LEARNING UNIT 3:

The air cargo industry

The purpose of learning unit 3 is to introduce you to the air cargo industry, looking at its supply
chain, from the shipment of the cargo to its delivery to the customer.

Unit Outcomes
On completion of this unit, you should be able to

• explain how the whole supply chain of air cargo works

• understand and explain the concept of air cargo volumes
• describe how the supply side of air cargo works
• understand the role that technology plays in the air cargo industry

3.1. INTRODUCTION

Transportation by air is an extremely important mode of freight transportation. According to IATA,

in 2016, airlines transported 52 million metric tons of goods, representing more than 35% of global
trade by value, but less than 1% of world trade by volume. That is equivalent to $6.8 trillion worth
of goods annually, or $18.6 billion worth of goods every day (IATA, 2016). On average, cargo
business generates 9% of airline revenues, representing more than twice the revenues from the
airlines' first-class passenger segment. In this learning unit, we unpack all aspects of the air cargo
industry. We start by looking at the supply chain as a whole and at which parties are involved in
which operations and we then examine the types of cargo and the types of carriers that are used.
After that, we get into the economics of the air cargo industry – what influences the demand for
and supply of air cargo and why it is a much more complicated industry than passenger transport.
A case study is available at the end of the learning unit, which brings together all of the different
concepts and ideas in a real-life example.
3.2. THE AIR TRANSPORT SUPPLY CHAIN

A supply chain is a network between a company and its suppliers to produce and distribute a
specific product to the final buyer. This network includes different activities, people, entities,
information, and resources. The supply chain also represents the steps it takes to get the product
or service from its original state to the customer.

When a demand on one place is supplied from another place with air transport as the main
transport mode, an air cargo supply chain must be compiled (AircargoNews, 2011). Air transport
is relatively expensive, but it is often the fastest mode of transport available to cover medium to
long distances. Therefore, typical air cargo consists of goods with a high value and/or an
operationally or commercially critical delivery time (high financial breakdown risk), for example:

• Airmail, diplomatic mail

• Live animals, hatching eggs, human organs, human remains, medical supplies
• Express parcels
• Perishables (food, flowers, dry-ice shipments)
• Pharmaceuticals
• Valuables (money, gold bars, diamonds)
• Technical supplies (high tech, oil & gas, aerospace, automotive, ship spares)
• Luxury consumer goods (electronics, fashion goods, accessories)

A typical air cargo supply chain consists of the following steps:

• Shipping: The door-to-door air cargo process starts with the shipper. A shipper is the
person or company that is physically and administratively responsible for shipping the
goods. Although in a lot of cases the shipper is also the customer of the forwarder, this
is not necessarily so. The customer can just as well be the consignee, or a third party
that has ordered the goods stored at the shipper’s location to be shipped from A to B.
For this same reason, the shipper also does not need to be the owner of the goods.
This all depends on the delivery terms ("Incoterms") that are agreed between the parties
involved, e.g. a buyer, the owner of the goods, a seller, a maintenance company, a
distributor, a transport company, a forwarder, etc . The shipper is responsible for
efficient assembly of the shipment in terms of volume, weight and packaging in order

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 to get the best price/volume utilisation of the aircraft pallet or container, and avoid
damage to goods, people and aircraft. When the goods are ready for transport (RFT =
correctly packed, labelled and with the right documents for forwarding as well as road
transport as the next steps), the shipper orders transport of the goods. The goods are
picked up at the shipper’s warehouse for delivery by road transport at the warehouse
of the forwarder, who organises the further air cargo process.
• Forwarding out: The goods are delivered at the forwarder’s warehouse. The forwarder,
sometimes also called expeditor, is the ‘architect’ of the air cargo supply chain. A
forwarder or expeditor can be IATA certified; in that case he or sheis referred to as an
agent. An agent is an IATA certified expeditor or forwarder that has been thoroughly
checked for financial status; has enough air cargo potential; has the right facilities for
handling air cargo; and has trained personnel for handling air cargo and dangerous
goods, just to mention a few. The forwarder will buy space at the airline's sales or
customer service department, or in case of a foreign airline, sometimes through the
airline's General Sales Agent, a GSA.
• Air transport: The goods (or consolidations) are received at the airline’s handling agent
warehouse. The handling agent will often be a separate company contracted by the
airline, but cargo handling can also be an in-house function of the airline, especially at
a major hub. The airlines also often offer their in-house cargo handling as a commercial
service to other airlines.
• The handling agent takes care of the air cargo handling at the airport, to and from the
aircraft. Depending on the kind of goods, destination (flight number) and urgency,
delivery at the handling agent has to be done within a certain norm-time before
departure (TBD) of the aircraft, also called a slot or a slot-time.
• Forwarding in: The receiving forwarder picks up the shipment documents at the
handling agent. This pick-up can be done by the forwarder himself, or can be
outsourced to a local courier. The forwarder prepares import documents (if necessary),
performs customs clearance for import (electronically or manually) and awaits approval
from customs. If the forwarder is also a certified customs agent, he will perform the
clearance himself (forwarding agent); if not, he can outsource these activities to a
certified customs agent. At this stage, customs can decide to release or hold the
shipment for inspection, whereby the packages are opened, and can demand payment

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 of import duties or even fines depending on the customs regulations and judging the
type of information given by the customs agent against these regulations and the actual
commodity of the goods to be imported
• Consignment: The door-to-door air cargo process ends with the consignee. A
consignee is the person or company that is physically and administratively responsible
for accepting the goods at final delivery. The customer can just as well be the shipper,
or a third party that has ordered the goods stored at the shipper’s location to be shipped
from A to B. The consignee will give a proof of delivery (POD) to the forwarder’s
transporter. After receipt, the packages are opened and the contents are checked
against the packing list and invoice. In case of payment at receipt, and if the goods are
received in good order and the right quantities, the goods will be released for payment
by the consignee. If the quantity received is not correct, the financial as well as the
customs administration should be corrected afterward, which is the responsibility of the
consignee.

