Air Freight Industry White

Paper


J. Petersen

The Supply Chain and Logistics Institute
H. Milton Stewart School of Industrial and Systems Engineering
Georgia Institute of Technology




April 1, 2007

This white paper is the result of work done by J on Petersen as a Research Scholar in the Industry Studies
Program of the Supply chain and Logistics Institute. J on can be contacted at Petersen@gatech.edu for any
comments or questions.
2

Preface


This document is intended to summarize the primary characteristics of the air freight
industry today. The words air freight and air cargo are used interchangeably, which
admittedly is not accurate. Of course, air freight generally refers to larger parcels, where
cargo is typically defined as the sum of freight, packages, and mail.

There are three goals for in this document:

(1) To present a macro-overview of the state of the industry, and how the model of
tomorrow will differ from that of today
(2) To present a comprehensive summary of how each component along the air cargo
supply chain works
(3) To summarize the most prominent challenges faced by the industry, and to suggest
areas for future research
The industry continues to emerge and faces several challenges in order to accommodate the
acceleration in the volume of airfreight. We conclude by suggesting the most critical areas to
address these issues.
3
Contents
I. Industry Facts
A. Volume . 4
B. Determinants of Air Cargo Volume ... 6
C. The Geography of Freight Movement .... 8
D. Air Cargo Tomorrow . 10
II. How the Process Works
A. The Players Involved .. 13
B. Process Flow: An Overview ... 13
C. Case Study at Singapore Changi Airport ...... 15
III. The Freight Forwarder
A. Classes of Forwarders .. 18
B. Market Facts ... 18
C. Case Study at BAX Global ...... 19
IV. The Carrier
A. Classes of Carriers ... 22
B. Major Carriers .... 23
C. Airports ...... 24
C.1 HACTL 25
C.2 Busiest Airports by Volume .. 25
D. Aircraft 28
D.1 Overview .. 28
D.2 Freighter Data ............. 28
D.3 The Air Freighter of Tomorrow .. 30
D.4 Containers 31
E. Fright Carrier Economics .... 32
E.1 Coordination ............ 32
E.2 Pricing .. 32
E.3 Air Cargo Revenue Management .. 35
V. Security
A. Air Cargo Security Risks .. . 39
B. Known Shipper Programs ....... 40
C. Air Cargo Security Technology .... 41
4
I. Industry Facts

Given the degree of globalization and the emergence of global supply chains, the role of
the air freight industry has become increasing important to the global economy.
Consequently, there have been considerable changes in the industry as it continues to
evolve. The growth of international air freight has outpaced that of global GDP by a
factor of 2.5 since 1980.

Air freight traffic constitutes less than 2 percent of all tonnage transported. However, it
represents over one-third of the aggregate value of all international trade. Virtually
anything can be shipped vis--vis air freight. Most of this tends to be high-valued goods
such as pharmaceuticals, machine tools, computers and electronics, aircraft, auto parts,
perishables, instruments, and medical equipment. Most of this is considered just-in-time
components used for time-sensitive processing.

Estimates on the nominal size of the air cargo industry range typically fluctuate around
$50 billion.

A. Volume

According to the 2006-2007 Boeing World Air Cargo Forecast in 2005 there were
178,122 million tons of freight ton-kilometers flown globally. The growth of air cargo
globally has averaged a 5.1% annual growth rate since 1995 (see Figure 1). Not
surprisingly, the majority of this growth is attributable to growth in Asian markets,
particularly China. This growth rate is anticipated to accelerate (see below).

Recall cargo is defined to be the sum of freight (scheduled and chartered), mail, and
express carriers (i.e. small packages typically handled by UPS, FedEx, and DHL). Figure
2 shows the decomposition of freight by class among cargo handled in the U.S. Freight
continues to exhaust the majority of all cargo averaging 61% of all cargo over this
period, while it has grown from 57% in 1995 to 64% in 2005.

Recently, there has been a slight downturn in the industry. In the first half of 2006, the
growth rate has been less than half relative to its ten year average. Despite this, the long
term outlook for the volume of air cargo is to keep growing at an accelerated pace.
According to Boeing, the total volume of air cargo is anticipated to grow at an average
annual rate of 6.1% through 2025. Among this growth, Asia is expected to lead the way.
Boeing is forecasting annual growth of all cargo in domestic China go grow at
10.6% per year until 2025
Intra-Asian routes are anticipated to grow at 8.6% annually
Asian-North American routes are expected to grow 7.1% annually; and Asian-
European at 6.9%.

That leads to the natural question of what influences air cargo?

5

Volume of Global Air Cargo
1995-2005
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
a
i
r
-
t
o
n

k
i
l
o
m
e
t
e
r
s
,

m
i
l
l
i
o
n
s
All Carriers
U.S. Carriers
Non-U.S. Carriers
source: Boeing 2006-2007 World Air Cargo Forecast

Figure 1

B. Determinants of Air Cargo Volume.

Here we examine three possible dynamics regarding on what drives air cargo. Of course,
deriving causation from correlation is often spurious. So we only examine a statistical
relationship. We consider the relationship between the volume of air cargo an (a) the
global macroeconomy (b) the price level and (c) the price of jet fuel. Figure 3 shows the
relationship between World GDP
1
. With the exception of the 2001 recession, there
appears to be an unambiguously positive relationship between the two, which is not
surprising.


1
normalized to current-year US $; Source: World Bank
6
Components of Air Cargo, U.S. Carriers
1995-2005
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
a
i
r
-
t
o
n

k
i
l
o
m
e
t
e
r
s
,

m
i
l
l
i
o
n
s
Freight
Mail
Express Carriers
source: Boeing 2006-2007 World Air Cargo Forecast

Figure 2

Cargo Volume and World GDP
1995-2005
100
120
140
160
180
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
t
o
n
-
k
i
l
o
m
e
t
e
r
s
,

b
i
l
l
i
o
n
s
25
29
33
37
41
45
t
r
i
l
l
i
o
n
s

U
S

$
global air cargo (left axis)
world GDP (right axis)

Figure 3
7


Figure 4 shows the relationship between the volume of air cargo, the (normalized) price
of jet fuel, and the (normalized) price of air transportation
2
. One might expect a negative
relationship between the price levels and the volume of air cargo. However the figure
shows this is not necessarily the case. The relationship between volume and each of the
price indices shows the lack of an unambiguous relationship. We therefore conclude that,
at least in the past decade, the growth of air cargo has been robust. That is, the high
growth of air cargo has developed in spite of unprecedented shocks concerning jet fuel.


Growth in Cargo Volume versus Jet Fuel Prices
1995-2005
-40
-20
0
20
40
60
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
%

c
h
a
n
g
e

f
r
o
m

p
r
e
v
i
o
u
s

y
e
a
r
Cargo volume
Price of jet fuel
Price of air transportation

Figure 4

As a coarse approach to quantifying the relationship each of these variables have on
volume, let us look at a simple OLS regression. We wish to fit the following model

t t t t t
Ptrans Pfuel WGDP Vol + + + + =
3 2 1 0


where
t
Vol denotes the volume of cargo transported (ton-kilometers) in year t,
t
WGDP
denotes world GDP in year t,
t
Pfuel denotes the change in the price of jet fuel in year t

2
this is the producer price index of jet fuel; source: Bureau of Economic Analysis
8
relative to year t-1, and
t
Ptrans denotes the change in price of air transportation in year t
over t-1. An OLS produces the following output:

7240 . 0
33 . 0 10 . 0 48 . 3 88 . 25
2
) 18 . 0 ( ) 75 . 2 ( ) 58 . 0 (
=
+ + + =

R
Ptrans Pfuel WGDP Vol
t t t t t



Where the OLS coefficients are reported and their corresponding t-values are below. We
note from this simple model that only world GDP statistically captures air cargo volume,
and as we would expect, we have a positive coefficient of world GDP. The model
captures most of the variation as evidence by the goodness-of-fit metric. By dropping jet
fuel inflation and air transportation prices, we have an improved reduced model:

7800 . 0
82 . 3 72 . 14
2
) 04 . 6 ( ) 69 . 0 (
=
+ + =
R
WGDP Vol
t t t


So we conclude by saying that world output statistically affects volume of air cargo, at
least from 1995-2005. Moreover, for every trillion dollar increase in world GDP, we
would expect the volume of air cargo to increase by 3.82 billion ton-kilometers, cetris
paribus.

C. The Geography of Freight Movement

Here we address the movement of air freight with respect to geography. Let us examine
the anticipated freight volume growth across regions.

Freight within North America
56% of all air cargo is shipped with at least one endpoint in the U.S. According to the
Airforwarders Association, in 2001 31% of total global freight activity was within the
U.S.; 25% was U.S.-abroad; and the remaining 44% was non-U.S. activity.

Within North America, lanes traversing the US-Canadian border experience a surprising
asymmetry with northbound freight volumes being more than twice of southbound
freight. Northbound freight typically contains small packages, computers, and general
industrial machinery. Southbound freight contains mostly telecommunications
equipment, small packages, and electric machinery.

