Premium freight services nearly disappeared at the outset of the financial crisis. Now recovery and inventory cautious-carmakers have brought back the need for speed, but under new terms.
To reduce inbound inventory volumes in recent years, the car industry has used a lot of premium freight. As supply chains extend, manufacturers found reasons to put parts on an plane instead of a ship or truck, from the desperate one-off dash to keep production running to the use of scheduled services to avoid tying up expensive components on ocean journeys.
But that was when factories ran at full capacity and struggled to meet demand. The recession dealt a blow to the premium freight sector that some thought would be fatal.
The impact of the downturn on premium freight services was as deep as it was sudden. Premium freight services faced a double blow as sales volumes dropped steeply, with supply chains full of unsold inventory, and also because the severe shortage of credit put expensive services in the spotlight. For Panalpina, airfreight dropped 7% more than sea freight at the peak of the crisis, and the more expensive the service, the harder it was hit, according to a source at the company.
Matt Brand, the global automotive director at Ceva, reports a similar slow down. But if the depth of the drop in premium freight volumes was painful for the large providers, at least they had the opportunity to compensate by offering lower cost services. “Our RFQ volume went up by a factor of ten when the crisis hit,” says Brand, “as the OEMs went out to the market in search of cheaper rates. Some of those companies were just benchmarking, but others were interested in making real changes to their supply chains, so we did win new business.”
Specialist premium freight providers, on the other hand, had less opportunity to compensate. “Before the crisis, we were doing 300 or 400 charter flights every year for automotive companies,” says Justin Bowman, group commercial director at Air Charter Service. “In 2008 we did 50 or 60 in total, and those tended to be for higher value vehicles.”
At Lufthansa subsidiary Time:matters, CEO Franz-Joseph Miller reports a similarly steep drop in automotive businesses. “Some of the sectors we operate in – trucks, for example – declined by 90%,” he says. Other automotive work was not so badly affected, such as time-critical spare parts logistics.
Gianni Maes, director of sales at Roberts Europe, which provides primarily road-based premium freight solutions, says a steep decline in airfreight business was a leading indicator of a slowdown in road shipments. “About 90% of our shipments go by road, but normally there is a relationship between road and air volumes: the more road you do, the more likely there will be an air upgrade. In mid September  we began to see a modal shift, with much more road transport, followed by a more general slow down in automotive business.”
Both Bowman and Miller report that other sectors they serve held up more strongly than automotive. For Neal Williams, managing director of Priority Freight, the relative robustness of other sectors was vindication for a strategy of diversification that his company has been pursuing. In recent years the company has reduced its automotive exposure from 70% to 50% of its business. From September 2008, however, those levels “dropped off a cliff”, with the automotive fraction falling to 20% for the company as the crisis hit.
As carmakers struggled to run down vehicle inventories, lines remained closed for extended periods. When they did restart, there was a new caution in the air. Nobody wanted to be stuck with unsold product, and everybody wanted to keep the lid screwed down firmly on anything that looked like excessive cost. As the focus shifted to protecting cash, would the industry revert to a slower way of working?
In the early summer, inventories had plummeted and government stimulus schemes were helping to kick start demand. As the production lines rolled again, the phones in the emergency logistics offices began to ring.
“When the factories started back up, their supply chains were pretty empty,” says Brand. “We started to see a lot of premium airfreight and even some dedicated charter work.”
Evolution Time Critical, an emergency provider specialising in automotive, saw June and July volumes match the same period as 2008, despite lower volumes, according to managing director, Brad Brennan. At Time:matters, Miller says that European intra-day shipments in September were at double the levels seen in March, taking overall volumes above precrisis levels. Justin Bowman at Air Charter Service says that at times in September, his company was making use of “everything available” to move parts for European automotive customers. At Priority Freight, says Williams, the fraction of automotive business has rebounded to pre-crisis levels.
The rebound has lasted to the end of 2009. In the augustto- november period, Evolution was up 30% on shipments and 50% on weight compared to a year earlier. “This confirms our observation of a trend toward larger quantities of material per shipment,” says Brennan, “and often a larger quantity of material by charter or sprinter van than by airfreight.”
With the skies full of car parts again, is the industry returning to bad old habits? Some problems are perennial. Despite overcapacity in the developed markets, some OEMs still seem to be led by manufacturing more than by the market, even for producing models that might not be selling well.
Sources close to one of the world’s largest carmakers admit that the company’s lower inventory levels have contributed toward it spending the same amount on premium freight this year as it did in 2007, despite drastic production cuts.
“The mantra of ‘production must be maintained’ is still valid curently, hence the reason our control centres are constantly busy,” says Brennan.
New model launches also create supply chain difficulties. At Air Charter Service, Bowman attributes much recent growth to model introductions, with 40 flights in a month to one major European plant earlier in the summer and 65 in September to another as both worked to debug production.
Structural changes in the supply chain also create difficulties, as OEMs shift suppliers in their hunt for cost reductions, or when suppliers fail and are replaced. The further thinning of inventory and buffer stock – from already low levels – also creates demand, which Brennan anticipates will continue as long as confidence in the recovery is low.
