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Air Cargo Day Switzerland
Zurich, June 2014
Logistics of
tomorrow –
Challenges and
opportunities in the
air cargo industry
2 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Let me introduce myself…
MATTHIAS HANKE, Managing Partner, Zurich > Matured (1965)
> Married
> Two kids (17/19)
> Born in Hamburg, living in Basel
> Apprenticeship in steel trading (2 years)
> German Navy (2 years)
> Combined Master studies of Mechanical Engineering and Business
Administration at Technical University Darmstadt (6 years)
> Junior Consultant to Senior Project Manager at RBSC (5 years)
> Executive Vice President "Network & Strategy" at Swissair, Crossair,
Swiss (4 years)
> DHL Express (3 years)
> Partner with RBSC in Zurich (8 years)
> Key areas: Logistics, Aviation, Tour Operating
> Mobile: +41 79 372 3945, e-mail: matthias.hanke@rolandberger.com
Source: Roland Berger Strategy Consultants
3 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
…and let me introduce our company
Founded in 1967 in Germany by Roland Berger
51 offices in 36 countries, with 2.500 employees
About 200 RB Partners currently serving
~1.000 international clients
Our scope and global reach
Source: Roland Berger Strategy Consultants
4 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation. It may
not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness
and accuracy of the statements made in this document.
© Roland Berger Strategy Consultants
Contents Page
This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation. It may
not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness
and accuracy of the statements made in this document.
© Roland Berger Strategy Consultants
A. The European air cargo market is dealing currently with demand stagnation and
growing overcapacity 5
B. Air cargo carriers find themselves in a "commodity trap" 16
C. Potential escape-ways from the commodity-trap have to be actively paved by top
management 23
5 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
A. The European air-cargo
market is currently
dealing with demand
stagnation and growing
overcapacity
6 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Competition in the airfreight market is becoming fiercer – Business model under
pressure
Summary
GENERAL TRENDS IN WORLD TRADE
> Trade-lanes to/from Europe are rather stagnating – fastest growing trade-lanes in Intra-Asia
> Historically low seafreight rates paired with low interest rates drive shippers to rethink their transportation strategy
> Overcapacities in sea- and airfreight are contributing to high volatility of rates and overall price pressure
> Overcapacity in airfreight especially fuelled by growing belly-space to/from the MEAST with impact on South-East Asia business
> Traditional "airfreight industries" enforcing a modal shift from air to sea in the past years
> Legacy market barriers within the airfreight segment are loosing their relevance
> Airfreight rates are seasonally volatile – overall so far stable … but for how long?
> Air-cargo carriers find themselves in a commodity trap – the current business model is under pressure
IMPLICATIONS FOR THE AIR-CARGO INDUSTRY
Source: Roland Berger Strategy Consultants
7 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
7
The world's trade landscape is shifting in the medium to long term – Focus
shifting to intra-Asian trade and trade between emerging markets
Traditional key tradelanes
2020 key tradelanes 1
2 3
1 South America – Asia
> Tradelane is forecast to cover ~1/20 of world trade by 2020
> Mainly driven by an increased consumer spending in South America
2 Middle-East/ Africa – Asia
> Tradelane is forecast to cover ~1/5 of world trade by 2020
> Strongly driven by increased consumer spending in Africa and Chinese investment in African natural resources
3 Intra–Asia
> Tradelane is forecast to cover ~1/4 of world trade by 2020
> Growth mainly driven by an increased trading between emerging economies in Asia
Trade lane development
Source: Roland Berger Strategy Consultants
8 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Asia-Pacific- and other emerging tradelanes seeing strong single digit growth
while cross-Atlantic tradelanes are either declining or static
Top 15 regional air freight flows 2000-2013 [actual weight, '000 t]1)
Source: Seabury, Roland Berger Strategy Consultants
1) Excluding undefined commodity flows
EU-NA
AP-AP
AP-NA 1′661
2′521
1′395
AP-EU
EU-AP
NA-EU
647
451
408
NA-NA
EU-AF
EU-EU
EU-NE
EU-SA
NA-AP
SA-NA
NA-SA
AF-EU
1′315
1′115
1′101
1′024
385
355
354
347
346
1′104
633
1′379 NA-AP
631
EU-NA
748
EU-NE
SA-NA
EU-EU
NA-EU
1′221
AP-NA 1′939
EU-AP 2′196
AP-EU 2′414
AP-AP 3′834
AF-EU
EU-SA
EU-AF
NA-SA
606
SA-EU