FIGURE 1: Air cargo supply chain (Bernal, Val Blascob, Pellicier, & González 2012)

For an overview of the air cargo supply chain, study Figure 1, which shows a simplified version
of an air cargo supply chain, highlighting the key role players and their sequence. Let’s use a
typical real-world example to illustrate the process. Let us assume that Tanya, a 23-year-old girl
living in Cape Town, orders an item of clothing online from an international e-commerce store
called Shop24/7 in London. Once Tanya has placed the order and paid for it, Shop24/7 parcels
up the order and calls their courier company, JB Couriers. JB Couriers is a large company that
operates as a freight forwarder. They collect the parcel from Shop24/7 and at the same time they
collect all the other parcels that Shop24/7 are shipping that day. JB Couriers transport all the

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parcels to the airport. At the airport there is a ground-handling agent that receives the parcels
from JB Couriers. This ground-handling service is provided by the airport. The ground handling
agent physically handles the parcels and makes sure that they are on board the correct aircraft.
The aircraft carrying Tanya’s order then flies to Cape Town. When it arrives in Cape Town, the
airport’s ground handling agent provides the facilities and resources required to offload the parcels
and hand them over to the freight forwarder in Cape Town, EazyFreight. EazyFreight makes all
the necessary arrangements to get the parcel that we are following to the consignee, in other
words, Tanya. The parcel arrives at Tanya’s front door – it has been four days since she finalised
her order.

Each party mentioned above is shown in Figure 1 above. The cargo is sent by the shipper, also
called a consignor (this can be an e-commerce company, a private individual, a fruit exporter, etc)
to the consignee, that is, the receiver of the freight. Depending on the length of the supply chain,
this can be a private individual like Tanya, or a wholesaler, or a retail outlet, and so on. On its way
between the two parties, it is managed and handled by the freight forwarder (this can, in some
cases, be a courier company, a postal company, or an integrator), the ground-handling agent and
the airline on either side of the transaction – that is, from origin to destination.

In real life there are a few additional parties involved, such as a customs agent who handles all
export and import tariffs and duties and so on, as well as possible intermediary courier companies.
But, as a general rule, these are the parties involved in the basic steps. As a transport economist
it is important for you to know the different terms used and the different roles played by each party.
To supplement the above example, watch this informative video showing the air cargo process
from beginning to end: click https://www.teachertube.com/videos/part-1-127940.

NOTE: What is customs duty?

When goods are transported between countries – in other words, across international
borders – they may be subject to customs duties. These are fees charged by the
destination country to allow the goods into the destination country. Different duties apply
to different products and are normally calculated as a percentage of the value of the
product. The reason countries charge duty is to protect their local industries. They need
external producers and suppliers to have an extra cost of supplying their market so that

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 the local suppliers have an advantage. In South Africa, duties vary between 0% and 45%
(SARS 2016).

3.2.1. Cargo

Air cargo is a term used to describe freight transported by air. Air transport is much more costly
than land transport and the rates and tariffs are significantly higher (Williams 2012). This is due
to the fact that an aircraft is generally much more expensive to operate than any form of landbased
transportation and provides a much faster delivery service. In addition, air transportation is able
to access remote and isolated areas that are inaccessible by other transportation modes.
Essentially, air cargo transportation offers a speedy and far-reaching service to cargo customers.

With this in mind, the type of cargo transported differs somewhat from traditional freight. Because
trips by air are generally much shorter than surface trips, they pose lower risks to the cargo while
it is in transit (Williams 2012). For this reason, air transport is often chosen for goods with a high
value-to-weight ratio. According to the International Civil Aviation Organisation (ICAO), although
world seaborne traffic moves 90% of the goods transported across the globe, air cargo moves
30% of the total value of those goods (Crabtree 2014:3). In other words, although the volume of
goods carried by air is considerably lower, the value is considerably higher. Medical supplies and
spare parts for machinery and cars are generally transported as air cargo, as is emergency food
aid. Perishables also lend themselves to air transportation. A large part of air cargo is made up of
fruit, flowers, and foodstuffs that perish very quickly. This cargo is transported in refrigerated
containers and needs to be in transit for as little time as possible. A less obvious perishable
product type is newspapers and magazines. Consider the magazines available in local stores
across South Africa, many of which are international titles. These need to reach the shelves of
retail outlets before they are out of date, and therefore require a fast transportation method, that
is air transport. Our example above with Tanya ordering clothing online is also an example of the
need for a fast transportation method, over a large distance, for a product with a high value-
toweight ratio. Air transport fills all these needs for its customers.

3.2.2. Air cargo carriers

Air cargo is transported in one of three different types of air cargo carriers:

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1. All-cargo carriers – these are specialised freighter aircraft that carry cargo on the main deck
and in the belly of the plane (Kupfer et al. 2009:5). They have larger doors than passenger
planes and reinforced floors to make them more durable and able to carry a heavy load.
2. Combination carriers – aircraft that can carry both passengers and cargo at the same time.
They can be reconfigured so that they can be used exclusively for passengers or exclusively
for cargo (Kupfer et al. 2009:5).
3. Passenger aircraft – some commercial passenger airlines transport freight in the spare
capacity of the hold of the plane (Kupfer et al. 2009:5).

NOTE: Generally, in literature and articles, combination carriers will be referred to as “combi”
carriers. The term “combi carrier” generally includes both combination carriers and passenger
carriers that transport cargo in the aircraft hold.

Figure 2 and 3 show how China’s air cargo has increased between 2010 and 2019, looking at air
traffic between passengers and cargo. Figure 2, below, shows China’s air traffic between air cargo
and air passenger between 2019 and 2020 (Li, 2020:2). On average, air cargo traffic has grown
by 1.9% per annum. Figure 3 shows China’s air cargo traffic between 2010 and 2019.

