). The liability limit was left unchanged at 250 Swiss francs per kilogram. The conditions under which the carrier is liable without limitation have been clarified. The limitation of liability now does not apply “if it is proved that the damage was caused by an act or omission of the carrier or its servants or agents done with intent to cause damage or recklessly and with knowledge that damage would probably result” (Article 25 of the Protocol). 7.4.1.2 Guadalajara Supplementary Convention of 1961 As aviation developed rapidly in both the decades following the Second World War, more shortcomings of the Warsaw Convention became apparent. A major regulatory shortcoming concerned those transports carried out by an airline other than the one that was a party to the agreement. The 1961 Guadalajara Supplementary Convention stipulated that the liability provisions of the Warsaw Convention affected both the contracting and the operating carrier. 7.4.1.3 Montreal Additional Protocols No 4 of 1975 With the collapse of the Bretton Woods Agreement in 1973 and the abolition of the gold standard in 1973, it became necessary to adjust the standard limiting the carrier’s liability. Until then, liability had been calculated in units of gold, a quantity of stable value. Under the Bretton Woods system, the US central bank had undertaken to buy or sell gold at a fixed price of US$35 at any time (Table 7.5).

Table 7.5 Subject matter of the Montreal Additional Protocols (MAP) Nos. 1–3 MAP 1 Amendments to the Warsaw Convention of 1929 MAP 2 Amendments to the 1955 Hague Protocol adapting the 1929 Warsaw Convention MAP 3 Amendments to the 1961 Guadalajara Supplementary Agreement to the 1929 Warsaw Convention UNCTAD (2006)

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In four additional protocols adopted in Montreal in 1975, the gold standard was replaced by the so-called Special Drawing Rights (SDR). The liability limit of 250 gold francs was replaced by 17 SDRs. The first three protocols were necessary in order to take into account the different situations among the UN member states. SDRs perform a function comparable to that of the gold franc. They are an artificial, non-exchangeable currency whose exchange rate is calculated according to a basket of the world’s major currencies. The basket includes the US dollar, the euro, the Japanese yen, the British pound and, since 2016, the Chinese renminbi. The most significant changes were introduced by Protocol No. 4, which above all simplified and modernised the accompanying documents and created the legal preconditions for electronic AWB. The first two additional protocols did not enter into force until 1996, the fourth in 1999. The third protocol was not ratified by a sufficient number of contracting states and thus did not become valid. As of 2019, the Federal Republic of Germany has not ratified any of the four additional agreements.

Example of Contradictory Bases of Liability in the Event of a Claim

In 2001, the Supreme Court, the highest court in the United States, addressed the question of whether a contractual relationship could be constructed between the United States and South Korea (Chubb & Son, Inc. Vs Asiana Airlines). This contract would have had to be used in calculating the amount of liability in a claim. In the present case, Samsung Electronics, a Korean electronics company, had handed over 17 packages of computer chips to Asiana airline for transportation. The air waybill was issued for direct flight 214 from Seoul to San Francisco. In fact, the shipment was on flight Asiana 202 to Los Angeles, from where the packages were trucked to San Francisco. Upon arrival, two packages with a value of half a million USD were missing. The insurance company Chubb & Sons filed a claim against the airline in the course of the settlement of the claim in order to obtain compensation for the damage. In assessing the limit of liability, it was necessary to consider which liability regime applied in the present case. When the loss occurred, the United States was a signatory to the Warsaw Convention but had not ratified the Hague Protocol. The State of South Korea, which had not yet been established when the Warsaw Convention was drawn up in 1929, had not ratified the WA, but had ratified the Hague Protocol. In the first instance, the competent court ruled that liability was limited to USD 706 per kilo based on the original agreement without the additional protocol. The Court of Appeal, on the other hand, denied any contractual relationship between the two states, as both had deliberately refrained from ratifying the other agreement. This view was also shared by the Supreme Court. There had been no evidence in the drafting history of the Protocol to justify the assumption that a signatory state had automatically acceded to the agreement. The court assumed unlimited liability on the part of the carrier because no treaty basis existed between the United States and South Korea and was not likely to be construed on the part of the court. Unlimited liability would also be assumed if the original WA had been taken as the basis, as the carrier had carried out the transport contrary to the air waybill issued.

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The situation, in which the Warsaw Convention, an agreement from the early days of aviation, was adapted by a large number of supplementary agreements, which were ratified differently by different states, led to an almost immense thicket of liability regulations in which only a few experts were able to find their way around.

7.4.2 Montreal Convention 1999 (MC99) Attempts to harmonize and self-contain the Warsaw liability regime through the four Montreal Additional Protocols of 1975 were not successful, as they were only adopted by a limited number of states (Reuschle 2011). The result was a jumble of different liability regimes that pushed those lawyers who specialised in transport law to their limits. In many cases, only the courts were able to clarify which liability regime applied in the event of damage. On the initiative of ICAO, a fundamentally new liability concept was developed in the mid-1990s. In 1999, ICAO member states and a number of non-governmental organizations met for a conference, at the end of which the new agreement, the Montreal Convention (MC99), was adopted. The USA and Japan were among the first countries to join the agreement. Since 2004, the agreement has also been in force in the member countries of the EU. The scope of application is comparable to that of the Warsaw Convention. However, the Montreal Agreement is classified as a convention because it is a multilateral treaty. Agreements are referred to as bilateral agreements by the current Foreign Office (Brinkmann 2009, p. 4). The agreement regulates paid or unpaid transports international air transports. A prerequisite for the regulations to apply is that the transport is carried out from one contracting state to the next. In the case of a transport between two signatory states of the Montreal Convention, e.g. the USA and Germany, it applies. The situation is different for a transport from Indonesia to Germany. Germany has signed the WA and MC99, Indonesia only the WA, so the Warsaw Convention applies (Table 7.6). The original liability limits were raised again in 2009, i.e. after 10 years. For damage to goods, they now amount to 19 SDRs instead of 17 SDRs. Liability under the regime of the MC99 is a liability in care, i.e. the carrier is liable during the period in which the cargo is in his care. His fault is presumed in the event of damage. He can only exempt himself from liability if he can prove that the damage was caused by a number of defined causes outside his sphere of responsibility. Exclusions of liability exist, inter alia, in the case of goods which have not been adequately packed, acts of war or state intervention (Art. 18 para. 2 MC99). In addition to damage, loss or destruction, the carrier is also liable for damage caused by delay. However, according to Art. 19, he is not liable “if he proves that he and his servants took all reasonable measures to avoid the damage or that it was impossible for him

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Table 7.6 The Warsaw Convention system and its amendments 1. Warsaw Convention 1929 2. Warsaw-Hague Convention 1955 3. Warsaw-MAP 1 Convention 1975 4. Warsaw-Hague-MAP 2 Convention 1975 5. Warsaw-Hague-MAP 4 Convention 1975

6. Warsaw Convention 1929 supplemented by Guadalajara Convention 1961 7. Warsaw-Hague Convention 1955 supplemented by Guadalajara Convention 1961 8. Warsaw- MAP 1 Convention 1975 supplemented by Guadalajara Convention 1961 9. Warsaw-Hague-MAP 2 Convention 1975 supplemented by Guadalajara Convention 1961 10. Warsaw-Hague-MAP 4 Convention 1975 supplemented by Guadalajara Convention 1961

UNCTAD (2006)

or them to take such measures.” The limits of liability do not apply if it is proved that the damage was caused by the Carrier’s wilful misconduct or recklessness (Art. 22 MC99, para. 5). The MT allows the use of electronic air waybills, an essential requirement for improving productivity and quality in the industry. The limitations of liability also apply without the creation of a paper-based AWB.

7.4.2.1 Status of Harmonisation of Liability Regimes Although the Montreal Convention is not controversial and does not impose obligations on any party that are difficult to accept, it is still far from being ratified by all UN member states, even 15 years after it was signed. The result is a very confusing liability regime. An example given by IATA itself is that of a passenger travelling from Singapore to Jakarta, buying two one-way tickets. On the outward journey, the Montreal Convention, which Singapore, unlike Indonesia, has ratified, applies; on the return journey, the Warsaw Convention applies (IATA 2013b). Based on the status with which the various agreements have been ratified, at least eight categories of countries can be distinguished. When transport takes place between two countries that have not signed a joint agreement or protocol, the conditions of carriage or national law apply (Table 7.7). Among the approximately 200 states in the world, there are quite a number (more than 20) that have signed neither the Warsaw Convention nor the Montreal Convention. These are primarily small states without significant air traffic, such as Palau or Andorra, and states whose statehood is still in the process of being established, such as South Sudan or Somalia. The most significant country from a civil aviation perspective that has not signed any of the agreements is Thailand, with status in 2017. Why have only six out of ten ICAO member states ratified the Montreal Convention by 2016? In many countries, the issue of air cargo liability is simply not high on the list of priorities, so political institutions are pushing for ratification. IATA and ICAO are continuing their efforts to harmonise the rules, but it is to be expected that it will take decades before the goal of a globally valid liability regime is a reality.

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Table 7.7 Categorisation of Member States in terms of ratification status of the four main international civil aviation liability conventions Category Ratification status A Only Warsaw Convention (1929) B Warsaw Convention (1929) and Hague Protocol (1955) C D

E F G H

Warsaw Convention (1929), Hague Protocol (1955) and Montreal Protocol No. 4 (1975) Warsaw Convention (1929), Hague Protocol (1955), Montreal Protocol No. 4 (1975) and Montreal Convention (1999) Only Warsaw Convention (1929) and Montreal Convention (1999) Only Warsaw Convention (1929), Hague Protocol (1955) and Montreal Convention (1999) Montreal Convention (1999) only No international agreement

Example Indonesia, Mauritania Bangladesh, Russian Federation, Sri Lanka Ghana, Mauritius, Uzbekistan Belgium, Oman, Turkey

Malta, Uruguay Germany, Kazakhstan, Poland Belize, Georgia Haiti, Nicaragua, Palau

Own representation

The question of which regime is stricter cannot be answered easily. The liability limit of the Warsaw Convention is somewhat lower than that of the Montreal Convention. The liability limit of 250 gold francs under the Warsaw Convention is now 17 SDRs following the 1975 amendments to the Montreal Additional Protocols. The revised liability limit of the MÜ99, on the other hand, is 19 SDRs. In the WA, however, the carrier’s liability is unlimited if there is intent or gross negligence. Accordingly, liability in these cases is also limited to 19 SDRs under the MÜ99. In both cases, a higher liability limit applies if the consignor has declared a higher value and paid a value surcharge.

7.5 Special Features of Trade Financing The documentary letter of credit, the method cash against documents, export financing and bank guarantee are widely used instruments in international trade to secure payments (Wood 1990). They are used where a buyer does not want to bear the risk that a produced good will not be paid for in full or at all. The letter of credit (LC) is probably the most common form of security in air transport. A letter of credit is defined by the International Chamber of Commerce (ICC) as any agreement which is irrevocable and thereby creates a fixed obligation on the part of the opening bank to honor a conforming documentary presentation (ICC 2007). Especially where buyer and seller are entering into new business relationships and trust in the foreign legal system is low, the letter of credit is suitable to counter the risk of non-payment. Non-payment does not have to be malicious; it can also be caused by insolvency, cancellation of an order, restrictions on the free movement of foreign exchange or political tensions.

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The typical course of an L/C transaction is roughly as follows: The contracting parties agree on a letter of credit transaction as part of the purchase agreement. The buyer now applies to his bank for the opening of a letter of credit. The opening bank is called the advising bank. It calls in its correspondent bank in the country of the exporter or seller. The seller now ships the goods in exact accordance with the terms of the letter of credit and hands over the complete documents to the correspondent bank. In the air waybill, the buyer’s bank appears as the consignee, and the buyer himself or his agent appears in the “notify address”, i.e. the party to be notified. The seller’s bank sends the documents to the opening bank. In turn, the purchase amount is transferred to the correspondent bank. The opening bank debits the buyer’s account and hands over the documents. Finally, the buyer or importer can demand the release of the shipment from the carrier by presenting the shipping documents. It is of particular importance in this process that the documents are complete and must correspond exactly to the specifications of the purchase contract. If the sender’s address has been noted incorrectly in the purchase contract, e.g. an incorrect postcode, this must still be included in the documents. In addition to the bill of lading, the essential documents that usually have to be provided for documentary credit transactions are the commercial invoice, the packing list, the export declarations, if applicable, and the confirmation that the shipment is insured. In many cases, the preparation of expert reports by engineers or inspectors independent of the seller is agreed upon to ensure that the goods have the agreed characteristics. These documents must correspond exactly to the agreements made in the letter of credit. Even a misspelled address can lead to a considerable, costly delay or even a failure of the transaction. It is estimated that every sixth transport document has discrepancies with the bank documents (Bergami 2013). The Banking Commission of the International Chamber of Commerce has drawn up guidelines for the processing of documentary credit transactions. A revised sixth version has been in force since 2007. It was published under the abbreviation UCP 600 (Uniform Customs and Practice for Documentary Credits). This guideline describes in detail the procedure for the types of documentary credit and the obligations of the contracting parties. Article 23 of UCP 600 (Air Transport Document) specifies exactly which features air transport documents must have in order to meet the requirements for documentary credits.

7.6 Ethical Risk Areas in Air Cargo Since the 1970s, ethical conflict areas have been the focus of attention, especially in US legislation, and with a delay also in British legislation. The prevailing Anglo-Saxon tradition of what may be ethically required is different from that of Germany, for example. The intellectual fathers of utilitarianism are the British philosophers of the nineteenth century, such as Jeremy Bentham and John Stuart Mill. Accordingly, actions in business and in private life must follow the maxim that they maximize the aggregate welfare (as a contemporary translation of the term utility). Those American founding fathers who

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emigrated from Scotland and England brought this philosophical approach with them to the New World. In this respect, the deontological approach, which is in the tradition of Immanuel Kant, asks less about consequences than about the legitimacy of an action itself. Thus, in this tradition, it is forbidden to lie or torture, even if doing so might save lives in a totalitarian system. So does the state have the right to order the shooting down of a plane hijacked by terrorists that threatens to be used as a weapon (von Schirach 2016)? Yes – in the Anglo-Saxon tradition, if the shooting down sacrifices the passengers and crew of the plane, but they are doomed to die anyway and the loss of a greater amount of life can be prevented. No – in the German tradition, because the value of a single human life is absolute and infinite, and therefore lives cannot be set off against each other. This digression helps to understand why the utilitarian United States has led the way in enshrining ethical principles in legislation and has pushed for their dissemination outside the country as well. The overall good is guaranteed where all economic agents have equal opportunities, a level playing field, even if legal regulations restrict individual freedoms. German legislation and jurisprudence dealt with shortcomings more pragmatically. For example, bribes paid abroad were still tolerated until the turn of the millennium and were even tax deductible as “useful expenses” (Keuchel 2002). Typical ethical conflict areas in which transport companies and service providers find themselves are cartel agreements, bribes to public officials, harassment in the workplace and environmental issues. In almost all of these areas, legislation and jurisprudence have narrowed the scope for entrepreneurial freedom, and actions that were once common practice have been pushed out of everyday life.

7.6.1 Cartel Agreements Cartels or agreements on competition are agreements between market participants which have the objective of restricting competition. In the words of Sect. 1 (Prohibition of Agreements Restricting Competition) of the Act against Restraints of Competition (GWB), “agreements between undertakings, decisions of associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition […] are prohibited”. Cartels are now illegal in most jurisdictions. The economic harm is that prices in cartels are significantly overcharged. In decisions by cartel authorities around the world, the overcharges found ranged from an average of 20% to a median of 40% (Connor 2014). Since the additional revenue is not matched by any costs, at least as long as it is not detected, such collusion is very lucrative for the parties involved. Probably also because cartels are punished in most countries like a misdemeanour but not as a criminal offence, numerous examples of anti-competitive agreements can still be found today. The following factors, on the other hand, act as a deterrent:

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1. On the one hand, companies are often liable for damages over and above the fine. As of 2018, the highest fine ever imposed by the EU Competition Commission was EUR 3.8 billion. In 2016, truck manufacturers Daimler, Iveco, DAF and Volvo/Renault, and in a second step Scania, were found guilty of colluding on the sales prices of their vehicles over the 14 years from 1997 to 2011. Of the hauliers and freight forwarders affected, 3200 companies subsequently filed a claim for damages of at least EUR 500 million (Handelsblatt 2017). 2. Under the Leniency Programme, which also applies in Germany, for example, the cartel participant who first discloses a cartel to the Federal Cartel Office receives immunity from fines. In the above-mentioned truck cartel case, MAN did not have to pay a fine. 3. The proceedings tie up considerable resources internally in the management bodies of the defendant companies and give rise to substantial costs for external lawyers. 4. In the USA, managers can also be sentenced to prison for cartel offences. Because of the low margins, the structure of the industry where competing executives often have known each other for decades, and the homogeneity of services, the air cargo industry may have been particularly vulnerable to illegal collusion in the past. Both carriers and forwarders have been fallible and punished in the past. In several cases, shippers were harmed due to inflated freight rates. The magnitude of recent penalties, particularly those handed down by the DOJ, as well as the risk of jail time in the U.S., have raised a great deal of awareness among company executives. In the meantime, the parties involved, carriers, forwarders and ground handlers have all taken precautions to limit the risk of illegal collusion.

7.6.1.1 Agreements by Air Cargo Carriers on Surcharges In 2017, eleven carriers were fined a total of EUR 800 million. The largest fine was imposed on the Air France-KLM Group. In a case brought by the US Department of Justice (DoJ), fines of USD 1.7 billion were imposed on 19 airlines in the same matter. The competition authorities are convinced that the carriers involved had colluded on the level of fuel and security surcharges in the period from 1999 to 2007. They also allegedly agreed not to pay carriers a commission for collecting surcharges. The whistleblower in the case was Deutsche Lufthansa AG (Höltschi 2010, 2017). In connection with illegal agreements on price surcharges, the former general manager and the sales manager of the cargo airline Cargolux even had to serve prison sentences of 13 months each. 7.6.1.2 Agreements Between the Leading Air Freight Forwarders Some of the world’s leading air freight forwarders responded to the issue of freight surcharges by coordinating their behaviour in an anti-competitive manner. Specifically, a total of four cartels in different periods and with different compositions were proven. In the PSS cartel (peak season surcharge) at so-called “breakfast meetings” in Hong Kong, the introduction, timing and, in some cases, the amount of the peak season surcharge were agreed. In the NES and AMS (automated manifest system) cartel, surcharges for exports from Europe

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were coordinated. In the CAF (currency adjustment factor) cartel, the participants agreed to switch contracts with shippers for shipments from China to Europe from USD to Renminbi (RMB) after the Chinese currency had appreciated (EU Commission 2012). That there was a degree of sensitivity on the part of the parties involved about the problematic nature of the arrangements is illustrated by the way in which they proceeded. For example, air cargo experts from the defendant companies met in so-called breakfast meetings in Hong Kong. There is evidence of seven of these meetings, including the meeting on 9 August 2005, where the introduction of a PSS for shipments from Hong Kong to Europe was agreed. In the so-called Gardening Club or Heathrow Garden Club, meetings took place in the UK between 2002 and 2004. Those involved used vegetable names such as asparagus or mini courgettes as code names or set up their own email address on Yahoo to disguise actions. The facts of the case are set out in detail in the Swiss Competition Commission’s ruling on collusion in the freight forwarding sector (WEKO 2012). According to the EU competition authorities, the collusion harmed hundreds of thousands of customers. In the case, the European Union imposed fines of EUR 169 million, the US DOJ USD 50 million and the Swiss Competition Commission CHF 6.2. million, among others. Further proceedings took place in the USA, New Zealand and Japan (DOJ 2010a; WEKO 2012).

7.6.2 Bribery of Public Officials In most cases, international air cargo must be cleared through customs upon arrival. Customs clearance carries with it the increased risk of bribery in very many countries around the world (McLinden and Durrani 2013). Cargo that has been transported by air is value-laden and time-sensitive, otherwise it would have been shifted to less expensive modes of transport. The risk of a public official, usually a customs officer, expecting a gratuity is manifold (Ndonga 2013). • A customs officer can speed up or slow down customs clearance. A delay can have significant financial consequences, for example if an oil platform is not operational without an urgently needed spare part. In the worst case, the goods may even become worthless, as in the case of vaccines or foodstuffs. • When dealing with goods that have been erroneously or scientifically misdeclared, a customs officer has room for manoeuvre. The declaration is used to decide whether a shipment may be imported or exported at all, or what rate of duty to charge on importation. It is possible that the employee will signal that he may overlook the error in a consideration (turn a blind eye). • The decision as to which class of goods a consignment is to be assigned to, and thus which customs tariff applies, cannot always be determined beyond doubt and is sometimes made arbitrarily. • Intentional errors may sometimes occur in the determination of the value of goods, to the benefit or detriment of the importer.