495
488
468
391
3.3%
3.3%
4.8%
5.4%
1.2%
2.3%
-1.0%
0.0%
1.1%
4.6%
4.7%
4.4%
1.5%
0.6%
2.2%
Tradelane volume 2000 Tradelane volume 2013 CAGR
9 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
During the next ~20 years China will take over USA's role as the dominant
trading nation
9
Status Origin Destination Value
1 China USA 594,741
2 China Japan 336,183
3 China Korea 281,140
4 China India 263,063
5 China Germany 201,382
6 Japan USA 189,785
7 China Singapore 178,291
8 NEW China Indonesia 169,356
9 Germany USA 167,467
10 NEW China Malaysia 162,376
11 NEW China Nigeria 151,570
12 Germany UK 144,131
13 UK USA 143,725
14 NEW China Thailand 141,201
15 NEW China Saudi Arabia 140,320
16 NEW China Brazil 136,295
17 NEW USA India 125,826
18 NEW China UK 121,603
19 NEW China UAE 120,318
20 China Australia 117,340
IMPACT
> New tradelanes are growing in importance for the air cargo industry
> China expected to become a new driver – origin or destination for 15 of the top 20 tradelanes
> Tradelanes from developing economies will be bilateral, instead of mainly focusing on export to developed countries
> Development changes the focus of the industry and creates challenges to build up a presence in new markets
Source: Roland Berger Strategy Consultants
Top 20 tradelanes 2030 [value of goods, sea and air]
10 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Based on historically low seafreight rates paired with low interest rates on
capital, shippers rethink their transportation strategy
Sea freight rates
Carrier slot cost ~USD 800-900/TEU1) ?
> Carriers have to follow with cost cutting
> Size matters to exploit economies of scale
> The industry will further consolidate
> Recent example: Hapag Lloyd and CSAV
Source: SCFI, Roland Berger Strategy Consultants
1) Thereof Bunker: ~USD 500, Port & Channel ~USD 250, Vessel Rate ~USD 200
11 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
A major driver of volatility of profitability is the overcapacity in the market –
Strongly fueled by growing belly capacities in PAX business
> Although a share of new airplanes will be used to replace existing fleets, the overall freight capacity is going to increase
> Capacity increases through
New freighter AC (e.g. B-747-800F, B 787F, …)
Belly capacity of new PAX AC (e.g. A350)
> New orders especially driven by carriers based in the MEAST
Source: IATA, ACAS, Company website, Roland Berger analysis
Notes: MTK: Million Freight Ton Kilometers 1) Scheduled transports 2012, Including transports in the belly 2)Incl. aircrafts operated for but not owned by FedEx
Aircraft orders of biggest freight carriers [2013, #]
199
112 12389 100
260
55
12976
298
92 56
206
121
73
161
198
4014
18
617
53
FedEx1)
3
1 1
Etihad
9
Qatar
Airways
8
EVA Air
20
China
Airlines
25
British
Airways
25
Cathay
Pacific
24
Emirates
12
Singapore
Airlines
9
Luft-
hansa
18
Korean Air
2 2
2
Ordered: Cargo
In service: PAX
In service: Cargo
Ordered: Pax
12 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Continuous modal shift to sea freight effected the air cargo share moving from
some 3.0% market shared of total traded/ forwarded volume towards 1.7%
Source: Seabury, Roland Berger Strategy Consultants
Modal shift from air to sea [loss of market volume]
1) Share of weight from total sea and air trade (containerized)
-5.5
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ton -5.4 m
3.0% 1.7% 2.6% 2.5% 2.4% 2.3% 2.1% 2.0% 3.0% 1.9% 1.8% 2.0% 1.9% 1.8%
Ton m
lost to
modal
shift
air
share1)
Initial modal shift drives, despite air cargo growth
Rate decline during crisis partially reverses modal shift
Limited modal shift due to restocking inventories
Intensified shift in the wake of the financial crisis
Significant modal shift has taken place pre-crisis
13 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
13
Current market development creates an environment in which traditional
success factors for air cargo are being challenged
> So far existing market
barriers are losing their
legacy relevance
> General air cargo
under strongest
pressure
> Either, business model
is to be moved towards
a non-compromised
volume strategy and/
or towards a dedicated
premium strategy
Source: Roland Berger
Available Volume
Premium air cargo
General air cargo
Air or sea cargo
III
Market barriers
challenged
Market barriers
emerging
Quality Price Time Price
Ave
rage
Yie
ld
II I Additional pressure
'chase every ton'
Shrinking general
air cargo segment
Existing capacity offered at marginal
operating cost
Increasing competition across all air cargo segments
Source: Roland Berger Strategy Consultants
14 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Airfreight rates are seasonally volatile – overall so far stable … but for how
long?