FIGURE 2: China’s Air passenger traffic and air cargo traffic by year-on-year growth rate (Li,
2020)

Figure 2 compares the trend of passenger traffic and cargo traffic handled by Chinese airlines
before and after the coronavirus outbreak. It can be expected that air cargo can exit this recession

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more easily than passenger transport: by the end of May 2020, air passenger traffic has recovered
to half of the previous year’s level, but air cargo traffic had been very close to the previous year’s
level.
FIGURE 3: China’s Air cargo traffic, 2010–2019 (Li, 2020)

As with the passenger air transport market, the air cargo industry reacts to changes in the global
economy and is therefore a cyclical and relatively volatile industry. As you can see in Figure 3
above, the air cargo traffic increased tremendously between November 2019 and November
2020. These increases were greatly influenced by the COVID-19 pandemic, which led to an
increase in e-ecommerce customers.

Table 1, below, lists the top ten air cargo carriers and the aircraft types they use. These figures
are from the World Air Transport Statistics (WATS) 59th edition, 2014.

TABLE 1: Top ten air cargo carriers globally (WATS 59th edition, 2014)
Airfreight company Freight-tonne km flown (millions) Aircraft types

FedEx Express 16 020 All-cargo

Emirates SkyCargo 11 240 Combination

UPS Airlines 10 936 All-cargo

Cathay Pacific Cargo 9 464 Combination

Korean Air Cargo 8 079 Combination

Lufthansa Cargo 7 054 Combination

Singapore Airlines Cargo 6 019 Combination

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 Qatar Airways Cargo 5 997 Combination

Cargolux 5 753 All-cargo

China Airlines Cargo 5 266 Combination

Within Africa, Ethiopian Airlines’ cargo subsidiary, Ethiopian Cargo, is the largest operator in Africa
and transports around 200 000 tons per annum. The carrier uses eight all-cargo freighters as well
as the excess capacity in the holds of the Ethiopian Airlines passenger fleet (BARSA 2015).

ACTIVITY 3.1

Go to Discussion Forum 3.1 and discuss with your fellow students the key role players involved
in the air cargo supply chain and the different ways of transporting air cargo.

3.3. AIR CARGO VOLUMES

This section will look at the whole air cargo volume context, from the definition to the current
demand, in 2021.

Firstly, we will look at the classification of the volume of air cargo, which is in two parts – the
potential air cargo volume and the realised air cargo volume (Kupfer et al. 2009:1–3). The potential
volume can be explained economically as the demand for air cargo. It is the potential or the
maximum volume that air cargo could achieve. The actual realised volume of air cargo can be
called the supply. It is the actual volume that exists in the market. Secondly, we look at the impact
of COVID-19 on the air cargo volume.

3.3.1. The demand side of air cargo

What volume of air cargo does the market require? This is the demand that exists. Demand is
mostly determined by the strong macroeconomic stability (environment), that is, the activities
across the entire market. The amount of trade that takes place within the global market as a whole
will determine how much air cargo the market demands. To be more specific, the demand for air
cargo is greatly affected by a country’s trade volumes. If a country is trading well with other
countries, it will be exporting more goods and will therefore require more air cargo. If a country is
trading well internally, it will need to transport more goods within the country itself, therefore

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requiring more domestic air cargo. This demand is not always equal between regions, areas, or
countries. As a result, air cargo demand is directional. In the section below, we will explore this
further.

3.3.2. Directionality of air cargo and imbalanced demand

A major difference between cargo transport and passenger transport, across all transport modes,
is directionality. Passenger journeys are two-way journeys, i.e. they travel from origin to
destination and then back from destination to origin. Cargo, however, is transported only from
origin to destination – there is no return journey. Directionality is the term used to describe this.
The impact of this is that sometimes the demand for a certain direction of a route is greater than
the demand in the opposite direction along that same route. This difference in demand results in
a difference in supply, meaning that more cargo is transported one way than the other. We call
this an air cargo imbalance.

Table 2, below, lists the imbalances in air cargo between certain countries. The figures given are
ratios and the table therefore reads as follows: For every 1 unit of cargo sent from Europe to
China, 2.6 units are sent from China to Europe (Kupfer et al. 2009:8–9). We can say this in a
different way: China transports 2.6 times the volume of air cargo to Europe than Europe transports
to China.

TABLE 2: Air cargo imbalances

Countries Ratio of air cargo between nations

Europe: China 1 : 2.6

USA: China 1 : 3.1

Europe: Middle East (excl. Israel) 9.6 : 1

USA: Africa 2.6 : 1

(Source: Kupfer et al. 2009:8–9)

Let’s take a look at a diagram that illustrates the figures above more clearly. Figure 4 shows that
2.6 times the amount of air cargo travels from China to Europe than the other way.

FIGURE 4: Air cargo imbalance between Europe and China

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 1
Europe China

2.6

This means that there is more demand for cargo to travel from China to Europe than there is for
air cargo from Europe to China. It is the same route with a directional imbalance. An extreme
example is Europe and the Middle East. Table 1 shows an imbalance of 9.6 times (Kupfer et al.
2009:8–9). This is due to the fact that the Middle East was experiencing large economic growth
during 2008 (when the table was drawn up) and that it therefore required a lot of imports from
Europe. The Middle East was importing a lot through air cargo from Europe and not exporting as
much to them. However, one must remember that this is only an illustration of air cargo imports
and exports and not all imports and exports. The Middle East’s main export is oil, which is more
suitable to sea transport. It may well have been exporting a large amount of this to Europe via sea
transport, so it does not necessarily mean that there is a large overall import-export imbalance.
The imbalance we are looking at is just within the air cargo industry and it is important to keep
this in mind.

