Revitalised by e-commerce, air mail is growing, as are demands on carriers to invest in new processing technologies, but given the low margins, is the expense justifiable?
Last November, Lufthansa Cargo and China Post elevated their long-standing commercial ties to a strategic cooperation. Their agreement gave the postal agency the equivalent of a weekly B777 freighter on the Shanghai-Frankfurt route over and above the existing space allocation.
In addition to the capacity agreement, their new partnership calls for joint work to shorten transit times, improve quality and advance digitisation. After years of shrinking volumes, mail is a growing business for airlines again.
“We’ve seen a shift from a decline to increases in mail,” says Jason Berry, managing director of Alaska Air Cargo.
For some carriers, the resurgence in mail has been massive. Qatar Airways Cargo registered a 40 per cent boost in this bracket from fiscal year 2016-17 to 2017-18. Currently, more than 100 tonnes of international mail pass through its hub in Doha every day.
The overall increase in mail traffic masks starkly diverging trends within this segment. Traditional letter mail has continued its descent, but this has been more than compensated for by the rise in e-commerce. The latter trend has manifested itself strongly in the growth in parcel traffic, including small parcels of less than two kilos in weight, observes Rahayana Gorospe Lee, head of mail and e-Commerce of Lufthansa Cargo.
Horst Manner-Romberg, principal of parcel research and consulting firm M-R-U, notes that flats have shown a strong momentum, as they are well suited to shipping small e-commerce items, such as earphone sets or cables for cell phones. “This is much cheaper than sending them in parcels,” he remarks.
While mail may be on the rise in the long haul sector, on shorter routes the downward trend for airborne transportation has continued, he points out. Much of the air mail that used to be flown within Europe now moves over the road, he notes.
As with forwarder consolidations of online orders, carriers do not have a clear picture of how much of the mail they are moving is e-commerce. It accounts for a considerable portion of flats, and sacks of mail may contain a mix of letters and small parcels, notes Tim Strauss, vice president of cargo at Air Canada.
The US Postal Service does not break out parcels in its contracts for mail carriage, says David Vance, vice president, Cargo Operation of American Airlines. According to IT provider Descartes, postal firms move over 60 per cent of e-commerce traffic.
Some of these have been very aggressive in their pursuit of this segment, which has given them a lifeline to reverse the slump in volumes from declining letter traffic. Australia Post has tapped into the desire of consumers in its home market to shop for US brands in their origin country.
Through its ShopMate website, it allows them to make purchases from US online merchants using a US delivery address. The merchandise is sent to a depot in the US for consolidation and flown to Australia, courtesy of Qantas.SingPost, the national mail operator of Singapore, moved last year to establish itself as a conduit for e-commerce flows for the region with the launch of a final mile platform for distribution across Southeast Asia.
Spanish postal provider Correos focused on outbound e-commerce two years ago when it launched a platform that allows small and mid-sized Spanish firms to offer their merchandise to consumers in China.
Some postal firms have embraced the extraterritorial office of exchange concept to poach e-commerce flows between other countries. They leverage the price differential under Universal Postal Union (UPU) rules to that end. This has led to some unusual flows, such as US origin e-commerce moving to Germany over Tibet, Manner-Romberg points out.
Terminal dues, a UPU scheme that allow postal agencies from developing countries to compensate partner agencies in developed destination countries at rates below local mail pricing, have been a target for the current US administration. Last autumn, it announced its decision to withdraw from the UPU unless this regime is reformed.
Obviously, the prime target of this move was China. By some estimates, outbound parcel flows from China constitute more than 30 per cent of the global cross-border e-commerce traffic. “Our business out of China is still very strong. We do a lot of work with China Post,” says Vance.
While the terminal dues issue is looming over the postal sector, air and ocean carriers have to submit advance data on postal shipments from China prior to loading to the US Customs & Border Protection (CBP) agency since the beginning of this year.
The requirement includes mail from the special administrative regions of Hong Kong and Macau.
More regulatory change mandating advance data transmission is under way. In October, the US Senate agreed on legislation for the US Postal Service to send advance electronic data on incoming international shipments to CBP.
This legislation was prompted by mounting alarm over dangerous drugs moving through the mail system. For airlines they constitute one more cause for screening of mail, alongside the more immediate concern of lithium batteries and other dangerous substances being shipped through mail without proper documentation and packaging.
“It’s not a huge challenge, but it does come with some additional work,” comments Vance. “We follow IATA guidelines, and we work with the posts on ensuring compliance.”
Lufthansa x-rays mail. If a shipment slips through the postal control mechanisms and is identified during x-ray at acceptance, it is sorted out and rejected. Depending on agreements with postal agencies, single shipments may be removed, but in most cases the whole receptacle is rejected.
The mandate to submit data electronically ahead of shipment reinforces the push for scanning of mail and electronic capture and transmission of information. Both elements are chiefly driven by the desire of postal operators to achieve better visibility of shipment status.
“Certain postal services require more scans. We will begin to roll out full-scale scanning this year,” remarks Strauss. Requirements for quality and visibility have continued to rise, notes Gorospe. Lufthansa uses handheld scanners at the receptacle level.
To achieve better transparency along the process, the airline has implemented scanning technology in 60 major stations. This is linked to a dedicated mail handling system that was introduced in 2007. It consists of a scanning/data capture module and a central database for data and quality analysis.
Qatar Airways rolled out an automated mail management system across more than 50 stations in its network last year, and management plans to extend this to more points in 2019.
In addition, the carrier has integrated Descartes’ Velocity Mail solution with its in-house cargo management system for electronic data interchange messaging and real-time track and trace. This automates the chain from origin to final destination, according to the airline.
Besides an increased level of scanning, American has also deployed more technology for internal processes, says Vance. He is looking forward to the full implementation of the airline’s new cargo IT platform replacing its legacy system. “This will transform how we utilise data from scanning. It will enable better analytics, better utilisation of capacity,” he comments.
For Lufthansa the objective of the digitisation drive is the elimination of paper from the mail flow, says Gorospe.
Airlines’ need for automation and improved connectivity is good news for technology provider Descartes, who certainly saw an opportunity when it decided to spend $25.5 million on the acquisition of Velocity Mail, provider of an electronic transportation network that links air carriers with postal agencies, and offers scanning and tracking capabilities.
“It was a significant investment to engage with mail,” reflects Berry. “To be competitive and meet the conditions of the postal service and consumer needs, you need more visibility, more data points. It is a barrier to entry for sure. We got out of it at some point because of the requirements.”
Is the investment worthwhile? E-commerce may be the fastest growing air freight commodity, but it is not the most lucrative. “It’s nothing to write home about in terms of yield,” comments Berry. “E-commerce margins are not as good as regular cargo,” remarks Strauss. He adds that some postal operators still equate volume with growth while selling their offerings at lower rates.
These may be well below the air freight rate on the route involved. “We may have cut ourselves out of some business by pricing appropriately,” he reflects. Mail pricing aside, getting good yields out of parcels that contain more air than content certainly is a challenging proposition.
“Density of mail is a big topic for us. We have to adjust our planning, especially our operational planning,” remarks Gorospe. “Mail is still based on weight. This will have an impact with capacity access.”
Despite less than stellar yields, mail remains attractive. “As it takes up more space, do you get the yield for it?” asks Strauss. “But it absorbs capacity,” he adds. “Mail is consistent. It is predictable, reliable volumes. You balance it with other cargo,” says Berry. “We were a very ‘peaky’ airline.
Mail gives us a consistent flow year-round, which helps us smooth out our volumes.” American has no intention of backing away from mail. “We value our relationship with the postal service and look to grow in this segment,” concludes Vance.