Power Distribution Models within the Air Freight Industry

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Framework

The theoretical framework relevant for this study consists of four major and one conclud-ing section. Firstly, the supply chain of the traditional air freight industry (Section 2.1) is presented followed by a detailed description of the air freight industry, its main actors, and performance measurements within this industry (Section 2.2). Secondly, the next two sec-tions refer to power distribution models (Section 2.3) and sustainability (Section 2.4) within the air freight industry. Lastly, Section 2.5 combines all findings of the theoretical frame-work into one concluding overview.

Supply Chain of the Traditional Air Freight Industry

In general a ‘Supply Chain’ can be described as a connection of integrated parties, such as supplier, wholesaler, manufacturer, and retailers, sharing information, execute the physical flow of products and services, and commit in financial exchanges in order to fully satisfy the end customer (Langley, 2009). As defined by Beamon (1998) the ‘Integrated Supply Chain’ reflects ‘[…] a number of various business entities […]’ that ‘[…] work together in an effort to: (1) acquire raw materials, (2) convert these raw materials into specified final products, and (3) deliver these final products to retailers.’ (Appendix 1). Depending on the industry where these actions take place further customization – regarding the involved ac-tors – can be applied. The focus of the thesis relies on the last part of the supply chain, which focuses on the delivery of final products to retailers or end customers.
A more contemporary way to describe the supply chain of the air freight industry has been presented by Neiberger in 2008, who introduces the concept of ‘Global Production Net-works’. This concept is described as ‘[…] the globally organized nexus of interconnected functions and operations by firms and non-firm institutions through which goods and ser-vices are produced and distributed.’ (Coe, Hess, Yeung, Dicken & Henderson, 2004) and applied to the air cargo industry. By doing so the author manages to illustrate the im-portance of logistics service providers and mostly air freight carriers within the network (Leinbach & Bowen, 2004; Neiberger, 2008).
Traditional air freight operates in a forwarder-airline-forwarder modus (Figure 2.1), where the carrier (airline) takes over the airport-to-airport transport and the freight forwarder handles all logistics services related to the transport before and after the airport.
Before 1990, the air freight industry consisted of agents, whose primary role was to offer point-to-point transportation, customs clearance, and storage services, while using assets such as aircraft, trucks, and warehouses.
The best characteristic for this time period consisted of serving a segment of total transpor-tation process. There was a lack of process focus by independent forwarders and airlines ‘[…] traditional industry was influenced heavily by the passenger industry.’ (Zhang, Lang, Hui & Leung, 2007), since few agents possessed the information and technology necessary to provide an integrated service. (Zhang et al., 2007).
After 1990, the era when the Internet, e-commerce and the practice of supply chain man-agement were implemented, a ‘[…] new business of integrated logistics activities and allianc-es with suppliers and customers.’ began (Lee & Billington, 1995).
Freight forwarders in this traditional concept are mainly known for acting as a Third Party Logistics (3PL) broker/operator which has contracts with the shippers and manages the cargo shipment (Clancy & Hoppin, 2001). The aim behind a forwarder-airline partnerships is to ‘[…] provide fully integrated door-to -door service […]’ (Zhang et al., 2007), to focus more on the end customers, and therefore improve competitiveness. This approach should also embrace the express service offered by shipping companies. (Zhang et al., 2007).
Before the alliances between forwarders and airlines, the movement of goods in the air took place fast pace, compared to ground transportation, where the movement of goods was slower. The reason behind this was due to the fact that each party in the multimodal transportation system needed to optimize its own mode of transportation which eventually led to inefficiencies within the entire supply chain. The alliances nowadays lead to im-provements of the interface between forwarders and airlines, both in physical links and in-formation flows. (Zhang et al., 2007)
The driving force behind these alliances seems to be the cutting of operational costs, as outlined by the IATA Cargo 2000 initiative: ‘As an example, Cargo 2000, which brings to-gether some 80 major freight forwarders, airlines and ground handling agents (GHA), has been considered a device to improve efficiency of air cargo and reduce operational costs, as well as to improve intermodal connectivity of the different agents.’ (Zhang et al., 2007).