Economically, this directional imbalance has two consequences – the air cargo carrier will be able
to charge higher rates for the journey with more demand, but will travel with a less-than-full aircraft
on the journey in the other direction. In reality, instead of increasing rates for the high demand
journey, carriers reduce rates for the return journey, offering customers discounts for this trip in
order to increase demand and fill up the plane. This is called backhaul pricing (ACI 2014).

3.3.3. Impact of the COVID-19 Pandemic on the air cargo volumes

In the past, for airlines and airport operators, the air cargo business was only a subsidiary business
dependent on the passenger business (Choi & Park 2020:14). However, now, the air cargo
industry, which has maintained a stable growth trend even during COVID-19, is seen as a new
opportunity. Moreover, the more limited the recovery in passenger demand, the greater the air
cargo growth expected.

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The air cargo market has been strongly dependent on macroeconomic variables (economic
growth) and increased trade volume. In other words, increasing trade volume centered on large
companies and suppliers has been a strong supplier of the air cargo market (Choi & Park
2020:14). However, the growing involvement of consumer preferences in the air cargo market
may also change the relationship between economic growth and increased air cargo. The recent
COVID-19 pandemic is a good example. The global economy is shrinking in the aftermath of the
COVID-19 pandemic, but the air cargo market has maintained a relatively stable trend. Why? Due
to export of minerals and vaccines, for example, worldwide air passenger traffic dropped 58.5%
year-on-year in the first half of 2020, but global air cargo traffic dropped 12.3% over the same
period (AC, 2020) . In fact, in the second quarter of 2020, when the COVID-19 crisis broke out,
the number of passengers at Incheon International Airport dropped by 98% year-on-year, but air
cargo dropped by only 5%. Items transported by air cargo are changing, airlines and other market
participants are revising their operation policy, and air cargo is positioned as one of the core
competitiveness factors for businesses to sell products to consumers (Choi & Park 2020:13).
COVID-19 will further stimulate this paradigm shift in the air cargo market. For example,
consumers who did not use e-commerce have joined e-commerce platforms and now enjoy online
shopping. Well-developed technologies such as product tracking, cold-chain technology, and
faster delivery of courier services also accelerate this change. COVID-19, in particular, changed
market participants’ views of the air cargo business.

The COVID-19 impact on world scheduled passenger traffic for 2020 (estimated actual results),
compared to 2019 levels: – Overall reduction of 50% of seats offered by airlines – Overall
reduction of 2,699 million passengers (-60%) – Approx. USD 371 billion loss of gross passenger
operating revenues of airlines

In section 3.4, we explore the tactics that firms use in an attempt to balance their supply with
market demand.

ACTIVITY 3.2
Go to Discussion Forum 3.2, and share why you think air cargo traffic dropped in 2008 but
increased during the COVID-19 period. In addition, advise on how airlines can improve their
businesses during this pandemic time.

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 3.4. THE SUPPLY SIDE OF AIR CARGO

We have discussed the types of freight that are best suited to air cargo, the carriers that transport this freight
and the factors that create demand for air cargo. We have established that the demand for air cargo is caused
by the macroeconomic environment – that is, the market and its fluctuations determine demand. Let us now
explore the supply side of air cargo. The microeconomic environment determines the supply of air cargo.
Phrased differently, the activities of all the individual air cargo firms combined, create the total air cargo supplied
to the market (Kupfer et al. 2009:1–3). The volume supplied is influenced by their available capacity, the
competition from other air cargo carriers as well as other transportation modes, their costs and their required
returns (Kupfer et al. 2009:1–3). All of these influences affect how an individual carrier positions itself within the
market.

Considering the factors above, an air cargo carrier needs to decide on the type of product that it
offers. This decision will be determined based on the following questions:

• Which routes will it use?

• How many trips will it make per day, per week, per month, per year?
• At what times during the day will these trips depart?

All of these factors will influence the type and volume of air cargo supplied by each carrier and,
ultimately, by the market as a whole. Let’s look at each a little more closely.

3.4.1. Route selection

Route selection and route network are important considerations for an air cargo carrier. Route
selection refers to the specific routes that it will operate – that is, if domestic, the cities will it fly
between; if international, the countries which it will fly to and the cities within those countries. These
choices depend on the type of cargo that it is carrying and the demand for such cargo in certain
areas. It will also depend on the type of aircraft that the carrier uses – this will determine the
distance that the carrier can travel, which will in turn influence its route choice. Airport facilities at
both ends of the journey need to be considered. For example, which freight forwarders operate out
of which airports, what are the ground-handling services like at certain airports and do the airports
have capacity? Once all of these criteria have been analysed and routes have been selected, the
carrier will then need to analyse the costs of travelling each route and the expected returns from
the demand on each route. Once a cost-benefit analysis has been done, the carrier will select its
routes.

Part of this decision will also involve the route network. Point-to-point, hub and spoke and triangular
networks are examples of the types of route networks that air cargo carriers use. Firms need to

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analyse the costs and benefits of each options and decide. Once all analyses are complete, the
firm will have a list of routes that they will operate along certain route networks. This is the first step
in determining their supply. The next step is scheduling.

3.4.2. Scheduling

Once a route and route network have been selected, the carrier needs to decide on the frequency
of trips and the timing of trips. This is called the schedule. Schedules are used in all aspects of life,
and are a simple concept that can be used in the context of air cargo. Consider a typical day at a
high school. There is a set start time for school each day as well as a set number of lessons. These
lessons have time periods during which they take place, certain teachers are assigned to each
lesson, certain learners are assigned to each lesson and so on. The timing of activities and the
frequency of activities are organised in such a way that the day is used as efficiently as possible,
the teaching resources are distributed evenly and the teachers are able to teach at an optimum
level. In the same way, the learners are able to absorb enough information and have adequate
breaks and changes in focus. Scheduling is the application of this same principle across multiple
disciplines.