The wider crisis has also made it unusually economic to purchase airfreight. Fuel prices have been relatively low all year and lower volumes in all sectors have produced spare aircraft capacity and lower freight rates. The normal autumn peak season for freight has not materialised, says Ceva’s Brand, so attempts to increase rates “are not sticking.” OEMs, he says, “will have a better time this year buying airfreight.”
Evolution agrees that airfreight continues to lose out to fast van or even charter where necessary, with industry figures suggesting automotive material by air is down 40%. But Brennan expects a return to smaller shipments by airfreight when inventory levels return to normal, although that may not be for several years to come.
It is clear that some manufacturers plan to carry the caution and financial discipline of the crisis forward into the recovery. An important symptom of this is centralised, standardised purchasing, even for exceptional items like emergency freight. “Nobody likes it when somebody at a local plant makes the decision to charter a $600,000 aircraft,” says Brand. “When times were good, carmakers might have left decisions like that to local P&L [purchasing and logistics] owners, but now the corporate offices are very much involved.”
For premium freight suppliers, the industry’s enthusiasm for contracted arrangements is seen as good news. Closer engagement with their customers allows them to plan for likely scenarios and to offer a wider range of services, while ongoing agreements mean they no longer have to compete with each other on a shipment-by-shipment basis.
“For us, relationships have become more professional. We sit down and discuss challenges and problems with our customers,” says Time:matters’s Miller. At Priority Freight, Williams has seen similar trends. His company is “getting more requests to tender for annual contracts.” This approach has benefits for both sides, “It gives us, the supplier, more security and allows us greater transparency. We can open our books and find the most cost effective solution for our customers. ”
Roberts Europe, reports Maes, has seen a similar picture, “In the past, premium freight was a little bit hidden. It was the only type of transport managed at a local level.” The crisis has served to bring premium freight into the open, and it is being treated more as a commodity, “More organisations with multiple production facilities are moving to centralised procurement. Since the start of the crisis, we’ve seen the number of tenders for centralised premium freight triple.”
For Roberts, which runs its operations from a single multilingual control facility in Maastricht, this trend supports plans in place before the crisis. “In 2005 we made the strategic decision that we would focus more on centralised services,” says Maes. “If the industry hadn’t moved towards those services anyway, we would have been trying to sell them.”
Closer relationships, providers emphasise, give them the best opportunity to balance cost and service for customers. “In the past, a company might call you up for a charter price and you needed to respond in an hour or less,” says Miller. “If you are asked for a price for five chartered aircraft, but it turns out that you can replace one of those charters with scheduled airfreight, you can offer tremendous savings to the customer, but that is only possible if you know their full requirements.”
Shifting from expensive charter to scheduled freight is the most basic strategy for cost savings in emergency logistics, but many providers emphasise the opportunities for bundling shipments together or sharing transport assets. It is often possible to find a backhaul load for a charter aircraft to avoid the payment of return-trip fees. “Basically, the longer the journey, the greater the chance that somebody can share the costs,” says Justin Bowman.
For Roberts Europe, the ability to offer a premium road service as a substitute for air is a compelling proposition for price sensitive customers. “Many of our customers now recognise that for certain shipment weights and distances, it can be both quicker and cheaper to go by road,” says Maes.
Beyond emergency freight, LSPs point out that conditions are right for a renewed interest in scheduled airfreight services for some parts, particularly as inventories remain low and companies focus on supply chain risks. A source at Panalpina reveals that the company has seen tier one suppliers look purely at transport cost and establish slow supply chains with 45-day transit times from factory to a customer’s production line. In those instances, it only takes one incident of disruption for them to need large quantities of airfreight.
The cautious nature of the recovery also seems to benefit premium freight providers as customers are reluctant to rebuild inventories too high in the face of unpredictable demand. At Time:matters, Miller points to the difficulty of forecasting as a driver of high-speed solutions and premium freight. “Our customers are very cautious about restocking right now. They don’t know what will happen, so they are only producing based on demand. The challenge is to make sure you maximise flexibility without multiplying your costs. To do that, you need a good balance of true emergency logistics and accurate forecasting so you can use more efficient services whenever you can.”
At Priority Freight, Neal Willams also sees this delicate balancing act as an opportunity. “Nobody wants to get caught out with big finished goods inventories, so the supply chain is going to be much more demand driven” he says. “But the need to keep customers happy puts the pressure on.”
Even once stability in the market improves, providers are bullish about the prospects for premium freight services. The parts most suited to premium freight are those both light in weight and high in value. Today, sensors, electronics and wiring harness components dominate that category and are likely to increase in importance. More radical changes in vehicle architecture could increase the value-density of components. Prior to the recession, for example, Panalpina received enquiries from small electric-vehicle manufacturers who wanted to manufacture in China and supply the US. Some of the parts for those types of vehicles, like compact electric motors, are both relatively light and high in value.
However other parts will be problematic for premium freight providers. It seems likely that the majority of the high power batteries used in hybrid and full electric vehicles will be sourced from Asia. These parts will be expensive, but also heavy and hazardous, making them a less-than-ideal candidate for air freight.