North America Asia
North American-Asian routes have boomed from the coupled effect both globalization
and strong domestic growth. Thanks to the two the continued economic expansion of
China, it is now the second largest trading partner with the U.S. as it has overtaken Japan
as the largest Asian trading partner. 33% of all air freight movement between the U.S.
and Asia is with China whereas Japan accounts for 24%. The growth of air freight has
been so pronounced, many major Asian stations have either insufficient capacities or
other inadequate infrastructure to support the continued growth of cargo activity.
9
Consequently, there has been a boom of infrastructure investment to support the
continued reliance of air freight between the two regions.

While the bulk of the growth has been on eastbound flights originating in Asia,
westbound flights have also been expanding rapidly. From 1995-2005, Asian-North
American routes have averaged a robust 7.8% annual growth while North American-
Asian routes have only averaged a meager 2.6% annual growth. Their respective
forecasts up to 2025 are 7.1% and 7.2%. This growth is projected in spite of exchange
rate volatility which is widely believed to influence the volume of cargo shipped.

There is no predominant type of cargo that is flown on eastbound flights. Boeing lists
59% of all cargo on these lanes as other while 11% are documents and small packages,
7% being electrical machinery, and 7% chemical materials. Westbound flights are also
quite diverse. Office machinery and computes account for 16% of westbound cargo, 14%
apparel, 14% telecommunications equipment, and 11% electrical machinery.

The trade imbalance, however, has continued as eastbound flights carry substantially
more volume than westbound flights. This has created problems for all players along the
air freight chain, particularly freight forwarders. Other coordination disturbances have
resulted which will be discussed in greater detail throughout this document.
Commerce between Europe and Asia also has experienced substantial growth. From
1995-2005, westbound traffic has increased 12% annually while eastbound has
experienced 4%. As is expected with North America, it is expected that growth over the
next 20 years will average to be around 7% per year.

North America Latin America
About 70% of all freight between North America and Latin America is with South
America, mostly from Columbia and Brazil. Growth between these two regions has
averaged 4.5% annually on northbound lanes and 0.3% of southbound. From 2005-2025,
Boeing anticipates an average growth rate of 6.0% on flows into North America and
5.4% on flows out of North America. Most northbound flights carry consumer goods
such as fish (23% of all northbound cargo), flowers (21%), and fruits and vegetables
(11%). Southbound traffic contains mostly electronics goods lead by automated data
processing machines (11%), manufactured goods and special machinery (10%), electrical
machinery (7%), and industrial machinery and equipment (6%).

Europe North America
Eastbound traffic has experienced an average annual growth rate of 2.5% since 1995,
compared to westbound traffic which has been growing at 3.8% annually. Both routes are
anticipated to accelerate with the expectation that eastbound and westbound traffic to
grow at 5.1% and 5.6%, respectively. Most of the trade activity with Europe has been
with Germany (21.4%), United Kingdom (19.6%), France (11.5%), Italy (9.3%), and The
Netherlands (8.3%). On both routes, most cargo is considered to be documents and small
packages, machinery, and specialized equipment.


10
North America Middle East
Despite the economic and instability in the Middle East, the region has been growing
rapidly in terms of output. The United Arab Emirates, Jordan, Qatar, and Kuwait have
averaged annual growth rates in excess of 6% from 2003-2005. This can be attributed
mostly to the continued expansion of oil exports. Not surprisingly, air cargo activity has
also been growing in the region and plays a role of increasing importance. North
American cargo activity with the Middle East accounts for only 10% of all activity, but
has been growing at 6.9% per year from 1995-2005 (and 7.8% from 2001-2005). Annual
growth between the two regions from 2005-2025 is expected to be 7.6%. Eastbound lanes
into the Middle East mostly consist of small packages, machinery, scientific equipment,
and transportation equipment. Shipments westbound into North America mostly consist
of apparel, fruits and vegetables, and pharmaceuticals.

Figure 5 summarizes the average annual growth rates from 1995-2005 and the projections
from 2005-2025 according to Boeing among major cargo lanes.

Cargo Volume: Historial and Future Expected Growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Intra-
U.S.
U.S. -
Canada
S.Am ->
N.Am
N.Am -
> S.Am
S.Am ->
Europe
Eur ->
S.Am
N.Am -
> Eur
Eur ->
N.Am
Intra-
Europe
Asia ->
N.Am
N.Am -
> Asia
Eur ->
Asia
Asia ->
Eur
Intra-
Asia
a
n
n
u
a
l

%
1995-2005
2005-2025 (proj)

Figure 5
D. Air Cargo Tomorrow

The fact that air cargo has grown in the presence of global economic volatility is
indicative of the robust state of the industry. That said, there are a number of considerable
challenges that the industry faces that provide a number of research opportunities.
Among these:

11
1. Capacities Many stations are reporting insufficient capacities to accompany
the growth in the volume of air cargo. An example is at LAX, where the
airport is having to locate storage facilities off-site to temporarily store cargo.
2. Security Concerns regarding the security of air cargo and that of major cargo
ports have been heightened post 9-11. However, inspecting 100% of air cargo
is unambiguously an infeasible solution. Designing a security system allows
for maximal inspection and implementing the best technologies to secure
cargo while minimizing the distortion it induces on the efficiency is an open
problem of great importance.
3. Fuel prices According to the Bureau of Labor Statistics, the price of jet fuel
has increased by 250% from 2000-2005 alone. Many believe the increased
price level is structural, possibly experiencing similar increases moving
forward. Figure 6 shows average annual price changes in jet fuel from 1975-
2005.
4. Technology The industry is becoming increasingly competitive and firms
who adapt to the latest technologies are more likely to succeed all else equal
than firms implementing antiquated technologies. Also, firms are
increasingly relying on collaboration, so synchronizing technologies is
imperative so firms are able to work together. As capacities become more
limited, more freight is shipped, and competition becomes more intense, the
demand to operate at the technological frontier is important to all firms. The
ability to advance the frontier outward is even more important and always
remains a challenge.

Change in the Price of Jet Fuel
1975-2005
-40
-20
0
20
40
60
80
1976 1980 1984 1988 1992 1996 2000 2004
%

c
h
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e

f
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p
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y
e
a
r

Figure 6
12
II. How the Process Works

Here we seek to understand the simple question of how a given piece of freight moves
between its origin and destination. The general overview of the process can be
summarized in the following figure:


Freight
Forwarder
Shipper
Security
Freight
Forwarder
Consignee
Storage Loading
Carrier
Pure freighter
Integrator
Combination Carrier

Ground
Handling at
Departure
Airport



Ground
Handling
at
Arriving
Airport
Unloading Storage
Final
Destination?
Customs
(if intl)
no
yes
13

A. The players involved

The following agents along the chain of air cargo are all crucial to the efficacy of the air
cargo process. Let us formally define them.

Shipper (or Consignor) the one who requests service in transporting the cargo (source
node of the supply chain)

Freight forwarder (or forwarder) analogous to a travel agent with passengers; the
forwarder typically arranges for the transportation of cargo from the shippers warehouse,
delivers (or has a contractor deliver) it to the departing airport, prepares the necessary
paperwork, picks up at the arriving airport, and delivers (or contracts for the delivery) to
the consignee.

Carrier The firm who provides the air delivery of cargo from the origin airport to the
destination airport. There are primarily two classes of carriers: cargo carriers that
primarily carry cargo and freight (e.g. FedEx, UPS, DHL, Kitty Hawk, Cargojet
Airways), and combination carriers that carry both passengers and cargo that is stored in
the bellies of aircraft (e.g. Korean Air, Lufthansa, Delta). About 25% of all cargo is
carried on commercial passenger planes with the remainder on freighter aircraft.

Ground Handler An agent at an airport that physically handles the freight; this usually
refers to whenever freight is loaded, unloaded, transferred, stored, retrieved, broken
down, or consolidated.

Consignee The receiving party that the goods are sent to (sink node of the supply chain)

B. Process Flow: An Overview

Process flow of air cargo is subject to variability across stations. However, most stations
follow the following overview. We will look at a case study in the subsequent section
with a more precise analysis in Singapore.

From the warehouse to the airport
While shippers may deliver their cargo directly to the airport, the majority of cargo is
handled through a freight forwarder. In most instances, the forwarder will pick the freight
up from the shipper or the shippers warehouse. Unless the freight is rushed, it is
generally brought to the forwarders warehouse and consolidated with freight to the same
(initial) destination. Forwarders generally have their warehouses close to airports as
freight is often transferred.

The forwarder must also possess the air waybill which is a contract between shipper and
carrier for the carriage of freight over the carriers routes.
14

Booking
Days before departure, the forwarder will book freight on a given flight with a carrier.
Most large forwarders receive a pre-allocated space on routes on a daily basis, but still
call the carrier to specify the dimension and weight of the freight on a given flight for
planning purposes. Forwarders may or may not have contracts with certain carriers. The
booking process is becoming increasingly automated as it allows for more efficient
operations and greater transparency. Generally the forwarder first reserves space, then
confirms and picks up the freight only after receiving confirmation from the carrier.

Consolidation
Once in the hand of the forwarder, the cargo is likely to be consolidated with other
shipments. The freight is likely to sit in a warehouse of the forwarder and await cross-
docking, depending upon the priority of the goods. If the goods are not time-sensitive,
they generally are stored one to three days in the forwarders warehouse to be
consolidated before being delivered to the airport.