In the air cargo industry, carriers need to ensure that their fleets are utilised adequately, that they
are offering enough trips to satisfy demand, and that they are offering trips at the correct times so
as to maintain operational efficiency. They are essentially taking the static capacity of their fleet
and transforming it into dynamic capacity by scheduling the journeys optimally.

NOTE: Static capacity vs dynamic capacity

Static capacity refers to the potential capacity that assets have when they are not being used. For
example, assume you have two aircraft, one larger than the other. In a static environment the
larger one has greater capacity. However, as we add other factors into the transport process –
such as labour, technology and operational tools like scheduling – the capacities of each aircraft
change. The smaller aircraft may well become more efficient and productive than the larger
aircraft. A well-organised and efficient schedule changes the smaller aircraft’s static capacity to
dynamic capacity. Scheduling is therefore an example of a strategic tool that can increase overall
operational efficiency.

A schedule needs to contain the following basic information:

• Frequency of departures: for instance, will the aircraft depart once a week, every
Tuesday? Increased frequency means that customers have more options from which to
choose and it increases the carrier’s competitive advantage. However, if the carrier is
traveling twice a week with a half-full aircraft, it could improve its operational efficiency by
making only one trip with a full aircraft. This would decrease the cost per unit and reduce
the cost to the customer, increasing the carrier’s competitive advantage as well. Carriers
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 need to assess the volume demanded against the costs per trip and come to an optimal
frequency, one that satisfies customer demand and is both operationally and cost efficient.
• Times of departure: as with frequency, the carrier needs to decide on the optimum times
of departure. Early morning trips may be more convenient in terms of arrival times at the
destination airport – perhaps it is a quieter time and airport services are more efficient at
that time, reducing offloading times and turnaround times for the aircraft. However,
evening departure times may suit some customers better as they are then able to load
orders from that day and offer their customers next-day delivery. Again, the carrier needs
to analyse the costs and benefits of each and choose the optimal time that maximises
efficiency and minimises costs.
• Arrival dates: the same concepts apply here as to the points made for frequency and times
of departure.
• Arrival times: the same concepts apply here as to the points made for frequency and times
of departure. Please see the link below, showing air cargo arrivals and departures at the
airport.
https://www.youtube.com/results?search_query=airplane+landing+sound+AND+DEPAR
TURE

In addition, it is crucial that an air cargo carrier considers the availability of return cargo when it
creates its schedule and chooses its route. As discussed in section 3.3.1.1, trade imbalances exist
between different directions along the same route. If a carrier has a full aircraft when travelling
from A to B, it may only have a third of the aircraft full on the way back, from B to A. This demand
needs to be analysed and forecast as best as possible. Carriers also need to take into
consideration the cost of a return journey when determining their tariffs for a one-way journey.
They need to be able to cover the costs of a plane flying back with less cargo.

Schedules are an important part of an air cargo carrier’s operations and require constant attention,
as markets are constantly changing.

3.4.3. Optimal capacity

Optimal capacity is the manufacturing rate with the lowest possible cost. When a company is at
optimum capacity, it produces the most it can with the smallest amount of cost; in other words, a
production capacity in which the cost of production of one extra unit is the same as the average
cost for every unit.
In order to meet demand, as discussed above in section 3.4.2, carriers decide on a schedule.
However, some carriers offer a mix of scheduled transport and unscheduled transport. The
scheduled transport will cater to the regular demand that the carrier is able to forecast (Kupfer et
al. 2009:16). Unscheduled transport will be offered on an ad-hoc basis, meaning that as the
demand arises, the carrier will supply. This difference relates to optimal capacity. Fulfilling
customer needs is any firm’s primary aim. However, this can be a difficult task. Customers require
speed, convenience and reliability from an air cargo company and need these to be available

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most of the time. However, in some instances, a customer’s need for convenience may be difficult
to fulfil. Consider an instance in which a carrier has a full shipment booked for a departure and in
which another customer desperately needs something delivered on that shipment. By simply
refusing the customer access, as none is available, the carrier risks losing the customer to a
competitor. Last minute services and demands are a reality in most industries, and they can be
predicted to a certain extent.

It is often in the interest of a cargo carrier to always retain a small amount of spare capacity on
every trip for such occurrences. Although operating at maximum capacity may sound like the ideal
situation, if a customer calls in with a last-minute request, the carrier will not be able to
accommodate them. However, if the cargo carrier maintains a small amount of excess space, it
can offer the customer that space at an increased rate. This increased rate will offset other trips
on which the space remains empty. Overall, it allows carriers to offer its customers a last-minute
service. This is convenient for the carrier and it does not suffer when the service is not utilised.
Operating at this capacity is considered optimal. Air cargo carriers will be able to determine which
routes are better suited to this strategy than others and offer it only on selected routes.

ACTIVITY 3.3

Now that we have discussed air cargo in details, looking at its classifications and how it has been
impacted in the last 10 years. Now go to Discussion Forum 3.3 to discuss with your fellow
students the paradigm shift in the air cargo market, in terms of economic growth.

3.5. TECHNOLOGY AND AIR CARGO

As in all industries across all sectors, technology has changed the way that products are
distributed and services are rendered. Air cargo is one such industry that has seen an
improvement in systems and an increased ability to streamline processes as a result of the
implementation of technology. The growth in the e-commerce industry has greatly impacted the
air cargo industry. Between 2012 and 2014 there was a 1 354% increase in the number of online
stores across the globe (Fernandes 2015). This is incredibly high when compared to brick and
mortar stores, which grew in number by only 100% during the same period (Fernandes 2015).
The nature of an e-commerce store is that the goods (or services) are ordered remotely and
delivered to the customers. Many of these stores sell merchandise like clothing, electronic
equipment and household products, a large proportion of which have a high value-to-weight ratio.
Air transport is used for many of these products and benefits greatly from growth in the sector.