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Correcting obvious misconduct is usually possible through official channels, but it is time- consuming and damages the relationship between the importer or his agent and the customs officer responsible. Taking this route is rarely in the importer’s short-term benefit calculus. However, curbing corruption is in the interest of the economy as a whole.

In connection with FCPA proceedings, the Swiss-based freight forwarder Panalpina reached a settlement with the US Department of Justice in 2010 and agreed to pay USD 82 million. The indirect costs of the proceedings, such as legal fees and lost revenue due to customer losses, exceeded this sum many times over. Panalpina had been found guilty of having paid bribes on thousands of imports for customers in the oil and gas industry between 2002 and 2007. The payments, amounting to at least USD 27 million, were made in at least seven countries, including Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. Shell’s Nigerian subsidiary and deep-sea drilling specialists Transocean and Tidewater admitted authorising and improperly accounting for the bribes. They also undertook to make payments (DOJ 2010b).

The United States is once again leading the way in efforts to curb the negative effects of corruption. The Foreign Corrupt Practices Act (FCPA) of 1977 prohibits paying money or granting comparable benefits to foreign public officials – which include customs officials and aviation authority employees – with the intention of establishing or maintaining a business relationship. It also requires listed companies to keep proper accounting records. Individuals and companies or their employees are affected by the provisions. The scope of application is worldwide, provided that even one of the parties involved has a business relationship with the USA. In the past, such a relationship has been constructed, for example, by the fact that an agreement to bribe a public official was made in a US hotel, or that a bribe payment was processed via a correspondent bank in Miami. The standard is quite controversial because Western values are virtually imposed on other cultures. In some Asian countries, for example, it is customary to show gratitude to business partners with generous gifts (Lordi 2012). In one respect, the FCPA is pragmatic in that it does not criminalise facilitation payments. In German, these payments are best translated as bribes. They are routine payments of a small amount. Through them, a party receives a service to which it is entitled more quickly than without payment. An example of this is when truck drivers in India pay small amounts to cross provincial borders instead of joining a queue for several hours. Many companies also prohibit their employees from paying bribes because they cannot always be distinguished from bribes beyond a reasonable doubt. The UK Bribery Act of 2010 goes even further than the FCPA. It prohibits firstly the payment and receipt of bribes, secondly the bribery of public officials and thirdly the failure to prevent bribery (Lordi 2011). The Bribery Act does not distinguish between bribes

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and kickbacks, and thus in effect prohibits both forms. The Act affects every company, even if only part of its business activities extend to the United Kingdom, and thus virtually every major international air freight carrier and freight forwarding company (Lordi 2012; Hunter 2011).

7.6.3 Harassment in the Workplace Harassment in the workplace occurs when employees are belittled or threatened because of their ethnicity, gender or sexual orientation. It affects the individual dignity of those affected. In the wake of the “me-too” debate, there has been an increased focus on the issue of sexual harassment. This is sanctioned in most developed legal systems, in Germany for example on the basis of the General Equal Treatment Act (AGG). The majority of employees involved in air freight are not on the aircraft but on the ground, and the majority are in commercial occupations. What is true for express and air freight pre-collection and delivery is even more true for sorting and loading during nighttime hours. The job offers employment opportunities even for low-skilled workers who appreciate the fast pace of service delivery with relatively good pay. The tone is often perceived as “rough but cordial”. Lines are occasionally crossed where workers feel harassed. Prominent cases of harassment, which are costly for companies, are known from the USA: • DHL Global Forwarding in the US, which handles air and ocean freight shipments for Deutsche Post DHL Group, reached a settlement with the US Equal Employment Opportunity Commission (EEOC) in 2012 in which the company agreed to pay $201,000 in compensation to nine Hispanic employees. According to the charge, the employees at the branch, who were from Mexico, Puerto Rico and El Salvador, among other countries, were consistently subjected to taunts and insults, and management failed to respond to management complaints (EEOC 2018). • Two drivers of Lebanese origin who worked as contractors for FedEx were awarded $11 million in compensatory damages and $50 million in punitive damages. According to the jury, the two employees were subjected to constant harassment over a two-year period. The company and the branch manager had created a hostile work environment with respect to race and national origin. Under California law, both the employees who harassed can be held personally liable, as can the company that ignored and failed to stop the harassment. One of the major reasons why female truck drivers in the U.S. leave their jobs is discrimination (Kau and Kleiner 2001). While it could be soberly argued that a supervisor who harasses a male or female employee is more valuable to the company than the victim because of his or her experience, and the latter should therefore be more likely to leave the organization. But such reasoning falls short. It does not take into account the significant

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indirect costs of harassment due to diminished productivity, loyalty, and the difficulty of recruiting suitable employees for the company after public reputational damage. It is almost impossible to quantify the costs, as proceedings usually end in settlements and the parties involved agree not to disclose the amount of compensation. An indication of the consequences can be found in a study carried out in the US army in 1994, according to which the annual costs amounted to US$ 250 million due to reduced work performance, for the clarification of suspicious cases and judicial processing (Faley et al. 1999).

7.6.4 Precaution Through Compliance The criminal proceedings against led many logistics companies in the transport industry to clarify their personnel regulations, tighten rules for dealing with third parties, set up their own compliance departments and review their geographical portfolio. The rules and structures are intended to help ensure that all employees in the company comply with legal requirements. Compliance is primarily intended to protect against prosecution for bribery payments. It is also intended to prevent other misconduct, such as the aforementioned cases of cartel collusion. It is not crucial that precautions always work. According to human judgement, error behaviour can never be completely ruled out, but that appropriate structures and rules have been put in place. But what is the framework by which a carrier, ground handling agent or freight forwarder can immunise itself from prosecution? The UK Bribery Act quite generally exempts a company from prosecution if it has adequate procedures in place designed to prevent wrongdoing (UK 2010). The FCPA itself is silent on the characteristics of an adequate compliance program. However, there is guidance from the US Department of Justice (DOJ). According to this, such a program should include, among other things, a clearly articulated business policy to prevent bribes, the appointment of a chief compliance officer who reports to the CEO, a stringent reporting system, the establishment of hotlines, disciplinary procedures against offending employees, and the screening of all agents and business partners. Thus, carriers, freight forwarding and ground handling companies must also satisfy themselves that their service providers are complying with applicable laws and audit them accordingly (Hunter 2011). It is obvious that this effort cannot be made by every company. It is an interference, ethically justified though it is, in industrial policy with the economic freedom of companies abroad. Despite the market potential, leading global logistics providers no longer have a presence, or only a rudimentary one, in some markets in West Africa and Central Asia. In countries with high economic importance and high susceptibility to corruption, companies can protect themselves from the risk of acting criminally by establishing effective compliance rules. In countries of medium economic importance, this effort is not worthwhile.

Part III Markets

The segmentation of heterogeneous markets is their division into homogeneous submarkets (Bruhn 2012, pp. 58–60; Smith 1956). Customers have different needs. In the market for new cars, for example, there are young, well-off women without children, fathers of families with small children and large space requirements and small incomes, or ecologically oriented dual-income earners whose children have already left home. An automobile manufacturer who wanted to appeal equally to all these segments would undoubtedly fail. Just as the average automobile buyer cannot be found, the average air freight customer cannot be defined. Successful marketing requires understanding the needs of the target groups and positioning oneself accordingly (Kotler et al. 2011, pp. 355–356; Doyle and Saunders 1985).

8

Customer Approach

Abstract

The global air freight market is highly fragmented on the part of both carriers and their customers. The largest cargo airline, FedEx, had a market share of barely more than 7% in 2016. On the part of air freight forwarders, who represent the largest customers of cargo airlines, the picture is similar. The top 20 players represent a market share of just over 40%. Given this fragmented market, the players are trying to occupy and siphon off interesting segments with products and additional services.

Segmentation is the division of a market into homogeneous groups of buyers. These groups have similar needs, characteristics or behavior patterns. After the decision has been made which segments are to be served, it must be decided which position is to be occupied by the product. Positioning allows the product to be clearly differentiated from competing products. The position of the product is the way a product is perceived by consumers in terms of important characteristics.

8.1 Segmentation Approaches in the Air Freight Market For industrial goods markets, Bruhn names a number of criteria that allow market participants to be distinguished (2012, p. 60). These include industry-related criteria, such as the type of industry, market volume, competitive intensity, as well as company-related criteria: Turnover size class, order size, location and the way goods are sourced.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_8

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8.1.1 Segmentation Criteria In principle, markets can be segmented along a variety of criteria, such as customer behavior, preferences, revenue, geography, age, gender. The same applies to the air freight market. Regardless of the market, the segments to be formed should meet some basic requirements (Brassington and Pettitt 2013): 1. The groups should be distinguishable (distinctive), i.e. clearly set apart from the others. For example, air freight forwarders usually distinguish between the high-tech and retail sectors, even though electronic products are available in the retail sector. The reason is that the purchasing behaviour of the electronics sector is different from that of the retail sector. 2. The segments should be concrete (tangible), i.e. have sufficient importance to justify the supplier’s efforts. For example, there is a market of native people in northern Canada who have a need for tropical fruits. However, from the perspective of a global air cargo provider, this segment would be too narrowly defined to specifically target. 3. The segments should be accessible. For example, for many players in the air freight market who are successful in northern hemisphere markets, the growth markets in Africa are not addressable. While these markets may be sufficiently distinct and concrete, a competitor is unlikely to succeed without sufficient operational presence.

8.1.2 Segmentation Based on Company Size In practice, many carriers as well as most global freight forwarders use a mix of different segmentation approaches to address their freight customers and align their distribution channels accordingly.

8.1.2.1 Cargo Airlines Cargo airlines focus their sales activities on those customers who contribute the most revenue, or at least have the potential to do so, but are still tied up with a competitor, for example. As mentioned, the largest customers in the freight sector are almost without exception air freight forwarders. Airlines serve their direct customers, mostly freight forwarders, either directly through key account management, area sales or through agents. As a rule, a customer is approached directly through different channels, depending on how much revenue or tonnage the customer contributes. A comparable organization of sales can be found at all of the larger air cargo carriers. Lufthansa Cargo, for example, distinguishes between three sales channels (Lufthansa Cargo 2018): • Global Partners, which include the world’s 11 leading air freight customers, including DHL, Expeditors, Hellmann, Kühne + Nagel and Panalpina

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• Premium Partner with some 33 medium-sized customers, such as the companies Agility, CH Robinson and Streck Transport. As an actual shipper, and not a forwarder, the Spanish textile company Inditex is also on the list • Business Partner with 50 medium-sized customers with reduced freight volume compared to the Premium Partners. While the larger airlines have opened up the major economic centres with their own branches, this does not apply to developing countries and emerging markets. The reasons for not establishing a presence in a country are primarily of an economic and legal nature. Unless the addressable market volume in a country reaches a certain size, it is hardly possible to justify a branch office of one’s own. In these countries, smaller customers are served by the carrier’s sales force or its general sales agent (GSA). General Sales Agents (GSA) or General Sales and Service Agents (GSSA) are agencies that represent the interests of one or more carriers in a clearly defined geographical area and receive a commission for this (Schramm 2012, p. 70). IATA Resolution 871 defines GSSAs as individuals or companies appointed by a principal to promote and distribute its air cargo (IATA 2014). This distribution channel is more efficient for carriers with a smaller volume than maintaining their own distribution organization, especially since large customers are often centrally managed. One such GSA is, for example, the Dutch company Euro Cargo Aviation, with branches in the Netherlands, Belgium, the United Kingdom and Germany. In 2019, the GSA marketed the cargo activities of ASL Airlines Belgium (the former TNT Airways), Norwegian Cargo, Iran Air, Stabo Air, Gulf Air and Yangtze River Airlines.

8.1.2.2 Freight Forwarding Companies For their part, international freight forwarders segment their customer base in a more complex manner. In most cases, the structure of the channels follows a revenue pyramid, with a small number of major customers at the top and the mass of small customers at the bottom. As a rule, the direct forwarding turnover (gross profit), i.e. the gross turnover after deduction of direct payments to carriers and customs duties made with a customer, serves as a guideline to which group a customer will be allocated: • The global key customers are mostly selected on the basis of the sales actually generated. Occasionally, interesting target customers are selected on the basis of their potential sales. This customer group is served by global key account managers. In the rarest cases, more than 100 customers are included in this segment. • Medium-sized customers are usually segmented on the basis of industry affiliation, e.g. the automotive, chemical, pharmaceutical or high-tech industries. These customers are served either centrally or locally by national key account management. • The group of customers with smaller sales contributions can be allocated to geographical segments. One possible allocation is the three sales regions North – Central – South. Alternatively, a distinction is made according to modes of transport, e.g. sea, air and rail, or according to trade flows, e.g. imports and exports.

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The first two customer groups represent a large share of the total revenue generated. The share of total revenue generated by the group of key accounts can reach up to 90% (e.g. Panalpina 2016a). The first two segmentation concepts follow the approach of targeting customers based on their specific needs. In the case of global key accounts, support is provided almost directly and in the middle group based on the assumption that companies within an industry have comparable requirements. Here, a key account manager looks after and develops several customers in one industry, e.g. from the automotive, chemical or pharmaceutical industries.

8.1.3 Overview of Important Industry Solutions If one compares the industries specifically addressed by carriers and forwarders, a recurring list of solutions stands out. The size of the corresponding segments in the air freight market can hardly be determined from publicly available data. One indication can be found in the 3PL Panalpina from 2011, which draws on data from the consultancy firm Seabury, now Accenture. According to this, the greatest demand is in the high-tech sector, mechanical engineering and the fashion industry (Panalpina 2011, p. 26) (Fig. 8.1).

Fig. 8.1 Air freight volumes (2010), broken down by sector

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In each of the three categories of airfreight, valuable goods, perishable goods and emergency relief and urgent spare parts, there are sub-segments that require specific targeting. It should be noted, however, that the classification of the sectors into these three categories is not clearly defined, but shows overlaps.

8.2 Valuable Goods Valuable goods are transported by air freight because transport by sea or land would tie up too much capital. Often, goods in this segment are only produced to order (build to order, BTO) or configured (configuration to order, CTO). Supply chains based on such short planning horizons are not feasible without air freight (Wong et al. 2009; Tyan et al. 2003).

8.2.1 High-Tech and Consumer Electronics High-tech is the world’s largest airfreight segment in terms of demand. This includes consumer electronics, such as laptops, tablets, games consoles and the like. These goods are characterised by the fact that they are generally of very high quality and have a comparatively low weight and volume. This makes them predestined for air transport. The alternative transport by ocean-going vessel would be less expensive, but would mean that the goods produced would not be delivered to the end customer until about 6 weeks later. Even if it was called something else at the time, the high-tech industry is one of the oldest segments within air freight. Already in the 1930s, parts for the production of radio sets, which were emerging at the time, were transported by air (Gries and Krovat 2011, p. 25). Nowadays, electronic products are transported mainly on the trade routes from Asia to North America and Asia to Europe. Handling of the goods is time-critical but generally relatively undemanding, as long as minimum climatic requirements with regard to temperature and humidity are taken into account. Protection against theft and robbery poses a greater problem. Transport between airports is generally secure. More problematic are the pre-carriages from the production sites to the gateways and from the gateways to the customer. Opportunistic criminals and organized crime always have inside information when valuable cargo is in a transshipment warehouse or on a truck and purposefully steal it. As there is little opportunity to differentiate itself as a carrier and demand for air freight volumes in the segment is high, it is characterised by considerable price sensitivity and low customer loyalty.

8.2.2 Mechanical Engineering After electronics, mechanical engineering (manufacturing) is the second most important segment in air freight. Due to their size and weight, many of the items of equipment

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transported here do not fit into the standardized air freight containers and have to be transported on pallets. Shippers are then regularly dependent on freighters for transport, as the consignments cannot be stowed below deck, but only on the main deck. If the consignment part does not fit into a normal wide-bodied aircraft, loading in an Antonov is the only way to transport such machine parts by air at all. Germany and Switzerland are important production locations for high-quality equipment. They are mainly transported on the routes to North America and East Asia.

8.2.3 Telecommunications In view of the continuing boom in mobile telephony and so-called smartphones, telecommunications forms a separate segment within air freight. Almost every mobile phone in operation outside China has been flown en route to the end consumer. Exceptions are very simple (“dumb”) mobile phones, which do not have the same value and offer only limited functionalities. In addition to cell phones, base stations, as part of the infrastructure necessary for cellular telephony, are goods that are transported by air. While the masts are produced locally or rather imported by sea freight container or truck, the airplane is suitable for transporting the higher value transmitting equipment. One of the fastest growing markets for telecommunications products is Africa. While the number of fixed-line connections in Africa is almost stagnating at a low level, the number of mobile phone users is growing rapidly. In most African countries, fixed networks are provided at high cost by monopoly companies, mostly publicly owned. In contrast, there is more competition in the mobile market. It is estimated that by 2016, one in two Africans already owned a mobile phone connection (The Economist 2016). Applications that are in low demand in the Western world are very popular in Africa. For example, many banking transactions in East Africa are carried out by mobile phone, partly because ATMs are not that widespread.

8.2.4 Automotive Industry A large proportion of the parts used in automobiles reach the production plants by truck. Longer distances are covered in containers on ocean-going vessels and increasingly by rail. The automotive industry is the segment in which one may expect the largest shifts from air to sea. Aircraft are mainly used to transport higher-value vehicle parts. In addition, the aircraft is always relevant when supply bottlenecks need to be eliminated. A typical car is made up of around 30,000 parts. BMW, for example, receives 30 million parts a day from 1800 suppliers. If one of the strategic suppliers were to fail, the entire production chain would come to a standstill. As a reference, events from 1998 can be taken as an example, when a manufacturer of door locks stopped deliveries to the Ford plants in Cologne. This led to a

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production stoppage of two days and an estimated loss of sales of EUR 50 million (Tagesspiegel 1998). Rarely, whole vehicles are transported. Especially prototypes that are being tested, but also exclusive vehicles of wealthy customers. Vehicles are also flown to automobile exhibitions with international participation, such as the Geneva Motor Show, the IAA in Frankfurt or the Detroit Auto Show. Some hot spots for automotive logistics are in North America Detroit, in the southeast of the USA, Canada, in Europe Germany, France and Eastern Europe, in Asia, India, China and Japan. In the growth market China, the airports Shanghai, Wuhan, Beijing and Guangzhou are of particular importance.

8.2.5 Consumer and Retail The relatively low share of the Consumer & Retail (C&R) segment in airfreight volumes may be surprising at first glance. It is difficult to put in proportion to the much higher economic importance of the segment. These include department store chains such as Walmart, sporting goods stores such as Sport Scheck or Runners Point, fashion stores such as C&A, home improvement stores such as Obi or Kingfisher, furniture stores, perfumery chains such as Douglas or electronics stores such as Media Markt. These are companies that sell goods to end consumers either through bricks-and-mortar retail or online. One of the world’s most important air freight customers, Amazon, is also part of the C&R industry. Two reasons are decisive for the secondary importance of the C&R segment for air freight. Firstly, most of the products distributed in the trade are original sea freight affine goods. Transporting furniture, tools or sports equipment by air freight can rarely be justified. In the words of the former CEO of a leading 3PL specializing in ocean freight, air freight in this segment is “embarrassed ocean freight.” These are shipments that were produced too late or did not arrive in time to be loaded onto a container ship.

As a result of the insolvency of the Korean shipping company Hanjin in autumn 2016, ships were not unloaded or allowed to call at ports for weeks. It is estimated that goods worth US$12–14 billion were at sea at the time Hanjin reported default (Chandran 2016; Kauffman 2016). In order not to jeopardize the important Christmas shopping season, retailers occasionally ordered products stuck in containers a second time and had them transported by air. Contrary to initial expectations, air freight volumes increased less than expected during the period, partly due to the sharp rise in air freight rates during the period in question (Whiteman 2017).

As in the high-tech segment, the Asia-Europe and Asia-North America tradelanes are the two most important in the C&R industry.

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8.2.6 Fashion The fashion segment is related to the consumer and retail segment. The deciding factor in whether an air cargo shipment is classified as C&R or fashion is who makes the commercial decision to select the carrier. If Walmart buys garments ex-works in South Asia and makes the choice of 3PL or carrier, it is an air cargo shipment. If it is a designer dress from Chanel and the fashion house chooses the carrier, the shipment is in the fashion industry. Customers of the two industries are occasionally served by a single source. Transport flows move inversely in the air to those by sea. Most fashion items are transported by sea from Asia to Europe and North America and by truck from Southern and Eastern Europe to Europe and Mexico to the USA. These are comparatively inexpensive bulk products. Due to lower labour costs, much of the production that was once shifted from Europe and the US to China now takes place in countries such as Indonesia, Vietnam and Bangladesh. Only in exceptional cases are textiles transported by air, for example when promotional goods need to be made available in stores at short notice or special articles are in high demand at short notice. This sub-segment, fast fashion, is developed by companies such as H&M, Zara and Gap. In terms of tonnage, the quantities transported by air are nevertheless almost negligible – but not in terms of their value of goods. The production facilities for high-quality fashion articles are located in the north of Italy and in France, important sales markets in the metropolises of the Middle East and Asia, such as Dubai, Singapore, Hong Kong and Tokyo, as well as in New York, Miami and Los Angeles. The requirements of the industry are specific. For example, many fashion houses require their goods to be transported on hangers, as hanging garments. This eliminates the need to reprocess the high-value items before delivery. The risk of theft is also considerable. A fact that logistics service providers must adjust to in their processes.