Upon arrival at departing airport
At the airport, the forwarder will deliver the freight to the carrier in which the freight
goes through security. This is a significant component of the air cargo process and will be
discussed in greater detail below. The air waybill is delivered, in which the forwarder
possesses substantial penalty if there are discrepancies. The cargo is usually temporarily
stored in a warehouse facility at the airport as it waits to be loaded. Usually, cargo is
randomly assigned to bins which induce fast storage but slow retrieval (designing
efficient storage mechanisms are of considerable interest).

The cargo is then retrieved prior to arrival and loaded via a unit loading device (or ULD)
and secured. The aircraft departs when all cargo is secure.

At the arriving airport
Cargo is flown either to the destination airport or an intermediate airport where it likely
gets re-consolidated, re-containerized, and placed on another leg. Most likely, the cargo is
temporarily stored at a warehouse where it is either transferred to a connecting flight or
awaits to be picked up from the forwarder and delivered to the consignee.

If re-consolidation occurs, there are a number of issues to classifying each piece of cargo.
It can be consolidated by: size and weight, special requirements (e.g. refrigerated goods
together, dry ice cannot move with live animals, etc.), service level (by priority), or
destination. Different operators may consolidate differently.

If a given leg is international, then the cargo is subject to customs clearance which is
done at the airport.

Delivery
From the airport, a forwarder typically will deliver the cargo in the reversed order from
where the forwarder delivered the cargo to the airport.
15

The air cargo process is driven by the freight forwarder, the carrier, and the process flow.
Here we study each of these principal components separately.

C. Process Flow: A Case Study at Singapore Changi Airport

Due to the aforementioned variability in the process flow across stations, let us examine
the precise flow at Singapore Changi International Airport (SIN). SIN is one of the
busiest cargo airports by volume globally, and is the hub for Singapore Airlines, one of
the leaders in freight transportation. Singapore Airport Terminal Services, Ltd (or SATS).
is the official terminal operator in Singapore, and one of the most reputable. SATS
handles over 75% of all of the air cargo flow in Singapore. Opened in 2001, SATS
Airfreight Terminal 6 is one of the most sophisticated global airfreight facilities which
required a $270 million investment.

Please note that information of the process and information flow at SATS is from the
Bazaraa, Hurley, et al. paper (2000).

Shipper Booking with Forwarder
The first obvious step in the process is for the shipper to contact the forwarder (unless the
carrier that will transport the cargo is an integrator, these will be different entities).
Orders are placed either through faxes or phones. The forwarder then will reserve space
with the carrier, and only after the carrier confirms space with the forwarder are
arrangements made to pick up the freight. If the forwarder has pre-allocated space from a
contract with a carrier, the confirmation is almost immediate. Otherwise, the confirmation
will take substantially longer.

For international shipments, the forwarder needs to apply through Tradenet for an Export
Cargo Clearance Permit, as well as other specialized permits that depend on the cargo
being shipped. In most cases, the permit is approved within 30 minutes, but the forwarder
is generally allowed the obtain the permit within three days after the export.

Once booked, the forwarder will send an itinerary to the shipper, and trucking is
scheduled for pick up. The cargo is then picked up, together with the necessary
paperwork. Generally the forwarder will make multiple pick ups before returning to the
forwarders warehouse where cargo is labeled and processed to the export department.
Once this is processed, it is officially measured and weighted for the air waybill to be
completed. The freight is stored, a pick list is generated, and the cargo is loaded to be
brought to the airport.

Check-in/Registration
Upon arrival to the airport, the forwarder clocks in the control form and proceeds to the
acceptance counter. There is an acceptance officer on duty who first process all the
documents upon accepting the cargo. Weighing is then done and cross-checked with the
AWB.
16
As is with the case of most facilities, lose cargo induces inefficiencies. Loose cargo needs
to be consolidated or built up at the facility which requires labor. Because there are
approximately 250 forwarders in Singapore, none with excessive market power, lose
cargo tends constitute a greater share at SATS than at most other facilities.

Ground Handling to Departure
Meanwhile planners monitor activity for each future departing flight and particularly
monitoring arriving cargo that needs to be transferred within a short time frame
(generally two to six hours). Planners have a list of the containers and a loading plan, as
well as a loading priority list that is to be loaded first. In the presence of overbooked
flight legs, planners will consult the airline for route management issues.

For loose cargo
For cargo accepted within four hours of departure is moved to a build-up area and placed
on a pallet or in a container. Cargo accepted more than four hours prior to departure is
placed in a storage bin that will be placed into the Automated Storage/Retrieval System
(ASRS) once it is full with other freight. The storage location is logged and later
retrieved.

Twelve hours prior to departure, the export retrieval team will sort cargo into bins
according to flight number. About four hours before departure, cargo is built up in a
location where all cargo is built up. A label or tag is then placed on the consolidated
cargo and is transferred vis--vis an elevating transfer vehicle (ETV) to the pre-load area
near the aircraft. This is done as early as two hours before the departure time. The master
loader typically begins loading cargo from this area an hour prior to departure. As cargo
is moved toward the pre-loading area, the flight manifest is updated until the completion
of all built-up cargo for the flight leg. This manifest is a master list of all cargo on the
given leg and contains the AWB numbers, weight, origin and destination, and a
description of a good.

For palletized/containerized cargo
The process flow for cargo not required to be built up is similar to that of loose cargo.
The only difference is that pallets or containers do not require further consolidation, and
are not brought to the general consolidating area. If built-up freight is checked prior to
four hours, a label is immediately placed on the container and are brought to the pre-
loading area. Otherwise, they are stored in the automated warehouse system and will be
retrieved before departure.

For specialized cargo
For cargo requiring special needs, there are specialized facilities located throughout the
airport that such cargo is brought to.

Arrival to Ground Handling
Generally, the arrival process is just a reversal of the departure process. Cargo is brought
to the terminal warehouse office and sorting begins. AWBs and other documentation are
sorted by accounts. Then they are placed in pre-specified pigeonholes according to the
17
forwarder contracted to pick the cargo up if the arrival airport is the destination. The
consignee may be notified of the arrival if requested. While the cargo is being unloaded,
documents are processed which are surprisingly time consuming. Cargo from passenger
aircraft takes approximately two hours to complete and three hours on a freighter aircraft.
Off-loading generally takes place between 30 and 45 minutes after arrival and all cargo is
then verified.

For cargo requiring transferal, it is sent to an export station and it goes through essentially
the same process as at the arrival airport without the registration. Special cargo is brought
to the specialized facility.

Ground Handling to Forwarder
In most cases, the forwarder will receive pre-notification of arrival. Cargo is generally
ready to be picked up two hours for passenger aircraft and three hours for freighters. The
forwarder collects the air waybills and related documents, and a delivery order is
generated. Through TradeNet, import cargo clearance permits and other various permits
(depending on the contents of the cargo) are applied for, and issued within 30 minutes.
After clearance, the warehouse department retrieves the cargo the transportation
department begins planning truck delivery routing.

The cargo is then given to the forwarder, in which the forwarder checks the condition of
the cargo and delivers it to its warehouse. It is then either broken down or sent directly to
the consignee.

18
III. The Freight Forwarder

The freight forwarder plays an integral role in the air cargo process. While they essentially are
responsible for coordinating the movement of freight between the shipper and consignee,
the mechanics by which they operate and the environment under which decisions are made
is complex. We seek to describe this here.

A. Classes of Forwarders

Before proceeding, it is important for us to identify different classes by which forwarders
are characterized. Forwarders are coarsely grouped into two types of firms: integrated
and disintegrated. Integrated forwarders play the role of both forwarder and carrier; their
firms operate at each stage of the air freight process. That is, they pick up, transport,
consolidate, book, carry, and deliver freight. Disintegrated firms, however, do not carry
freight. At a minimum, disintegrated firms only coordinate the movement of freight; they
contract the delivery process. However most forwarders provide the trucks (either
directly or through a contractor) and deliver to the departure airport and pick up at the
destination airport.

B. Market Facts

In 2004, the global freight forwarding industry amounted to $27.63 billion. Not
surprisingly, the freight forwarding industry has grown with the air freight industry. An
interesting observation is to note that there has been more market concentration in the
industry. Deutsche Post alone, the German postal service, alone has made over 100
acquisitions since 2003 alone including all of DHL, 25% of Lufthansa Cargo, Air
Express International, Airborne Inc., and SmartMail.

Among the major acquisitions recently, in 2005, Deutsche Post acquired Exel for $6.6
billion. The next year, Deutsche Bahn acquired BAX Global for $1.2 billion. The most
common explanation for this increase in concentration is the fact that the high growth in
cargo drew more forwarders into the industry at first. Many of the firms that got bought
out were nitsche providers. In general, coordination among firms abates double
marginalization and such a mechanism cannot be sustainable in an industry as
competitive as the freight forwarding industry when margins are low to begin with.

Federal Express (FedEx), United Parcel Service (UPS), and DHL account for the three
largest forwarders, often collectively referred to as the Big Three. These are all
integrated forwarders, but are somewhat different from a traditional freight forwarder in
the sense that the majority of their volume accounts for small packages which do not
account as freight. Each of these firms has separate divisions distinguishing documents
and small packages apart from pure freight.

