Volga-Dnepr Airlines is usually associated with An-124 behemoths, to a lesser extent with the B747 freighter fleet of AirBridgeCargo, but the company is currently looking to establish an offshoot in the European Union that will operate narrowbody cargo planes.

“We are evaluating the set-up,” says Robert van de Weg, vice president of sales and marketing. The plan is to operate a fleet of narrowbody freighters, such as B737s, to carry e-commerce and express traffic within Europe.

Kenya Airways is another carrier that has set its sights on the e-commerce market. The African carrier has embarked on a transformation to make it more attractive to the likes of Amazon and retailers like Ikea to carry on-line purchases.

Management plans to add some 20 new routes over the next five years and acquire ten B737 aircraft – including two freighters. The objective is to boost the revenue contribution from cargo from currently 10 per cent of the airline’s total to 20 per cent.

Over the past couple of years, e-commerce has given a massive boost to air cargo traffic. It has been arguably the biggest factor behind the turn-around in the market that turned a capacity glut into a scramble for lift.

DHL's e-commerce package scanning
DHL’s e-commerce package scanning

The outlook for the segment is bullish. According to the consulting firm Apex Insight, the global parcel market reached almost $350 billion in 2017, up from just over $310 billion the year before.

Figures from McKinsey indicate that the B2C segment accounted for 20 per cent of the international express business in 2015, and the consultancy has predicted strong growth for this sector going forward.

Logistics consultants Armstrong & Associates project that e-commerce logistics will increase at a rate of 18.8 per cent through 2020

The company is bracing for a challenging peak season this year. “The fourth quarter is going to be insane,” says Brian Bourke, vice president of marketing.

The shortage of truck drivers in North America is forcing retailers to look increasingly to airfreight, he adds.

Horst Manner-Romberg, principal of parcel logistics research and consulting firm M-R-U, notes that cross-border e-commerce flows have been growing faster than domestic e-commerce.

For SEKO cross-border e-commerce has been the biggest growth area in the past two to three years.

Belgium, which has 11.3 million inhabitants, receives about two million parcels in a month from China. Sweden, populated by 10 million people, receives 150,000 parcels a day from China, Manner- Romberg observes.

“This is reflected in the expansion plans of the Chinese on-line merchants and their logistics partners,” he adds, pointing to SF Express’s interest in establishing a gateway at a location in Central Europe like Leipzig or Frankfurt-Hahn.

Kenya Airways Cargo 737-300
737-300 Kenya Cargo

Numbers from Apex Insight identify the Asia- Pacific area as the largest regional market for e-commerce in terms of value, commanding about 40 per cent of total spend.

North America and Europe combined account for slightly over 50 per cent. Within Asia-Pacific, China is the 900-pound gorilla, covering almost 60 per cent of the region’s total.

The sector’s enormous momentum has lifted the fortunes of air carriers. FedEx, which beat expectations for the quarter that ended May 31, attributed the result in part to a surge in e-commerce traffic.

Atlas Air, which has a rising number of aircraft allocated to linehaul for express operators and for Amazon, raised its profit outlook for this year in June by 5 per cent.

Volga-Dnepr intends to use its planned offshoot primarily for contract flying. “This will be the key driver,” says van de Weg.

While e-commerce has filled the holds of aircraft, the margins it produces for the operators are another matter. Amazon has developed a reputation for aggressive bargaining.

Moreover, this traffic tends to be volumetric, so airlines need to balance it with denser types of cargo to optimise their loads.

E-commerce chinese operators SF Express
Chinese operators like SF Express are interested in establishing central European locations

Typically, the value of e-commerce shipments is not very high, so most of them cannot absorb high airfreight charges. As such, it would seem more suited to consolidations, but this often clashes with expectations on delivery times.

“Chinese online merchants offer free shipment to Europe within three to four weeks. You can consolidate that,” remarks Manner-Romberg.

“But the objective is 72 hours of delivery worldwide. A forwarder cannot cover that with consolidation,” he continues.

“Consumers and business customers nowadays expect equally short transit times, even for intercontinental routings. For carriers this means a gigantic potential, which goes hand in hand with challenges,” comments Stefan Frankenhauser, head of product and service development at Lufthansa Cargo.

