Strategic Aspects of Chartering Business Model in Air Cargo – A Market Analysis
Author: Ahsan Hameed (Date: 17.05.2016)
After several years of stagnation, the growth of charter air cargo has showed new opportunities for charter air cargo operators and they are looking for making strategic decisions to capitalize emerging opportunities. The focus of this research is to critically analyse the dynamics of charter air cargo market in terms of external analysis, internal analysis, competitive analysis and customer behaviour analysis. A case study, based upon qualitative approach, has been employed along with PESTEL analysis, Five Forces analysis and SWOT analysis. The findings of research have shown that although there are growth opportunities, but the uncertainty is high because of external factors, internal factors, competitive factors and customer behaviour. In the end, the recommendations for improvement have been suggested for charter air cargo operators.
The charter air cargo market is small sub-part of the air cargo market along with scheduled cargo and mail cargo. In 2013, the 7.9% of total RTK of global air cargo has been delivered by charter air cargo, which is 2.9% higher than the previous year (Boeing-WACF, 2014, p63). Being a part of air cargo, the most of characteristics of charter air cargo operators (CACO) are similar to full cargo carriers, but it is unscheduled and provide customized solutions upon customer request. However, due to the large volume and demand, the chartered air cargo has its own market with market related characteristics. According to Air Charter Guide (2016), there are 333 charter operators, offering air cargo services globally.
The problem statement of the research study is concerned with market opportunities of charter air cargo operator (CACO) market, which is linked with the primary air cargo market. The Boeing report of cargo forecast shows a green signal for CACO, which is reviving after three years of stagnation. According to the report, the air cargo traffic will increase from 207.8 billion Revenue Tonne Kilo meters (RTK) in 2013 to 521.8 billion RTK in 2033 with annual growth of 4.7% for the next 20 years (Boeing-Forecast, 2015). Further, the World Trade Organization (WTO) has expected 3.9% growth in global trade in 2016, which is 2.8% than year 2015 (Connecta, 2016). Moreover, the IATA Cargo strategy (2015) and press release confirms the moderate growth in the air freight market, as the Freight Tonne Kilometres (FTK) in march 2015 have recorded as 1.6% and yield 5.3% higher than that of the previous year in the same month (Appendix 6) (IATA-Growth, 2015). However, the actual results of 2015 showed 2.2% growth of global air freight (IATA-Air Freight, 2016). But overall, the emerging trends are giving growth indications in air freight in coming years.
Specific to CACO market, Coppinger (2015), in his article in “Air Cargo Week” states that the cargo charter market is expected to see the moderate the growth in coming years, which was having experienced a low business sentiment in 2014. The Boing Report about charter air freight shows that in 2013, the RTK by charter air freight operators have been increased by 2.9% from 16049 million (2012) to 16508 million (2013). The cargo charter operators are closely monitoring the environmental changing such as a decline in oil prices, growth optimism in the Chinese economy, stability of Eurozone after Greece crises and investments in stalled oil and gas projects. In fact, charter cargo operators have to develop new strategic plans or adjusting plans for capitalizing the emerging opportunities.
For this purpose, as Coppinger (2015) stated that there is still uncertainty exist in the market, so it is very important for cargo charter operators to closely assess the environmental changes, new emerging trends, competitive situation and also customer behaviour. This outcome of environmental analysis and customer behaviour will help the CACO to develop or adjust their strategic plans accordingly.
2. Air Cargo Business:
The air cargo business consists of airlines offering airfreight, mail and express/courier services (Morrell, 2012, p308). The air cargo business has three main kinds, such as, scheduled air freight, charter air freight and air mail. In the airline industry, there are full cargo carrier operators, Combi operators and passenger carriers. The passenger carrier transports only passengers such as Ryan Air. Similarly, the full cargo carrier transports only air cargo such as Cargolux. Whereas, the Combi (combination) carrier is also commercial operators transports both passenger and cargo in lower deck of aircraft such as, Emirates, Lufthansa, and Air Berlin (Boeing-WACF, 2014, p59; Morrell, 2012, p311). According to IATA, the air cargo generates the 9% of the airline industry and highly critical for economic growth and global trade (IATA-Cargo Strategy, 2015, p3; Zhang et al., 2004, p148).