Development of the Air Freight Industry

The ‘Air Freight Industry’ is an excellent choice when it comes to rapid deliveries caused by shortenings within the inventory replenishment plan, especially in the garment industry, in order to keep up with unplanned and urgent demand. It portrays the ‘best speed’ option for short shelf lives of perishable and cold chain goods, since it guarantees the shortest transportation times. The downside of this transportation mode is high costs, that are asso-ciated with choosing the time sensitive option. Air carriers charge twelve to sixteen times more in costs compared to ocean cargo and four to five times higher costs compared to road transport. (Shacklett, 2014)
The air freight industry is characterized by the increasing value of air cargo, but at the same time by the decreasing revenue carriers earn per tonne. According to the Council of Supply Chain Management Professionals’ 23rd Annual State of Logistics Report, released in June 2012, this seems to apply for both domestic and international flights (Cited by Dutton, 2012).
A retrospective view is outlined in the following paragraphs (Table 2.1) in order to provide an overview over the happenings in recent years within the air freight industry (Boeing, 2014):
There are several factors that contribute to these occurrences along with economic activity, general niche increases, aircraft emissions, capacity, volatile fuel prices, freight forwarders, automation, and regulations. The main reasons behind the stagnation phase seem to be re-ferring to the weak world economy and the slow trade growth. (Boeing, 2014)
The historical background of the ‘Economy’ is marked by influencing impacts such as the EU banking crisis, the U.S.’ national debt, and the Iranian fuel embargo that have led to a weakened consumer confidence and weakened manufacturing. The general U.S. economy is rated as ‘poor’, forcing air carriers to focus more and more on efficiency and cost reduc-tion, while shippers re-evaluate their transportation options. Furthermore, investments in air freight for replenishment have been shortened. (Dutton, 2012)
‘Niche Forwarders’, mostly handling the section of perishable good (including food and pharmaceuticals), increasingly gain market share at the expense of some of the larger freight forwarders (Shacklett, 2014).
Within the technology sector of the air freight supply chain several changes have been made in the last couple of years. Among this, ‘Automation’ has been a big topic. Automa-tion refers to the acceptance of electronic documentation that grown internationally and it is a concept that seems to have become standard within the U.S.. Contrarily, there are still many other countries which only accept paper documents. The big issue behind this alludes to shippers who need to provide both paper documents and electronic data at the same time. (Shacklett, 2014)
Furthermore, air cargo’s shifting business models describe how many freight forwarders (over 80%) consider moving away from air cargo and over to ocean freight instead. The main cause behind this initiative seems to be costs related to air transportation. Air carriers therefore become more agile when it comes to coordinating or allocating their capacity with actual demand for a better control of costs. While doing this they can also focus on partnership improvement and deeper collaboration with freight forwarders. Additionally, there is a movement towards a more integrated supply chain which ‘[…] is cloud-based in order for many different transportation providers across multiple transport modes to utilize and expedite the integration of air cargo with the overall supply chain and with intermodal shipping.’ (Shacklett, 2014) and gives several involved parties end-to-end visibility of the entire supply chain network. (Shacklett, 2014)
On the other hand, Shacklett (2014) states that the air cargo industry shows performance improvement by becoming more fuel-efficient and having more outstanding flexibility when it comes to reacting to spikes in the market demand. Air transportation can yet make a difference when it comes to shipping to new and emerging countries (e.g. Asia and Afri-ca) where the road and rail infrastructure is quite poor (IATA, 2014). The Chief of Execu-tive (CEO) of Cargo Service Center in India, Radharamanan Panicker pointed out that ‘[…] air cargo is the catalyst for fast economic growth and sustainable development.’ (Cited by Shacklett, 2014).
Recent information, published on the IATA (IATA, 2014) website, shows that the airline industry is slightly picking up due to lower oil prices and stronger worldwide Gross Do-mestic Product (GDP) growth leading to improved profitability. The air cargo volume in 2015 is expected to be 4.5% above the level of the previous year. Also, the real cost of transporting good in 2015 is expected to fall by 5.8% compared to 2014. The total of 53.5 million tonnes of air cargo is forecasted to be shipped in 2015. These positive aspects not only being beneficial for the parties involved in the transportation process but also for the end-customers, since the monetary benefits are being passed on. Even though the industry awaits a total cargo revenue of $63 billion, this number is still below the achieved revenue level back in 2010 by 5%. (IATA, 2014)

Main Actors within the Air Freight Industry

Moving goods from the point of origin to the point of destination within the supply chain of the air freight industry not only involves shippers, but also several other parties such as origin and destination freight forwarders, ground handling agents, customs agents for ex-port and import, carriers, and consignees (Sales, 2013; Coyle, Langley, Novack & Gibson, 2013). Figure 2.2 shows all the key stakeholders that are part of the air freight industry.
Ground handler agent is the agent located at the airport ‘[…] that receives and consolidates outbound freight, stores and transfers it to the aircraft, and unloads and retrieves the ship-ments at their destination.’ (Sales, 2013, p.3).
Carrier – also known as airline* – describes the airline whose routes are used for the trans-portation of products and the relevant documents via air including the first and last section of carriage. (Sales, 2013) Consignee is the party whose name appears on the transportation documents as designated destination. The consignee is the organization who receives the cargo by the airline or its agent. (Wankel, 2009)