8.2.7 Aviation Industry The parts that make up aircraft are designed to be as light as possible. Measured by their weight, they are usually highly expensive. Transporting these parts by air freight makes good business sense. Using the example of an aircraft manufacturer in “Western Washington”, Bayazit and Karpak (2013, p. 389 f.) list the following points as must-have criteria on the basis of which a pre-selection of possible logistics providers is made. According to these criteria, the provider must have a broader range of services and have already successfully implemented comparable projects. In addition, they must have sufficient financial strength. The selection of providers is based primarily on competence, the availability of suitable infrastructure and only secondarily on costs. Even though the analysis refers to logistics providers, most of the criteria can be applied to the requirements of air freight forwarders.

8.3 Perishable Goods

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One sub-segment in the industry is the supply of spare parts, which is actually assigned to Sect. 8.4. Spare parts for aircraft that cannot take off due to damage (Aircraft on Ground, AOG) enjoy the highest priority for all airlines and are given priority for loading.

8.2.8 Valuable Cargo Value cargo is defined by IATA (Chap. 3.7.6 of the TACT) as a consignment which meets at least one of the following conditions: • • • •

A value of more than 1000 USD per kg, Gold bars, goods containing gold and platinum, Banknotes and travellers cheques, Diamonds, rubies, emeralds, sapphires, opals and pearls, and jewels containing these precious stones, • Jewels and other articles of gold, silver or platinum. Despite the high transport costs and the risk of loss, valuable goods are transported more frequently than is assumed. Jewels and luxury watches are manufactured in Switzerland and are in demand in Asian metropolises such as Singapore, Hong Kong and Tokyo. Cash has to be taken abroad to banks and exchange offices for foreign exchange.

8.3 Perishable Goods Perishable goods are those which, if not delivered on time, become commercially worthless. Perishable goods transported as air freight primarily include foodstuffs such as fruit, vegetables, fish, meat as well as flowers. In the USA, the transport of delicate flowers already met with great demand in the early days of air freight. The founder of the cargo airline Flying Tigers, Bob Prescott, succeeded in winning a flower grower as a major investor with the intention to fly flowers from California to the East Coast (Allaz 2004). The airplane thus opened a new market: flowers in the relatively cold northeastern United States, which could not have been addressed without airplanes. Within Europe, tomatoes were first flown from the Canary Islands in the 1960s, as a seasonal business before they could be produced in greenhouses closer to the endmarkets. A few decades later, they again succeeded in creating a new market. Cut flowers from East Africa are taken back to Europe as return cargo, in the holds of planes that are otherwise underutilized.

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8.3.1 Foodstuffs and Flowers (Perishables) To transport perishables, carriers must guarantee an unbroken cool chain. To do this, carriers rely on refrigerated trucks during road transport, transshipment warehouses equipped with cold storage cells and specially insulated ULDs on aircraft. These guarantee a temperature range close to that of refrigerators (+2 to +8 °C) or, less frequently requested, from +15 to +25 °. Due to the perishable nature of the products, especially flowers, a short transit time, which can be ensured by direct flights or quick transshipments in the airports in North Africa or the Gulf, is crucial. For frozen goods, such as fish, which are transported in a corridor between −18 and − 25 °C (Hsu et al. 2013), the speed aspect is not quite so crucial. Some examples of perishable products transported by air freight are listed in Table 8.1. The goods mentioned travel against the usual trade flows, e.g. from South America to North America and from Africa to Northern Europe. Another special feature is that this business of the individual products is very cyclical. This is true, for example, when sending flowers before Valentine’s Day. With the help of the airplane, the supply of certain seasonal products is spread out over time. They are first flown to the buyers from warmer, more distant climes, before milder temperatures make it possible to supply the buyers from glasshouses or open areas by truck. The ability to deliver these goods to customers in the shortest possible time by air is the real business driver for producers. The low rates rest on the fact that cargo space from emerging markets is often underutilized. The majority of perishable goods transported by Table 8.1 Examples of foodstuffs and flowers transported by air freight Example Asparagus produced in Peru and exported almost exclusively

Explanation In 2016, 110,000 tons of asparagus were flown out of the country. This accounted for 90% of air freight exports from Peru. Two thirds of the exports go to the USA, followed by the Netherlands and Spain (Fresh Plaza 2017). Meanwhile, white asparagus is increasingly grown in the country alongside green and exported to Germany during the winter months Flowers flown from Kenya is the world’s leading exporter of cut flowers after the Netherlands, Kenya to Europe Colombia and Ecuador. The country represents more than a third of the European Union’s sales of cut flowers. Around two-thirds of the 125,000 tonnes of flowers exported from the country in 2013 went to the Netherlands. The auction in Aalsmeer, in the immediate vicinity of Schiphol airport near Amsterdam, is the world’s largest market for flowers. Around 17 million flowers are handled there every day Fish transported, for The business model has existed since the 1970s. At that time, Japan example, from Chile exported high-value electronics by air with planes, but the cargo space was and Canada to Asia, underutilized on the way back. Airlines therefore offered attractive freight in particular Japan rates close to the contribution margin to encourage the import of fish to Japan (Sehl 2016) Own representation

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air freight are economically justified solely on the basis of favourable freight rates. Significantly higher transport prices would divert production to other regions or make consumption unattractive. When shipping perishable goods, carriers usually require prepayment of freight. The risk that an exporter of flowers or seasonal products will not pay the freight charges on arrival is an incalculable risk for the majority of carriers and forwarding agents.

8.3.2 Live Animals A special sub-segment and one that follows its own business logic is the transport of live animals, primarily horses. These are transported in special container boxes. During the flight, the horses are provided with water, hay and feed. On longer flights, the animals are accompanied by grooms during the flight. The greatest demand for these services comes from the Middle East, the USA and Asia. In addition to horses, cows, zoo animals and ornamental fish are among the animals transported by air. Overall, however, this is a very small sub-segment and one that is developed more by the airlines themselves than by freight forwarders.

8.3.3 Pharma and Healthcare The Pharma and Healthcare sector is a particularly demanding segment in terms of logistics handling. Due to the attractive revenue margins achieved in the transport of pharmaceutical products and the overall size of the market segment, it is one of the strategic growth areas of many airlines and 3PLs. The segment primarily includes pharmaceuticals. Medical devices, i.e., devices and appliances used to detect, monitor, and treat diseases and disabilities, are also frequently included in the segment. It is true that the majority of pharmaceutical products are transported by ocean-going vessel – but only in terms of tonnage. According to a 2012 estimate by Seabury, a renowned consulting firm, approximately 500,000 tons are transported by air and 3.5 million tons are transported by sea. However, the value of pharmaceutical products in air freight accounted for more US$ 213 billion compared to US$ 56 billion in ocean freight (Keyrouse 2013). In the meantime, this tonnage has increased again in both air and ocean freight. Typical products that are more likely to be transported by sea include vitamins, antibiotics and low-priced medicines. Medical products with a high value per kilogram, which are accordingly air freight affine, include blood fractions, vaccines, hormones, and higher-priced drugs (Seabury 2017). The main exporting countries are the US, India, Germany, China, Switzerland, and France, while the main importing countries are by far the US, followed by China, Japan, Germany, and Brazil.

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8 Customer Approach Annual Spend for Logiscs Services in the Biopharmaceucal Sector (Esmates, US$ Bn)

$11.0

2014

$77.1

$71.4

$66.2

$61.5

$12.6

2016 non controlled

$14.4

2018

$16.7

2020

controlled

Fig. 8.2 Global spending on logistics services in the biopharmaceutical sector (estimates, US$ billion)

While the requirements for handling medical equipment and apparatus in air freight are less different from ordinary capital goods, the challenges involved in transporting medicines are much greater. The most significant is ensuring a continuous cold chain. Not all medicines need to be refrigerated, but an increasing number are. The need for refrigeration is particularly acute in the rapidly growing field of biopharmaceuticals. A service provider that is unable to offer continuous refrigeration does not have the comprehensive range of services demanded by the market (Fig. 8.2). The supplier must be able to keep products within the required temperature range from the moment of collection through handling in the gateways to delivery, if required. Cooling can be provided passively in the transport units, e.g. by blankets, insulated boxes and coolants, or actively by temperature-controlled containers. Depending on the product, two common temperature corridors must be maintained (Mandzo 2018): a range of +15° to +25 °C, referred to as ambient, with a clean, well-ventilated and dry environment, and a range of +2°–8°, referred to as cold chain, which must be maintained especially when transporting vaccines. With the help of tracking devices, active sensors, the shipper or the 3PL can continuously monitor whether the temperature is actually maintained within a specified corridor and, if necessary, initiate countermeasures in good time. IATA estimates that around 20% of temperature-controlled pharmaceutical transports require active cooling (IATA 2016c). The greatest weak point in transport are the handling warehouses in the airports in departure, transit and reception, each of which must have appropriate cold storage cells. According to IATA, losses due to deviations in temperature requirements range from USD 2.5 billion to USD 12.5 billion per year (IATA 2016c). The deviations, if left undetected, can render the products worthless, and in the worst case, harmful to patients. As a rule, however, shippers are able to track the complete compliance with temperatures. Should the cold chain ever be interrupted, the responsible forwarders and carriers face considerable penalties due to contractual regulations.

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259

With CEIV Pharma, IATA has launched a project that aims to audit the handling processes in transport on the basis of standards and to certify sites that withstand the audits (IATA 2016c). As part of this, particular importance is attached to the training of the employees concerned. The initiative addresses all participants in the supply chain between shipper and consignee: freight forwarders, trucking companies, ground handlers and airlines. This is IATA’s response to the requirements of shipped pharmaceutical companies. An essential part of the certification is the training of the staff involved, in particular the operational staff, their managers, the quality officers and the branch managers. The logistics industry increasingly faces theft and armed robberies. When transporting pharmaceutical products. Lockable security areas within the gateways provide the necessary protection. As a result, organized crime activities affect not so much the actual air transport, but the associated deliveries or pick-ups by truck. According to a 2016 analysis, some focal points in Europe are Italy, Russia, and the United Kingdom. The authors estimate the value of pharmaceutical products stolen by criminals in Europe at more than 40 million euros (Ekwall et al. 2016).

8.4 Emergency Transports The Berlin Airlift can be used as a historical template for emergency logistics. Without the supply of airplanes, the city would not have survived for long, after the supply routes by land and road were cut off. Emergency supply is characterized by the fact that the cost of transportation, in this case air freight, is hardly an issue (Morrell and Klein 2018). In addition to the transport of relief supplies, this category also includes that of urgently needed spare parts. Contrary to what is sometimes assumed, the use of the aircraft for purely distributional considerations, such as reordering lower-quality textiles to bridge supply bottlenecks, should not be counted as part of this segment (Shaw 2011).

8.4.1 Oil, Gas and Mining The main modes of transport for projects in the oil and gas industry are truck, rail and ship. In these ventures, the focus is on the construction, maintenance and, if necessary, dismantling of production facilities for oil and gas extraction. The aircraft is only used where spare parts are urgently needed. The transport of the actual raw materials, for example by pipelines or tankers, is another aspect of logistics that is less relevant in this context.

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Operating a production platform can cost several hundred thousand US$ per day. When transporting missing spare parts, the costs of an airfreight shipment are negligible if it can be used to quickly remedy a shutdown. In such cases, heavy individual parts, such as drill pipes, or chemicals are also transported over long distances by air. Important distribution points for the oil and gas industry are Houston in Texas, Rio de Janeiro in Brazil, Aberdeen in Scotland, Amsterdam, Stavanger in Norway, various locations in Nigeria and the Middle East, and Singapore. In terms of logistical complexity, projects in the mining sector are similar to those in the oil and gas sector. However, as the projects are usually less time-critical, air freight shipments rarely occur. Production downtime due to a lack of spare parts usually has less severe consequences.

8.4.2 Marine Solutions Shipping, the big competitor to air freight, sometimes relies on aircraft to deliver shipments due to much lower transportation costs. When ferries, cruise ships or container ships are stranded due to damage, high costs quickly arise, which quickly justify transporting spare parts by air freight that are not available at the location. Two logistics providers offering services to shipowners, shipyards, shipping companies and suppliers in the Marine Solutions segment are Hellmann Marine Solutions (HMS) and Kühne + Nagel. Hellmann maintains its own hubs with specialists in Hamburg, Athens, Seoul, Hong Kong, Miami, Dubai, Singapore and Houston, all of which are important centres for international shipping. Spare parts warehouses have been set up at strategic locations from which shipments can be dispatched at short notice (Hellmann 2018).

8.4.3 Emergency & Relief Humanitarian disasters are characterised by the fact that the local community and state institutions are overwhelmed in their ability to cope with the effects (Day et al. 2012). External support is needed to ensure the well-being and survival of the population. In addition to the quality of the goods, food, clothing, tents, medicines and the like, the speed with which they are made available to the population is at least as crucial. The airplane is indispensable, especially in the first phase after a disaster. This is partly because of the urgency with which relief supplies are needed, and partly because in the first phase the roads and railways from the ports to the disaster areas are often unusable for relief transports. The areas can usually be better reached from the airports in this respect. A damaged airfield can also be restored to an operational state comparatively quickly. The challenges related to emergency response are specific in nature (Kavanagh 2016). Commercial airlines will often cease services during war, for example Eritrea, Yemen or Syria during civil strife. In other countries, capacity is tight even at normal times, such as

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in South Asia. In some regions, the locally available aircraft are too small to accommodate large amounts of cargo, such as on some of the island states in the Pacific. The majority of humanitarian disaster and emergency assistance is provided by private sector companies and less often by the military. The dropping of relief supplies by parachute and the transport of air cargo by the armed forces of the affected country or a friendly state are relevant where civilian providers reach the limits of their capabilities. The military can also restore critical infrastructure. For example, the U.S. military temporarily took control of the Port-au-Prince airport after the devastating earthquake in Haiti. All aid agencies here relied on the cooperation of the military (Hellingrath et al. 2011). The type, size and interests of the clients for aid deliveries are diverse. Essentially, three groups of organisations can be distinguished (Hellingrath et al. 2011) • Government Organizations (GO), such as the German Technical Relief Agency (THW), • Non-governmental organizations (NGOs), such as World Vision, and • Intergovernmental organizations (IGOs), such as the United Nations World Food Programme. The size of the organisations determines to an important degree how professionally the procurement of relief supplies, the transports to the crisis areas and their local distribution are organised. Delivering aid to disaster areas without a core logistical service is simply inconceivable. The quality of the relief supplies, vaccines, medicines, clothing, tents etc. is secondary if they do not reach those in need. In emergency relief, logistics costs are a significant cost, estimated to be 40–60% of total expenditure. There are many reasons for this. On the one hand, freight capacities to the crisis areas and on the ground are limited, and prices are correspondingly high due to a lack of competition. Secondly, the usual efficiency considerations do not apply when lives are to be saved (Table 8.2). Probably the most important institution in the allocation of projects for the supply of crisis areas is the Supply Division of UNICEF with headquarters in Copenhagen and New York. Unicef is the United Nations (UN) Children’s Fund. In addition to its Table 8.2 Overview of significant natural disasters in the period 2009–2013, adjusted overview Number of Year natural disasters People killed 2009 343 10,885 2010 385 297,598 (of which 222,500 earthquake Haiti) 2001 332 30,773 (of which 19,846 tsunami/earthquake Japan) 2012 357 9655 2013 315 22,279 (of which 7986 cyclone Philippines) Schumann-Bölsche (2016)

People affected (in millions) 199 217 (thereof 134 flood China) 245 (thereof 68 flood China) 125 95

Economic damages (in billions [$?]) 48 124 366 (thereof 210 Japan) 157 116

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warehouse in Copenhagen, it maintains three warehouses located in Colon, Panama, Dubai and Shanghai, from where shipments can be posted within 48 h. Another United Nations agency committed to alleviating humanitarian emergencies is the World Food Program (WFP), based in Rome, as well as the UNHCR. The various aid programs within the UN coordinate their procurement activities under the direction of Unicef. Two air freight forwarders that work closely with UNICEF are SCAN Global Logistics and Kühne + Nagel.

9

Regional Markets and Trade Routes

Abstract

In air freight, as in other service industries, distribution density, i.e. presence in the market, plays a special role, as the goods themselves can be transported, but not the service (Haller 2012, p. 93 f.).

The receipt of the goods, the organisation of the onward transport, the preparation of the necessary documentation require to be represented with own locations or by representatives or agents. Market participants face a conflict of objectives when deciding in which countries and economic centres they want to be represented. On the one hand, shippers appreciate it if service providers are represented in as many markets as possible with their own branches. On the other hand, such a presence is associated with costs if staff have to be employed and premises rented, licences applied for and annual financial statements audited.

9.1 Regional Markets In most cases, air freight is transported across national borders. The average distance (stage length) covered by a wide-body aircraft of the type B747-400 is more than 6000 miles. This means that it almost always travels beyond national borders (ICAO 2017).

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_9

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9 Regional Markets and Trade Routes

9.1.1 Important Domestic Markets Two important exceptions to the rule that air cargo is international are the two countries USA and China. According to ICAO data, 15,600 million freight tonne kilometres (FTK) were transported within the USA and 6000 within the People’s Republic of China in 2015. These two countries represent 87% of the world’s domestic air cargo transports. The other large territorial states, such as Russia (632 million FTK), Canada (399 million FTK), Brazil (512 million FTK) or Australia (135 million FTK) are comparatively small economies. Therefore, the absolute volumes transported within these countries are less significant (Alexander and Merkert 2017). Moreover, the economies in these countries cluster in a relatively small area: in Australia in the southeast of the continent, in Brazil along the Porte Alegre – Sao Paulo – Rio de Janeiro corridor. Within these economic centres, rapid transport by road is also possible. A special case is Japan (961 million FTK), where transports from one island to another by truck are more time consuming when ferries are needed.

9.1.2 Countries with Significant Air Cargo Volumes The list in Table 9.1 shows the countries with the highest transport performance. The list is headed by the USA. The USA is an important import market, China the most important export market for air freight consignments. However, both countries have trade relations with a large number of other countries. An analysis of these trade routes (tradelanes) is therefore more meaningful than a purely country-based analysis. It is not so much the Table 9.1 Global transport performance in million freight tonne-kilometres in 2015 Country USA China – Hong Kong – Macau UAE Rep. of Korea Japan Qatar Germany Luxembourg Singapore UK

Total (FTK million) 37,219 19,806 11,294

International transport (FTK million) 21,596 13,579 11,294

Domestic transport (FTK million) 15,623 6227 0

25 16,647 11,297

25 16,647 11,242

0 0 55

8869 7563 6985 6309 6154 5467

7908 7563 6980 6309 6154 5465

961 0 5 0 0 2

ICAO (2016a, b)

Domestic share of total (%) 42% 31%

11%

9.2 Major Trade Routes

265

French airfreight market itself that is of interest, but rather the volumes transported to and from France. The concept of trade routes is not a new one. Probably the best known is the historic Silk Road, which connected China with the Middle East and Europe by sea and land since the second century BC.

9.2 Major Trade Routes Within medium-sized and small countries, transport by air offers fewer advantages than by truck and, given the costs, is generally used only for express goods. The data in Table 9.2 on traffic volumes are largely taken from Boeing’s World Air Cargo Forecast 2016–2017. The company, which dominates the market for freighter aircraft, invests many resources in presenting the status of the air cargo market and forecasting developments. For their part, the figures are based on a variety of sources, such as IATA, the statistical authorities of the USA, the European Union and China, consulting firms and interest groups. In the overview in Table 9.2, ten trade routes account for approximately 83% of freight volumes measured in tonne-kilometres and approximately 76.5% of tonnage.