There are many points of differences, which make the air cargo different than passenger airlines (Morrell, 2012, p25-37). Primarily, the cargo carriers serve totally a different market, which is having different characteristics. First, it serves mainly commodity market. According to Merge Global, the total cargo FTK in 2007 showed the 27% high tech products, 19% capital equipment, 17% apparel and footwear, 16% consumer products, 12% intermediate products and 5% refrigerated products. Secondly, it requires special handling items. The Lufthansa cargo forecast in 2004 showed temperature controlled items (8%), fresh products (45.2%), shock sensitive products (6.1%), theft endangered products (22.3%), valuable items (2.2%), animals (2.8%) and dangerous goods (13.2%). Third, the cargo handles special purpose trips like, humanitarian aid, defence items and customized solutions. Moreover, the full & charter air cargo operators use specific freighter aircrafts such as, Boeing 747, Airbus A380, MD 11 (Appendix 10).
According to Connecta (2016), the recent developments in air cargo have led towards facing certain trends. First, they’re air cargo sector will invest heavily in IT infrastructure, because of IATA’s recommendation about the electronic airway bill (e-AWB), enhancing agility and adopting E-commerce model. Second, due to low fuel prices, the price level will remain stable and competitive, which increase the expected demand and capacity of aircrafts for handling large cargo volumes. Third, the increasing level of fragmentation in air cargo would lead towards collaborations among cargo operators as well as mergers and acquisitions.
3. Chartering in Air Cargo:
Unlikely to scheduled carrier, the charter airlines, also known as air taxi, serves the customers like renting a tax for a single trip. In this model, the customer pays a lump sum fee (based upon mileage or time, crew expenses and waiting time). The charter provider provides everything such as, aircraft, crew, and fuel and inflight services (Wensveen, 2015, p138). Basically, the charter operator provides services for different sectors, including air cargo.
According to Boeing Report, in 2013, the world charter air freight has grown by 2.9%. The 10 year (2003-2013) and 7 region comparison (except south Asia) shows that 166563 million RTK has been transported, which include North America on top with 78371 RTK, Europe on second with 49128 RTK and commonwealth independent states on third with 18622 million RTK transported (Boeing-WACF, 2014) (Appendix 9 & 10).
The charter air cargo operators (CACO) also provide the same service solutions as scheduled cargo, however, but at limited extent and unscheduled (Section 2.1). The Cargolux is Europe’s market leader in full air cargo services, also offers the charter air cargo for multiple products such as, livestock, humanitarian relief items, electronics, pharmaceuticals, perishable goods, dangerous goods, cars, automobiles and outsized and heavy cargo (Cargolux, 2016). Similarly, Atlas Air, a subsidiary of polar air, a leading charter provider, holding world’s largest fleet of Boeing 747 F aircrafts have gotten permission from US department of defence to begin charter service for US military personnel (BusinessWire, 2011). The CACO also provide industry based solutions. For example, Volga Dnepr Airline offer charter freight operations for aerospace industry, oil & gas industry, automotive industry, aid & relief and heavy equipment (Volga Airline, 2016).
This section involves the presentation of research findings and also critical discussion. The data collection strategy is based upon both primary data and secondary data, so the data presentation strategy is based upon combining both data together and perform critical analysis simultaneously.
4.1 Market Dynamics of Charter Air Cargo Market:
The characteristics of charter air cargo market make are separate than its parent “air cargo” sector and other sub-sectors including scheduled air freight and air mail (Boeing-WACF, 2014). The charter air cargo market consists of charter operators, which are offering air charter services for air cargo operators. The nature of business is primarily serves business to business (B2B) and also serves business to consumer (B2C) market. For example, the General Motors shifted its plant in Italy, so it was B2C.
