The air freight sector has seen a period of strong global economic and consumption growth that is expected to increase an average of 3 percent a year at least until 2025, according to McKinsey & Co. analysts, but the skies are not necessarily so friendly for air-freight forwarders and cargo airlines.
A new McKinsey report, “Air Freight Forwarders Move Forward Into a Digital Future,” contends that rapid expansion in capacity and modernization of freighter fleets could subject general cargo to price increases and lead to stagnant revenue even with higher transport volumes.
“An even bigger question hanging over the business today is digitization,” the report from McKinsey’s Manuel Bäuml and Ludwig Hausmann noted. “New technologies, such as advanced analytics and machine learning, can help companies automate some of their back-end and customer-facing processes and raise levels of utilization. But these technologies will also disrupt air-freight forwarding profoundly over time.”
The specter of digitization
According to McKinsey, air-freight forwarders are being forced to digitize from market forces. These include emerging digital forwarding specialists that offer fresh solutions in the value chain, provide a range of transport services nearly matching traditional forwarders and often offer better customer service at competitive prices. Air-freight forwarders are also facing competition from transportation carriers building and improving their own digital channels to serve customers directly.
As this and other studies have forecast, digitization will impact supply and demand, and McKinsey stressed that “the course of technological progress is harder to predict now than it was in past disruptions.”
Several scenarios are possible, McKinsey noted, and they’ll depend on factors such as how quickly technologies that effect the speed and extent of automation and collaboration are adopted, how they work between different forms of transportation and the how far the development of 3-D printing will go in displacing air-freight cargo volume.
The article from McKinsey’s “Insights on Travel, Transport & Logistics” series sets a scene for 2030 that has air-freight forwarders automating their operations significantly and digitizing much of their business models. The forwarders of the future will collaborate extensively with adjacent value-chain partners, such as providers of intermodal services, McKinsey foresees.
‘The more comprehensive digital forwarders will act as catalysts for the new technologies, but successful companies will be specialists, offering advanced data-based solutions,” the report said. “All surviving forwarders will be more digitized by 2030…and the better they leverage these technologies to reduce their internal costs and improve the customer experience, the better their chances of keeping or extending their share of the profits.”
Digitization challenges six sources of value
The report looks at six sources of value for traditional air-freight forwarders.
1. Their biggest profit generator is value-added services such as customs clearance, warehousing and packaging which go beyond “pure transportation.” Most of these services will require physical interactions, for at least the next 10 to 15 years, the report noted.
2. Bundling volumes lets forwarders appear as a single large customer and creates stronger purchasing power thanks to economies of scale. Digital platforms can also bundle volumes and over time will lead to cutting prices for certain products, like direct port-to-port full-truckload shipments.
3. While traditional freight forwarders offer customers information on rates, available capacities and routing options, their ability to offer real-time rates despite so-called “freight-all-kind pricing” is uncertain. But by partnering with carriers, McKinsey said “digital platforms such as Freightos or Xeneta also provide this kind of information—more quickly and at lower cost, since less human labor is involved.”
4. Traditional companies provide details on shipment status of estimated arrival, and the report sees vertical digitized specialists improving their track-and-trace offerings over time with the use of better real-time data on shipments.
5. Physical consolidation increases the utilization of assets and cuts rates, and vertical specialists have emerged that can now help carriers optimize the re-positioning of empty equipment, according to the report, which cited Avantida as one that provides an online platform for checking whether empty containers can be reused for export customers.
6. The key source of value for air-freight forwarders is reducing the level of complexity for customers along the transport chain, and digitization will only be able to help solve part of the complexity problem. For example, according to the report, “booking engines like CargoBase combine some individual stages such as airport-to-airport air carriage and onward ‘hinterland’ road haulage into an end-to-end product for customers.”
To digitize or not
Digitization isn’t the panacea, for logistics. McKinsey’s surveys of shippers shows that to deal with errors in a way that’s reassuring to customers, companies must have infrastructure and relationships with airports, carriers, handling agents and ports across the world. All of this is hard to digitize, as is the work of a knowledgeable and caring staff.
“Digitization has its limits, at least for now,” the report noted. “Many traditional companies are much larger than digital ones and therefore have significantly lower procurement costs and consolidate shipments more easily. Air-freight transport chains will continue to be dazzlingly complex, so shippers want trusted, experienced and reliable partners to manage the problems, and the disruptors don’t yet have that kind of credibility.”
However, competitive dynamics could shift to favor digital contenders that invest in physical assets, while digital technologies “will enable the disruptors” to cut costs and improve the customer experience, especially for smaller shippers.
“The pressure on traditional forwarders will surely increase as digitization continues its long march through the world economy,” McKinsey concluded. “They must now consider their strategic choices carefully. First, embracing digital technology in customer-facing and back-end processes is a no-regrets move for them. Second, they must place strategic bets on building or buying marketplaces or partnering with emerging digital platforms. But they should also emphasize the things they themselves excel at—offerings based on people and expertise, which are hard to turn into commodities. If these companies succeed in all this, they will continue to play a major role in the forwarding game. If they don’t, they may well face a future of constant and accelerating decline.”
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