Development of airfreight rates [East-West weighted average1)]
Average $ per kg1)
Source: Drewry, Roland Berger Strategy Consultants
3,00 $
4,00 $
3,80 $
2,40 $
3,60 $
3,40 $
2,60 $
3,20 $
2,80 $
85
90
95
100
105
110
115
120S
ep 1
2
July
12
Jan
13
May
13
Jul 1
3
May
12
Nov
12
Sep
13
Mar
13
Nov
13
Average $ per kg
Index (May ’12=100)
1) Weighted average of all-in air freight ‘buy rates’ paid by forwarders to airlines for standard deferred airport-to-airport air freight services on 21 major East-West routes. Rates are expressed in $/kg and include 3 components: the base rate, the fuel surcharge and the security surcharge. Excluding door delivery costs.
Index
15 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Major Cargo carriers are facing the "commodity trap" – current business model
is under pressure
EBIT development of selected airfreight carriers [EUR, m]
-343-333
69
-436
-207
2009 2012 2013 2011 2010
Source: Annual reports, Reuters, Roland Berger Strategy Consultants
1) Financial Year Ending in March
104
249310
-171
77
2013 2012 2011 2010 2009
43
611
80
-40
LH Cargo AF/ KLM Cargo
Cargolux
16 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
B. Air Cargo carriers find
themselves in a
"commodity trap"
17 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Air cargo carriers find themselves in a "commodity trap" – Many drivers are likely
to further worsen the situation
DEFINITION: "COMMODITY TRAP"
> Competition and differentiation between players in the market focus primarily on price
ASPECT VISIBLE IN THE AIR CARGO INDUSTRY
Source: Roland Berger Strategy Consultants
Summary
> Stagnating markets and overcapacities lock players in a situation where margins are difficult to be restored
> Entry hurdles into the business (i.e. reach sufficient delivery quality) are low – customers appreciate quality above standard, however, display limited preparedness to pay any surcharge
> Economies of scale is a necessary prerequisite to remain in a competitive position in the market
✓
✓
✓
✓
18 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
RECENT STUDY: "commodity trap" is a cross-industry phenomenon but
majority of companies have not discovered how to mitigate it
Roland Berger survey "Escaping from the commodity trap" – Results1)
1) Study conducted in February 2014 with ~400 participants across industries
61 %
63% 65% of the companies
are facing the commoditization of their products and
services
of the companies see their products and
services already caught in the
"commodity trap"
of the companies realize that they have not taken sufficient
action to escape from the
"commodity trap"
Source: Roland Berger Strategy Consultants
19 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
There are three interlinked elements of a "commodity trap" – Each driving the its
development within an industry
Elements and indicators of the "commodity trap" – Selected aspects
Technologies, products, know-how
Competitors
Customers
1
2 3
"Commodity trap"
1 > Transparency on product/service features, pricing and cost
> Globally accessible supply markets – decreasing customer loyalty
> Changed customer value perception – away from differentiation
> Price based buying decision – Purchasing decides on supplier
Source: Roland Berger Strategy Consultants
2 > Technological maturity, i.e. low rate of further development
> Standardization of technologies, interfaces, components etc.
> Modularization of products – emerging mass customization
> Transfer of experts to emerging market competitors
3 > Established quality standards – officially or de-facto
> New market entrants from lower cost/developing countries
> Excess production capacity, i.e. supply greater than demand
> Substitute products, e.g. at lower end of (previous) market
20 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Transportation is among the industries with the largest gaps between realizing
the "commodity trap" and reacting accordingly
Automotive
Chemicals/Oil
Transportation
Consumer Goods (FMCG)
Healthcare, MedTech and Pharma
Construction
IT/Telecommunication
Utilities
Others
Financial Services
Engineered Products and High Tech
Overview survey results per industry 0% 100% 25% 50% 75%
"Yes,
"Yes,
…our company's products or services are caught in the "commodity trap"
…we currently take sufficient action to escape from the "commodity trap""
Source: Roland Berger Strategy Consultants
21 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Innovation levers are seen as highly effective against a "commodity trap" – Gap
to application level largest for aligning business model
Very low
Application of marketing and sales tools (e.g. ads, pricing, CRM, product positioning, etc.)