One important trend has been found as the focus towards environmental impacts have been increased, especially when it has become a legal issue. The charter air cargo operators are interested to have latest fuel efficient and less noisy air crafts in order to reduce carbon emissions, fuel expenses and reducing noise charges. According to Freight Transportation Association (FTA) report; (a) the fuel efficiency of today’s air crafts have been doubled since last 40 years, (b) the aircrafts in today’s cargo operations are 20 decibels quieter than those of 1960’s and 1970’s (FTA, 2016). Although, this trend has increased the demand for new and fuel efficient aircraft. However, for a charter air cargo operators, buying a new air craft is a challenging decision, when it has to operate unscheduled trips and uncertain demands.
4.2 PESTEL Analysis:
This is management framework, which has been employed in order to analyse the external environment of global chartering air cargo market from political, economical, social, technological, environmental and legal perspectives (Johnson, Scholes, & Whittington, 2008).When it comes to finding the marketing opportunities for cargo charter operators, then it is very important to consider the impact of environmental forces, which are likely to affect the strategic decisions of cargo charter operators. The PESTEL framework is helpful in understanding the impact of external factors.
4.2.1 Political Factors:
The political factors are highly influential on strategic performance of cargo charter operators (Holloway, 1998). Basically, the cargo charter market is a sub – market of the global air freight market, so the impact of political factors on the global air freight market has also resulted in the cargo charter operator market. First, the country’s aviation policy is a major influence on marketing opportunities for Charter Air Cargo Operators (CACO). For example, the china’s conservative international aviation policy has weakened the airline’s competitiveness as compared to international airlines, because due to international travel restrictions, the airlines couldn’t have international experience and not able to meet international standards of performance and infrastructure (Zhanf et al., 2004, p159). Similarly, a liberalized aviation policy and bilateral agreements would create market opportunities for CACO sector.
According to IATA, the growth of air cargo is significantly influenced with trade barriers between countries, which is a political matter. This implicates towards the role of WTO and Trade Facilitation Agreements (TFA) in removing trade barriers, which can increase the trade by $ 1 trillion overall (IATA-Growth, 2015).
4.2.2 Economical Factors:
The economic factors are another key influential factor, affecting the strategic decision of cargo charter operators. According to growth, report of IATA, WTO and Boeing, Air Cargo Week, the growth of cargo charter operators, due to linkage with the air cargo market, is mainly affected by economic growth of countries and regions. For example, the Boeing market report shows that Intra-Asia and Chinese markets are expected to grow by 6.5 % to 6.7%, which is higher than the average annual growth of 4.7%. Similarly, the developing markets are expected to grow faster than already developed markets (Boeing-WACF, 2014). This economic growth trend affects the market opportunities and strategic plans for charter cargo operators as well.
The cost inefficiency is another big economic factor for CACO, during strategic decision making. For example, according to Radnoti (2002, p197), the charter operators can not enjoy discounts on fuel prices as compared to all cargo and passenger carriers. Moreover, they have to pay equal salaries (especially in Europe) to crew staff. However, the depreciation for air cargo charter is less than other carriers and they don’t have to bear huge fixed overhead costs as compared to other carriers. The reason for these negative and positive factors is mainly due to the small amount of operations.
4.2.3 Social Factors:
The impact of social factor in strategic decisions of cargo charter operators has been observed moderate, but influential. The rise of air travel and world trade has increased the demand for charter air cargo operators, but still the nature of the industry is dependent upon diversified on customer needs rather than wants (choices). The customer wants basic services such as, documentation, safety, transportation and pricing. However, by each day passing, the social factors are becoming influential like, demographics, usage rate and buying behaviours.
4.2.4 Technological Factors:
The role of technological factor is moderately in the airline industry and it affects the strategic decisions of cargo charter operators (CACO). However, in comparison with scheduled air cargo, the charter air cargo operators are affected by technological factors mainly related to aircrafts. The increasing pressure from customers and competition is putting pressure upon CACO to have advancements aircrafts. However, they need IT systems for valuing aircrafts, connecting with customers, accounting stuff and connecting with suppliers and authorities. Moreover, the regulatory requirement raises need of IT systems such as, IATA’s recommendation about the electronic airway bill (e-AWB) and adopting E-commerce model.