9.2.1 East Asia – North America The trans-Pacific trade lane between Asia and North America is the most important trade route in terms of tonne-kilometres flown. The trade is quite unbalanced. While 2.7 million tonnes were transported from Asia to North America in 2015, only 1.5 million tonnes were

Table 9.2 Share of trade routes in traffic volumes Trade routes 1. East Asia – North America 2. Europe – East Asia 3. Intra North America 4. Europe – North America 5. Intra-Asia-Pacific 6. South Asia 7. Europe – Latin America 8. China Domestic 9. Latin America – North America 10. Africa – Worldwide Subtotal Other (Middle East, CIS; Intra Europe, etc.) Total Boeing (2016a, b, 2018a, b)

Share (RTK) 20.9% 20.3% 9.0% 8.2% 8.4% 5.5% 2.9% 2.6% 2.2% 2.7% 82.7% 17.3% 100.0%

Share (tonnage) 8.5% 10.1% 13.8% 6.3% 16.5% 5.6% 1.6% 8.9% 2.5% 2.7% 76.5% 23.5% 100.0%

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9 Regional Markets and Trade Routes

transported in the opposite direction. In other words, for every tonne of cargo flown from Asia to North America that year, only 556 kg. went back. The result is that freight rates on the two routes differ significantly. The majority of the cargo on this tradelane is transported with a stop in Anchorage, Alaska. In 2015, the throughput amounted to 2.6 million tonnes. This corresponds to about half of the tonnage transported across the Pacific. Air freight from Asia consists mainly of telecommunications (mobile phones), electrical machinery and equipment, such as laptops, and fashion items. In the opposite direction to Asia, it is mainly electrical machinery and equipment, documents and small packages, machinery and equipment, chemical products and perishable goods. For example, many tons of fish are exported to Asia from the US and Canada every year.

9.2.2 Europe – East Asia Around one in ten tonnes of air freight is transported on the Asia to Europe route or vice versa. As on the Trans-Pacific, the “Far East – Europe” trade route is not balanced. In 2015, 2.8 million tonnes were transported from Asia to the West and 1.9 million tonnes in the opposite direction. The ratio was 1–0.7. The main goods transported from Europe to Asia are machinery and electrical goods, transport equipment and accessories, and perishable goods. On the opposite direction, it is mainly computers and electrical goods, documents and small packages, and machinery and electrical goods. Parts for the automotive industry are transported in both directions, for example from Germany to China or from Japan to the UK.

9.2.3 Intra North America The intra-North American air freight market is essentially an intra-US market. Less than 4% of tonnages are flown within Canada or between the two countries. Given the distances between economic centers located on the east and west coasts and the Great Lakes, respectively, air travel is an essential mode of transportation. A truck requires about 4–5 days to cover the distance of 3500 km between Chicago and Los Angeles. Almost two-thirds of the market is served by integrators. However, this segment, like the North American air freight market as a whole, has been stagnating since the turn of the millennium. The terrorist attacks of 2001 and the financial crisis after 2008 were two major cuts that led to a shift in shipments from air to road. This is because not all shipments need to be transported across the U.S.; they can also reach their destination by road in a day or two. An indication of the extent of the shift can be found in the annual reports of the integrator FedEx (FedEx 2007, 2017). For 2006, FedEx reported Domestic Package revenue, which includes Express shipments, of $11,249 million; for 2016, it reported $11,804 million. This represents an average annual increase of 0.5%. FedEx Ground, on

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267

the other hand, saw revenue rise from $5.3 billion to $16.6 billion. It thus grew by more than 12% annually. Interestingly, the growth segment is also proving to be significantly more profitable. In the Ground segment, Fedex generated an average operating return of 16% in 2014–2016. In the express segment, which includes domestic parcels and documents as well as international shipments, the return in the same period was only 7%.

9.2.4 Europe – North America Trade on the North Atlantic has lost importance in the context of globalization. However, in 2015 it still represents 6.5% of the tonnage flown. On North America, 90% of the trade relates to the USA, and on Europe, 70% relates to the five countries Germany, the United Kingdom, France and Italy. Despite double-digit growth rates in the accession countries such as Poland, Hungary and the Czech Republic, transatlantic trade remains dominated by the western countries of Europe. In air freight, trade flows were relatively balanced. In the year under review, 1.7 million tonnes of freight were flown from Europe to North America, and 1.3 million tonnes of freight were flown from North America to Europe.

9.2.5 Intra Asia Pacific In terms of tonnage, most air freight in 2015, almost 15%, is transported between countries within the Asia-Pacific region, which also includes the countries of Oceania. These figures do not include shipments within countries, particularly those within China. The top five air freight routes within Asia are China – Korea, Japan – Korea, China – Japan, Hong Kong – Taiwan and Japan – Taiwan. Asia has become the world’s workbench in the context of globalization. In view of rising wages in China, many activities are increasingly migrating to other countries in the region. Compared with Europe, trade between the countries can hardly be conducted by road. The most important economies after China, Japan, South Korea, Australia and Indonesia, cannot be reached by land – in the case of South Korea because the border with the North is not very porous, in the other cases because they are island states. The above five connections cannot be replaced by land transport – at least not for the foreseeable future. For these reasons, the container shipping trade lane within Asia is also – by far – the largest in the world. In both sea and air freight, transports here are characterised by short distances, low average yields and high competitive pressure. The players are also different. Local carriers and forwarders play a much greater role here than in the rest of the world.

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9.2.6 South Asia The South Asian market represents just over 5% of global volumes, both in FTK and tonnage. More than a third is carried on the tradelane to and from East Asia, and around a fifth each to and from Europe and North America. The most important market in South Asia is by far India, followed by Pakistan and Bangladesh. The most important goods exported by air from East Asia are articles of clothing, perishable goods and medical products. The main imported goods are machinery, electronic products, metals and vegetables.

9.2.7 Intra-China With 4.0 million tons transported, the domestic Chinese air freight market is the second largest after the domestic North American market. China is one of the largest countries in the world in terms of area. Development has long been concentrated in the coastal regions, from which products can be easily exported by container ship and raw materials can be easily imported. The main economic centers are located in the regions around Beijing, the Pearl River Delta, and along the lower reaches of the Yangtze River. To counter the rural exodus toward the coastal cities, the central government is promoting economic development in the hinterland. Cities such as Chongqing (including the armaments and transport industries), Chengdu (mechanical engineering and aircraft construction), Xi’an (telecommunications) and Wuhan (mechanical engineering, chemical industry) have developed into important centres in their own right. Even though the Chinese motorway network is the fastest growing in the world and is now also larger than that of the USA, the aircraft continues to be an important alternative for transporting products within the country in a timely manner. This is especially true for the supply industry. Another key driver for the continued growth in the domestic Chinese air freight market is the area of e-commerce.

9.2.8 Latin America – Europe and North America Within Latin America, Brazil is the most important economy. Products imported to South and Central America by air freight are primarily high-tech products, machine parts and automotive accessories. Unlike the trade routes to Europe or North America, fewer finished products are transported here. Perishable goods are transported from South America, e.g. berries from Argentina and Peru, as well as salmon from Chile (Newnham 2018). Many of the South American economies are making efforts to increase the local content in production. In Brazil, trade barriers such as high import tariffs, strict labor protection laws and lack of availability of qualified workers are known as “Custo Brasil”. These costs, flanked on the other hand by the promotion of local production, mean that goods are only assembled in the South American country of destination. For example, in 2012,

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computer manufacturer Lenovo invested approximately USD 30 million to build a production and distribution center in Sao Paulo. One of the most important production centres is Manaus, a free trade zone far away in the Amazon region, where investors benefit from tax exemptions.

9.2.9 Africa – Worldwide It is well known that perishable goods, such as flowers, vegetables, fruit and fresh fish, are transported from Africa to Europe. The transport regularly takes place at such reduced rates that only economically justify the transport of these goods. In the big picture, airlines earn money by transporting goods to Africa, such as electronic goods in particular. The return cargo serves to increase the contribution margin and ensures that the cargo space is well utilized. Overall, a shift in growth towards the Middle East carriers can be observed, as the Gulf carriers are investing in cargo capacities to and from Africa (Air Cargo World 2014). A particular feature of the African market is the relatively high number of accidents. It was attributed in an older study to relatively poor training of pilots and air traffic control and regulatory staff (Rhoades 2014). Tradelanes to and from Africa are mainly served by carriers from Europe and the Middle East, but African carriers are catching up. A prominent position is held by Ethiopian Cargo, which had nine 777-200Fs in 2019.

9.3 Segmentation by Transit Times Even if airfreight initially appears to be a homogeneous product, carriers and forwarders are known to have found ways to break it down and exploit their customers’ different willingness to pay. Lufthansa Cargo, for example, positions its products based on different transit times and service levels. The basic td.Basic product, for example, can only be booked online and requires a minimum weight of 300 kg with a transit time of 3 to 4 days. The express product t.d. Flash, on the other hand, is not subject to any weight restrictions. Bookings can be made around the clock via a hotline and the freight is moved with the highest priority. Lufthansa Cargo also offers additional services, e.g. for perishable or particularly valuable goods.

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In its own words, Lufthansa Cargo differentiates the following products by maturity (Lufthansa Cargo 2019a, b): • td.Basic is our entry-level model into the world of Lufthansa Cargo and combines a lower price with the usual Lufthansa quality. A product that can only be booked online and is used precisely when time is important, but not everything. • td.Pro is our economical and reliable offering for your standard freight – regardless of size and weight. With td.Pro you can be sure that important freight will arrive at the right place at the planned time. • td.Flash combines speed with the highest quality and readily available capacity. The product for highest priority shipments is the world’s leading air cargo express service and is not limited in cargo size. • Courier.Solutions – as a solution for particularly time-critical and high-value airfreight and • Emergency.Solutions – for immediate help in logistical emergencies – complement our product range for the need for maximum speed. The urgent shipment sub-segment is primarily the domain of the three integrators, FedEx, DHL and UPS. It requires dedicated consideration.

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Abstract

The business model of integrators is fundamentally different from that of normal air freight. Integrators primarily do not sell free capacity, but a quality promise (Franke 2017, p. 48), for which they keep capacities available in the air, on the road and in the sorting facilities.

Air freight forwarders, in the language of the German Commercial Code (HGB), organize transport by procuring capacities. Integrators maintain these capacities themselves. Three factors are characteristic of the segment’s success: 1. Express is fast: shipments usually take two to three days to reach their destination – compared to six days for normal air freight. 2. The shipments are easier to handle. While handling normal air freight requires a certain amount of training for a shipper, this is comparably easier in the express, courier and parcel segment. Shipments can even be managed by a private sender. 3. A transit time is guaranteed. This promise is either implicitly signaled or explicitly supported by a money-back guarantee. The costs for express shipments are significantly higher than those for normal air freight. FedEx generates revenue of around US$4 per kg of freight in the express segment. The rates of normal air freight, including surcharges, is less than half that under normal conditions. Even though it is more expensive than freight, the express product has been growing over-proportionately for years. A key driver is the worldwide growth of e-commerce.

© The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_10

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10.1 Success Factors In a study of the South Korean market, the competitiveness of the leading express service providers was analyzed (Park et al. 2009). Of the 245 shippers who provided feedback, as shown in Table 10.1, the low price and the speed and accuracy of service provision were considered to be particularly important. Only Korean shippers were surveyed for the study. Despite some cultural and economic peculiarities of Korea that cannot be easily transferred to other markets, the results can be condensed into success factors. No other similarly systematic and publicly accessible analysis of express customer preferences is known.

10.1.1 Pricing and Revenue Management The integrators’ services are generally not calculated and priced individually but are based on discounted standard rates. A customer, for example an architect’s office or an advertising agency, that only rarely uses the transports pays the full price. A customer with a large volume of shipments receives substantial discounts. Standard rates incorporate the cost of pickup and delivery, road and air transportation, sorting, and an administrative surcharge. Rates are essentially tiered by distance, transit time and weight. Sales staff, who are often measured by the number of successful contracts signed or sales generated, are motivated to grant discounts rather generously. As a corrective measure, the decision on granting discounts is taken away from them. The power to set prices is assigned to independent departments. These departments, known as pricing departments, make their assessments based on sophisticated algorithms. UPS, for example, uses a “target pricing” system (Boyd et al. 2005; Cross et al. 2011). It calculates the probability that a new tender will be successful based on past tenders at various rates (Agrawal and Ferguson 2007). The patent specification for this system shows that UPS increased profits by more than US$100 million since its implementation (Boyd et al. 2005). The picture is similar for FedEx. According to the company’s founder and long-time CEO, a significant Table 10.1 The expectations and their ranking (in parentheses) on the part of Korean shippers of express products Factors Pricing Accuracy Speed Benefit Reliability Security Park et al. (2009)

Important characteristics (rank) Low price (rank 1), advantageous rate policy (2) and range of rates (4) Timely delivery (3) and collection (9) The fast delivery (5) The [extent of the] area to be served (7) Interface-free customs clearance (8) Delivery without loss or damage (10)

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portion of FedEx’s revenue growth and profit increase can be attributed to more disciplined management of prices (Cross et al. 2011, p. 13)

10.1.2 Maximising Productivity with High Quality All three integrators share a certain obsession with process discipline, albeit to different degrees. The basic idea is the same for all companies: that there is an optimal procedure for every activity. In a nutshell an application of the “The principles of scientific management” as it was published by Frederick Taylor in 1903 and 1911.

The methods that express service providers such as UPS use to optimise work processes are an almost ideal-typical implementation of Frederick Winslow Taylor’s principles of “scientific management”. He describes the four principles of proper management as (Taylor 1997) • The application of scientific methods to all activities, rather than the outdated “rule of thumb” method, • The scientific selection, training and development of the labour force: this instead of, as in the past, a worker training himself, looking for a job and doing it as best he could, • Working closely with the worker to ensure that the work is implemented correctly, • The almost equal division of work and responsibility between management and staff.

The thoughts have found appeal especially in the manufacturing sector. For example, Henry Ford followed Taylor’s thoughts in the production of the Model-T and the introduction of the assembly line (Brennan 2011). The length of activities is measured precisely and processes are optimized on this basis. All integrators maintain very expensive networks of owned or leased vehicles, aircraft and sorting equipment that must be utilized to the fullest. The management of the investment bank Merrill Lynch became aware that employees were using FedEx to route mail from one floor to another in the head office. The reason: the courier service was faster than the internal mail organization (Berry et al. 2006). Internal regulations are designed to minimize risk, increase revenue, and improve productivity. Engineers, doctors, industrial designers, and computer specialists, among others, are brought in for optimization (Niemann 2007, p. 8 f.). UPS quantifies the savings, if one minute of working time per day can be saved for each driver by optimized processes, at US$ 50 million per year.

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UPS’s training methods in particular are optimized in the industry and beyond. In the U.S., courier drivers begin by attending a six-week boot camp, which includes thirty days of driver training. As early as the 1920s, management developed very detailed specifications, such as how the process of delivering and picking up shipments should be handled. The instructions on how a courier is to walk to and board the vehicle after a delivery or pickup include 18 points alone (UPS 2005; Lukas and Overfelt 2003). For the boarding process, a separate chapter in the manual, details how to start the vehicles: • For petrol vehicles with three-point belts, first tighten the belt and then start the engine. • For petrol vehicles with single belts, fasten the belt and insert the key into the lock at the same time. Next, start the ignition with one hand and simultaneously release the handbrake with the other hand. • For diesel vehicles, insert the key into the ignition lock, turn it over and then tighten the seat belt. Then start the engine with one hand and release the handbrake with the other.

These guidelines are constantly updated, not least to take account of technological innovations. The company tracks the performance of each employee in detail and continually tries to optimize processes. For example, by using an artificial system to plan routes for the last few years, rather than having drivers plan their own stops, UPS saved around 100 million unnecessary journeys a year, or US$300–400 million (Levis 2015). To counter the risk of service failures, integrators double-net at key points. Legendary is FedEx Flight 1311, which flies from Denver to Memphis every night, usually heading about 200 miles in the wrong direction first, and even without cargo on board. At a cost of US$30,000 each, the flight is an expensive version of the broom wagon. It was set up to still pick up cargo in case of any problems in the southwestern US. This could be, for example, that not all capacity has been loaded or aircraft is not operational (Berry et al. 2006; Cave 2016).

10.1.3 Brand The three integrators are some of world’s most valuable brands in the transport sector (cf. Table 10.2). A strong brand is based on an implicit promise of quality: it allows it owner

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Table 10.2 The most valuable brands in the transport sector Rank 1 2 3 4 5

Brand UPS FedEx Japan Railway Group DHL Union Pacific

Brand value (USD million, 2018) 22,003 18,170 11,103 10,714 7877

Brand Finance (2018a)

to charge a higher prices for the products and services offered. This premium is ultimately reflected in a higher stock market valuation (Kotler and Pfoertsch 2007). Maintaining the brand requires a great deal of investment, especially for marketing, but also for consistently delivering a service that meets or even exceeds the level of quality expected by customers. According to the consultancy Brand Finance, the UPS brand is worth the most – more than twice as much as the DHL brand. In its assessment, the company calculates the expected sales that can be attributed to the brand, as well as the notional royalties that the company would have to pay for the use of the brand if it did not own it (Brand Finance 2018a). One explanation of the lower value of the DHL brand can be found in the wide spread of services offered. Under the DHL umbrella brand, services range from shipping within Germany for a few euros to complex logistics outsourcing with a volume of several million euros. Remarkably, no airline has managed to build comparable brands. Brand Finance, for example, rates the American Airlines brand as the most valuable among carriers, at around USD 9 billion. Emirates ranks 5th with 5 billion and Lufthansa with 3 billion USD (Brand Finance 2018b). Despite significant marketing expenditures, particularly sponsorship of sports clubs, even Middle Eastern carriers have failed to build brands as strong as UPS, FedEx, and DHL.

10.2 Players in the Express Mail Market Since the takeover of the Dutch TNT by FedEx, the global market for express shipments has been dominated by only three providers. Remarkably, two of them, DHL Express and FedEx, are still relatively young companies, founded in the late 1960s and early 1970s respectively. FedEx is the market leader in North and South America, while DHL is the market leader in Europe, Asia-Pacific and Africa (DPDHL 2015) (Fig. 10.1).

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Regional Express-Markets (2013) 47%

44%

41% 32% 22%

18%

25%

24% 11%

Americas

Europe DHL

Marketvolume

€ 7,2 Bn.

Fedex-TNT € 6,0 Bn.

Asia-Pacific UPS € 6,5 Bn.

Fig. 10.1 Regional express markets

10.2.1 DHL DHL’s early success was largely due to the failures of the US Postal Service and other government postal operators. DHL was founded in 1969 by Larry Hillblom and Adrian Dalsey. Robert Lynn, a real estate investor and Dalsey acquaintance, left the company shortly after it was founded because he doubted the success of the business idea. Nevertheless, he left behind a lasting memory: the first letter of his surname, together with those of Dalsey and Hilblom, forms the abbreviation DHL (Scurlock 2012; Chung and Bowie 2017). DHL’s first customer was the shipping company Seatrain, which deployed modern container ships at the turn of the year 1969/70. Hillblom promised to transport the bills of lading (B/L) through couriers in the aircraft on the route from San Francisco to Honolulu. While the national postal service usually delivered the bills of lading well after the ships arrived, DHL was able to deliver them before office hours the next day. The ability to initiate clearance even before the ship entered port was a compelling selling proposition in the company’s early days. Other shipping companies and banks were quickly won as customers. Nevertheless, the first years were modest. In the beginning, Hilblom himself often spent the night on the porch of the parents of a fellow student from his student days. The shipments were often handled in the parking lots of supermarkets. They were transported by couriers, mostly private individuals who were given free flights but had to do without their own luggage.

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By 1970, DHL already had a customer base of 40 companies and was expanding to Guam, Los Angeles and Portland, Ohio, among other places. Another year later, the company opened depots in the Philippines, and in 1973 in Hong Kong, Japan, Singapore and Sydney. DHL has been present in the United Kingdom since 1974 and in Germany since 1977. In 1977, it also expanded its product range, which until then had consisted only of document shipping, by introducing the Express Parcel product. In 1990, Lufthansa Cargo, Japan Airlines and the Japanese trading house Nissho Iwai acquired shares in DHL as part of a capital increase. In 1998, Deutsche Post initially became a minority shareholder: four years later, in 2002, the then state-owned company initially acquired 51%, and later even 100% of the shares. DHL was integrated into the Group and became the umbrella brand for Deutsche Post’s global freight and logistics activities. DHL’s original core business, the express delivery of parcels and documents, has since been operating under the DHL Express brand. DHL’s attempt in 2003 to gain a foothold in the domestic American market with the acquisition of Airborne Express (ABX) failed. At the time of the acquisition, Airborne was the number 3 carrier, but significantly behind FedEx and UPS (Keane 2003). Deutsche Post Group expected the integration of Airborne to fill the gap in the domestic U.S. market – a market that DHL was never able to fill despite its American roots. There were many reasons for the failure. For example, Airborne’s aircraft, former passenger planes, were never fitted with large cargo doors for cost reasons and could not accommodate the ULDs commonly used by DHL Express. Loading and unloading proved to be correspondingly complex. DHL Express’ international hub was relocated to Airborne’s hub in rural Wilmington, Ohio. The nighttime employees, often farmers who jumped at the chance to make extra money, were sometimes overwhelmed with handling international shipments. Arguably, the crucial point was the massive, textbook reaction of the FedEx and UPS oligopoly to the emergence of the new competitor. In 2008, the Group finally announced that it was withdrawing from the domestic American market, laying off 9500 employees and closing its hub in Wilmington. The officially communicated expenses for restructuring and severance payments alone due to the withdrawal amounted to approximately US$ 4 billion. Since then, DHL Express has largely concentrated on international business in the USA. As legislation in the USA strictly regulates the ownership of American airlines, DHL works with various joint ventures. Polar Air Cargo is the 51% subsidiary of the American Atlas Air (AAWW), the world’s leading provider of ACMI leasing. The remaining 49% is owned by DHL Express, which is also Polar Air’s largest customer. All the airlines mentioned offer charter services in addition to the network business.

