With substantial overcapacity in scheduled services, air freight carriers are primed to take advantage of a return to growth in the automotive industry.

When it comes to analysis of transport modes used in automotive industry supply chains, air cargo can be somewhat elusive. While a a large OEM will move millions of tonnes of freight by truck each year and ship hundreds of thousands of containers around the globe, the material it sends by air is often little more than a sliver of the transport pie chart, perhaps barely registering 1% of volume. But the percentage of transport cost for the plant or model for which the parts are being flown could be 20 times that.

In many cases, air freight is seen only as an option of last resort – an emergency plug necessary to fill a component gap before it shuts down a line or holds up a launch. Last year, emergency logistics specialist Evolution Time Critical revealed that one manufacturer chartered aircrafts to fly cup holders so as to avoid missing a new model launch date.

"For 2013 we are estimating an increase of 8% in automotive imports and one of 5% in the export of automotive spare parts compared to 2012" - Marcus Santarem, Guarulhos Airport

Air freight is used with relative frequency for spare parts logistics, particularly when dealers order urgent parts for waiting customers. Depending on OEMs’ regional stocking strategies, flying parts, both internationally and domestically, is fairly common. For example, at Guarulhos Airport, in Sao Paulo, Brazil, about 7,000 tonnes of automotive spare parts were handled in 2012, making up about 5% of all air cargo passing through the airport, according to Marcus Santarém, cargo terminal director.

But air freight is also used more strategically, including on scheduled services, although few manufacturers are inclined to discuss this openly (in fact none of those contacted were willing to do so for this article). According to James Woodrow, Cathay Pacific’s general manager for cargo sales and marketing, the higher the value of the component, the more likely it is that a just-in-time air programme that minimises inventory carrying costs can be justified. Also, this type of air programme permits maximum supply chain flexibility, allow ing for more and later production changes, he adds.

Growing in the air

While the opinions of OEMs tend to vary depending on the region and services they run, a number of executives from airlines and logistics groups have noted a rise in scheduled air freight for automotive – much of it driven by the growth of markets and supply chains in countries like China. However, this growth comes at a difficult time for the air freight sector, with substantial excess capacity keeping rates depressed (see air freight data on p8). While this has led8 to cheaper prices for air forwarders, carriers say services are suffering and many are unsustainable at current prices, which could lead to a reduction in routes and frequency.

Also, the growth in such markets has prompted a need to improve certain services, including customs clearance. While some providers say the automotive industry enjoys preferential treatment by customs authorities in many markets, most agree that the industry needs more electronic clearance and automated processes.

Screen Shot 2013-06-25 at 17.13.37

Guarulhos Airport in Sao Paolo, Brazil shipped around 7,000 tonnes of automotive spare parts in 2012

China leads the skies

For many airlines and airports, the automotive sector is currently a growth segment. With the market soft in Europe, this rise is most notable in Asia. Logistics provider GAC Group has seen automotive air freight grow by 25-30% per year in China, according to GAC China’s managing director, Claus Schensema. This growth has been driven by the need for just-in-time manufacturing, a reduction in lead times and increasingly demanding inventory management metrics across the sector, he explains.

GAC China is currently handling between 120 and 150 tonnes of automotive cargo per month. “But it is important to consider this increase within the context of continuing growth for the Chinese automotive industry as a whole,” Schensema adds. “China’s vehicle market is by far the largest in the world and further growth is expected, which will ultimately increase freight demand by sea, air and road. It is an extremely competitive market that requires precision across the supply chain and guaranteed delivery by the most cost-effective and efficient means. Air freight can be particularly well suited to meet these stringent requirements.”

According to Schensema, airports in Shanghai, Wuhan, Beijing and Guangzhou handle the majority of the country’s automotive shipments, with GAC China active in all four, providing services primarily to tier two suppliers within these cities and beyond. “Given that the sector is very well developed, the majority of manufacturers and plants lie within a 200km radius of the airports, and this proximity is beneficial to freight services providers like us,” he says. Luxembourg-based Cargolux, Europe’s largest all-cargo airline, is also handling an increasing amount of automotive air cargo, consisting of finished vehicles, parts and components. The company enjoyed double-digit increases in automotive freight in 2012 compared to 2011, according to its manager of market intelligence and alliances, André Sies. “We do see a trend of increased flows shifting towards the emerging countries, such as Brazil and China, where the automotive industry is growing at higher rates than for companies based in Western economies,” he says.

Cathay Pacific’s Woodrow also sees strong growth for automotive air freight in Asia and China. “As the car industry booms in our home market of Asia, this generates intra-Asia business as well as long-haul,” he says. “Automotive shipments can move in both directions – from Germany to automotive plants in China or from Japan/Korea to automotive plants in the UK, and so on.”

But not every region has enjoyed growth. While Europe has obviously suffered, Brazilian air freight has also been weak for automotive during the last few years. Guarulhos airport in São Paulo, which serves car plants situated in the surrounding region, saw automotive tonnage fall 8% in 2011 and a further 20% in 2012, according to Marcus Santarém, but the airport expects better growth this year. “According to the projections of Sindipeças [the Brazilian automotive suppliers association], for 2013 we are estimating an increase of 8% in automotive imports and one of 5% in the export of automotive spare parts, compared to 2012,” says Santarém.

