During the day we have engaged on logistics issues related to order aggregation, logistics network optimisation, unforeseen distribution complexities in the single sourcing model, and the fragility of the air cargo market. On each and every matter we were drawn to comment on the nature of problems derived of hub and spoke operations raised by inventory managers and transportation industry executives.
While we may disappoint the supply chain professional with our priorities today, we will start today with the air carriers. We hope supply chain and logistics professionals will bear with us, however, and in coming posts we might uncover some method in our madness.
The article cites weaknesses across both the passenger carriers (primarily employing combination passenger and freight carrying aircraft) and dedicated cargo aircraft operating carriers. As in all communications of this nature, it is important to take note where the comment was made. In this case it is Singapore, which happens to be a nation long at the forefront of supply side investment in the hub and spoke model (by means of airport infrastructure & terminals, and the national carrier’s investment in freighter aircraft).
Long term trends had come to fruition by 2012 for Singapore Airlines, who are among the largest tonne/km operators of dedicated freighter aircraft on international routes, when cargo losses had reportedly tripled and they reduced their capacity by 20%:
By mid 2013, the underlying result was hardly better when it was reported (see URL following) that Singapore Airline’s “Cargo revenue was affected by lower loads (-5.3%) and yields (-5.5%) with overcapacity in the market as well as the weak global economic situation.” Moreover, that the overall airline operating result was affected by further measures including “A restructuring impairment cost of $293 million was booked on four surplus SIA Cargo freighter aircraft that have been removed from the operating fleet and marked for sale.”
We mention again today the fragility of the proposition, absent of supply sider political and capital intervention, that operating efficient primary transportation hub ports primarily supporting efficient aircraft or vessels necessarily represents the optimal channel (in supply chain engineering terms) to support the majority of world merchandise trade.
In respect of the similarly poor results for the combination passenger-freight aircraft operators we should start by speaking of fleet transitions both in freighter and passenger aircraft markets. As discussed in an earlier blog post, the supply side interventions into the second hand aircraft owner-operator and leasing markets were important elements in the development of network models that came to incorporate a majority of the world’s fleet of wide-body freighter aircraft.
Without the resale potential made available by means of freighter conversion of older wide-body passenger aircraft market and the lifting of prices of those second-hand aircraft, many new wide-body passenger aircraft sales in the 1980’s and 1990’s would never have materialised. Moreover, many less aircraft engines and spares would have circulated during the period. Hence, it should be less than surprising that engine maker GE features so prominently in past share registries of aircraft leasing and freighter aircraft operating companies.
The consequences of cheap supply derived of the “old banger” freighters kept in the air well past what many were saying at that time was their “use-by-date” was a tide of both revenue and market share growth for international air cargo which conveniently married with a technology boom. Once the market was established, noise regulations surfaced that disappeared the old aircraft and engines, and replaced them with brand spanking new ones purchased by those with liquidity (capital or debt) and convinced by supply side theory.
These developments mentioned above attracted both new entrants and expansionists into the new air freighter market; especially prominent were Asian carriers. In the background we imagine the notion of their essentiality to the growth of hub port operating revenues being front-of-mind with the usual state corporatists. New entrant express cargo carriers concurrently appeared to strategise that their ambition to grow the size of their international shipments meant growing the size of their aircraft, their networks, and their fleets; and a step along that path was the defraying their transitional network cost by selling off the back of their newly acquired wide-body cargo aircraft to subsidiaries, or the general market. In the face of this, some of the longer lived combination carriers in Europe either trimmed their dedicated freighter capacity or allowed their freighter sector market share to decline. Perhaps the thinking was that we live to fight another day?
Despite market volume growth and artificial cost suppression, several ill-fated strategies and enterprises were already washed up before the end of the dot.com era. Even so, the impetus derived of questionable capital investment led gambles returned to bolster the system during the noughties, while the underlying receding tide from a previous era played out.
Absent continuous growth of air cargo market volume and revenue, the scenarios underwriting two generations of investment and the shape of infrastructure development come into question. If the idea that past demand growth was built of unsustainable price subsidies, and supply growth was built of some peculiar strategies that anticipated demand without thought of what might underwrite it, then we are right to be concerned about market prospects.
The worry now is that with supply-sider network operating costs locked, economies of scale growth at both port and in the air stagnant, and the nature of markets altering, the Singapore Airlines experience will become the fate not only of aircraft operators, but also the capital intensive primary hub developments that sit behind them.
The upside, however, is the same as always for the air cargo market. This is an industry built upon opportunism and innovation from its earliest days. In the Yahoo report above we see the recent poor cargo revenue results of the passenger airlines, but we do not have a handle on the underlying movement in the aircraft types operated or the split between international or domestic derived volumes. We know that the delivery cycle of the hub busting B787 aircraft and the A350 to follow are still to rotate into the schedules of the passenger carriers. The cost of running cargo through three cargo terminals via the primary hubs and the employ freighter aircraft, when compared to the alternative consisting of two terminals and a cost sharing with passenger derived revenues while employing hub busting aircraft represents opportunity.
I hope the supply chain managers reading this long post will see jumping off points where we may continue to delve into downstream hub and spoke systemic issues; and their relation to evolving sourcing, aggregation, and network optimisation logistics organisational issues. Have inventories hubs followed the freight hub capital investment? How smart has that capital been? Does political risk and labour cost/quality follow capital investment, or lead it, in respect of locating regional DC’s? Is the warehouse vs transport decision paradigm moving as we speak? How do we retain control of inventory moving around traditional hubs?
This was a long day, we will return to this matter on another one.