10.2.2 FedEx Federal Express is a comparatively young company. It was only founded in 1973, four years after DHL. Ant yet it is the first true integrator. It was the first company to operate

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its own aircraft, vehicles and sorting centres. As of 2017, the successor company FedEx is the world’s largest airline in terms of cargo tons transported and the fourth largest in terms of number of aircraft.

10.2.2.1 Preparations Fred Smith first developed the idea of network to transport packages at night and deliver them the next day as a student at Yale University. In a seminar paper, Smith outlined the idea of a hub-and-spoke system that linked the major economic centers of the United States. According to legend, the paper was only graded with a “C”+ (Trimble 1993, p. 80 f.). After graduating from Yale University, Smith served three years in the U.S. Marine Corps. Although he never piloted aircraft himself during the war, this time and especially his deployment in Vietnam had a formative influence on his later work at FedEx. Because weapons, ammunition, and other supply items had to be transported long distances to the Southeast Asian country, the logistical challenges were daunting. Not coincidentally, the Vietnam War also helped the sea container make its breakthrough. The country had only one deep-water port. The manual unloading of individual packages proved far too costly (Levinson 2009, p. 171 ff.). After returning to the U.S. and being discharged from the Army, Smith bought a small aircraft maintenance business. In 1971, Federal Express was founded. Unlike Larry Hilblom, Smith came from a wealthy background. With his handsome inheritance and thanks to a bank loan, he had enough seed capital right from the beginning to finance a fleet of fourteen Falcon-20s from the French aircraft manufacturer Dassault. Although only a start-up, FedEx managed to raise a loan of around 90 million USD, close to half a billion USD worth in 2018. The Falcon was designed as a business aircraft and was not really suitable for transporting cargo. But the opportunity presented itself to take over a larger inventory of the aircraft, when it was parked in Arizona and available cheaply. A second reason for choosing the Falcons was regulatory. FedEx was incorporated as an airline and thus was subject to the regulations of the Federal Aviation Authority, rather than those of the ICC, which typically oversaw cargo carriers (Niemann 2007). From the beginning, Smith wanted to flexibly deploy his aircraft depending on demand. For cargo airline operations, this conflicted with current Civil Aeronautics Board rules. Therefore, the decision was made to officially register the Falcons as a taxi service. The payload limit for such services was raised in time by the CAB to 7500 pounds (3.4 tons) (Mason et al. 1997; Trimble 1993, p. 131).

10.2.3 The First Decade Unlike DHL, which developed slowly at first on the Hawaii – California route, FedEx started with a bit of a bang. FedEx designed its network around the central hub of Memphis from the beginning. All shipments were handled at the location. This made FedEx not only

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Table 10.3 Growth of Federal Express in the early years Year 1973 1974 1975 1976 1977 1978

Revenue situation Loss Loss Profit Profit Profit Profit

Aircraft used Falcons Falcons Falcons + leased aircraft + leased aircraft + B727s

Cities served 22 69 73 75 78 99

Number of packages per day 3500 8000 11,600 18,000 25,000 35,000

Chan and Ponder (1979)

the first integrator, but also the pioneer of hub-and-spoke networks. These are also common in passenger transportation today (Danesi 2006). On April 19, 1973, the 14 Falcons took off from Memphis to 25 major cities in the eastern United States. During the night, 186 packages were transported. Volumes grew slowly at first and the network proved to be very costly. In its early years, Federal Express faced insolvency several times. A legendary part of the company’s history was Fred Smith’s reaction when he realized on a Friday that there was insufficient liquidity to continue operating the airline. He flew to Las Vergas, bet his remaining money in the casino, and returned with US$27,000 (Trimble 1993, p. 161). By mid-1975, the profitability threshold was reached and, as shown in Table 10.3, there was rapid volume growth. The coordinated flight schedules, the company’s own aircraft and delivery vehicles, the central hub in Memphis with its automated sorting facility and the early use of computer technologies brought about an unprecedented leap in quality. Also, the shift of flights to nighttime hours proved to be an advantage, since during those hours the infrastructure at the airports was not strained by passenger flights. While the two providers Airborne and Emery, organized as air freight forwarders, were only able to deliver 25% and 42% of parcels respectively the next day in 1975, FedEx was able to deliver 93% of express shipments on time (Chan and Ponder 1979, p. 222 f.). FedEx was made a significant leap with the liberalisation of the air freight industry, which had been strictly regulated until then. Since its early days, the company had tried to influence legislation in Washington. In 1977, President Carter signed into law amendments to the Federal Aviation Act of 1958, which allowed cargo airlines to operate aircraft of any size. FedEx then invested (cf. Table 10.3) in B727s, with 5–6 times the capacity of the Falcons (Trimble 1993, p. 220 f.). Ten years after its founding, in 1983, Federal Express achieved sales of $1 billion for the first time and was solidly established in the North American market. International expansion into Europe and Asia followed the next year. In many cases, smaller local providers were purchased and integrated into Federal Express’ network. In 1988, the company acquired one of its largest competitors, Flying Tigers for US$880 million. Flying Tigers, one of the remaining pioneers in the air cargo industry by then, had a strong presence in Asia in particular, in addition to the US, with its 39 aircraft and 6500 employees (Adelson 1988). The acquisition enabled FedEx to expand internationally much faster than would have been possible through organic growth.

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10.2.3.1 Failed Expansion into Europe in the 1980s Since two CEP competitors, DHL and TNT, were already established in the market for international express shipments, FedEx’s foreign business continued to be loss-making for a long time. Until the 1990s, the company repeatedly generated losses that threatened to endanger the company’s substance. In 1992, after the departure of key U.S. executives and a quarterly loss approaching $200 million, the company pulled the emergency brake and largely withdrew from Europe. The European hub in Brussels was closed and more than 6600 couriers were laid off. TNT took over part of the infrastructure and regional business in Europe (with the exception of the UK). In return, FedEx agreed to deliver TNT shipments in the USA (Barnard 1992). 10.2.3.2 Acquisition of TNT The Dutch company TNT is an international express and parcel service provider whose origins can be traced back to Thomas Nationwide Transport. Ken Thomas started his company in 1946 with a single truck and offered his transport services exclusively in Australia in the 1950s. TNT expanded in the 1970s and 1980s. In 1996 TNT was acquired by the Dutch postal company and in 1998 it was listed on the stock exchange as a separate company, TNT Post Group (TPG). Despite its best efforts, TNT never really gained a foothold in the United States in the face of FedEx’s and UPS’s dominance. Compared to its three competitors, TNT was considered too small to be profitable (Reid 2015). In 2012, UPS announced its intention to acquire TNT for a sum approaching EUR 5 billion. However, this takeover was rejected by the European Commission the following year. Such a rejection was rare in the history of the Commission and was justified on the grounds that the takeover would have significantly reduced competition in the member countries (Alex Barker 2013). The ultimate winner of the failed takeover was FedEx. In 2016, the company successfully acquired TNT at a price of EUR 4.4 billion. With the successful acquisition, FedEx has strengthened its international express business and is now a competitor in the European market. With the acquisition of TNT, FedEx, like DHL and UPS, is present in 220 countries and territories, either with its own branches or in cooperation with partners. In 2018, revenue was approximately $65 billion, of which 55% was generated in the Express segment. FedEx Express is the largest cargo airline in the world, measured in tonne-kilometres. Memphis is competing with Hong Kong for the #1 spot among the largest cargo airports. Even though competitors also invest innovations (Ling et al. 2009), FedEx has maintained its reputation as a technology leader (Mason et al. 1997).

10.2.4 UPS The origins of United Parcel Service date back to 1907, when nineteen-year-old James E. Casey founded the American Messenger Company together with Claude Ryan. Part of the founding myth of the Seattle/Washington company is that it initially operated out of a

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basement (UPS Switzerland 2018a, b). Initially, it undertook all forms of messenger services, from delivering important messages to delivering groceries, on foot and by bicycle. The local market was definitely competitive, as the barriers to entry were low given the low investment costs. Casey and Ryan themselves started with a loan of just $100, about $2600 in today’s purchasing power. In the following years, the focus of activities shifted from messenger services to the delivery of parcels, and motorcycles were increasingly used. In 1913, the first delivery vehicle, a Ford Model T, was purchased.

10.2.4.1 Expansion in the USA and Abroad In 1919, the company expanded to Oakland, California, and began operating as United Parcel Service. In the decades that followed, UPS opened more offices, first in the West and later in the central and eastern United States. With the acquisition of a common carrier in Los Angeles in 1922, it introduced modern processes at all locations, such as daily pickups, the option of cash on delivery, and sorting by conveyor belt. These processes were novel at the time, but are now standard in the transportation operations of freight forwarders and express service providers. From 1929 UPS also used the airplane to transport particularly urgent shipments, but only for a short time until the stock market crash in September. It wasn’t until 1953 that UPS offered a comparable service again. The backbone of the express service was commercial airlines – unlike today, when UPS uses its own planes. Packages were loaded in the cargo hold of passenger aircraft, with a guaranteed delivery time of two days (UPS Switzerland 2018a, b). For a long time, rigid regulations by state regulatory authorities hindered further expansion of the company. It wasn’t until 1975 that the UPS network covered the entire 48 states of the USA (excluding Hawaii and Alaska). 1975 was also the year in which UPS established its first foreign subsidiary, Canada. In 1976, UPS expanded into Germany. In the following decades, the company opened branches in other foreign markets. Today, the company is by its own accounts present in 220 countries and territories. 10.2.4.2 Expansion into the Express Segment in the 1980s UPS was not able to gain a foothold in the actual express segment, the delivery of packages and documents the next day (overnight), until the 1980s. The rapid growth of FedEx, whose short transit times UPS was initially not able to counter, caught UPS management unprepared (Niemann 2007). For a long time, UPS underestimated the threat posed by FedEx. It was not until 1982, nine years after FedEx began over-night operations, that UPS launched a comparable express product that was delivered the following day with a money- back guarantee. Deregulation of the air freight market in the United States in 1978 allowed UPS to establish its own airline. The central hub was opened in 1980 at the Louisville/ Kentucky airport. In the first years UPS used the capacities of established airlines, such as Evergreen International Airlines, Ryan International Airlines and Orion Air. Beginning in 1988, this cooperation ended. In that year UPS had received permission from the FAA to operate its own airline and could now use its own aircraft to transport express shipments (McCormick 1988).

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Among logistics providers, UPS is one of the most respected players. In 2018, the company was again voted the “most admired company” in the logistics sector by the US business magazine, ahead of DHL, Deutsche Post DHL and FedEx (Forbes 2018). Employees are trained on the company’s processes at an early stage, and deviations are strictly sanctioned. For example, drivers in the US are taught exactly how to enter a delivery vehicle and in which hand to hold the vehicle key (Lukas and Overfelt 2003). Despite the comparatively strict regime, turnover is low. Many employees remain with the company for their entire working lives. Safe driving has been recognized since as early as 1923. More than 10,000 drivers worldwide have been rewarded for driving accident-free for 25 years. One driver even delivered more than 5 million shipments accident-free over a 55-year period (UPS 2018b). One of UPS’s weak points is its continued strong focus on North America, despite substantial foreign investment since the mid-1970s. After numerous moves, the headquarters are now located in Atlanta in the southern state of Georgia. The transformation from a US-based transporter of small packages to a global logistics company is the company’s declared goal (Wood 2011).

10.2.5 Consolidation of the Market The market for express shipments in particular has been subject to considerable consolidation in recent years. In the meantime, the three market leaders have largely divided the market for international express shipments with guaranteed transit times (time definite international, TDI) between them. As of 2016, DHL had a market share of 38%, FedEx 29%, UPS 22% and the remaining providers combined 11% (DPDHL 2015). If domestic express markets are included, the role of FedEx and UPS is stronger compared to DHL. The former Deutsche Bundespost was the most active competitor in driving consolidation. After Deutsche Post acquired the remaining shares in DHL, it bundled the various companies it had acquired in the decade before under the DHL brand. The Express Division brought together the activities of DHL and Deutsche Post EuroExpress. EuroExpress, for its part, was a merger of national, formerly independent parcel and logistics service providers, such as Guipuzcoana in Spain, Ducros in France, MIT in Italy, Van Gend en Loos in the Netherlands and Securicor in the United Kingdom. Table 10.4 provides an overview of the acquisitions made by the three leading integrators in the past decades. With these acquisitions, the three companies not only strengthened their core business, but also expanded their product offerings. All three providers are now active, albeit to varying degrees, in the areas of logistics, supply chain management and traditional air freight. Due to its early expansion, the Asia-Pacific region is the most important geographic market for DHL (see Table 10.5). According to its own figures, DHL has a market share of almost 50% here. In Europe, the home region of the parent company Deutsche Post, the share is 44%. FedEx occupies a comparably strong position in America. Even after the acquisition of TNT, FedEx has not closed the gap on UPS in Europe.

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Table 10.4 Selected acquisition of the three leading integrators worldwide (year of acquisition) DHL – Van Gend & Loos (1999) – Danzas (1998–2000) – Airborne (2003) – Exel (2005)

FedEx – Gelco (1984) – Tiger International (1989) – Kinko (2004) – TNT (2016)

UPS – Mail Boxes Etc. (2001) – Fritz Companies (2001) – Menlo (2004) – Kiala (2012) – Coyote (2015)

Own representation Table 10.5 Market shares of the integrators in the world regions, based on the segment of express shipments with transit time guarantee

Stakeholders DHL FedEx (Incl. TNT) UPS Other

Region (market size) America’s Europe (US$8.2 billion) (US$7.1 billion) 20% 44% 44% 21%

Asia-Pacific (US$8.0 billion) 49% 23%

Global (US$24 billion) 38% 29%

33% 4%

11% 17%

22% 11%

24% 11%

DPDHL (2018)

10.3 Handling of International Express Shipments The handling of international express shipments, even when aircraft are used, differs from that of conventional airfreight shipments. This is particularly true in that the shipments are regularly door-to-door transports, and collection from an airport by the recipient is the rare exception.

10.3.1 Procedure for an International Express Shipment Table 10.6 shows an example of the process of an international express shipment. The processes are similar for all major integrators. Differences exist in the extent to which the services are actually provided “from a single source”. In Germany, for example, DHL Express works with service providers for pick-up and delivery, while UPS primarily uses its own drivers. In countries where an integrator does not have its own branch office, it will generally work with a permanent agent. In the example of Iceland cited elsewhere, both UPS and FedEx use agents, while DHL maintains its own office, at least in the capital Reykjavik, according to the company. Due to the close interlocking, express service providers achieve transit times that are noticeably shorter than those of normal air freight. While, for example, shipments on the important China – Western Europe trade lane take around 6–7 days when freight

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Table 10.6 Sequence of a typical international express shipment 1

2

Activity The customer informs the service provider that his shipment is ready for collection or will be ready for collection at a certain time on the same day. The information is provided electronically or by telephone. The courier is informed electronically about the pick-up. For shippers with a regular volume of shipments, the notification is not necessary, the courier will provide for a pick-up on his own initiative The courier picks up the shipment and takes it to the nearest depot

Example Collection of an electronic item from the manufacturer in Shenzhen (China)

Transport from the customer to the depot in Shenzhen 3 The shipments are pre-sorted and transported to the designated Transport from the airport depot to the gateway in Shenzhen 4 The consignments are sorted again at the airport of departure, packed Loading of the into airfreight containers and loaded onto the aircraft consignment into a ULD, loading of the ULD into the aircraft 5 The aircraft transports the shipment to the international hub Flight from Shenzhen to Dubai 6 Reloading of the ULD, if necessary re-sorting of the individual Transhipment of the consignment ULD in Dubai 7 The aircraft transports the shipment to the international hub Flight from Dubai to Cologne 8 Reloading of the ULD, if necessary re-sorting of the individual Flight from Cologne consignment to Stansted 9 The containers at the receiving airport are deconsolidated and the Transport of the shipment is loaded into a truck for onward transportation to the consignment to the receiving depot depot in London 10 The shipment is delivered from the receiving depot Delivery within London Own representation

forwarders are involved, express shipments with UPS or DHL Express reach their recipients in just half the time. The same applies to the important transatlantic traffic. For UPS, a cargo plane leaves the European hub in Cologne-Bonn at 21.30 h each day and reaches the Worldport at midnight local time. This allows shipments picked up in the afternoon in the Rhineland conurbation to be delivered to nine out of ten business addresses in the USA the next morning local time.

10.3.2 Major Express Hubs All three integrators now use the hub & spoke system as developed by FedEx. To this end, they maintain several hubs on the continents of the northern hemisphere: in the USA, Europe and North Asia (Table 10.7).

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Table 10.7 Overview of the most important international hubs of the three major integrators North America

DHL – Cincinnati, OH – Miami, FL

Europe, Middle East

– Leipzig – Bahrain

Asia

– Hong Kong

FedEx (TNT) – Memphis, TN – Miami, FL – Anchorage, AK – Oakland, CA – Paris – Frankfurt – (Lounger) – Dubai – Hong Kong – (Singapore)

UPS – Louisville, KT – Miami, FL – Ontario, CA – Cologne/Bonn

– Hong Kong – Shenzhen – Pampanga

Rodrigue et al. (2017)

Many hubs, i.e. cargo-only airports, are former air force bases. Clark Air Base in Pampanga in the Philippines, for example, was one of the largest military bases outside the USA until 1992. Since the airport was returned and converted into a free trade zone, both UPS and FedEx use Clark International (CRK) Airport as a hub.

10.3.2.1 Memphis (MEM) Memphis International Airport owes its importance as the second largest cargo airport almost exclusively to the fact that it is FedEx’s global hub. For a long time, Memphis was even the world’s number 1, until it was replaced at the top by Hong Kong in 2010 (CAPA 2011). The airport’s focus is on cargo, far less on passage. The only international flights in 2016 were to Cancún and Toronto. As part of a modernization program, the passenger terminal is being reduced in size. This move underscores how comparatively little passage matters. Memphis owes its success to the failure of neighboring Little Rock, Arkansas airport. FedEx initially began its operations there. After airport authority support failed to meet its needs, FedEx’s founder moved the hub some 120 miles farther west to Memphis (Table 10.8). The facility is capable of sorting up to 325,000 shipments per hour. FedEx operates a 2-shift system, a weaker day sort and a higher volume night sort (FedEx 2010). During the day, 3500 employees process the 650,000 less urgent shipments, and at night, 7000 employees the 1.3–1.5 million express shipments. In 2010, a mathematical test was performed to determine the extent to which the choice of Memphis was actually optimal. Based on this analysis, the optimal location would be only 500 km further north, near the city of Indianapolis (Morrison 2010). This is the location from which the average distance to any resident in the United States would be the least. Other factors also played a role in the choice of Memphis, such as better weather, lower labor costs, supply of labor, lack of other constraints on the airport, and a business-friendly environment. Meanwhile, FedEx has located its second-most important national hub in the network, in Indianapolis. The

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Table 10.8 Key data Memphis/TN Airport (as of 2018) Freight volume (2017) 2.3 million tons

Runways 2 × 2,700 m 1 × 2,800 m 1 × 3,400 m

Services sorting plants 325,000 parcels/h (UPS)

Own representation Table 10.9 Key data for Louisville/KT Airport (as of 2018) Freight volume (2017) 2.3 million tons

Runways 1 × 2200 m 1 × 2600 m 1 × 3600 m

Services sorting plants 416,000 parcels/h (UPS)

Own representation

hub has a sorting capacity of 99,000 shipments per hour, with plans to expand to 147,000 shipments per hour (Orr 2018). Other important FedEx hubs are located in Oakland near San Francisco, Newark near New York, Dallas/Fort Worth and Greensboro in North Carolina (O’Kelly 2014).

10.3.2.2 Louisville (SDF) Louisville/Kentucky International Airport is the home base of UPS. As discussed the company invested in its own aircraft rather late, and in response to the success of FedEx. Louisville Airport is located about 400 miles further northeast of Memphis. It has three runways. The IATA code SDF still comes from the airport’s old name, Standiford Field. Like Memphis, Louisville is only frequented by a few passengers, about 2 million each in 2017 (DoT 2019). By comparison, Cologne had more than 12 million passengers in the same year (Table 10.9). In order to meet the increasing demands of UPS, the airport significantly expanded in the early 1990s, resulting in the relocation of several thousand residents. The transshipment center, internally called “Worldport”, was expanded already several times since its opening in 2002. It is strategically positioned between the two parallel runways. The location allows for quick loading and unloading. In total, UPS had invested about US$2.4 billion in the expansion of the Worldport. UPS’s facilities sort about 2 million shipments per night, more than any other facility in the world. The facilities are capable of handling up to 115 shipments per second, or up to 416,000 shipments per hour. The conveyor belts alone have a length of 250 km (UPS 2018a). The majority of the workforce at the sorting centre is made up of students who can study for free under a programme at one of the two local colleges. Classes start relatively late in the morning to accommodate the needs of UPS’s nighttime workforce. Many of today’s UPS executives began their careers as student workers at Worldport.