Growth on scheduled services

Perhaps surprisingly, for many carriers and logistics companies the majority of automotive shipment growth has been on regularly scheduled air services. “It is a bit of a myth that air freight is only used as a back-up for the automotive industry,” s ays GAC China’s Schensema. “The strong growth trend suggests there are many more suppliers and manufacturers worldwide utilising air freight as part of their logistics mix.”

Almost all of the air freight cargo handled by GAC China is in the form of scheduled consignments; the company only handles occasional emergency lifts because of delays at the point of manufacture or the occasional bespoke requirement. “GAC has also been involved in a number of ‘hand carry’ jobs, where we have sent members of our team as on-board couriers with urgent shipments for line close downs or emergency requirements,” remarks Peter Orange, GAC’s regional manager of freight sales for Asia Pacific and the Indian Subcontinent.

Schensema believes the use of scheduled air freight in the automotive industry is growing as a viable alternative to reduce overall supply chain costs, given the need to operate on a just-in-time basis.

Cargolux’s Sies also says that a large share of its automotive business is on regular services. “The majority of the shipments on board our flights are regular flows, although we do also carry urgent or last-minute shipments,” he says.

At Brazilian airport operator Infraero, a spokesperson points out that Brazil’s automotive industry works primarily under a fixed, yearly schedule for its production routines, while ‘spot’ traffic is not necessarily that common. Nevertheless, it concedes that if the release of a new model generates unexpected consumer demand, the airport operator has contingency plans in place to properly handle peaks.

A sense of urgency

While emergency shipments are far from being the only or dominant reason for automotive air freight, a large amount of such transport is driven by season or variable demand – such as new model launches – and even some of the ‘regular’ services might be added only during these periods.

“It very much depends on the value of the goods transported and on the lifecycle of the products involved,” says Sies. “We see certain demand peaks in automotive air cargo shipments when new models are being released and speed of delivery is viewed as more important than cost. Fluctuations in the cost differential between sea and air – as well as the reliability of the ocean supply chain – are also important factors when triggering a decision to shift some cargo to air.”

"When global GDP growth and car volumes slow, there is a refocus on costs and a move back to lower cost transport, such as truck, train, sea-air, sea" - James Woodrow, Cathay Pacific

Air France-KLM-Martinair Cargo (AF-KL-MP) moves a considerable tonnage and volume of automotive-related consignments, consisting not only of parts and components, but also individual vehicles. While Rainer Czikowski, senior international sales manager for automotive, has also noticed a trend in recent years of the automotive sector making more use of air, he says it has been driven mostly by urgent requests. “Less urgent consignments will invariably be transported by sea or land, since this works out cheaper. Globally, however, the demand by customers to use air is definitely increasing,” h e says, adding that while ‘spot’ requests are quite frequent, such business is established on the back of regular contracts.

According to Santarém at Guarulhos, scheduled consignments for automotive are very rare at the airport, with the vast majority of movements being emergency cargo. He actually sees few signs that the automotive sectors would like to make more use of air to ship scheduled consignments.

But while the balance between regular and urgent air shipments seems to vary, in general it would appear the factor most influencing automotive air freight is global automotive production volume rather than manufacturers’ supply chain strategies. As Cathay Pacific’s Woodrow points out, air freight goes up as vehicle production goes up, largely because there is a greater need for speed to get the parts to the line. “There does appear to be a trend towards handling ever more automotive cargo, although it moves in waves,” he says. “When the industry and global economy are booming, auto-related air freight volumes boom. When global GDP growth and car volumes slow, there is a refocus on costs and a move back to lower cost transport, such as truck, train, sea-air, sea etc.”

Empty air

It is not just automotive economics that influence air freight service, of course. The sector’s fortunes rise and fall with global macroeconomic trends and currently the sector is generally suffering from overcapacity, par ticularly on European routes.

“One of the characteristics of the air cargo sector at the moment is the worrying existence of overcapacity in almost all markets,” says AF-KL-MP’s Czikowski. “Air freight is consequently not being shipped at realistic tariffs, therefore meaning that the business is not being run cost effectively.”

Cathay Pacific’s Woodrow also points to excess capacity, especially when both freighters and bellyhold are taken into consideration. “With global economic growth being slow and wide-bodied passenger deliveries continuing apace, supply exceeds demand in most trade lanes,” he says. “This will change once the global recovery gains momentum. However, there is certainly capacity out there for tailor-made air solutions for automotive.”

Cargolux’s Sies points out that because of the excess capacity situation, companies have been able to buy air freight space without much difficulty. “There are no real barriers to companies wishing to regularly make use of air cargo uplift,” he says.

Screen Shot 2013-06-25 at 17.14.11Overcapacity has led to cheaper, some say unrealistic, air freight tariffs but sustainable growth will only come with an upturn in the wider economy
But while available space and low rates are certainly enticing to manufacturers, GAC’s Peter Orange says they are unlikely to stimulate demand for automotive freight on their own. Rather, volume will only return with a return to growth in production and sales, particularly in Europe. However, he also points out that the low air freight rates are likely to have pulled some freight from multimodal sea-air services, which have dropped in volume quite significantly in the last year.

The use of automotive air freight remains complex and varied. At best it could be said to represent a supply chain where manufacturers truly value the speed at which a part (or even finished vehicle) should get to the line or to market – and, if not altogether happy to do so, they are willing to pay for it. In many other cases, the use of air is a desperate reaction to a mistake or problem somewhere else in the supply chain. Either way, the global nature of the industry and its supply chain means that air freight will have a continuing, if not growing relevance for automotive logistics.