As technologies advance, customers become more driven by instant access – they want
convenience and speed in all products and services they purchase. This is why e-commerce and
online stores have become so popular. These desires, however, translate into the service that
they expect from couriers, freight forwarders and air cargo carriers. In response to this, the
industry has committed to a target of a 48-hour reduction in shipping time. Through innovation,
improved facilities, advancements in technology and a commitment to speed and convenience for
its customers, . A major tool in achieving this goal is the introduction of e-waybills.

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NOTE: What is a waybill?
A waybill is simply a document between two parties along the transport supply chain that explains
the contract that exists between them and the details thereof. The specifics differ between
organisations but, as a general rule, a waybill contains all the information of the shipper, the cargo,
the delivery details and the receiver. It is generally signed as it changes hands, i.e. as the
shipment progresses along the supply chain to different parties, and acts as proof of receipt of
the goods, and a commitment to adhere to the terms of the agreement. An e-waybill is an
electronic version of a waybill.

In learning unit 2, we discussed the influence that technology has had on low-cost carriers, and
specifically how the reduction in paper ticketing has dramatically reduced costs and improved
operational efficiencies. An e-waybill is similar to an e-ticket (see an example of an e-waybill at
https://www.youtube.com/watch?v=sCbc7mXhq).It is a computerised waybill that negates the
need for physical printing of the waybill and thus the use of paper. It allows airlines, freight
forwarders, and ground-handling firms to access all the information that a waybill contains via an
automated system without the need for paper or human capital to transport the paper waybills
(Fernandes 2015). It also allows, in many instances, individuals to track their shipments as these
travel around the world. This gives customers peace of mind and improves customer satisfaction
levels. E-waybills are becoming more widely used across the globe. Between 2020 and 2021
ewaybills increased in penetration from 15.3% to 30.9% (Tyler 2015:40). In some regions, such
as Hong Kong, Singapore and Dubai – all of them major cargo hubs – e-waybill use is in excess
of 50% (Tyler 2015:40).
Advancements in technology such as the e-waybill improve communication channels along the
supply chain and improve operational efficiencies.

ACTIVITY 3.4

Read the case study below and then go to myUnisa Discussion Forum 3.4, Unit 3.1 and
analyse it with your fellow students.

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 Case Study 1: The Lions fan in China

Ted is a huge rugby fan! His favourite team is the Golden Lions. He goes to every match that
he can, knows all the players and has every jersey that the team has had over the past 15
years. Ted was recently offered an incredible job opportunity in Hong Kong. Although he loves
South Africa, he decided to take the job and experience life on the other side of the world for
a while. Ted is really sad because he can’t go to the Lions matches anymore, but he gets to
watch most of them on TV. With the new Super Rugby season starting, the team has brand
new kit. Ted is desperate for it but cannot find it in any of the stores in Hong Kong! He phones
his sister in Johannesburg and asks her to buy one for him and to send it to him via courier.

Ted’s sister, Susan, buys the team jersey from Totalsports and heads to her local Post It
branch. Here, Susan fills in a house waybill with all of her personal details, Ted’s home address
(to which she wants the jersey delivered) and all of Ted’s personal details. Post It packs the
jersey into a branded plastic courier bag and attach the waybill. They charge Susan a minimum
charge of R50 plus R120 based on the weight and size of the parcel. The package is ready
for transport (RFT). Susan pays Post It and goes home. She calls Ted and tells him that his
parcel will be delivered within 7 days. Ted is thrilled!

The next day all the parcels to be sent to Hong Kong are collected from the Post It branch and
transported by truck to the Post It warehouse. Henry, who has worked at Post It for close to
six years now, receives the home waybills and the packages. Henry makes sure that the
outgoing and exports handling is organised, and calls his customs clearing agent to make sure
that the contents of the packages are legally authorised to enter Hong Kong, and whether they
will be liable for any customs duties. He is told that Susan’s package is authorised for transport
and that no customs duties apply. Henry completes an air waybill (AWB) for each package.
Like the other AWBs, the one for Ted’s package contains all the information regarding the
package and its contents. In this case, these details include Susan’s personal details, Ted’s
personal details, and Ted’s delivery address. Henry then calls the logistics manager who
organises for the packages to be collected that afternoon and transported by truck to the OR
Tambo International cargo warehouse.

At the airport warehouse, Khanyi Aviation Services, the ground-handling agent, checks all the
packages and AWBs and makes sure that all the cargo is accounted for. They then pack all
the parcels and packages from Post It and other courier companies into larger containers and
make sure that they are secure and protected from damage. The package is ready for carriage
(RFC). The staff at Khanyi Aviation Services load the containers onto the aircraft, which is
scheduled to leave for Hong Kong the next morning.

Rose, an employee of Khanyi Aviation Services, notices that the aircraft is not full. She phones
Henry to let him know. Henry phones all the Post It branches and informs them of the excess
capacity. The Randburg branch calls back to say that they have three additional parcels that
they need to get onto the aircraft before it leaves. All the customers have paid an increased
special rate to get them delivered quickly. These parcels are delivered to the Post It
warehouse, where Henry completes all the checks and fills in the AWB. The parcels are

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 delivered to Khanyi Aviation Services, which performs all the required tasks and loads the
parcels onto the aircraft. The aircraft takes off on time and lands in Hong Kong 13 hours later.

Upon arrival at the Hong Kong International Airport, Peak Operations offload the cargo and
transport it to the Peak Operations warehouse at the airport. Peak Operations is the
groundhandling agent that Khanyi Aviation Services always deal with. They have worked
together for many years and know each other’s systems and processes well. Upon arrival of
the cargo at the warehouse, Khanyi Aviation Services are notified and a truck arrives from
their Hong Kong branch to collect their packages. The packages are taken to the Khanyi
warehouse in Kowloon. Once the packages arrive there, the local courier company affiliated
with Post It, JLA Couriers, collects all the parcels. John from JLA Couriers checks the parcels
against their AWBs and plans his trips for the day. Around midday he drives to Ted’s address,
knocks on the door and hands Ted his parcel. Ted opens it right away and is thrilled! Ted is
so impressed with the service from Post It and will recommend them to all of his friends in
South Africa. And the Lions won their game that weekend!