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10.3.2.3 Leipzig (LEJ) Leipzig Airport in Saxony is located in the Schkeuditz area and was first put into operation in 1927. While the airport is the second largest in Germany in the cargo sector, it plays only a relatively insignificant role in the passenger sector. Around 2 million passengers are recorded annually. The importance in the cargo sector is mainly based on the decision of Deutsche Post-DHL to relocate its European hub from Brussels to Saxony in 2008. The Group decided in favour of Leipzig after the Free State of Saxony had given guarantees not to waive a night curfew. Since the beginning, Deutsche Post DHL has invested approximately EUR 655 million in the development of the site at the airport (Table 10.10). In 2016, DHL opened a new facility at the site capable of sorting 150,000 shipments per hour. (DHL 10.12.2016b) 10.3.2.4 Cologne/Bonn (CGN) Cologne/Bonn Airport dates back to a former military training area during World War II. It had been used for military purposes since then and was only handed over for civilian administration by the Allies in 1957. In the following decades it was the capital city airport and connected by motorways to the city centres of Bonn and Cologne and the wider motorway network. It has three runways, one of which is 3800 m long and is suitable for intercontinental traffic. The airport was one of about 25 alternate points worldwide that the space shuttle could have approached in an emergency. For comparison: the neighbouring airport Düsseldorf has only two runways, the longer of which is 3000 m long. At the time when the relocation of the DHL hub from Brussels was being examined, the possibility to fly to the airport at night was in question. With the relocation of the hub from Brussels to Leipzig, DHL Express also withdrew most of its activities from Cologne- Bonn. In the meantime the airport has been granted an operating permit until 2030. This allowed the two American integrators to invest in the location in the long term; FedEx in particular took advantage of the capacities freed up with the departure of DHL (Table 10.11).

Table 10.10 Key data Leipzig Airport (as of 2018) Freight volume (2017) 1.3 million tons

Runways 2 × 3600 m

Services sorting plants 150,000 parcels/h (DHL)

Own representation

Table 10.11 Key data for Cologne-Bonn Airport Frachtvolumen (2017) 839 thousand tons

Own representation

Runways 1 × 1900 m 1 × 2500 m 1 × 3800 m

Services sorting plants 190,000 parcels/h (UPS) 18,000 parcels/h (FedEx)

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Cologne-Bonn Airport has the distinct advantage of being located within the “blue banana”. Within a radius of 500 km around Cologne, 40% of the EU’s GDP is generated. This economic centre can be accessed cost-effectively by sprinters and trucks. The location advantage also explains why DHL recently decided to return to CGN and invest EUR 100 million in a gateway (DVZ 2016b). The share of general cargo is relatively small. The airport is mainly used by the three integrators. The top dog at the airport is UPS, which maintains the largest hub there outside the USA. UPS flies from Cologne to Hong Kong, Dubai, Newark, Philadelphia, and Memphis (Bowen 2012). In 2014, the company invested another $200 million in the site. The capacity of the sorting facility was expanded to up to 190,000 packages per hour or 53 per second (UPS 2014). A so-called early freighter heading west leaves Cologne-Bonn at 9:30 pm. It lands at midnight local time in Louisville, Kentucky (USA), UPS’s World Port, is unloaded and the shipments are distributed to their destination routes. This way, the parcel service can guarantee delivery by 10:30 a.m. the next day to over 90%of all business addresses in the USA, parts of Canada and even Mexico. Five further connections to the USA with next-day delivery depart at night for Newark, New Jersey, Philadelphia, Pennsylvania and Louisville. The early freighter from Asia arrives in Cologne-Bonn around midnight. Here, UPS offers next-day delivery for 19 European regions and 39 economic zones. There are further flight connections to China, Thailand and India, for example. The airport’s strategically favourable location – it is only 15 km from Cologne city centre – and the lack of a ban on night flights led to complaints from residents. The airport did not have a zoning procedure due to its history as an allied base. This made it vulnerable to legal attacks. The Münster Higher Administrative Court, which is responsible for Cologne-Bonn, found that there was a fictitious planning approval procedure, since the airport had been built before the current approval procedures for major projects existed. Lawsuits against the night flight ban were again dismissed in 2015 (LTO 2015). In order to channel the lawsuits and open the way for further infrastructure measures, the airport company has now applied for a planning approval procedure in 2016 (Pieper 2017). According to the current state of discussions, it is more likely that a night ban on passenger flights will be introduced at CGN Airport. This could ease the pressure on the integrators. If, on the other hand, there should be a general ban on night flights from 2030 onwards, the integrators based there would have to relocate their hubs and make significant write-downs on their investments.

Part IV Developments

As noted in the introductory chapter, air freight has been growing at a rapid pace since the end of the Second World War. However, growth continues to slow. Is air freight a product nearing the end of its life cycle? Or is it poised for a renaissance with the growth of international e-commerce? Are technological leaps conceivable that will literally “give the product wings”?

Innovations

11

Abstract

Logistics providers, which include airlines and freight forwarders, are less innovative than comparable industries (Busse and Wallenburg 2011; Schwolgin 2017). There are few indications in the literature as to the reasons for this. They are likely to lie primarily in the inadequate capital resources of many actors. The main drivers of innovation are the well-funded integrators and the e-commerce platforms Amazon.com and Alibaba.

11.1 IATA StB Initiative IATA’s Simplifying the Business (StB) initiative was a programme that ran from 2004 to 2017 and aimed to ‘transform’ the passenger experience (IATA 2015a). StB Cargo is taking a similar approach to cargo. The goal is to make the cargo product more user-friendly, smarter and faster. The programme includes a total of six projects: e-freight & e-AWB, ONE record, Interactive cargo, smart facility, air cargo incident database and cargo connect.

11.1.1 e-Freight and e-AWB The digitalisation of paper-based documentation (e-freight) and the introduction of the electronic air waybill (e-AWB) is one of IATA’s most important innovation projects in the freight sector. The project was launched in 2004: in addition to representatives of the airlines and freight forwarders, the World Customs Organization (WCO) was also involved at an early stage. It pursues several goals at once (Sales and Hulsman 2016). By shortening transit times, improving data quality and better ensuring compliance with regulations, cost © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_11

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savings of almost US$5 billion are expected. The savings are essentially fed by two sources (Smith and Moosberger 2009). Firstly, digitisation eliminates the costs of printing, processing and transporting documents. According to estimates, e-freight will omit the need the transport around 8000 tonnes of paper documents, corresponding to the capacity of 80 B747s. Table 11.1 lists an overview of the 16 paper-based documents that are to be replaced by e-freight (Smith and Moosberger 2009). In addition, warehousing costs are reduced when shipments are processed faster, resulting in earlier and more reliable delivery. This allows companies to reduce safety stock in warehousing. Despite the significant anticipated savings of around 2% in the airfreight-related supply chain, the project is lagging behind the original schedule. When e-freight was launched in the first six pilot countries in 2007, the goal was to roll out the project wherever possible within three years (IATA 2007). In 2017, almost every second waybill was still paper- based on those trade routes where its use is legally possible. This, despite all the vocal efforts of IATA, the airlines and the larger freight forwarders. IATA itself cites a number of reasons that stand in the way of further diffusion (David): 1. In some countries or airports, the exclusive use of e-AWB is not possible due to regulatory restrictions. Unfortunately, in some countries, customs authorities have been reluctant at best to support the switch to paperless procedures. Yet the digitalization of customs processing is an essential prerequisite for eliminating corruption in emerging economies. 2. The inadequate coordination of processes between freight forwarders, airlines and ground handling companies remains a stumbling block. 3. In addition, part of the market is not addressed because smaller freight forwarders often do not have the technical prerequisites to implement the project. IATA is addressing this problem with the web-based application e-AWBLink. This allows smaller freight forwarders to take advantage of e-freight without having to adapt their existing software architecture or invest in new systems. More than 120 airlines were connected to the system in 2018. Table 11.1 Documents replaced by e-Freight Handover consignor to departure forwarder – Commercial invoice – Packing list – Certificate of origin – Instructions of the consignor – Dangerous goods declaration

Transfer of departure forwarder to customs office of exit – Master AWB (MAWB) – House waybill (HAWB) – Manifesto of the HAWB – Export declaration

Smith and Moosberger (2009)

Transfer airline to customs office – Flight manifest – Transfer manifesto – Export visa – Import advice

Handover customs to receiving forwarder – Import declaration – Customs clearance

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4. A more profound criticism of the project is that e-freight has only digitalised existing processes, but that the processes have not been fundamentally rethought. Oliver Evans, the former chairman of the air freight organisation TIACA, for example, expressed this view (Lennane 2015b). Since the 1990s, the discussion on business process reengineering (BPR) has shown that considerable efficiency gains are possible when processes are not improved incrementally, but rather developed from scratch, as if on a blank sheet of paper. Processes should not be automated but obliterated (“don’t automate, obliterate”), according to the pioneers of reengineering (Hammer 1990; Hammer and Champy 2006). 2005, IATA expected that it would be able to make handling air-freight paper-free within five years, by 2010. In 2019, the industry is still far from this goal (N.N. 2005). Given the slow progress in implementing e-AWB, Lufthansa Cargo decided in 2018 to pass on the higher handling costs of manual AWB in the form of fees. It is likely that other carriers will follow suit (Lennane 2018b).

11.1.2 ONE Record The ONE Record project within the StB Cargo initiative is designed to help make data smarter and therefore better shared between stakeholders. It thus facilitates the goal of paperless clearance and the connection of stakeholders. A prerequisite for the programme is the successful implementation of e-freight. The goal, which IATA itself cautiously describes as a long-term vision, is to enable an end-to-end digitized logistics and transport chain from pick-up to delivery (“end-to-end”), where data is easily and transparently shared (IATA 2019a).

11.1.3 Interactive Cargo As part of the “Interactive Cargo” project, IATA aims to improve the visibility of cargo. This is of interest for particularly valuable shipments, pharmaceutical shipments, perishable goods and live animals. The aim is to enable shippers and authorised consignees to check the status of a shipment at any time. This service is also in high demand in the e-commerce sector. The first step is to enable tracking at the piece level. To this end, a working group has been set up, initially comprising only representatives of the airlines, and later including other stakeholders (Piece Level Tracking Task Force, PLTTF). Among other things, the working group will evaluate the suitability of various tracking technologies, such as RFID, GPS and Bluetooth, and develop recommendations for the relevant bodies within IATA (2018b).

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11.1.4 Smart Facility There are opportunities in cargo handling for cost saving by intensifying cooperation among competitors. For example, it is common practice that the transshipment halls used by different carriers are audited independently of each other and thus several times, applying similar criteria. As part of the Smart Facility Operational Capacity audit (SFOC), another project within the StB Cargo programme, an accreditation procedure is being developed that should reduce the effort required for the audits by half and improve their quality. According to IATA, this auditing can be carried out more cost-effectively and sometimes better through structured self-assessments by operators and reviews by independent institutions.

11.1.5 Air Cargo Incident Database (ACID) By setting up the Air Cargo Incident Database (ACID), IATA is responding to the desire of those involved to track and analyse incidents and irregularities in the transport of air cargo in a structured manner. A distinction is made between incidents involving lithium batteries, other dangerous goods and ULDs. The existing reporting system is largely used for this purpose (IATA 2018a). Most airlines already collected data on incidents and irregularities in the past in order to meet regulatory requirements and their own safety programs. Until now there has been no uniform procedure for collecting, evaluating and comparing data (IATA 2017).

11.1.6 Cargo Connect The aim of the Cargo-Connect initiative is to simplify and improve electronic communication between airlines, ground handling agents (GHA), freight forwarders and customs clearance agents. In 2016, 95% of electronic communication went through intermediaries called Cargo Community Systems providers (CCS). Only a few connections exist directly between two servers. As the various CCSs are in turn interconnected, all stakeholders in the air cargo sector can communicate with each other. The intermediaries are able to handle a variety of protocols, including modern web-based communications. Whether CCSs are still needed at all in was questioned back in the earlier days of the Internet (Hastings 1996). More than two decades later, they continue to exist. They were and are capable of processing and forwarding the high volumes of data. The standard in use today is Cargo-IMP, an EDI dialect developed under the direction of IATA for the handling of air cargo. Cargo Connect has the task of setting new standards for access to the CCS and for communication between intermediaries. Such standards will allow participants to switch service providers more easily. In this context, airlines and forwarders are encouraged to switch from Cargo-IMP to the more modern Cargo-XML

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standard. Cargo-XML contains more information than Cargo-IMP and is therefore better suited to electronically transmit the diverse documents within the framework of e-freight. Cargo-XML also communicates better with new technologies such as scanners and tablet computers (IATA 2016a).

11.1.7 Discussion The implementation of the various initiatives highlights the slow progress that the air freight industry is making towards the digital age. As the divisional director of a leading freight forwarder responsible for air freight put it in a confidential conversation: it is not comprehensible to a customer in 2019 that, in the event of a delivery delay, the responsible gateway manager has to be called on his mobile phone at the weekend to look for a shipment in a warehouse, instead of reliable status information being accessible online. The frustration about the lengthy implementation of clearly identified solutions is shared by almost all stakeholders. To blame IATA would fall short of the mark. It represents the interests of the airlines. The industry, with the exceptions of some years, is generally not very profitable and has few capital reserves to invest over the long term. Investments that are made are mostly channeled into new flight equipment and improving the passenger experience. Air cargo is used by passenger airlines to cover running costs and is not a priority. Airlines have moved to cut costs continuously, not just in response to cyclically recurring crises (Doganis, p. 222). The fact that scarce IT development resources are not being invested in the modernization of cargo systems is understandable from a business point of view and in many cases even the order of the day. A second party that might have an interest in modernizing systems is the freight forwarding industry. But it is a customer of the airlines and has limited ability to set standards for all stakeholders, such as GHA, customs and the shipping industry. In the meantime, individual companies in the supply chain are trying to close the gap through individual initiatives. One example is Swedish communications manufacturer Ericsson’s collaboration with Finnair and freight forwarder Panalpina to create a platform where different parties can feed in and retrieve shipment data. In the (exaggerated) words of the person in charge of the project at Ericson, the current deficit is that shipments become invisible from a system perspective the moment they leave the warehouse (of the shipper) and only become visible again when they show up at the recipient (Air Cargo News 2018b). Information has so far been primarily shared between two parties in IT terms, but not maintained on neutral platforms to which all interested parties could have access. To what extent such an initiative remains an isolated solution or makes IATA’s efforts redundant, e.g. with regard to ONE Record, remains to be seen.

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11.2 Innovation in Aircraft Construction Anyone who looks at the development of aircraft construction since the dawn of the jet age at the end of the 1950s usually comes to the conclusion that relatively little has changed. Under the headline “Invitation to Disruption”, the Handelsblatt criticises the lack of innovation of the duopoly Boeing and Airbus (Fasse, 2016): A clad fuselage, now increasingly made of carbon fiber, engines that are mounted under the wings, usually two instead of the former three or four, and kerosene as fuel, now mixed with renewable fuels. These developments can hardly be qualified as technological leaps.

The development of a fundamentally new aircraft type is a financial feat for manufacturers. Instead, aircraft models that are more than 50 years old, such as the B737, are sometimes developed further. The development of the A380 is estimated to have cost US$25 billion, the total investment in the B787 Dreamliner estimated to be US$30 billion (Friese 2015; Gates 2011). In the case of the A380, it has already become clear that the development costs will not be recouped. For the B787, the verdict is still out there. In the meantime, both manufacturers can point to good performance indicators. With order books full, there is little urgency to innovate. In 2017, Airbus’ order book guaranteed capacity utilisation until 2022. The threat of a disruptive technology sometimes comes not from one of the two players, but from a third party. By analogy with the German automotive industry, which for a long time relied on the internal combustion engine and neglected the development of electric drives, until Tesla came along, it is conceivable that third parties will revolutionize aircraft construction through new technologies.

Attempt at an Outlook

12

Abstract

Air freight is a product that fascinates almost everyone involved along the supply chain. In part, this is coloured by the personal joy of travel and the observation of how a multitude of players work together in close interaction to produce the service. However, views differ widely in their assessment of how the air cargo industry will evolve.

12.1 Growth Forecasts of Aircraft Manufacturers The two aircraft manufacturers Airbus and Boeing regularly produce forecasts of growth in the aviation industry. Both assume that growth will exceed that of the global economy (Airbus 2018a; Boeing 2018b). They assume that the trend towards slowing growth rates will be reversed. For example, Boeing expects RTK to increase by 4.2% annually in the period from 2018 to 2037, compared with growth of only 2.6% in the 10 years to 2017. Accordingly, above-average growth is expected in intra-Asian and intra-Chinese traffic. Airbus expects FTK to increase by 3.4% for normal air freight (general cargo) and 5.1% for express shipments in the same period.

12.1.1 E-Commerce as a Growth Driver Global e-commerce growth has been the driving factor behind volume increases in recent years. Boeing points to estimates that global e-commerce sales could more than double from $1.7 trillion to $3.6 trillion between 2015 and 2020. Growth is particularly strong in China, with its young, tech-savvy population. China is already the world’s largest © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 J. G. Schäfer, Air Cargo, https://doi.org/10.1007/978-3-658-38193-6_12

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e-commerce market and is expected to be larger than the US, UK, Germany and France combined as early as 2020 (Boeing 2018a, b). The boom has been and continues to be primarily for the benefit of integrators. The shipment size and expected transit times are in the domain of companies like DHL, FedEx and UPS. But they have also encouraged the two market leaders Amazon and Alibaba to build up their own aircraft capacities. However, in the face of declining growth rates in their core business, airlines and freight forwarders are also increasingly pushing into the e-commerce segment. For both players, conquering the last mile is the real challenge. They are unable to deliver parcels at competitive costs due to their B2B shipping-oriented structures. One solution is closer cooperation between carriers and forwarders with those of national parcel companies. This is the approach taken by Lufthansa Cargo and the Chinese postal service, for example, in their strategic cooperation.

12.1.2 Logistics Activities of the Leading Online Platforms The development of the e-commerce business give reason for optimism to the two aircraft manufacturers, Boeing and Airbus: But it is a cause for concern for the transport industry and the integrators in particular. Volume increases reached a level where it has become worthwhile for the two leading providers, Amazon and Alibaba, to establish their own networks.

12.1.3 Amazon The technology group Amazon, which started as an online bookseller in Seattle in 1995, is the world’s leading online department store and the world’s largest cloud provider. The group has increasingly mutated from a retailer to a logistics company (Worstall 2014; Buchman 2018). Its investments are focused on two elements of the supply chain.

12.1.3.1 Main Leg In 2015, Beijing Century Joyo Courier Service, a Chinese subsidiary of Amazon, registered with the US Federal Maritime as a non-vessel operating carrier (NVOCC). The NVO is best described a carrier without assets, i.e. ships. The largest NVOCCs are without exception subsidiaries of 3PL, e.g. the world’s largest, Blue Anchor Line as a subsidiary of Kuehne + Nagel. A NVOCC can – this is the difference to a freight forwarder according to American jurisdiction – issue its own sea waybills, so-called bills of lading, but is at the same time obliged to publish tariffs. As an NVOCC, Amazon allows Asian shippers on its platform to take advantage of the company’s cheaper rates. The volumes Amazon requires get the company superior terms with container lines. Moreover, since Amazon is more advanced in digitalization than many ocean freight forwarders, the process costs are favorable. Shipments can already be consolidated in Asia. This means that exclusive groupage

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containers can be routed through to the Amazon warehouse in the USA or Europe and do not have to be broken up at the ports of reception (Dupin 2016). In the area of air freight, Amazon is also striving to make itself independent of third- party capacities (Jamerson 2016). In 2016, Amazon entered into a strategic partnership with the American airline Atlas. Amazon leases 20 Boeing 767 s each from Air Transport Services Group (ATSG) and Atlas Air. Amazon also agreed that it could acquire up to 19.9% of ATSG and 30% of Atlas Air over a period of a few years. Some of the aircraft will be painted in the Amazon design. Atlas Air, based in Purchase, New York, is one of the world’s leading ACMI providers. In 2016, the approximately 3000 employees generated consolidated sales of around 2 billion US dollars. The company is listed on the New York Stock Exchange.