19
Table 1 shows some data of these three giant firms, as well as the size of their air and
ground fleets.

Table 1
Summary of FedEx, DHL, and UPS (2006 data)
% of total revenue FedEx DHL UPS
Air freight 10.96% 6.56% 1.88%
Forwarding services/logistics
(includes small packages)
11.75% 20.33% 11.13%

Aircraft 671 420 268
Freight Vehicles 42,000 76,200 91,700

Besides the so-called Big Three, other dominant freight forwarders include Nippon
Express, Kuhne & Nagel, BAX Global, Schenker, Kintetsu, and Panalpina. These firms,
along with FedEx, DHL, and UPS accounted for about 70% of the total global air freight
forwarding in 2004
3
.

C. Case Study: BAX Global

To illustrate how a typical freight forwarder operates, let us study one of the major global
freight forwarders, BAX Global.

About BAX Global

Founded in 1972 as Burlington Northern Air Freight
World Headquarters: Irvine, California
$.29 billion in revenue in FY 2005 (77% is from international transport or
logistics service)
Currently operates about 500 facilities in over 130 countries
In January 2006, Deutsche Bahn acquired BAX Global; the value of the company
increased from $3 billion to $12 billion.

Services Provided

In addition to air forwarding, BAX Global provides the following services:
Ocean freight forwarding
Trucking services
Consulting
Value Added service
Warehousing


3
Source: 2005 Deutsche Post Annual Report
20
Given the recent increases in the price of air freight transportation, ocean freight has
become relatively less expensive for the forwarder (and hence, the shipper).
Consequently, many forwarders are focusing on growing their ocean forwarding services
as it has traditionally not been as well developed as air freight forwarding. The fact that
firms face increasing demand for ocean forwarding helps explain the increased market
concentration. As mentioned, in January 2006 Deutsche Bahn (the German logistics
provider who also owns DHL) acquired BAX Global from The Brinks Company (the
former parent company of BAX Global) partly to harmonize their global logistics profile.
More specifically, Deutsche Bahn acquired Schenker Logistics who has been a dominant
ocean forwarder. The further acquisition of BAX Global is likely a result of this change
in the composition of forwarding services.

Logistics at BAX Global

Domestic freight is either shipped by truck or plane, depending on the priority of service
requested by the shipper. The truck fleet is operated by a number of trucking firms who
are contracted (e.g. Schneider, ATi, USPS, UPS, among others), some of whom are
required to display the BAX logo on their trucks. There is a network consisting of six
Gateways and six consolidation hubs.

With respect to air freight, there is a single hub in Toledo, Ohio. The fleet consists of 21
DC-8s (which, as of December 2006, constitutes as the largest operator of DC-8s), with
about three aircraft being in maintenance at any given time. Freight also may be
transported by commercial air carriers who BAX contracts with. While BAX owns its
own fleet, they fly only domestically. Thus, they are most aptly characterized as an
integrated fleet with respect to domestic cargo and a disintegrated fleet with respect to
international freight.

The fact that there is a considerable imbalance between outgoing and inbound freight
poses challenges between the coordination of them and their contract carriers (see section
1 for a description of this imbalance; this is particularly pronounced on Asian-North
American routes). Because of this imbalance, freight forwarders exhibit bargaining power
with carriers on North America to Asia lanes, whereas the carrier will exhibit such power
on Asia to North America lanes. To hedge this imbalance, BAX Global guarantees its
shippers that for every container that is outbound to Asia, they will accommodate four
containers inbound from Asia.

Supply Chain Coordination

Collaboration between freight forwarders and other global supply chain participants is
critical to the success of firms. Prior to 2003, BAX operated mostly independent from
their competitors in their trucking network. At the beginning of that year, on most lanes
they made their trucks available to other forwarders to enable them to (a) expand their
existing network and (b) improve upon load factors to their trucking fleet.

21
Coordination between participants along a supply chain becomes increasingly important
given that margins remain to be low for the forwarders. Contract design in the freight
forwarding industry (as well as that for the air cargo industry) remains a topic of interest
that is not well developed. This topic is considered one of the more open questions.

22

IV. The Carrier

Clearly in order to study airfreight, one must study the carriers. We begin by listing the
major carriers, and characterize the major firms. Then we study how cargo operations
differ among the major firms. We also study airports and how capacity constraints and
major facilities may influence the future of the air carrier.

A. Types of Carriers

Air carriers can principally be decomposed into three classes: freight carriers,
combination carriers, and integrators. Freight carriers are devoted solely to freight, while
the combination carriers include airlines or subsidiaries of large air carriers who carry
passengers while storing freight in the belly of aircraft. Integrators oversee the entire
process and act as the forward and the carrier. Examples of freight carriers include
Cargojet, Kitty Hawk, Gemini Air Cargo, Polar Air Cargo, among many others. Some
airlines have subsidiaries that act as a freight carrier, but are likely to be considered a
combination carrier, like Lufthansa Cargo, a subsidiary of Lufthansa Airlines that carries
only cargo, while Lufthansa Airlines is clearly a passenger airplane.

Combination carriers are generally passenger aircraft that additionally carry cargo aside.
Cargo used to be a byproduct of passenger airlines, but has grown in the importance of
most firms operations. However the size and importance of cargo operations greatly
differs across firms (see below). So Lufthansa also is likely to carry freight in any given
flight in an A-320 which makes Lufthansa Airlines a combination carrier. However their
subsidiary Lufthansa Cargo is a freight carrier. In the U.S., Northwest Airlines (as of
2006) was the only U.S. airline that operated freighters.

The primary integrators are the big three: FedEx, DHL, and UPS.

A number of estimates show that with regards to all air freight flown by combination
carriers, roughly 75% is still flown on freighter aircraft while the remaining 25% is
integrated with passenger planes.

It is interesting to note that in their annual reports, the big three have indicated a
movement away from small packages and documents to larger freight. This could have a
profound impact on the industry as these giants exhaust a greater share of large cargo
transported.

Another noteworthy trend is the development of so-called niche providers. While there is
considerable market concentration in the airfreight industry, the number of firms has still
been increasing. One explanation for this observation is the increase in the number of
carriers who specialize in specific types or classes of freight transportation. Many of
these are typically smaller firms who are contracted to fly for larger carriers. So while the
23
number of carriers has been increasing, the aforementioned major carriers have been
transporting a greater share of all freight transported. Examples of niche providers
include those firms that specialize in the transportation of: produce, garments, live
animals, wine, forestry products, IT equipment, medical supplies, frozen/refrigerated
goods, among other specialized freight.
B. Major Carriers

Table 2 lists the largest carriers of air freight overall in 2004. Please note that for
combination carriers, the FTK data represents the sum of freight flown in passenger
aircraft and freight flown by their subsidiaries.

Table 3 shows some data on load factors, and Table 4 shows a sample of larger passenger
carriers and the share of profit from cargo.

Table 2
Freight-Tonne Kilometers (FTKs) Flown, 2004
4

rank Carrier Millions FTKs
1 FedEx 15.58
2 Korean Air 8.26
3 Lufthansa Cargo 8.04
4 UPS 7.35
5 Singapore Airlines 7.14
6 Cathay Pacific 5.88
7 China Airlines 5.64
8 Eva Airways 5.48
9 Air France 5.39
10 Japan Airlines 4.92

Table 3
Sample of Load Factors at Major Carriers
5

Carrier Load factor
Korean Air 76%
China Airlines 73%
Lufthansa Airlines 65%
Singapore Airlines 64%








4
Source: International Air Transport Association
5
Source: each carriers annual report (2005)
24
Table 4
Sample of Cargo Share of Revenue at Major Combination Carriers
6

Carrier Cargo Revenue, as % of Total Revenue
China Airlines 43.54%
Korean Air 32.28%
Singapore Airlines 31.49%
Cathay Pacific 28.50%
Continental Airlines 8.66%
United Airlines 4.30%

Table 4 verifies that the share of cargo at major combination carriers is subject to
considerable variation. A natural question to ask is what a break-even load factor must
be. While data is not readily available, according to their annual reports, China Airlines
and Singapore Airlines reported break-even load factors of 72% and 63%, respectively.

C. Airports

It is naturally of interest to study airports as they have a great impact on the efficacy of
the air cargo process. A natural place to place to begin is identifying the major airports
utilized in airfreight. Table 5 exhibits the 20 busiest stations of air cargo handled by
volume in 2005.

A great concern is that whether airports, particularly the ones listed in Table 5, have
sufficient capacity to accommodate the expected growth in air freight even in the short
term. An example is at LAX which serves as an important gateway to and from Asia. The
facility is so capacity constrained that other nearby facilities are being utilized more. For
example, John Wayne Airport, Ontario, and Long Beach are airports that are being
increasingly utilized as a result. According to the Ontario airport authorities the owner
and manager of both (LAX and ONT) is counting on ONT to assume tremendous cargo
growth as LAX confronts critical capacity limitations
7
.

This problem reiterates the importance of planning considering that the volume is not
expected to be constant, but it is anticipated to grow at 6.1% per year from 2005-2025
(according to Boeing). One area that has grown that has been able to increase throughput
at some facilities has been the implementation of automated retrieval systems. Further
work in picking, storing, and cross-docking is important to increase efficiency and
therefore the ability for facilities to accommodate the future anticipated growth. This is
an important challenge for airports, particularly consolidation hubs, and will be discussed
in greater detail below.