Upgrading/bundling of products with services (e.g. warranty, availability, maintenance, etc.)
Shift towards specific market segments (e.g. for BRIC countries, high-end customers, etc.)
Product differentiation by innovation (e.g. technology leadership, etc.)
Increase in product and delivery quality
Strategic portfolio alignment (e.g. buy/sell business units, etc.)
Strategic alignment of business model (new revenue model, higher step in value chain, etc.)
Creation of organizational prerequisites to flexibly react to strategic challenges
Strengthen target costing/design-to-cost
Effectiveness and current application of levers to escape the commodity trap
> For all levers current
application is behind
effectiveness of the
corresponding lever
> Innovation is seen as the
most powerful tool to escape
a "commodity trap" across
industries
> Business model alignment
is the lever with the largest
gap between effectiveness
and current level of
application
Very high level of effectiveness/ application
Source: Roland Berger Strategy Consultants
22 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Companies have two generic options to react to the commodity trap –
"Changing the rules" offers an escape out of the price spiral
> Compete within the "commodity trap", i.e. in price competition
> Increase size and of economies of scale
> Restructure and reduce cost
Option I "Play by the rules"
Option II "Change the rules"
> Escape the "commodity trap" by changing the rules of the game
> Tackle all three elements of the "commodity trap" and their indicators
> Select and implement an appropriate set of counter-measures – change business model, if possible
Technology Competition
Customer
1
2 3 Play
Technology Competition
Customer
1
2 3
Es- cape
Source: Roland Berger Strategy Consultants
Options to react to the "commodity trap"
Technologies, products, know-how
Competitors
Customers
1
2 3
"Commodity trap"
23 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
C. Escape-ways from the
commodity-trap have to
be actively paved by top
management
24 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Many approaches to differentiate – Product Management finds itself more than
ever in a key position to reshape the carrier's USP
Cost cutting and innovation to be orchestrated at the same time
Ro
le a
nd
Org
aniz
atio
n o
f P
rod
uct
M
anag
emen
t ?
Cost efficiency
Service differentiation
Operational differentiation
Low imitability
Source: Roland Berger Strategy Consultants
Process/ docum. automation? ✓ ✓
Focus on niche markets? ✓ ✓
More efficient aircrafts? ✓
Integration with cargo handlers? ✓ ✓ ✓
Customer segmentation? ✓ ✓
Revenue management? ✓ ✓
New regions? ✓ ✓
Review of the network strategy?
Extend Value Chain? ✓ ✓ ✓
✓ Overall cost cutting?
Introduction of industry verticals? ✓ ✓
E-Cargo? ✓ ✓
✓ ✓ ✓
25 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
The necessary innovation (within the current value chain position) basically
come from three directions
Best regards from Igor Ansoff … all is known and nonetheless the relevance is high
Source: Roland Berger Strategy Consultants
MA
RK
ET
S
PRODUCTS
NE
W
CU
RR
EN
T
EXISTING NEW
Market development
Enforced Market Penetration
Product development
I.
III.
II.
> Enforced market penetration > Closer relationship to shippers > Flexible and proactive pricing > Indepth trade-lane understanding > …
I.
> Development of new products > Review of the business model/ USP > More solutions and focus on industry
verticals > Strong incentivizing of innovation > Operational alignment with cargo hdlg. > …
II.
> Step into new markets > Indepth trade-lane analyzes > Clear go-to-market strategies > Operational alignment on network topologies > …
III.
26 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Air cargo product management in a difficult sandwich position – There is no
ideal way to organize
Product Management – The Turf
INTERNAL DIMENSION
EX
TE
RN
AL
DIM
EN
SIO
N
TERMINAL/ AC/ NETWORK
> Physical Infrastructure
OPERATIONS
> Processes
MARKET DEMAND
> Product
> Place
OFFER/ DISTRIBUTION
> Price
> Promotion
AIR CARGO
PRODUCT
MANAGEMENT
> People
> Product management to coordinate external and internal dimensions
> Key internal interfaces are
– PM and Operations
– PM and Sales/ Marke-ting as well as Pricing
– PM and Infrastructure
> There is no "single receipt for success" when it comes to setting up product management – depends on the company culture, core competencies etc.