At a conference earlier this year Justin Irvine, commercial director of SEKO Omni-Channel Logistics, stated that speed and service drive growth.

Consumers shop more and have higher cart spends with companies that provide consistently higher service levels, and they are willing to pay more for a better service once they have established confidence in the reliability of the vendor.

Companies that build up these elevated service levels can expect to see their business grow 1.6 times faster, he concluded.

“Price is a huge consideration, but we would pay a premium to airlines that have the best service,” says Bourke from SEKO Logistics.

For most airlines, the largest chunk of e-commerce traffic they carry comes from postal agencies. “We continue to grow quickly. Most of it is with postal services,” confirms Tim Strauss, vice president Cargo at Air Canada.

Forwarders have been pushing into e-commerce, typically with services to online merchants that bundle their traffic to individual countries or customs unions for single customs clearance, followed by breaking down the consolidations to feed shipments into national or regional distribution services for final delivery, sometimes using postal agencies. Carriers reckon they get considerable amounts of such traffic, but they cannot get a handle on accurate figures.

Kensuke Tsuchida, from the Profit Management Group in the Cargo and Mail Administration of Japan Airlines notes that commodities usually cannot be identified in consolidations, but he is sure that e-commerce has increased the carrier’s cargo and mail volumes in recent years.

“We get a lot from forwarders, but they don’t tell us what exactly it is,” says Strauss.

DHL Global Forwarding does not make separate agreements for its e-commerce traffic with airlines, although the requirements of this business play into the deals, according to Andreas von Pohl, head of airfreight, Americas.

Manner-Romberg has some reservations about consolidations in busy sectors. “Airfreight from China to Europe is very expensive because of lack of space. There are not that many planes on long-haul routes,” he reflects. “On less tight routes you can consolidate.”

Air Canada e-commerce cargo
The e-commerce market for airlines is bullish

Some airlines figure they can do better by dealing with online merchants directly. After a few months of trials, IAG Cargo officially unveiled Zenda in February, a door-to-door cross-border platform for e-commerce.

It shows landed costs of shipments and lets shippers book directly from door to door. The carrier has teamed up with partners that handle the first and last mile segments. It has signaled that other airlines are welcome to join.

Air France KLM Martinair has joined hands with Parcel International (which deals with the first and last mile aspect) and Amsterdam Schiphol Airport is to set up the same day intra-Europe service called 12send. It uses the luggage handling system at Schiphol.

Strauss from Air Canada finds the concept interesting. “We have to have the express carrier mentality. We are in the express business. We beat FedEx by a day from Hong Kong to Toronto,” he says.

Stan Wraight, president, and CEO of strategic aviation solutions international sees a historical opportunity for airlines to claim a premium business, arguing that they can offer faster connections than the integrators.

They have to get their act together and sort out the ground element, he stresses.

“Fundamentally it’s a good idea. It will hinge on the execution if an airline can compete with the integrators,” comments Manner-Romberg. “The merchants need a supply chain that is end-to-end, with first and last mile, customs clearance and so on.”

Horst Manner-Romberg, principal of parcel logistics research and consulting firm M-R-U
Manner-Romberg believes cross-border e-commerce flows have been growing faster

He stresses the importance of customs clearance and seamless processes to deal with spot checks by the duty men. The integrators submit manifest information to customs at the receiving end before the cargo arrives there and the approach to e-commerce.

“Having defined marketplaces is very important,” he says. Instead of taking on cargo randomly, it is better to have clearly defined sectors to be able to plan around blocks of business, he finds.

While airlines may be stretched to compete with the integrators for standard parcels, they can do well in special segments, such as moving food or flowers, Manner-Romberg thinks.

JAL made an early foray into such a segment within e-commerce back in 2013 when it teamed up with Japan Post to launch Cool EMS, an international speed post service for temperature-controlled parcels.

It combines the mail agency’s express parcel service with the carrier’s network and experience in handling temperature-sensitive cargo to move high-end perishables like designer-grade sushi to a select number of markets.

Volumes have climbed almost 15-fold since 2013, and the delivery network has been expanded from a handful of points in the Asia-Pacific to include more Asian destinations as well as France.

Management is interested in growing its e-commerce business. “We are considering any possibilities to expand this business with our partner companies,” Tsuchida remarks, adding that these deliberations are still confidential.

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