3.6. SUGGESTIONS FOR THE DEVELOPMENT OF AIR CARGO ENTERPRISES

This section provides suggestions on the opportunities that air cargo enterprises can explore
amidst the COVID-19 pandemic.

1) Enhancing the sense of responsibility and preparing for market rejuvenation: The
COVID-19 pandemic concerns everyone. With their fast and efficient service, air cargo
enterprises have become the most important carriers for transporting medical and
personal protective equipment. Air cargo enterprises should have a sense of social
responsibility and take more active steps to transport medical relief materials. They can
cooperate with the agencies responsible for public health, ground traffic, and customs and
other institutions to establish a convenient and efficient reaction mechanism. Besides, as
the epidemic situation improves, demand for the transport of common goods will rise.
Thus, air cargo enterprises should prepare well by increasing their freight capacity, and
this is also a necessary response to e-commerce development in China.
2) Increasing the input on digital logistics: When performing their service during the
epidemic period, some enterprises have achieved the integration of transport and
distribution by the adoption of intelligent logistics technology. For instance, Ecommerce
companies used big data to analyse historical delivery orders and population distribution
in areas with infected cases, thereby forecasting future orders’ tendencies. In doing so, it
gave priority to orders from the critical hospitals in Wuhan and achieved accurate

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 distribution and delivery of medical supplies. Air cargo suppliers should attach more
importance to the establishment of intelligent supply chains by inputting digital logistics
technologies.
3) Improving integrated service on the supply chain: Traditional freight enterprises
relying on a single logistics park to carry out business may meet difficulties in the context
of the COVID-19 pandemic. In contrast, those with their supply chains have shown better
performance. For instance, Cainiao South-Africa accomplished efficient supply and
delivery of medical materials to the forefront of the epidemic by close collaboration with
the upstream suppliers of masks and protective clothes as an integrated part of its supply
chain system. Air cargo enterprises can gain advantages by extending their service from
pure air freight to an all-encompassing supply chain.
4) Providing customised service: In a more competitive market, it is worthwhile for air
cargo enterprises to cultivate their core competitiveness by the provision of customised
services. On the one hand, given the growing demand for ecommerce express delivery,
they can strengthen their cooperation with e-commerce platforms and provide door-todoor
express delivery service. There are business opportunities in the transport of medical,
coldchain, and fresh items, provided their service meets the special requirements of those
customers. On the other hand, they can adopt a more flexible pricing strategy in response
to the changing external market environment. By subdividing the freight market, different
pricing strategies can be implemented for orders varying in routes, seasons, and items.

What are air cargo supply challenges?

• e-AWB. The electronic air waybill became the default contract for carriage of all air cargo
freight on 1 January, 2019. This is part of the ongoing process to make the entire air supply
chain digital. While this new format can help reduce – and ideally eventually eliminate –
the numerous errors that can occur as a result of manual or paper processes, it also brings
its own challenges that the industry needs to tackle. Access to relevant data, and the
quality of that data, should be a primary focus, as well as better technology to support all
needs.
• Security. It is fully understandable that we are seeing more stringent security measures
implemented for all aspects of global trade. Unfortunately, there still remains a level of
disparity globally with such measures and no accepted global standard. In the United
States, there are initiatives such as ACAS (Air Cargo Advance Screening) and PLACI
(Pre-Loading Advance Commercial Information), but many countries remain without such

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 initiatives and this continues to present a challenge to the air freight logistics industry.
There is also the added challenge of getting up-to-date information for the countries cargo
carriers fly to and this is something that the industry needs to address.
• Postal requirements. While mail shipments used to enjoy a level of exemption, 2019 saw
the start of radical new changes with the introduction of the SAFE Framework of Standards
and of ICS-2. For now, the new rules mean that all air express carriers must provide
information to customs on any mail shipments being carried. These new rules also extend
to all postal shipments as of 2023. This means that the logistics industry must look at ways
to collate the information required and use it to complete the relevant security filings.
• E-commerce. The growth in the e-commerce sector has led to a massive growth in those
goods being sent by air. With a rise in these goods traveling by air, the challenge has been
for everyone involved in the air freight sector to rise to the challenge and ensure these
goods are dealt with in the fastest possible way. These changes may need new processes
to be developed as well as adapting or developing new technology.

3.7. LOOKING TO THE FUTURE

The global air cargo industry is forecast to grow at 4.2% over the period of 2018 to 2037. It is
envisaged that the primary drivers of the global air cargo growth will be increasingly driven by
ecommerce and world economic growth. Boeing (Baxter, 2019:6) sees the future as follows:

Asia will continue to lead the world in average annual air cargo growth, with domestic
China and intra–East Asia markets expanding 6.3 percent and 5.8 percent per year,
respectively. Supported by faster-growing economies and growing middle classes, the
East Asia–North America and Europe–East Asia markets will grow slightly faster than the
world average growth rate. Middle East and Latin America markets connected to Europe
and North America will grow at approximately the world average. In recent decades, in
Africa there have been a number of crises including multiple health and terrorism-related
crises that have caused sudden changes in transport demand, as people make significant
changes to transport patterns, either in response to changes necessitated by transport
disruptions, or perceived risks of travelling. This is particularly true for non-essential travel
and in relatively wealthy countries where people have access to remote working facilities
or alternative, private forms of transport. For other people, the decision to cease

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 commuting during a crisis may not be an option at all and this is all caused by COVID-19
crises. In the more established and mature trade flows between North America and
Europe, growth will be below the world average.