6
Source: each carriers annual report (2005)
7
Source: www.ci.ontario.ca.us/index.cfm/2559/3817
25
C.1 HACTL
One of the most important facilities in the air cargo world is Hong Kong. It is also one of
the most efficient. Hong Kong Air Cargo Terminals Ltd, or HACTL, is largely
considered a model for how a cargo facility should operate. It is unambiguously
considered the most technologically advanced facility. Because it is such a major player
in global air cargo, let us look at some basic facts before looking at why it is considered a
model facility.
The SuperTerminal 1 at HACTL is the worlds largest stand-alone air cargo
handling facility.
Opened in 1976, SuperTerminal 1 recently opened after an investment of more
than $1 billion.
It has an annual capacity for 2.6 million tonnes of capacity.
The land area for SuperTermianal 1 alone is an astounding 170,000 square
meters.

The reason why HACTL is largely considered the model facility can be most succinctly
characterized in one word: automation. Lets look at some of these components
8
.
The container storage system, for example, is fully automated with more than
3,500 storage positions. There are 12 computer-controlled stacker cranes for
moving cargo efficiently within the network.
The box storage system (BSS) contains more than 10,000 bulk storage positions
for individual consignments. Goods move in and out of BSS with no human
intervention.
Even cargo unit and pallet handling are also highly automated. Units and pallets
go directly from the tarmac into the storage system which has more than 3.500
storage positions.
The top floor of the six-story facility is dedicated to breaking down and building
up freight according to a computer-generated plan in one of over 300 individual
workstations. This is done in a tightly-restricted highly secure area. Containers
move throughout the facility by a highly sophisticated level of conveyor loops and
computer-controlled cranes.
The security system is also considered the most advanced. It has consistently had
the lowest rate of pilfering among major ports.

While many successful cargo facilities have implemented information technology that
lies near the frontier of available technologies, HACTL is still considered a model for
major hub facilities, and it ought to be emphasized when studying the air cargo industry.

C.2 Busiest Airports by Volume
Table 5 shows the 20 busiest cargo airports globally (2005 data). 8 of the 20 are U.S.
facilities, 7 are Asian facilities (3 of which are in China), 4 are in Europe, and 1 in the
Middle East (Dubai).


8
Source: HACTLs website at www.hactl.com
26

Figure 7: Container storage systems at HACTL




Figure 8: Bulk cargo distribution system at HACTL (sushi-style loop conveyor system
27
Table 5
Busiest Cargo Airports (2005)
9

rank Station Metric tonnes handled
1
Memphis International (MEM)
Memphis, Tennessee
3,598,500
2
Hong Kong International (HKG)
Hong Kong, China
3,433,349
3
Ted Stevens Anchorage International (ANC)
Anchorage, Alaska
2,553,937
4
Narita International (NRT)
Narita, Japan
2,291,073
5
Incheon International (ICN)
Seoul, South Korea
2,150,140
6
Charles DeGaulle International (CDG)
Paris, France
2,010,361
7
Frankfurt International (FRA)
Frankfurt, Germany
1,962,927
8
Los Angeles International (LAX)
Los Angeles, California
1,938,430
9
Pudong International (PVG)
Shanghai, China
1,856,655
10
Singapore Changi (SIN)
Changi, Singapore
1,854,610
11
Louisville International (SDF)
Louisville, Kentucky
1,815,155
12
Miami International (MIA)
Miami, Florida
1,754,633
13
Taiwan Taoyuan International (TPE)
Taoyuan, Taiwan
1,705,318
14
John F. Kennedy International (JFK)
New York, New York
1,660,717
15
OHare International (ORD)
Chicago, Illinois
1,546,153
16
Amsterdam Schipol International (AMS)
Amsterdam, The Netherlands
1,495,919
17
London Heathrow International (LHR)
London, England
1,389,589
18
Dubai International (DXB)
Dubai, United Arab Emirates
1,314,906
19
Bangkok International (BKK)
Bangkok, Thailand
1,140,836
20
Indianapolis International (IND)
Indianapolis, Indiana
985,457

9
Source: International Air Transportation Association
28
D. Aircraft

Here we examine aircraft used my major freighters. For combination carriers, freight is
stored in the belly of the aircraft so aircraft utilized on these routes are of little interest.
Therefore we restrict our attention towards freighter aircraft.
D.1. Overview

Many smaller freighters operate retired aircraft. For example, in 2006 BAX Global was
the worlds largest operator flying 21 DC-8 aircraft. Kitty Hawk Aircargo is one of the
larger operators of the antiquated Boeing 727 fleet while operating 28 such aircraft (26 of
which are pure freighters; the other two are Boeing 727-200; they also operate 7 Boeing
737-freighters). Yet most of the firms that operate retired commercial aircraft or old
freighter aircraft constitute a relatively small share relative to their larger counterparts.
Let us examine some of the aircraft statistics of freighter aircraft operated by these large
entities.

D.2. Freighter Data

Overall, Boeing leads the freighter industry overall. According to Boeing, their aircraft
provide over 90% of the of the total worldwide dedicated freighter capacity
10
.

Boeing 747-F
Boeing 747 freighters exhaust two-thirds of the worlds wide-body freighter fleet
11
.
Further, it is estimated that half of all global airfreight is carried in a B747-F. Most the
larger carriers operate a B747-F in their fleet, particularly for trans-continental routes.
Payload capacity is in excess of 124 tons (113,000 kg) and the standard range is 4,450
nautical miles (extended range versions can travel an additional 525 nautical miles).
Maximum takeoff weight is 910,000 pounds.



Figure 9 (source: cargo.koreanair.com)


10
http://www.boeing.com/commercial/777family/pf/pf_freighterback.html

29

Boeing 777-F

Launched in May 2005 the Boeing 777-F was introduced specifically for long-hauls with
a maximum range of 4,885 nautical miles (9,047 km). The twin-engine aircraft was
marketed as inducing the lowest unit operating cost. Payload is slightly less than the 747-
F at 114.5 tons (103.9 metric tones). Boeing insists that this particular aircraft will induce
the lowest unit operating costs as a result of the increased range.

Boeing 767-F

While older than the B-777 F, the 767-F remains the worlds second most popular
freighter aircraft which is primarily used a medium-size aircraft. It is marketed as being
robust and fuel efficient. Over 40 airlines own a B-767 and is crew-compatible with the
B-757 freighter. There is a two-person flight deck and its twin-high-bypass ratio is said to
provide efficient fuel economy. Unlike the B-747 and B-777, it is not primarily used as a
long haul freighter with a range of 3,270 nautical miles (6,056 km). Payload capacity is
approximately 60.5 tons (54.88 tonnes). The aircraft is good for bulk loading as it will
hold virtually all types of containers.

The only real competitor to the Boeing family is the Airbus freighters which are a distant
second in terms of share of global air freight. However, many industry analysts believe
that the introduction of the Airbus 380 could increase Airbus share of the freighter
market. However, in early 2007 Airbus announced that it would delay the production of
its 380F version. This could have a more global impact. UPS was scheduled to purchase
several A-380 F models, but has canceled several of these in March 2007 as Airbus has
reported that it would be shifting several of their production staff to the development of
the A-380 passenger model.

Despite Airbus relatively small market share in the global airfreight market, there are
still a number of aircraft that transport a substantial volume of freight, most notably from
FedEx, DHL, and Lufthansa Cargo.

Airbus 300-F (A300-600 F)

The A300-F is designed primarily on shorter routes with a range of 2,650 nautical miles
(4,850 km) and bulk holding area of 298 cubic feet. The double side-by-side loading area
allows for a capacity of 21 pallets, while the single row loading design allows for 15
pallets.


30

Figure 10 (source: cargo.koreanair.com)


Oversized Freight: Beluga (Airbus)

Designed to carry oversized cargo like airplanes, helicopters, and other aircraft, as well as
other abnormal sized cargo, Airbus designed the A300-600ST as a wide-bodied version
of the A300-600F. With a length of 184 feet, span of 147 feet, and empty weight of 86
tons, the A300-600ST, or Beluga as it is commonly known (see Figure 11 for an
evident explanation as to why it is frequently called this) is one of the largest and most
innovative of aircraft designs. The Beluga has a cargo volume of 848 ft
3
(or 1,365 m
3
),
cargo capacity of 47 tons, and requires a cockpit crew of four to operate. The aircraft
replaced previous so-called Super Transporters (hence the ST in the aircraft model)
including the Super Guppies that began in operation in the early 1970s.


Figure 11: Airbus A300-600ST or Beluga

D.3 The Air Freighter of Tomorrow

Noise restrictions are also sensitive to the industry considering the bulk of trans-
continental activity is conducted around midnight where there are more restrictions.
31
Another issue that is heavily pursued is sustainability and implementing policies that
minimize unnecessary emissions. This is currently of interest to many that study the
industry. Among the more notable studies that has been active in the community is a so-
called continuous descent approach whereby aircraft climb to a given ascendancy point
quicker and descend in a more gradual, continuous, manner instead of a more rapid
descent. The advantages to a continuous descent approach include:

Increased cost effectiveness
Emission reduction
Noise reduction

There was a trial at Louisville International Airport (SDF) which serves as the main hub
for UPS in 2004. Although the approach is subject to variation in pilot ability, wind
speed, and aircraft weight, the conclusion validated the preceding three advantages. CO
emissions below 3,000 feet were reduced by about 15% (depending on the aircraft); HC
below were reduced by about 18%; and NO
2
emissions below 3,000 feet were reduced by
34%. Further, the fuel burned to fly the last 180 nautical miles to the runway was reduced
by 364 and 118 pounds per flight on a B-767F and B-757, respectively. The time it took
to fly the last 180 nautical miles also declined by about two minutes
12
.