Source: Roland Berger Strategy Consultants
27 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Instead, the appropriate setup of product management should be closely
connected to the business model and the strategic goals of the company
Generic product management setups observed in different industries
Source: Roland Berger Strategy Consultants
Part of Marketing & Sales
> Market facing product management organization – Close contact with customers and insights into target industries
> Often observed in industries such as consumer goods and some logistics players
> Key question: how to (1) coordinate efficiently with Sales and (2) make sure appropriate impact in Ops?
A
Part of Operations
> Product management to adapt product to volume/ quantity changes, typically where focus is economies of scale
> Often in very asset heavy industries, such as car rental or passenger airlines as well as integrators
B Department within R&D
> Research focused product management in companies having high importance of technological innovations
> Typically electronics companies, but also some railway companies
D
PM as an independent function on board level
> Focus on reflecting external demand with company value proposition – PM is a key function within the group
> Often found in industries with a heterogeneous portfolio, such as industrial goods, travel agencies etc.
> Key question: toothless tiger or with a say towards/ lead over sales, pricing and parts of operations?
C
28 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
Besides 'pursuing Ansoff', the current value chain position is a discussion closely
connected to potential product solutions
Value chain extension - illustrative
Source: Roland Berger Strategy Consultants
Airfreight carriers have further options
Manu- facturer
Forwarder (& oth. LSP)
Importer / local agent
Contract Logistics VALUE CHAIN
Production
Common value chain setup Alternative value chain setup Value chain handled by airfreight carriers
Distribution B
A
B
> Airfreight carriers to expand geographically
> Think about a multi-hub strategy (reloaded)?
> Cargo alliance 3.0? > Advanced resource sharing?
Horizontal growth within same value chain step
> Airfreight carriers moving into forwarding and solutions offering?
> Airfreight carriers moving into handling/ warehousing
Vertical integration across value chain steps
Transportation to airport
Customs/ import handling
Warehousing
Transportation to destination market
Air Cargo Carrier
B
A
A
29 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
However – Often – for companies in the air cargo industry product management
plays a role as a "poor cousin" with only limited impact
Must-haves for an effective product management
Source: Roland Berger Strategy Consultants
Be empowered by clear guidelines and tasks, shared between commercial and operations
Product Management to have a seat in the relevant commercial and operational
decision circles
Have access to key customers, competitive intelligence and industry knowledge
Have the best available people in the team to drive innovation across the
organizational borders
Be part of all key processes in air-cargo, from product definition via product
sales to customer handling
Closely integrate product management and overall strategy planning
30 Logistics of tomorrow_Challenges and Opportunities in AirCargo Business_fin.pptx
In short, if properly configured, product management has the potential to be a
key change agent to help players in the air cargo industry successfully adapt to
the challenges from a dynamic and fast-paced market environment
From a STATIC SURROUNDING…
The fact is that our industry is far too busy with
itself, and with the here-and-now. Plenty to do
there of course, but we must open our minds
to the future, and be ready to shape it.
Oliver Evans, CEO, Swiss Cargo
1) Volatile, Uncertain, Complex, and Ambiguous
NE
W R
EA
LIT
IES
…into a VUCA1) WORLD
> Where little radical change was seen and forecasting was seen as a reliable management tool
> Where air cargo companies were driven by a rather "defensive" approach to challenges that the market presented them with
> Where key success in air cargo was focused around reducing unit cost, opening new routes and lowering freight rates against competition
– Where the key driver for success is the ability to proactively reinvent oneself, instead of simply reacting to the market
Source: Roland Berger Strategy Consultants
– In which Organizations must adapt and develop the skills to:
Manage complexity Manage volatility Restructure / Implement change Foster innovation to drive future business changes Increase speed Optimize impact (less resources mobilized – larger effect)
– Where there is an outspoken and urgent need to adapt value propositions and operating models to the new realities
– Where an effective and forward thinking product management function is part of the organization's DNA and is configured to achieve real, strategic, and sustainable change
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