12.1.3.2 Delivery Amazon is also investing in its own delivery capacities. For example, in 2014 the company acquired a 4% stake in Yodel, one of the UK’s leading parcel delivery companies. Yodel reported 5000 delivery staff and 16,000 employees in the UK that year. Amazon has also invested in French parcel delivery company Colis Privé. The complete takeover of the provider failed in 2016 due to antitrust concerns (Bowers 2014; Lierow et al. 2016; DVZ 2016a). In the US, Amazon has built its own delivery network consisting of independent contractors. According to Amazon, Delivery Service Partners (DSPs) must contribute at least US$10,000 in capital and, if they have between 20 and 40 leased vehicles in operation, can generate between US$1 million and US$4.5 million in revenue per year. The founders will receive training and software from Amazon, as well as other support (amazon.com 2018). A similar program is under development in Germany, but seems to have met less favorable response than in the US. In the long term, Amazon wants to deliver packages with drones. To this end, Amazon Prime Air is developing drones that will deliver packages weighing up to 2.5 kg from a delivery base within 30 min of the order being placed. The first delivery test was successful in the UK in December 2016 (amazon.com 2019). 12.1.3.3 Competition Between Close Logistics Partners By investing in its own air and shipping capacity and building its own parcel delivery capabilities, Amazon is emancipating itself from the integrators. All three leading players in the express segment, DHL, FedEx and UPS, have benefited from Amazon’s growth in the decades since its inception. The real danger for the companies is not that they will lose volume from Amazon’s business, but that Amazon will become a competitor to third parties as well. So far, Amazon has critical volumes only in metropolitan areas and on major trade routes. The company continues to rely on express and parcel carriers on less- frequented tradelanes and in rural areas. The latter sometimes balk at this form of “cherry- picking,” but in doing so they are accelerating Amazon’s ambitions to become a full-service logistics provider in its own right, controlling the entire supply chain from shipper to receiver. In its commentary on its latest financial statements, Amazon names in 2019

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transportation and logistics service providers as competitors for the first time, a logical consequence of its own actions (Woods 2019).

12.1.4 Alibaba Alibaba is the world’s second leading internet retailer alongside Amazon. In 2017, it generated sales of more than USD 50 billion with around 50,000 employees. The Hangzhou- based group, which is listed on the New York Stock Exchange, includes a B2B and B2C platform, a payment system and a cloud provider. Alibaba aims to deliver all orders within 1 day in China and within 3 days in the rest of the world (Lennane 2018a).

12.1.5 JD.com JD.com is Alibaba’s lesser-known competitor in the West. It primarily serves the domestic Chinese market (Team 2018). The company is based in Beijing. It generated revenues of close to US$70 billion in 2018 with its 180,000 employees. It invests, on the face of it even more than its competitor, in advanced technologies such as drones and artificial intelligence. In 2018, JD.com also started to build its own freighter fleet through a collaboration with Tianjin Air Cargo.

12.1.6 Market Distortions in International Online Trade Alibaba and Amazon invested in their own freighters at a time when legacy carriers such as BA, Air-France KLM, Japan Airlines and EVA Air were cutting their dedicated freighter fleets (ACN 2014). Since they predict the volumes that will be transported much more accurately than the carriers, they can better utilize their capacity. They already know at the moment of ordering how many shipments with what weight and what dimensions are likely to be flown out in 1–2 days and can consolidate shipments accordingly. For freight forwarders and airlines, consolidation does not take place virtually, but in the warehouse on the day of departure. This gives the large e-commerce platforms efficiency gains that integrators and air freight forwarders cannot easily make up. However, only time will tell whether the model of transporting small consignments together with their packaging over long distances will be viable in the long run. It is more problematic if shipments are transported to Europe and North America as individual packages. The packaging, the addition of accompanying documents such as warranty cards and instructions for use, and the delivery of the shipment can be done more ecologically from distribution warehouses in Europe and North America. However, this route is more time- consuming and more complex to orchestrate for the majority of small Asian shippers. So far, online retailers from China have benefited in two ways:

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• The shipping costs for parcels that Chinese traders had to pay were significantly subsidized. Forbes magazine compared the cost of shipping a 0.5 kg package. The USPS charged about US$6 to send a parcel from South Carolina to New York, while the cost from Beijing to New York was only US$3.66. The reason being that national postal companies could pass only a fraction of their costs, because of unfavorable cost share agreements with the Universal Postal Union, located in Berne. For example, the USPS and Deutsche Post are only paid about US$1 or 1 Euro, respectively, for delivering mail (Mills 2018; Shepard 2017; Schlautmann 2018). In 2018, the US government decided to terminate the contract because it would give Chinese companies unfair advantages. • Another loophole that has favoured the boom in e-commerce between Asia and Europe will be closed from 2019. In the past, many Asian traders had not registered with the national authorities. The German treasury, for example, was deprived of sales tax in the hundreds of millions of Euros (Meier 2018). Correcting these market distortions will help restore the competitiveness of traders in Europe and North America. It may be that shipping goods from China, will be less profitable in the future, and air cargo volumes may decline.

12.2 The Future of the Air Cargo Industry from an Industrial Economic Perspective For anyone involved in business, it is evident that certain industries are more profitable than others. Companies in these industries are able to pay their employees better wages, grow faster, and pay out higher dividends to their owners than companies in other industries. The question of why some industries are supposedly “better” than others has long preoccupied scholars. The industrial-economic view postulates that the earnings power of companies is largely shaped by the competitive environment. The American economist Joe Bain developed the structure-conduct-outcome paradigm as an explanatory framework in the 1950s, He provided empirical evidence of the profitability of individual industries as a function of the competitive situation (Bain 1951). Through the writings of Michael. E. Porter, the paradigm reached a wider audience (Porter 2008a, b). Porter describes the five competitive forces (“Five Forces”), the characteristics of which determine the attractiveness of an industry. These are the bargaining power of suppliers, of customers, the threat from new entrants and from substitute products, and internal rivalry in the industry. Applied to the example of the airline industry, the unsatisfactory profitability of the industry can be explained. Among the 30 or so U.S. industries, airlines and mail-order companies had the lowest returns on invested capital (ROIC), averaging 5.9% over the period 1992–2006. The returns were regularly below the cost of capital, meaning that the companies were destroying value. An analysis commissioned by IATA confirms that none of the five forces is shaping up favourably for the industry (Pearce 2013). It can be extended to include the specific conditions of the air cargo segment.

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12.2.1 High Power of Suppliers The suppliers of new aircraft are now almost exclusively two companies: Boeing and Airbus. The smaller competitor Embraer has tied itself to Boeing and ATR to Airbus. Russian and Chinese competition so far occupies niche markets at best. As a duopoly, the two companies can skim off returns at the expense of the airlines. Boeing even has a virtual monopoly in the field of brand-new cargo aircraft. The market for turbine manufacturers is equally consolidated. Here, the three manufacturers GE Aviation, Rolls-Royce, and Pratt & Whitney dominate. In this respect, the market for used passenger aircraft is more competitive. The major airlines compete with each other, and lessors compete with each other, when they act as sellers of passenger aircraft that have reached the end of their economic life. The relatively low price of such aircraft provides the justification to convert them to freighters. Here again, the aircraft manufacturers are in competition with private suppliers. However, since the latter depend on licenses from the original manufacturers for the conversion, competition is imperfect (Fig. 12.1). Pilots and cabin crews employed by Western airlines have mostly organised themselves into trade unions and often enforce demands on working conditions and salaries by using the right to strike. In Asia and the Middle East, such means are less common, but the bargaining power of pilots in particular is considerable. They represent a bottleneck in recruitment. Pilots – like mechanics – are trained for a specific type of aircraft. This restriction is

Fig. 12.1 The workplace of the pilots of a B747F (Cargolux)

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particularly virulent in the case of wide-body aircraft, given the cost of training. It is worth recalling the measures Cargolux has resorted to in order to recruit pilots for the B747–400 fleet of its Chinese subsidiary.

12.2.2 Purchasing Power of Customers Airline customers have significant buying power. The cost of changing suppliers is minimal. The services offered are very comparable and the transparency of prices is almost perfect, even for individual travelers, thanks to electronic booking platforms. What is true for passage is also valid in the cargo sector. The differentiation of services is almost exclusively based on price and the quality of the connection offered. The latter describes the departure or arrival times and, if applicable, the transit time depending on any transfer requirements. Whereas additional quality aspects such as frequent flyer programmes, seat pitch, width and recline, catering, ground and in-flight services and in-flight entertainment (IFE) come into play in the passenger segment on long-haul flights, these differentiation options are largely absent in the cargo segment. Here, services are even more interchangeable and the cost of switching to another airline is even lower. At the same time, demand is much more concentrated than in the passenger sector. The major international air freight forwarders regularly represent the customer structure in the cargo sector. Only rarely is a beneficial cargo owner, shipper from trade or industry among the major customers.

12.2.3 New Players Given the below-average returns earned by airline owners, it is surprising that new players enter the market every year. This is possible because the barriers to entry are manageable, and the incumbent players have relatively few advantages from their existing market presence. Given the acquisition cost of a new aircraft, how can the threat of new players be considered low? Porter identifies seven reasons when barriers to entry might exist (Porter 2008a), but these are less likely in the air cargo sector (Cf. Table 12.1). Ishka, a consultancy specialising in air transport, counted a total of 47 airline start-ups in 2016 (Flaye 2017). The majority of the start-ups are in the full-service and LCC segments, but four pure cargo airlines were also launched. However, a closer look puts the first impression into perspective. Only one company, Sky Gates Airlines, is a true start-up. The remaining three are spin- offs of existing companies. Sky Gates initially leased a 15-year-old B747-400F from Silk Way West Airways, the cargo airline from Azerbaijan, with which it also has a marketing agreement. The monthly lease cost for an older 747-44ERF was only about $250,000 a month in 2015. The investment requirements are thus within manageable limits for a young start-up. Even if the number of genuine start-up cargo airlines is manageable: for existing players, the risk of a new competitor entering the market is theoretically a

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Table 12.1 Assessment of entry barriers in the air freight market Form of the barrier 1. Supply-side economies of scale 2. Demand-side benefits of scale

Note Advantages exist when companies that produce large volumes can post lower unit costs. However, this is not the case in the freight sector Network effects can be assumed more readily in passenger than in cargo. In fact, passengers of leading airlines such as Lufthansa or Emirates benefit from the breadth and depth of the offer. This is less true in cargo. Freight forwarders, who are the main customers of the cargo flight product, put together their services individually 3. Customer switching The cost to a customer of switching from one airline to another is costs minimal. All major airlines are easy to integrate electronically into the carrier’s own systems 4. Capital The acquisition costs of brand-new aircraft are high and hardly requirements affordable for start-ups. The costs for converted passenger aircraft or old freighters, on the other hand, are manageable 5. Incumbency Air freight is a product that, for all its changes, has been in the market advantages for 100 years. Top dog status has been earned, if at all, only by FedEx independent of size of and UPS in the north American express market existing suppliers 6. Unequal access to Passenger flights and air freight shipments can be compared, evaluated distribution channels and booked by interested parties without any effort 7. Regulatory barriers In fact, the airline industry is still – Worldwide – One of the most restrictive government regulated industries, for example in terms of airline ownership policy Own representation

constant. With Amazon and Alibaba, real competitors already entered the market, as described in Sect. 12.1.2.

12.2.4 Existing Substitute Products As described at the outset, air freight consists essentially of three categories: perishable goods, emergency goods and valuable products. Due to technological development and investments in transport infrastructure, all three categories are vulnerable to substitute products.

12.2.4.1 Container Shipping The majority of international trade is handled by ship. The ocean freight has advantages in all the dimensions that put air freight at a disadvantage: Cost, environmental sustainability, size and weight restrictions. Since its invention, the shipping container has proved to be an almost ideal means of transport: This because it can be loaded on ocean-going vessels, barges, railways and trucks. Shipment in this one transport container is possible over long

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distances without reloading the goods. The globalization of the world economy would not have taken place without the invention of the shipping container. Compared to airplanes, the enormous capacity of container ships is impressive. Containers are standardized in their dimensions, coming in sizes of 20 or 40 feet in length, which corresponds to 6.1 or 12.2 meters in length. About 30% of the sea containers used worldwide are 20 feet, while about 60% are 40 feet standard containers. The remainder are special containers in the sizes mentioned. The maximum payload is between 20 and 25 tonnes. Assuming that a ship is loaded one-third with 20′ and two-thirds with 40′ containers, 20% of the slots are occupied by the shorter version and 80% of the slots by the larger one. Modern container ships have a capacity of more than 20,000 tons, under the above assumptions this would be about 4000 containers of 20′ length and 8000 containers of 40′ length, in total 12,000 containers with an average capacity of 22 tons payload. A large container ship can thus carry more than 260,000 tonnes of cargo – if an average payload of 20 tonnes is assumed – which is more than 2000 times the capacity of a wide-body B747–400 F aircraft.

Due to the use of increasingly larger container ships with a slot capacity more than 20,000 TEU, the market in the mid-2010s is characterized by an oversupply of freight volumes. Although the new, large ships have a lower cost per slot than older ships, the savings are not sufficient to compensate for the decline in freight rates. In the short term, the fall in rates has the effect of making shipping by ship even more attractive, but it is too low to guarantee shipping companies’ long-term survival. In the medium term, the persistently low rate level will lead to a crowding out of weaker providers and a consolidation of the market. For example, the German container shipping company Hapag Lloyd merged with its Chilean market companion CSAV in 2014. In 2016, the intention to merge with the shipping line United Arab Shipping Company (UASC) from Kuwait was announced. However, in view of existing overcapacities, permanently low sea freight rates are to be expected. Given the much longer transit times of ocean freight compared to air freight – about six weeks instead of six days from the ramp of a shipping warehouse in China to the ramp in Germany – it is surprising to what extent the ship has become a serious competitor to the airplane. Indeed, according to estimates from a 2014 study presented at IATA’s World Freight Symposium, air freight’s share of aggregate air and ocean freight tonnage declined from 3.1% to 1.7% between 2000 and 2013 (Seabury 2014). Although air freight tonnage had grown at an average annual rate of 2.6% over the period, this was significantly slower than those in ocean freight at a CAGR of 7.4%. There are essentially three causes that have led to the shift from air to ocean freight:

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1. The freight structure effect: the composition of goods flows has changed. The transports of lower-value and thus sea freight-affine goods have increased more than those that are higher-priced and thus considered air freight-affine. For example, the volumes of raw materials transported increased by 7.8% and chemicals by 8.5% over the comparative period 2000–2013, while high-tech products typically transported as air freight increased in volume by only 4.1%. The goods structure effect in global trade thus runs counter to that within developed economies. For example, the railways, which typically transport bulk goods such as coal and steel, have been increasingly displaced by trucks over the decades (Wittenbrink 2014, p. 25). 2. The value effect: if demand for low-priced products within a product line increases more than those at the higher end of the price scale, this also leads to a modal shift. For example, the sub-segment of very low-priced textiles has grown more than the sub- segment occupied by companies such as Dior, Chanel or Hugo Boss due to the emergence of brands such as Zara, Primark and H&M. Inexpensive clothing is preferably transported by ship from Asia to North America and Europe, while luxury items are transported by air from Europe to Asia and North America. 3. Transport shift: the price drop within a product line, such as laser printers, often no longer justifies shipping by air. A modern printer with an assumed weight of 5 kg and a retail price of about EUR 70 is better transported by ship or rail for business reasons, even when the higher packaging expense is taken into account. The aforementioned study focuses on the economic aspects of transporting valuable products. In addition, technical progress has favoured the shift from air to sea in this respect. It made the transport of perishable goods possible in the first place. Modern reefer containers, such as those used by Hapag-Lloyd, allow the temperature to be adjusted up to ten times during transport and the ripening process of the loaded fruit to be delayed by changing the CO2 content in the container. Shortly before arrival at the port, the process can be re-triggered so that the goods reach the supermarket shelves with the desired degree of ripeness (Hapag-Lloyd 2018). The use of this technology allows avocados to be transported for up to 35 days and bananas for up to 45 days without losing their value to retailers. This technological leap was made possible because the containers now have their own refrigeration units (integral containers) and are not cooled by a central refrigeration unit on the ship (porthole containers), as was still the case in the 1990s.

12.2.4.2 Railway Rail has recently emerged as an interesting alternative for transporting goods between Asia and Europe. Due to the different track widths, freight has to be reloaded twice, which causes delays. The successor states of the Soviet Union have a rail width that differs from the standard gauge prevalent in Europe. The running time of the trains is around 2–3 weeks, which is between that of the aircraft and the container ship in terms of time. Currently, the capacity of the trains is still quite limited. A typical train transports containers 40 feet long, which is equivalent to 80 container positions (TEU). Assuming four

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trains each on 350 days, up to 112,000 TEUs would be moved in each direction each year. This volume can be moved by five large container ships with a capacity of 21,000 TEU alone. According to market participants familiar with the product, the cannibalization of revenue is greater in air freight. Many of the goods that are moved by rail between China and Europe were previously transported by air. Rail can be used in particular to reach those cities in the Chinese hinterland that have so far been poorly connected to the seaports on the coast. The development of the hinterland is one of the strategic priorities of the Chinese central government. It is intended to counter the rural exodus from the provinces to the better developed coasts. Therefore, even stronger competition from rail is to be expected in the future. The Chinese and Russian governments have agreed to establish a high-speed train connection between Moscow and Beijing, which would reduce travel time from 6 days to 33 h. This connection will also reduce freight transit times in the medium term, as all parties will be interested in opening the route to freight traffic as well.

12.2.4.3 Multimodal Offers In multimodal transport, more than one mode of transport is used. Intermodal, as a special form of multimodal transport, uses the same transport unit to transport consignments on several modes of transport without repacking (Steadie-Seifi et al. 2014). For example, a sea freight container can be carried on an inland waterway vessel, a rail car, or a truck in addition to an ocean-going vessel. Air freight shipments are always multimodal, as a precarriage or onward carriage by truck to the airport is almost always required. On the other hand, they are rarely intermodal, as ULDs are usually only travelling between gateways. In view of the considerable costs of air freight, transport managers are looking to combine air-freight with other modes of transport. One combination that is already established combination is that of the fast but expensive aircraft and the slow but inexpensive ocean- going vessel. A number of freight forwarders offer such transports as a standard product, especially via the Gulf States. For example, a consignment is transported from Hong Kong to Dubai by ocean-going vessel, transported from the seaport to the airport and then transported on to Europe by air. Compared to air transport, cost savings of 50% can be achieved, and transit times can be reduced by between 30–50% compared to sea transport. 12.2.4.4 Truck Apart from a few adventures, the Europe-China route has rarely been covered by car, and then usually not through Siberia. The reason was the lack of infrastructure until a few years ago. Until 2004, there was a gap of around 640 km on the route in central Siberia, which was only passable under the most difficult conditions and was unsuitable for the transport of goods. The now completed R297 motorway, the “Amur Highway”, makes it possible to reach Vladivostok from Moscow and thus also northern China (Interfax 2014). Already today, forwarding companies offer transports by truck from Europe to Mongolia. It seems only a matter of time before the first regular connections by road to China are offered. One obstacle to more rapid expansion will be the security in parts of Russia. Truck

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transport lends itself to higher-value goods. However, this also entails an increased risk of theft or hi-jacking. In South America, trucks and trains will not be a substitute for transports to Central America in the foreseeable future. The gap in the Panamericana between Colombia and Panama, is politically deliberate. Also, the crime rate in parts of Central America, especially in Guatemala and Mexico, is so problematic that the truck can hardly replace the airplane.

12.2.5 Substitute Products Under Development The development of innovative substitute products is of interest to shippers, express service providers and airlines. The actual pioneering work in developing new systems has rarely taken place within the logistics sector. However, it is the better-funded integrators in particular who are making early efforts to test the marketability of new technologies.