Studying continuous descent approaches are one of many mechanisms that are being
studied to improve both cost and environmental considerations. It has gained traction
among those who study the industry, and is possible to become increasingly a focus point
moving forward.

D.4 Containers

As the shape and size of freight is subject to variation, there are also many different
containers to accommodate different classes of freight. The most common types of
containers will be owned by all airlines. Most bulk freight comes in either a closed container
or is shipped on an open pallet. Containers are also tailored for specialized freight. For
instance, there are refrigerated containers, horse stalls, and other specialized containers.

The most commonly used unit load devices (or Olds) are the following:

LD3
The LD3 container is the most common general closed containers (see Figure 8). The
volume of the LD3 is 153 ft
3
(or 4.3 m
3
). The larger freighter aircrafts generally have a
capacity for at least 30 such LD3 containers. A Boeing 777 has capacity for 30 LD3s; An
A340-300 has capacity for 32 LD3s, and an A380-800 has a capacity for 38 LD3s. There
is also a refrigerated version of the LD3 for produce and freight requiring temperature
control.


12
note: noise was reported to be greatly reduced but was not quantified due to unexpected wind changes
32

Figure 12: LD3 Container

Pallets
Pallets are just rectangular bases that support open faced cargo that is secured. Pallet
sizes differ; the most commonly used pallets are of (approximate) dimension 7x10x8
that have a maximum tear weight of 275 pounds (125 kg). The other is of dimension
7x10x5.5 with the same max tear weight (see Figure 9).


Figure 13: Pallet
E. Freight Carrier Economics

The freight carrier industry is becoming increasingly competitive, and therefore a highly
complex environment. Here we study some aggregate industry-wide facts of the industry,
examine market concentration, how some planning decisions are made, and how carriers
coordinate. We conclude by a case study of air cargo revenue management implemented at
KLM.
E.1 Coordination

Given the number of players and the multiple stages of the air cargo supply chain,
coordination becomes an important means of a carriers strategy. Also, we will see that
the industry has become increasingly concentrated. We begin by first studying where
carriers coordinate with other firms. I focus primarily on the coordination between the
carrier and the forwarder as these two players do most of the handling on a given
shipment.

Carrier-Forwarder Coordination
33
Recall the case study of BAX Global. While BAX has a fleet that flies within North
America only, they contract with certain carriers on transcontinental routes. Such
collaborations are favorable as they abate the asymmetries between certain routes. We
have seen that on trans-Pacific routes, forwarders exhibit market power on flights to Asia
while the carriers have market power on flights that originate in Asia. Another critical
point in carrier-forwarder coordination is risk sharing.

Technologies are making it increasingly possible for the coordination to improve.
Tracking technologies are centered at RFID that has allowed customers, carriers, and
forwarders to coordinate together. Considerable resources have been, and continue to be
allocated toward improving this further so as to make cargo technology as transparent as
possible.

One considerable barrier the industry faces is integrating the technologies of different
firms. Since Deutsche Bahn acquired them, BAX Global expressed a great challenge of
integrating their IT systems with that of their partners and has expressed how the frictions
between incompatible systems have not allowed full collaboration to take place.

Forwarder-Forwarder Coordination
While shippers use forwarders as an intermediary in the delivery of freight, the forwarder
contracted by the shipper may not be the only firm that is used in ground transportation.
Shippers often collaborate with other shippers for two reasons. The first is asymmetry in
forwarders network. If at a given receiving destination the carrier contracted by the
shipper has little presence, the forwarder will generally have the service provided by a
different firm who collaborates with the forwarder. For instance, BAX Global has a fleet
of trucks with the BAX logo on, but are neither owned nor operated by BAX. They also
contract with UPS, FedEx, USPS, among other forwarders. The second reason for
establishing coordination with other forwarders is to improve load factors. Naturally
spoilage (excess capacity in this context) occurs more frequently when a firm operates in
isolation than when they are able to transport some cargo for other firms. An example
comes from the trucking industry. Many of those familiar with the industry cite the
asymmetry involving truck loads in and out of Florida; freight flowing into Florida
outweighs that of flowing out of Florida, and given the geographic isolation from Florida,
hedging this asymmetry becomes an important policy for many trucking firms.

Carrier-Carrier Coordination
Some carriers will coordinate with each other, motivated by the same principle by which
forwarders coordinate, namely risk sharing. DHL, for example, coordinates with several
other non-integrators to carry some cargo on specific routes. FedEx and UPS, however,
carry almost all their freight on their own fleets.

E.2 Pricing

Another question that naturally arises is how pricing is determined. Unfortunately there is
not a precise answer to this complex question. What we do know, however, is that pricing
34
is usually state-dependent as we expect any firm that uses revenue management to
exhibit. In the case of the freight forwarder, pricing is based according to volume,
priority, service, and other characteristics.

As we would expect, consolidated shipments are charged separately in which the
shippers freight is consolidated (generally at the shippers warehouse) and are charged a
lesser price. Non-consolidated (LTL) shipments are considerably more expensive.

With respect to the pricing of the carrier, we will study the complicated issue of revenue
management below. Forwarders either book freight for individual flights, or have
contracts with carriers in which the carrier reserves the given allocation on each flight
with the forwarder. For flights in which the forwarder book separately, prices are subject
to volatility. Of course the price depends upon the capacity (and forecasted capacity),
dimensionality of the freight, and other factors.

It may be of interest to learn about the aggregate behavior of price indices. Figure 14
shows the price indices for inbound versus outbound freight in the U.S. from 1992-2006.
We note two salient observations: first, the price of airfreight is subject to volatility.
Secondly, which should not be surprising considering the behavior of the volume of air
freight, that the price of both inbound and outbound freight have risen considerably since
2002 (recall that 2001 was a recessionary year). Moreover, the price changes for inbound
and outbound freight appear to have grown at the roughly the same pace.

Price Indices for International Freight
1992-2006
80
90
100
110
120
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
i
n
d
e
x
outbound flights
inbound flights

Figure 14
35

In the past, pricing would be generally static there would be a fixed charge for a given
service that would rarely adjust. However technological advancements have made pricing
more dynamic in the air freight industry. With market segmentation, pricing is an
extremely complicated and highly-dimensional problem. This problem is of extreme
importance and needs to be studied in greater detail. We now turn our attention to this
problem of revenue management.
E.3. Air Cargo Revenue Management

In the passenger airline industry, revenue management became an extremely useful and
important tool used by airlines in the 1990s. The idea is to charge the right price to the
right person at the right time so as to maximize revenue. Passenger revenue management
is highly dimensional as time of booking, type of passenger (e.g. business versus leisure
passenger), origin-destination pair; among other factors is a function of the price of the
ticket when issued. Despite this complexity, advancements in computational technology
have made these previously unsolvable problems tractable and have become a vital
component to any carrier. Revenue management is also used with cargo carriers, and the
idea is nearly identical to that of passengers. As with passengers, cargo space is allotted
in advance or sold for free-sale. Both strategies use an iterative schedule planning
process: first a central planner schedules a draft that is later evaluated in the second phase
where it is modified if needed. Both are driven by demand driven dispatch the type of
aircraft is subject to change as a function of demand. Despite these similarities there are
also considerable differences, and the problem of revenue management of air cargo is
even more complex regarding passengers. The following distinguish these complications:
Unlike passengers, cargo can easily be off-loaded subject to on-time delivery.
Consequently, the number of possible ways to route a given shipments exceed
that to route a passenger.
In passenger revenue management, each entity is well-defined: a passenger. In
cargo revenue management, each item is more complex: length, width, and weight
now define each entity.
Many bookings in air cargo are cancelled, re-booked, and cancelled again.
Therefore, the booking process is subject to considerable volatility.
Demand is lumpy and forecasting future demand is thought of as being at least as
complicated as passengers.

Despite the difficulty in analyzing revenue management in air cargo, the potential benefit
is far too ignoring the complexity in studying this. There has recently been some work
done in the field that has suggested various policies so as to improve revenue
management. Before looking at these, let us first decide the challenges in modeling. The
first is how to abate the curse of dimensionality. Even with modern technology, solving
such highly dimensional problems is infeasible and obvious assumptions and
simplifications are inevitable. Another is whether the carrier is assumed to be a
combination carrier or a pure freighter. Different booking policies and pricing strategies
would be employed under each scenario. Overage costs are vital to cargo because
rebooking is a more viable option in cargo as oppose to passenger (i.e. overbookings
36
would naturally be far greater in the cargo framework as a result). Spoilage costs are also
critical to designing policies of a carrier. It has been shown (see below) that that the
overage/spoilage costs are essential in governing revenue management policies of a
carrier. Another complication is modeling show up rates. Due to the high fluctuations in
booking and rebookings (mostly by the freight forwarder) the show up rate is volatile and
also seen to be essential in appropriately modeling air cargo revenue management. The
differences in revenue management between passenger traffic and air cargo is so vast that
there have been papers published just to enumerate these.