From an airline route network standpoint, freighter routes are highly concentrated on relatively
few trade lanes, particularly in the world’s two largest trade routes, East Asia–North America and
East Asia–Europe. In contrast, passenger networks are much broader in scope and often include
destinations where there is limited or minimal air cargo demand. This difference in the distribution
of passenger and cargo traffic explains the considerable load factor difference in the lower deck
belly space of passenger services and freighters, which average approximately 30% and 70%,
respectively. In addition, range limitations on fully loaded passenger aircraft and restricted
passenger services to key air cargo airports make freighter operations essential. For these
structural reasons, Boeing has predicted that freighter aircraft will carry more than half of the
world’s air cargo for the next 20 years.

In recent times, world air cargo growth has been influenced by the shortening of product life cycles,
reductions in the times to ship goods to markets, and the trend towards the global sourcing of
products (Baxter, 2019:6). In addition, more firms are increasingly recognising that the higher
costs of shipping goods by air cargo mode can be offset by reductions in their inventory holding
costs, warehousing, and packaging costs. The rapid rise in e-commerce, and the growing
importance of global companies’ supply chain strategies, have continually influenced the growth
of the global air cargo market in recent years. Consequently, air cargo also plays a substantial
role in the modern-day supply chains. Air cargo-carrying airlines need to remain cognisant of
these changing trends and in so doing develop solutions (products/services) that will help them
to become integrated into the air cargo supply chain.

The positive developments brought forth by COVID-19 increased the formation of alliances in the
air industry. More on this will be covered in learning unit 4, which focuses on the cooperation and
alliances in the airline industry.

3.8. CONCLUSION

The air cargo industry is a very important sector of air transport. It provides cargo transport for
businesses that require transport of high-value cargo at great speed and with high levels of safety.

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The increase in online businesses has assisted the air cargo industry greatly, as customers
demand fast and efficient deliveries of merchandise and goods purchased online. In order for air
cargo carriers to maximise their supply and meet the growing international demand, they need to
focus on operational activities such as route selection, scheduling and achieving optimal capacity.
Each of these activities will allow carriers to create more efficient, cost effective and competitive
firms.

SELF-ASSESSMENT QUESTIONS
1. Is the demand for air cargo determined by the macro or micro economic environment?
2. Explain what the term “directionality” refers to in the context of air cargo.
3. Which direction has higher demand – USA to China or China to the USA?
4. Explain how a demand imbalance along the direction of a route can result in a carrier offering
discounted fares.
5. What is “frequency” and how can it increase or decrease customer demand?
6. How does optimal capacity differ from maximum capacity?

3.9. BIBLIOGRAPHY

ACI Website. Available online: https://asianaviation.com/aci-world-data-shows-covid-19-

pandemiccontinues- to-devastate-international-air-traffic/ (accessed on 8 January 2020).

Airports Council International – North America (2014) Chapter 1 – Air Cargo – An Historical
Perspective. [Online] Available at: < http://www.aci-na.org/sites/default/ files/chapter_1_–
_an_historical_perspective.pdf> [8 April 2016].

Air Cargo News. 2011. Air cargo- How it works: Air transport. [Online] Available at:
https://www.bing.com/search?q=+air+cargo&qs=n&sp=-1&pq=&sc=0-
0&sk=&cvid=9E9F72AB80294B6AA4B8B85712174B2A&first=11&FORM=PERE#

Baxter, G. (2019). A Strategic Analysis of Cargolux Airlines International Position in the Global Air
Cargo Supply Chain Using Porter’s Five Forces Model.

Bernal, M.P., Val Blascob, S., Pellicier, E.L., & González,R.S. (2012)Optimization of the air cargo
supply chain. Journal of Airline and Airport Management. 2(2), 101-123.

Board of Airline Representatives of South Africa (2015) Ethiopian Wins Air Cargo Brand of the
Decade for Africa Award. [Online] Available at: < http://barsa.co.za/ethiopian-wins-aircargo-
brand-of-the-decade-for-africa-award/> [7 April 2016].

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Crabtree, T. (2014) Getting the Most Out of the Air Cargo System. [Online] Available at:
<http://www.icao.int/meetings/iats2014/documents/crabtree-boeing.pdf> [6 April 2016].

Choi, C.H., & Park, D.J. 2020. Investigating Paradigm Shift from Price to Value in the Air Cargo
Market. Journal of Sustainability. 12, 1-15.

Fernandes, S. (2015) Consumer e-Commerce: Is Air Cargo Ready? 3 December. [Online] Mercator
Blog: Blog. Available at: <http://www.mercator.com/blog/consumer-e-commerceis-air-cargo-
ready> [6 April 2016].

IATA (International Air Transport Association). (2014) World Air Transport Statistics (WATS)
[Online] Available at: <http://www.iata.org/publications/Pages/wats.aspx> [6 April 2021].

IATA (International Air Transport Association) (2016) IATA Forecasts Passenger Demand to
Double over 20 Years. IATA, Geneva. http://tiny.cc/js77jz.

Kupfer, F., Meersman, H., Onghena, E., Van De Voorde, E. (2009) Air Cargo: The Difference
Between Success and Failure? Antwerp: University of Antwerp.

Li, T. 2020. A SWOT analysis of China’s air cargo sector in the context of COVID-19 pandemic.
Journal of Air Transport Management, 88 (1-6).
South African Revenue Service (2016) Customs Duties and VAT. [Online] Available at:
<http://www.sars.gov.za/ClientSegments/Customs-Excise/Processing/Assessment/
Pages/Duties.aspx> [7 April 2016].

Tyler, T. (2015) International Air Transport Association Annual Review 2015. [Online] Available
at: <http://www.iata.org/2015-review/index.html> [6 April 2016].

Williams, G, Dr. (2012) Air Transport in the 21st Century: Key Strategic Developments. [Online]
Available at: <https://bookshelf.vitalsource.com/3/books/9781409486732/ [6 April 2016].

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