12.2.5.1 Unmanned Aerial Vehicles (UAV) Unmanned aerial vehicles (UAVs) are defined by ICAO as flying objects that are not controlled by a pilot. Unmanned aerial systems (UAS) are aircraft and their associated elements that are operated without a pilot on board (ICAO 2011c). Another common abbreviation for such systems is RPAS (remotely piloted aviation systems). Colloquially, they are referred to as drones (Boucher 2015). With these systems, navigation takes place autonomously or via a remote control, usually from the ground. The drones known from private use, which are operated for “purposes of sport or recreation”, do not count as unmanned aerial systems (BMVI 2014). The demarcation is made by the use and less by the design. If a drone is used privately for sport or recreation, it is a model aircraft and not a UAV. In fact the drones that integrators such as DHL and UPS and retailers such as Amazon and Walmart are testing are very similar to the devices that are operated privately (Höpner 2016). Quadrocopters are mostly tested, i.e. unmanned helicopters with four rotors, two of which rotate in opposite directions. They are suitable for transporting smaller quantities over shorter distances, especially in the B2B sector. Even if the use and not the design is the defining characteristic of UAV, there is another crucial difference to model aircraft. UAV, such as those being tested by express delivery companies or Amazon, are used beyond the line of sight of the operators, unlike drones in private use. They fly beyond Visual Line Of Sight, (BVLOS). DHL has tested the use of drones in the delivery of medicines on the North Sea island of Juist (Nicolai 2014). Their use was possible even in adverse weather conditions where normal aircraft would not have taken off. Drones are primarily suitable for integrators, as the average weight of express shipments is considerably lower than what is transported as conventional airfreight. In addition, express shipments are much more expensive and urgent in relation to their

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weight, which justifies the use of aircraft on the first or last mile of the transport route in the first place. The latest generation of drones is no longer resemble the simpler quadrocopters. DHL’s Parcelcopter 3.0, for example, can take off and land vertically. In flight, however, it more closely resembles a small aircraft (DHL 2016a). As UAVs become more powerful, their potential applications increase. Their increasing capability opens up new horizons. The German Aerospace Center (DLR) distinguishes between two types of non-private, non- military use of UAVs (Temme and Helm 2016). On the one hand, commercial applications, such as taking aerial photographs, use in agriculture and also the transport of cargo; on the other hand, government applications, such as counter-terrorism, meteorology and border security, among others. In the area of cargo transportation, the authors identify three potential applications: • Long-haul express freight transports (long-haul express freight) • Company internal transports • Emergency transports (relief flights) The challenges are not in designing an unnamed aircraft that can transport goods over long distances. The Golden Hawk military surveillance drone from defense manufacturer Northrop Grumman has a payload of only up to 1.36 tons, but a range of 22,780 km (Northrop Grumman 2016). This is far more than that of the B777–200 LR, the civilian aircraft with the longest range of 15,000 km. The maximum operational time of the drone is over 32 hours. In the medium term, it is conceivable that even larger cargo aircraft such as the B777 will be converted to fly without pilots on board (Temme and Helm 2016). Greater challenges lie in keeping drones and manned aircraft at a safe distance from each other on the ground, i.e. at airports, during take-offs and landings, and in flight. The urgency to address this issue was demonstrated by the numerous flight cancellations at UK airports in December 2018. The risk can be solved in the short term if drones only use dedicated airports and are deployed on specific corridors. Transferred to the area of normal air freight, certain airports and corridors would have to be kept free for UAVs. Such a development could sometimes benefit those airports, such as Parchim or Lübeck, that have so far failed to attract significant LCC and cargo business.

12.2.5.2 Tube Capsules and Hyper Loops The idea of transporting small goods over a short distance through tubes was first implemented in London in 1853. In German, such systems are known as Rohrpost, in English as “Pneumatic Tube Transport” (PTT). The capsules are moved by generating either compressed air or a vacuum. Such systems can still be found today, for example in hospitals, where blood samples, documents and similar items are transported to the wards (Kuster 2010).

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Concepts for transporting larger goods over longer distances unaccompanied, i.e. without a driver, through tubes have not yet been successfully implemented on a permanent basis anywhere. Such raw capsule systems differ from conventional pneumatic tube systems in that the capsules are driven by their own propulsion system. The vacuum in the tubes is not used to move the capsule, but to reduce air resistance. In order to transport larger goods, the tubes also have a larger diameter. For some years now, various innovative concepts have been developed for transporting people and freight in tubes. The driving force behind the idea of transporting pods through tubes at high speed is Elon Musk, the South African-born founder of PayPal, Tesla Motors and SpaceX. Hyperloop Transportation Technologies is a California-based startup that is developing technologies to transport passengers and cargo at speeds of around 1200 km/h over distances of up to 1500 km. These speeds are to be achieved by extracting air from the tubes in which the transport capsules move. This way the problem of air resistance can be solved. The capsules are to glide in the tubes on air cushions. For this purpose, air is sucked in at the front of the cabin and moved out again at the bottom or used as propulsion (Musk 2013). In the cargo version, the capsules are to have a payload of up to 22.5 tons. Despite the visionary character, established transport companies are also interested in the project. Elon Musk has proven with his previous start-ups, such as Tesla, that he is capable of bringing disruptive technologies to market maturity. In light of this success, Deutsche Bahn became involved in the project in 2016 through its subsidiary DB Engineering & Consulting (Mühle 2016; Heeg and Lindner 2016). Critics, on the other hand, point out that based on their calculations, the pilot line between Los Angeles and San Francisco alone would cost around USD 100 billion rather than the USD 6–10 billion envisaged (Bilton). Even if the targeted distances are below those of conventional airfreight, a successful implementation of the hyper-loop concept would have a significant long-term impact on the design of global logistics chains. For example, an even stronger focus on a few central hubs in Asia, Europe and North America could be expected, to which regional nodes within a radius of up to 3000 km would be connected. The impact would be even greater in the express segment than in conventional airfreight. The system would make regional air cargo feeders largely obsolete. The hyper-loop networks, which would primarily be used to transport passengers during the day, could be used to transport cargo at night. Transport of passengers and cargo by aircraft would then be limited to serving the periphery and intercontinental routes.

12.2.5.3 Cargo Sous Terrain The Cargo Sous Terrain (CST) project aims to move freight transport in Switzerland underground. The vehicles would be electrically powered and move on induction tracks. They would be considerably slower than the Hyper Loops, but their network would be more closely meshed. The project was initiated by the Swiss business community, namely Migros and Coop, the leading retailers in Switzerland. Unlike Hyperloop, the CST is designed to transport freight only. It will run exclusively underground and connect Switzerland’s major metropolitan areas between Geneva in the southwest and St. Gallen

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in the east. The concept envisages that freight will be transported by elevators from intermediate storage facilities into the tunnels, where it will then be carried at a speed of around 60 km/h. This low speed will is to be put into perspective. Trucks on Swiss motorways do not travel any faster on average. It is planned to finance the project without public funds. The task of the state is initially limited to creating the necessary legal conditions. The construction of the first stage is estimated to take 7 years. It is scheduled to open in 2030. The project is also attracting international interest. Hyperloop One was the first foreign investor to take a stake in CST (Cargo Sous Terrain 2016). The Cargo Sous Terrain project focuses on the transport of goods within Switzerland. It is not a substitute for air freight. However, it is conceivable that the system can be used for the pre-carriage and onward carriage of goods at the three major Swiss airports of Zurich, Basel and Geneva, and that it will be extended to neighbouring countries in the distant future.

12.2.5.4 3D Printing One technology that could make the transportation of goods obsolete is 3D printing or additive manufacturing (AM). This is a relatively new technology. The first prototypes were developed in the mid-1980s. One of the inventors is Chuck Hall, who developed the stereolithography process that is still widely used in industry today (Lipson and Kurman 2013). The first successful applications were implemented in the dental field. The cost of a printed dental prosthesis is a fraction of that of its manual production by a dental technician (Kühl et al. 2015). An implant manufactured in Asia must be flown. A locally printed one can be transported by mail. The extent to which this new technology might impact the much larger market for replacement parts is a matter of debate. The US think tank Atlantic Council already estimated the potential impact in 2011 (Campbell et al. 2011): • Traditional assembly line manufacturing could be streamlined or eliminated for many products. • Instead of physical products, only the designs are transported, and this electronically. Production is shifting from the Asian workbenches, especially China, back to the consumers – with positive effects on fuel emissions in production and transport. • The capital-intensive maintenance of inventories is no longer necessary. The replacement of a defective door in the icebox of a refrigerator is intended to illustrate the possibilities that 3D printing brings with it. If a door needs to be replaced today, the customer in Germany will most likely order the replacement part from the manufacturer’s customer service department. The manufacturer, if the part is available, will retrieve it from the European regional warehouse or the Asian production facility. As the replacement of the part is urgent, transport will often be by express and involve air freight. In the future, it is conceivable that the blueprint will be retrieved electronically and the “printing” of the icebox door will be done either at the producer’s own country, an independent copy shop in the customer’s area, or even at the customer’s site. It is to be expected that this type of production will be cheaper, faster and of the same quality as mass production abroad. There is no need for the costly transport by air freight.

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The world’s leading shipping company Maersk, for example, is experimenting with printing spare parts on tankers (Canty 2014). Until now, spare parts usually have to be brought to the nearest port and from there by chartered ship on board the tanker. Urgent parts that are not available locally have to be sent by air freight or express shipment. The use of 3D printers makes it possible to provide parts within a very short time at a much lower cost – if necessary even on the high seas. Among other things, the costs for packaging, transport, customs clearance and onward carriage are saved.

12.2.5.5 Airships The idea of transporting cargo by airship as a further development of the zeppelin is captivating. By replacing the flammable hydrogen with the safer helium, the risk of explosion is more controllable. The main advantage of the airship is that it is not dependent on airfields, but can – at least theoretically – land on any large open space. The design of modern airships has changed since the end of the Second World War. At that time, rigid airships were still used, in which the aluminum frame dictated the shape. The more modern type of construction is a semi-rigid one that uses far fewer elements to give the airship structure, thanks to the air pressure generated (Straeter 2012). Another innovation is the hulls of modern airships. Today, they consist of layers of different plastics that are sewn and glued together (Klußmann and Malik 2007). An overview of major airship projects can be found in a contribution to the 2008 ICAS aviation conference (György et al. 2008) (Table 12.2). It shows that the majority of the vehicles only have a very limited payload, are slow and cannot be compared with the rigid airships from the 1930s. Projects with a payload comparable to the Hindenburg or Graf Zeppelin were never realized. Thus, an airship suitable for the transport of significant cargo is not yet available on the market: • The successor model to the Graf Zeppelin and Hindenburg airships from the 1930s, the NT model, which has been built since 1997, is primarily used for tourist and scientific purposes. • The attempt to launch a keel airship for transporting up to 60 tons of cargo with the Cargolifter did not make it past the concept phase. The airship would have had 2.75 times the volume of the Hindenburg. Due to its dimensions, it eliminated a key advantage of airships: it would not have been able to pick up the cargo at a random location, but the cargo would have had to be transported to the airship by land at great expense (Khoury et al. 2012). The parent company was wound up after skyrocketing development costs. The shipyard hangar, the largest cantilevered hangar in the world, was converted into a tropical theme park (Budras 2015).

12.2 The Future of the Air Cargo Industry from an Industrial Economic Perspective

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Table 12.2 Overview of realised and failed airship projects T yp LZ1 LZ 6 LZ36 LZ120 LZ129 WDL 1B American blimp A-150 Skyship 600 Spirit of Goodyear Zeppelin NT Cargolifter CL160 Aeros 40D Skycat 20 Aeroscraft ML16 Dynalifter PSC-1 RA-180

Year 1900 1910 1915 1920 1936 1988 1997 1998 2000 2000 2005 2006 2008 2009 2009 2009

Speed (km/h) 28 56 85 127 137 105 95 120 80 125 125 82 157 220 185 148

Payload (kg) 1400 4400 11,000 96,000 96,000 800 628 1900 650 1900 160,000 980 20,000 5400 86,200 30,000

Built? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No No No No

György et al. (2008)

• The Airlander 10 is a hybrid airship with a payload of ten tons that still has to prove its commercial suitability. Should the project be able to overcome the problems encountered during the test flights, the further development of the Airlander 50 with a payload of 60 tons is conceivable. The targeted range is approximately 3500 km (Norris 2015; Harris 2016; global). In the development of cargo airships, the fundamental problem has not yet been solved, since at the moment of setting down the cargo, a massive lift would occur and the vehicle would virtually “shoot” into the air. Airships do not need a hanger, but they do need an anchorage The Cargolifter would have had to be fixed at an altitude of 60–100 m above the ground, where its size would have made it vulnerable to gusts of wind and turbulence (Khoury et al. 2012). One hope for the industry is to develop hybrid models that combine the design features of airships and airplanes or helicopters. However, their suitability has yet to be proven in practice.

12.2.6 Internal Competition The air freight market is characterized by a large number of players who are in intense competition with each other. IATA has almost 300 airlines as members in 2018. They represent around 80% of global air traffic. The comparability of prices and the homogeneity of services mean that competition between airlines is intense. Time and again, airlines run into liquidity problems, are taken over by larger players, or even cease doing business altogether.

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Number of Airlines with Investment- and Speculave Grade (S&P, Stand Nov. 2015)

Investment Grade

Speculative Grade 5

5 4 3

2

2 1

BBB+

BBB

BBB-

BB+

BB

BB-

B+

B

B-

Long-Term Standard & Poors Credit Rang Fig. 12.2 Number of airlines with investment or speculative grade

Margins in air transport are unsatisfactory from a business perspective. Most airlines, but also many other service providers in the segment are not even able to earn their cost of capital (Fig. 12.2). The difficult situation in which airlines in particular find themselves is also reflected in financial ratings, among other things. At the end of 2015, for example, the international rating agency Standard & Poors gave just seven of 22 airlines an investment grade (IATA 2015b): Air New Zealand, Qantas, Lufthansa, Southwest, Alaska Airlines, Ryanair and WestJet. The remaining competitors only had a rating between BB+ and B−. Such a speculative grade indicates an increased likelihood of default. The statutes of most institutional investors, such as large pension funds in particular, prohibit holding bonds in companies with poor credit ratings, expressed as a non-investment grade. These companies thus find it difficult to obtain financing on the capital market and to make the necessary investments to ensure their long-term competitiveness. Remarkably, among the seven investment grade companies, three are low-cost carriers, which again underlines the economic viability of the business model. What can the players in the market do to meet the demands of their shareholders, especially the shareholders, investors, employees, customers and suppliers? How companies can strategically optimally align themselves to the challenges is the subject of ongoing intense debate in business administration between adherents of the industrial economics and resource-based schools of thought.

12.3 Possibilities of Differentiation Through the Development of Core Competences

315

12.3 Possibilities of Differentiation Through the Development of Core Competences While older writings in industrial economics merely provided economic descriptions of returns in different competitive environments, Porter distilled these insights into factors that allow a firm to gain competitive advantage. Porter was less interested in how perfect competition could be achieved for the benefit of society, but conversely how firms could operate successfully by adapting to their environment. However, very few players in the business world can fundamentally change their business model if they are dissatisfied with the profitability of the existing business. The history of business administration knows only a few examples in which companies have successfully reinvented themselves. A less encouraging example is the transformation of the steel company Preussag into the integrated tourism company TUI, which in retrospect can be judged as a failure (Dittmann et al. 2004). There is disagreement on the extent to which profitability is determined by the industry. Although supported by empirical knowledge – companies in the tourism industry are generally more profitable than steel manufacturers, for example – empirical evidence can only contribute to a limited extent to settle this academic dispute. At the beginning of the 1990s, the US management researchers C.K. Prahalad of the University of Michigan and Gary Hamel of the London Business School enriched the discussion with the concept of long-term success factors (Prahalad and Hamel 1990; Hamel and Prahalad 1994). It is a variation of the resource-based view, which is in contrast with Porter’s market-based view in the 1990s (Manikutty 2010; Schäfer 2001; Dillingham 1910; Grant 1991). Hamel and Prahalad argued that companies needed to break free from the spiral of constant cost-cutting programs– an observation that fits few industries as well as aviation. This requires the development of unique core competencies. These core competencies are “bundles of capabilities and technologies that allow a company to deliver specific benefits to customers” (Hamel and Prahalad 1994, p. 199). Some of the companies listed in the first publication of “Core Competence of the Corporation” in 1990, namely Canon, Casio, NEC or Philips, are no longer suitable as role models after three decades. It is hard to deny that successful companies generate sustained excess returns when they develop capabilities that competitors cannot replicate in their organizations. Prahalad and Hamel identify three characteristics of core competencies: 1 . They allow potential access to a wide range of markets. 2. They contribute significantly to the perceived benefit of the customer. 3. They are hard to copy. The authors cite, for example, Honda’s competencies in engine manufacturing (Hamel and Prahalad 1994, p. 204 f.). In addition to vehicles, Honda engines can also be found in garden products, such as lawnmowers, in watercraft, e.g. jet skis, in generators and in aircraft.

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Attempts to define core competencies for the airline industry (Nair et al. 2011) are not very convincing. As a low-cost airline, why is Ryanair so much more successful than its closest competitors operating in the same market? At the beginning of 2017, Ryanair’s enterprise value is already 20 times that of its German rival, and Air Berlin filed for bankruptcy at the end of the same year. One answer may lie in the company’s strict cost discipline and clear positioning of its core product. This focus on costs can be found in all aspects of the company, right down to its dealings with customers and its own employees. At the end of the 1970s, the two McKinsey consultants Tom Peters and Robert Waterman looked for constants that explain why some companies are more successful than others. To this end, they analyzed 43 corporations in detail, i.e. companies that were excellent in their subjective perception and that of their environment (Peters and Waterman 1986). They described companies not only on the basis of their structures, systems and strategies, but also on the basis of their shared values, skills, management style and staff. These 7S are equal in their contribution, have to be in harmony with each other and strengthen each other. With regard to the example of integrators: A company like DHL Express will hardly be able to copy the core competencies of UPS. The success model of the American market leader consists of a focus on process reliability, low staff turnover and American values learned over more than 100 years. Instead of copying the competition, DHL Express is successfully reflecting on its own strengths. The roots of DHL Express lie in the traffic between Asia and North America. Before its competitors, it developed countries in growth markets such as the Middle East and Africa. For DHL, the will to be a pioneer in a business field is decisive. DHL is often one of the first companies gaining a foothold in countries that are just opening their markets. For example, it was one of the first in many Eastern European countries after the fall of the Iron Curtain. And so both the industrial economic perspective and the resource-based perspective can perhaps be reconciled: • With Porter it is to be attested that the returns in the aviation industry are volatile and unsatisfactory in most years. The reason lies in the market structure. It costs little for customers in the bulk business to switch providers. • On the other hand, in line with Hamel and Prahalad, we find companies that are more profitable than others in this competitive industry. The companies Cargolux and Air Bridge Cargo each successfully occupy niches in the sub-segments for cargo that needs to be reliably transported on the main deck. Even in the market of pure cargo aircraft, whose operation is not subsidized by passengers, companies manage to operate profitably by differentiating themselves along the needs of the shippers. The relevance of the two conceptual frameworks in the logistics environment are empirically supported, for example, by a survey of executives of British freight forwarding companies (Liu et al. 2010).

12.4 The Particular Future Prospects of Cargo-Only Airlines

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12.4 The Particular Future Prospects of Cargo-Only Airlines Both Boeing and Airbus forecast high demand for all-cargo aircraft (Boeing 2018b; Airbus 2018a). As of 2018, Boeing expects to deliver a total of 2650 freighters by 2037, half to replace existing freighters and half to meet growing cargo volumes. The aircraft maker further estimates that 1670 aircraft, or 63% of deliveries, will be passenger aircraft conversions and the remainder, about 980 aircraft, will be brand new freighters. Airbus expects demand to be slightly lower at 2400 freighters. The more optimistic assessment of the American aircraft manufacturer is partly explained by the fact that Boeing has historically been much more successful in bringing freighters onto the market, either new or as conversions, than its European competitor. As recently as 2004 and 2005, the share of air freight transported in all-cargo aircraft was over 60%. Since then, the share has fallen steadily and, as of 2018, is a few percentage points above 50%. However, Boeing estimates that even in 2037, more than half of freight volumes (RTK) will be transported in freighters and only the smaller portion as belly freight (Boeing 2018a). Only the future will tell what if these optimistic forecasts become true. If the development of the past continues, it can certainly be expected that belly freight will become more important. The value proposition of freighters is that they can both serve destinations that are less in demand for passenger service and carry cargo on the main deck that cannot be loaded below deck. Three factors have contributed to the decline of freighters over time: 1. Today, many more destinations around the world can be reached by widebody aircraft than in the past. For many years, the cargo airline Cargolux profited from the growing demand in the oil-producing countries of Africa. Today, new players, such as Ethiopian Airlines’ cargo subsidiary, serve numerous destinations in West and East Africa. The same applies to Emirates SkyCargo. 2. The cooperation between the development and logistics departments at the shippers has improved. Greater attention is already paid to the transport requirements at the design stage. In order to reduce transport costs, machinery is designed so that it can ideally be placed below deck. Airlines charge a premium for cargo that can only be landed on the main deck. 3. A number of combination carriers have reduced the number of all-cargo aircraft they offer or, following the US example, have withdrawn from the segment altogether. Finnair Cargo, for example, has divested its fleet of MD-11 s, which were operated between Europe and Asia, and has not replaced them. Finnair Cargo’s sales manager described MD-11 operations as no longer “viable” (Lennane 2014). Bellyfreight freight rates can be calculated close to the contribution margin. To that effect, cargo in all- cargo must cover all costs, including crew, aircraft depreciation, etc. In addition to Finnair, International Airlines Group, which includes British Airways and Iberia, also

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decided in 2014 to stop using its own freighters and instead leverage on a cooperation with Qatar Airways. Air France KLM reduced the number of wide-body freighters from 26 to 5 in the period between 2005 and 2016 (Budd and Ison 2017). Emirates Skycargo has also recently returned its B747s to owners and reduced its freighter fleet (Lennane 2017) The linchpin of whether all-cargo will be able to defend its strong role is the overall growth of air cargo. If this is indeed at the 4.2% forecast by Boeing, passenger aircraft capacity may not be sufficient and the market will need all-cargo capacity to the same extent. And so all involved in airfreight are left with the insight, attributed to Mark Twain, that projections are hard to make, especially those concerning the future.

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