As with the case of treating passengers as entities, there are principle models that capture
the decision process of booking cargo: Markov decision process (MDP), bid price
accept/reject decision, and dynamic stochastic knapsack problem. The last of these is not
as common in the passenger model as entities are well defined. There are clear
advantages and disadvantages to each of these.

Most of the papers listed below in a brief survey share the same characteristic in the sense
that cargo is often offloaded, re-routed, and is subject to many changes given the low
relative cost of overage relative to the high cost of spoilage (of course this is not the case
in high-priority freight, but the routings of these are more exogenous). Even by making
generous assumptions regarding ways to abate the dimensionality problem, the resulting
problem is still hard to find. Therefore, the next question is how to apply a good heuristic
to find a good, if not optimal, solution.

Amaruchkul, Cooper, and Gupta (2005) simulate seven heuristics by looking at capacity-
to-demand ratios with respect to both weight and volume. Appropriate bounds are easily
found and deviations of the outcomes with respect to each policys upper bounds are
compared. The best heuristic depends centrally on the capacity-demand ratio. Not
surprisingly, a higher penalty cost induces a more conservative booking policy in a
simple accept/reject framework. Perhaps most notably, the authors show that airlines can
boost revenue substantially by reducing uncertainty of their volume. This is somewhat
surprising considering the aforementioned fact that overbooking is seen less costly in air
cargo. However, the authors result suggests that airlines may overbook too much in
which the tradeoff of higher volume of shipments is more than offset by the reduced
reliability of the carrier. Therefore, it may be of a shippers interest to implement policies
so as to reduce the volatility of volumes. For instance, they may wish to introduce a more
standard shipping size.

Case Study: Revenue Management at KLM
While air cargo has made some advances in the academic literature, implementation is a
concern in which the recommended policies are not necessarily tangible. The way airlines
use revenue management and the way the literature argues they should do not necessarily
coincide. Fortunately this issue has been documented in a paper by Slager and Kapteijins
(2004) in looking at a case study of revenue management at KLM.

37
Forecasting cargo is much more difficult than passengers because of the lumpiness of
demand as well as the erratic behavior of the cargo booking process. Moreover, KLM is a
combination carrier so balancing passenger and cargo bookings is a challenge and
complicates revenue management.

Air cargo revenue management at KLM is not as new as some may believe. In the mid-
1990s KLM Cargo initiated a program called System Profit Management, or SPM.
However, the program ultimately failed because it had focused too much on IT and a
scientific approach, instead of the numerous complexities of the day-to-day process.
(Slager and Kapteigns, pp. 82). In 2001, revenue management was brought back into
what they coined as margin management (MM) which sought to implement the
conceptual gains made from SPM. The goal of MM was to optimize the margin of cargo
by (a) increasing revenues (b) decreasing the network costs for handling and (c)
enhancing load factors in both volume and weight. To continue the implementation of
MM, two organizations existed: MM Execution which was responsible for the day-to-day
execution of MM process in each of the three areas and MM Process, and MM Process &
Tool Development which was responsible for the development of systems in which each
of the key players in their major markets could access. Margin management continues to
prosper at KLM Cargo today.

As with most carriers, cargo is sold one of two ways:
1. Contract Here there is a mutual agreement between KLM Cargo and their
customers (i.e. forwarders) in which the customer is guaranteed a certain
capacity on a given flight leg.
2. Free Sale Also called Request/Reply or R/R bookings Here space is sold
prior to departure with no guarantee on capacity. R/R can be sold at either: list
prices that are published in advance, customer specific prices, or order specific
prices.

The revenue management of each of the two cargo products differs. Let us examine each.

MM on contracts
Twice per year, at the start of the IATA summer and winter schedule, new requests
for contracted capacity is submitted by the worldwide sales organization. Customers
request capacity per flight/weekday. KLM determines for each flight/weekday how
much of their total forecasted flight capacity may be sold on a contracted basis (on all
flights to and from Amsterdam). Requests are then ranked per flight/weekday in
descending orders beginning with the highest margin per cubic meter or per kilogram.
Then final contracts are signed (KLM may take some lower margins over higher
margins under certain considerations from their customers, particularly if their
historical performance is reliable). Contract requests may also be submitted during
the season, and go through a similar process.

MM on R/R
On all flights to and from Amsterdam, route managers set and adjust shipment entry
conditions (or SECs) daily. Given a daily SEC, minimum margin requirements are
38
defined. The SEC can be set either per cubic meter or per kilometer, depending if the
flight is volume or payload constrained. Daily forecasts for SECs are made depending
upon historic booking profiles, current capacity, current booking profile, market
knowledge, and other considerations. Conference calls are held daily between route
managers and the sales force to ensure SECs are raised or lowered appropriately. If a
disruption causes SECs to be lowered unexpectedly (i.e., if there is a large unexpected
cancellation), a flight alert message is sent to commercial organizations to attract
more cargo to that flight.

If the margin on the requested shipment exceeds (is less than) the SEC, the flight is
accepted (rejected). If the booking involves multiple legs, the same principle is
applied, now to the sum of the legs.

The margin requirement is updated and incorporated into their information systems
for transparency. KLM Cargo continues to improve the base of their margin
management systems. They continually seek to improve upon their existing
foundation by introducing new mechanisms so as to protect high margin cargo and
eliminate low margin cargo, manage the relation between SEC and price, and to
invest in upgraded systems to improve the robustness of their existing systems.















39
VI. Security

While not as prominent as with passenger security, cargo security has recently been under
considerable scrutiny over its perceived vulnerability. This can be seen from the 108
th

Congress where some have called for screening of 100% of all cargo aboard passenger
planes (see The Aviation and Transportation Security Act, P.L. 107-71), which nearly all
experts in the industry will render as infeasible. However, there have been a number of
policy changes recently calling for increased security measures. Among these include the
TSA to at least tripling the amount of cargo placed on passenger aircraft that has been
inspected (FY2005 Homeland Security Appropriations Act P.L. 108-334). Another calls
for the TSA to pursue screening technologies and enhance security procedures as
recommended by the 9/11 Commission (National Intelligence Reform Act of 2005, P.L.
108-458). Security concerns by no means unique; analogous reforms have been adopted
in Germany, the U.K., Singapore, among other locations.

While 100 percent of cargo is screened, far less than that is inspected. Screening refers
exclusively to the known shipper program where physical inspection. Inspection is done a
number of ways (credentialed agents, trained canines, biometric technologies, etc.).
Here we seek to discuss issues pertinent to security, and the future of security design.
A. Air Cargo Security Risks

Let us first highlight the risks associated with air cargo security.

1. Explosive and Incendiary Devices From the Congressional Research Service
(CRS) Report to Congress in a mimeo updated January 26, 2006 (pp. 4-5):

Undetected explosive or incendiary devices placed in air cargo are potential
threats to aircraft. Experts have warned that air cargo may be a potential target for
terrorists because screening and inspection of air cargo is currently not as
extensive as required screening of passengers and checked baggage. Cargo carried
aboard passenger aircraft may be at particular risk since passenger aircraft are
generally regarded as highly attractive targets to terrorists and have been attacked
in the past. It has been reported that TSA considers the likelihood of a terrorist
bombing of a passenger airplane to be between 35% and 65% based on 2002
intelligence reports, and TSA believes that cargo is either likely to become, or
already is, the primary aviation target for terrorists in the short term While
cargo as a means to place explosive or incendiary devices aboard aircraft has
historically been rare, heightened screening of passengers, baggage, and aircraft
may make cargo a more attractive means for terrorists to place these devices
aboard aircraft, including all-cargo aircraft as well as passenger aircraft, in the
future. Investigations have suggested that al Qaeda terrorists had an interest in
bombing all-cargo aircraft prior to September 11, 2001, and were planning to
bomb U.S.-bound cargo flights in an operation run out of the Philippines


40
2. Hazardous Materials about 75% of all hazardous materials shipped vis--vis
aircraft are carried on cargo planes while the remaining 25% are shipped on
passenger aircraft
13
. There are significant risks associated with shipping
hazardous materials that are not declared leading to improper handling and
storage. This can be seen from the May 11, 1996 crash of a ValuJet DC-9 over
the Florida Everglades. The National Transportation Safety Board determined
that improperly carried oxygen generators ignited in one of the planes cargo
holds.

3. Cargo Crime The U.S. General Accounting Office estimates that loses
attributable to cargo theft across all transportation modes are between $10 and
$25 billion in the U.S. alone, which a nontrivial share of this is from air freight.
Crimes generally includes either theft of goods and the smuggling of
contraband, counterfeit, and pirated goods through a distribution network.
According to the CRS, there have been major theft rings at JFK Airport in New
York, Logan Airport in Boston, and Miami International Airport. A recent
review of transportation security needs has focused on six components to
improve cargo security so as to abate cargo crime.