Performance Measurements of the Air Freight Industry

There are several methods on how to measure the level of performance of a specific supply chain. As defined by Coyle et al. (2013, p.145) a good measure is a measure that ‘[…] is quantitative, easy to understand, encourages appropriate behavior, is identified and mutual-ly understood, encompasses both outputs and inputs, measures only what is important, and is multidimensional […]’. Furthermore, Kallio, Saarinen, Tinnilä, and Vepsäläinen (2000) point out that there are four numerical categories that can be used in order to measure a process within the supply chain: Cost, Time, Quality, and Efficiency.
As described by Chelariu, Kwame Asare, and Brashear-Alejandro (2014) ‘operational measures are becoming even more important in business-to-business environment […]’ – a factor influencing the relationship between airline and freight forwarder within the air freight industry. Not only do the processes involved with handling and transporting goods ‘[…] demand high level of quality and precision […]’ (Chelariu et al., 2014), but also focus on diminishing the failure of meeting process requirements that could lead to the interrup-tion of the supply chain. In the process of and after implementing e-freight, airlines and freight forwarders would, as a result, be required to frequently measure operational per-formance. By doing so, both parties can determine as to which level the supply and distri-bution channels are meeting the operational standards and requirements. (Chelariu et al., 2014)
By analyzing different ways of how performance was measured in the past and by Chelariu et al. (2014) within their study, it can be suggested that some measures can be applied to the air freight industry. One performance indicator described several times is customer sat-isfaction. Customer satisfaction highlights whether the customer is satisfied with the service offered or not and is based on several quantitative measurements such as on time delivery performance, the price of the service offered, and the logistics effectiveness. (Chelariu et al., 2014)
Additional to these quantitative aspects, there are several qualitative performance meas-urements that Beamon (1998) has identified and are of important relevance to the air freight industry. These involve the following criteria: Customer Satisfaction, Flexibility, In-formation and Material Flow Integration, Effective Risk Management, and Supplier Per-formance. Customer Satisfaction, as stated previously, refers to how pleased the customers are with the product or service that is being offered (Beamon, 1998). Flexibility on the other hand describes how the supply chain is able to respond to unexpected changes in the demand structure (Beamon, 1998). Nicoll (1994) defines Information and Material Flow Integration as the ability of all functions within the supply chain to exchange information and transport materials. The Effective Risk Management, as described by Johnson and Randolph (1995) relates to the process of minimizing the effect or risks within the supply chain. Last but not least the Supplier Performance, shows how consistent the freight for-warder acts when it come to its service performance and delivering the goods on time and in a good condition (Beamon, 1998).
Adopted from the principles outlined in the journal ‘Performance measurement of supplier relationship’ written by Giannakis (2007) there are three different supplier relationships es-tablished within the supply chain of the air freight industry, namely:

  • airline – freight forwarder,
  • freight forwarder – end customer,
  • and airline – end customer.

In all three scenarios, the first mentioned actor acts as a supplier of a specific service. To be able to analyze to which extent the implementation of e-freight influences the relationship between the airline, freight forwarders, and the end customer, there is need for further in-formation regarding the supplier relationship. The characteristics of the supplier relation-ship model are considered to be the basic parts of any kind of business relationship. These characteristics are trust, power, involvement, and commitment. Firstly, trust is built upon contributions of calculative, cognitive, and normative attributes of both trading actors. Secondly, power refers to the ability of making decisions within the relationship. This abil-ity is based on the level of authority, control, and influence each party can perform. Third-ly, involvement highlights the contribution to the supplier relationship. The involvement includes aspects such as complexity of the relationship, scope, and intensity of the interac-tion. Lastly, commitment describes the effort attached to, the loyalty to, and the length of the supplier relationship. (Giannakis, 2007)

1 Introduction 
1.1 Background
1.2 Problem Definition and Contribution
1.3 Purpose
1.4 Research Questions
1.5 Delimitations
2 Framework
2.1 Supply Chain of the Traditional Air Freight Industry
2.2 Development of the Air Freight Industry
2.3 Power Distribution Models within the Air Freight Industry
2.4 Sustainability within the Air Freight Industry
2.5 Synthesis
3 Methodology 
3.1 Research Process
3.2 Research Approach and Purpose
3.3 Literature Review
3.4 Research Strategy and Time Horizon
3.5 Methodological Choice
3.6 Data Collection and Relevant Measures
3.7 Data Analysis
3.8 Trustworthiness of Research
3.9 Ethical Considerations
4 Empirical Findings 
4.1 IATA
4.2 Airline 1: Pegasus Xpress Airways (PXA)
4.3 Airline 2: Ikarus Airways Ltd. (IKA)
4.4 Freight Forwarder 1: Phoenix Forwarding Ltd. (PF)
4.5 Process Description of Transporting and Handling Goods
5 Analysis 
5.1 Achieving the Goals of the e-Freight Initiative
5.2 Changes within the Air Freight Supply Chain
5.3 Main Drivers related to the Power Distribution
5.4 Visual Summary of the Study
6 Conclusion 
6.1 Summarizing Evaluation
6.2 Managerial Implications
6.3 Further Research
Glossary 
Appendix
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Analyzing the Effects of e-Freight within the Air Cargo Industry A cross-sectional case study focusing on air carriers and freight forwarders in the U.S. and China

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