4. Aircraft Hijacking and Sabotage Of course this area remains a great concern
in a post 9/11 world. Many have argued that hijackings of all-cargo planes
remain relatively more attractive given the recent improved security measures
taken with respect to passenger aircraft. While historically rare, there have been
some instances of hijacking of freighters.

B. Known Shipper Programs

One of the most important components to the security process is the so-called known
shipper program. While this may be called something differently in other countries, the
premise is that once a shipper has built a sufficiently high, cargo would be pre-screened
and subject to lax security measures. The known shipper program has evolved as the
principal means for pre-screening cargo. They were established initially to differentiate
trusted shippers known to either a freight forwarder or an air carrier. Therefore containers
from unknown shippers would undergo further screening and inspection. Currently in the
U.S. cargo shipments from unknown shippers are prohibited on board passenger aircraft.
The profiling procedure from the known shipper program is not that unlike passenger
profiling, which is used in passenger security.

The exact policies of the known shipper program vary across countries. Let us look at a
few and how they differ.

United States Today there are more than 400,000 known shippers in the U.S. Most
estimations show that between four and five percent of all cargo is inspected.

13
Source: U.S. General Accounting Office, Aviation Safety: Undeclared Air Shipments of Dangerous
Goods and DOTs Enforcement Approach, GAO 03-22, J anuary, 2003.
41
There are generally two prominent criticisms of the U.S. system that are being focused on
improving. The first, critics argue, is that the discretionary basis upon which shippers are
classified as trustworthy. They argue that there is little oversight as forwarders and
carriers have authority to accept/reject shippers into the program. The second criticism is
the lack of a centralized database. Because of the preceding sentence, there are frictions
for the TSA to monitor known shippers. The TSA has issued a proposed rule that would
make consolidation of known shippers into a centralized database a requirement.

Currently, shipments from unknown shippers are prohibited from being transported on
passenger aircraft. Additionally, both carriers and forwarders must refuse to transport any
cargo from shippers (irrespective of whether they are known or not) that refuse to give
consent for searching and inspecting cargo.

European Union The most noteworthy observation about the EU regulated agent
program is that all shipments who do not qualify as a regulated agent must be kept in
storage by airfreight carriers for five days before they are eligible to be transported. This
was implemented in 2006 and other countries are monitoring the results carefully.
Moroever, there have been increased training requirements for security personnel as well
as freight documentation. The latter poses challenges as firms are forced to modify IT
systems accordingly.

Hong Kong In March 2000, Hong Kong implemented the Regulated Agent Regime, or
RAR similar to the known shipper program in the U.S. While a non-regulated agent still
has the ability to ship cargo subject to substantially higher security controls, these types
of shipments constitute a negligible share of all cargo shipped from Hong Kong. At
HACTL, over 95% of all cargo originating in Hong Kong is shipped from a registered
agent.

Regulated agents are likely to have their status stripped if either there are discrepancies
on the air waybill, or more prominently if dangerous or hazardous materials are
mislabeled or mishandled.

C. Air Cargo Security Technology

Given the joint increase in both the (expected) volume of air cargo flown and security
concerns, a greater share of cargo can be inspected only when there are sufficient
technological advances. Here we describe current technologies implemented in air cargo
security and where the technologies are moving toward to accommodate future security.

The National Intelligence Reform Act of 2004 (P.L. 108-458) has directed the TSA to
develop technologies of air cargo security by authorizing $100 million annually from
2005-2007 for research and development of upgrading the existing security systems.

42
A number of technological advancements have already been made, yet still await
implementation in air cargo security. Each of these was reported by the CRC (see Elias
2006)

Tamper-Evident and Tamper-Resistant Seals
Various tamper-resistant technologies already exist in cargo shipments, but
advancements have recently been made in electronic seals that would allow more
immediate detection of tampering.

X-Ray Screening
The most commonly used systems in the screening of cargo is x-tray technologies.
One of the focal points moving forward is advancing current technologies that
minimize human factors. To this extent, threat image projections (which superimpose
images on x-ray scans) are one of the more promising advancements made.

Explosive Detection Systems
Current explosive detection systems exist that use x-ray computed tomography in
scanning objects, along with computational algorithms that estimate the probability of
a threat given the density and shape of the package. Advancements are being made to
include the possibility of scanning large objects (currently there are limitations as to
the size of objects that can be scanned).

Chemical Trace Detection Systems
These mechanisms are used in passenger screening, but are far less common in
screening cargo considering these systems are labor intensive and time consuming.
TSA has been contemplating extending the technology currently implemented in
passenger screening to cargo screening. Given the labor input, this would probably be
a secondary source of screening since it would be impractical to search a significant
share. Nevertheless, this is under consideration and is less developed.

Neutron Beam Technologies
While still being developed, neutron beam technologies remain one of the more
exciting advances in security. These systems send a pulse neutron generator to an
enclosed object that initiates multiple low energy nuclear reactions with the chemical
elements comprising the object. Then the detector can measure this reaction and the
gamma-rays emitted from the reaction, and information can be inferred from these
measurements.

While a promising means of securing the air cargo process, there are substantial costs
involved in developing such methods. It is estimated from the General Accounting
Office that with currently available neutron-based technology, each machine would
cost about $10 million and would require about one hour per container.

Hardened Cargo Containers
This is an attractive means to abate concerns about explosive devices. The 9/11
Commission suggested increasing the usage of hardened containers. Hardened
43
containers became popular after the 1988 bombing of Pan Am flight 103 over
Lockerbie, Scotland. There currently exists hardened unit loading devices, although
carrying these may induce inefficiencies from their increased weight which reduces
available payload, as well as increased procurement cost for hardened containers.
Therefore, current challenges are to strengthen the durability of these containers while
introducing lighter material to offset these inefficiencies.

The airlines are likely to impose a law requiring substantial increases in the use of
hardened containers because of the crowd out effect of capacity. However, there are
interesting questions to be raised, such as trading off lower capacity for lower security
costs of unknown shippers (since their goods would be placed in hardened containers,
the need to as stringent security would not be as high).

Biometric Screening Technology
In order to ameliorate the problems associated with air cargo security risks, as in
section VI.A (much of which has been caused by credentialed individuals with access
to cargo loading areas), biometric screening technologies have been advanced. A pilot
program has been established at some selected facilities whereby fingerprinting,
retinal scans, and facial pattern recognition are being evaluated of transportation
workers. The National Intelligence Reform Act of 2004 contains extensive provisions
requiring the TSA to enhance the usage and implementation of biometric systems at
airports (P.L. 108-458).

44
VII. Concluding Remarks and Future Work

Even in the presence of substantially higher expectations in oil prices, the air cargo
industry still is expected to grow at a sufficiently high rate so as to induce more pressure
in an already highly-capacitated system. Consequently, there are a number of areas for
work to accommodate this growth, or at least to develop a greater understanding certain
areas. I suggest four principal areas that seem particularly attractive.

(i) The air cargo network is a very complex one with the number of possible routings,
schedules, consolidation points, and stations serviced too many to enumerate. Fleet
assignment, crew scheduling, recovery, operations, and revenue management have
shaped the broad field known as airline operations research. However this usually refers
to passenger movement, and less is known about cargo. The cargo model is vastly
different than its passenger counterpart, and it could be argued that its network is even
more complex than with passengers considering cargo has more routing options (unlike
passengers, cargo that is not of highest priority could receive multiple transfers).
Studying the planning process of the cargo network should be better understood as a first
step to optimization applications.

(ii) Continue the development of air cargo revenue management in three aspects. First,
develop better forecasting methods or design incentives so as to reduce the uncertainty of
show-up rates. Second, it would be of great interest to improve upon the existing revenue
management principles so as to better ascertain the true marginal value of a booking
request. As mentioned, modeling such phenomena is complex considering the
dimensionality of the problem. Third, it is of interest to continue to foster the
implementation of revenue management similar to what KLM has done.

(iii) Develop a greater understanding and mechanisms for collaboration along the air
cargo supply chain. The way in which to design an incentive compatible contract both
among different players, as well as different firms as the same player would likely yield
better network management and reduced lead times.

(iv) Design more efficient warehouse and ground handling systems in an increasingly
automated fashion. This is particularly motivated by major facilities facing severe
capacity constraints (like LAX).

As mentioned previously, this document sought three objectives. This was not meant to
expand the frontier of academic literature, neither was it intended to make any proposals
regarding the movement of air freight. Rather, we sought to obtain answers to the most
salient questions such as what is likely to be shipped, how volumes of cargo have evolved
and where they are anticipated to evolve, how exactly the process works, how different
players along the supply chain interact and collaborate, identified the biggest firms in the
industry and how they operate, and to understand issues that ought to be improved in
shaping the air cargo industry of tomorrow.
45
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Revenue Management

Bazaraa, M., Hurley, Joseph D., et. al.,. The Asia Pacific Air Cargo System,
mimeo, The Logistics Institute Asia Pacific, 2000

Billings, J., Diener, A., and Yuen, B. (2003) Cargo Revenue Optimisation, Journal
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Elias, Bartholomew, Air Cargo Security, CRS Report to Congress, version: January
26, 2006, The Library of Congress

Kasilingham, R. (1996) Air Cargo Revenue Management: Characteristics and
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Kleywegt, A.J. and Papastavrou, J.D. (2001) The Dynamic and Stochastic Knapsack
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