4.2.5 Environmental Factors:
The one of the burning issues in aviation is the environmental concerns, which are also affecting everyone in aviation business, including cargo charter operators. Primarily, the notion of environmental regulations is to have environmentally friendly aircrafts, which are “fuel efficient” and “less noisy” aircrafts. For customers, the preference is safety and reliability. That’s why, the charter air cargo operators need to buy new aircrafts. Moreover, from regulator perspective, with old air crafts, the charter has to pay high landing fees, noise charges and sometimes bans of flying illegal aircrafts.
4.2.6 Legal Factors:
Due to industrious nature, the aviation industry is a highly regulated industry, which is regulated not only by legal institutes, but also by non-governmental institutions such as IATA, environmental agencies and other institutions (Zhanf et al., 2004, p161). The legal factors also affect the strategic decisions of cargo charter operators. Wensveen (2015, p138) stated that the regulations for CACO are stricter than other cargo operators, which makes it very difficult for CACO to seek permissions, operate and expand.
4.3 Findings of Five Forces Analysis:
The five forces framework has been employed in order to assess the attractiveness and competitiveness of global chartering air cargo market in terms of buyer’s power threat, supplier’s power threat, new entrant threat, substitute threat and competitive rivalry threat (Johnson, Scholes, & Whittington, 2008).The five forces analysis of charter air cargo markets shows the competitiveness of the market along with the impact of forces.
4.3.1 Bargaining Power of Buyers:
The bargaining power of buyer is not very high in charter air cargo market. The customers come to charter operators because of their need, which is mostly customized, time sensitive or any other reason. So, mostly they need fulfilment of needs in the best way, so money is not considered high. But, in the case of competition, the customer gets choices, which increases customer bargaining power. However, frequent user of charter services and customer with good status mostly gets good deals. For example, the Atlas air recently provided leasing service to Amazon and previously (Atlas Air, 2016), Atlas air got a contract from the US defence department. In these cases, customer is having more bargaining power.
4.3.2 Bargaining Power of Suppliers:
The bargaining power of supplier is higher for charter air cargo operators. The nature of the industry is highly supplier dependent. Radnoti (2002, p198) states that the charter operators have to pay fees to airports, maintenance, air traffic control, fuel companies, handling companies and any other cost without discounts. For example, seeking permissions, security clearance or any other certification for CACO is very challenging job. The supplier can charge high price or put a ban on charter operations, which may affect the strategic decisions.
4.3.3 Substitute Threat:
The threat of substitute is very high for charter air cargo operators. Besides the other modes of transportation, there are options in air freight as well, such as, full cargo or Combi carrier are alternative for customers. However, the extent of substitute threat is based upon two factors, the availability of substitute and switching cost. For example, Apple wants to transport it iPhone shipment from China to USA on urgent basis. Unlike to ship and road transportation, the airway is fast, but the shipment is highly valuable, contain the risk of damage and require privacy and security. There are option of choosing a full cargo carrier or charter air cargo. Due to the high opportunity cost, Apple will choose charter air cargo that can provide, speedy, secure and secure shipment.
4.3.4 Threat of New Entrants:
The threat of new entrants is relatively low for air cargo charter operators because of regulator and economic factors. In fact, the air charter market is highly regulated, as Wensveen (2015) said, regulations for charter operators are highly strict than all cargo operators. The cargo operators have to comply with regulations of the FAA, IATA, environmental laws, manufacturer regulations, international laws and local aviation laws. Secondly, the level of investment, capital intensive operations, the complexity of business model and less demand makes this industry unattractive for new comers.
4.3.5 Competitive Rivalry:
Similar to other industries, the charter air cargo market is also having direct competition with other charter cargo operators and all cargo operations (who offer charter cargo) and indirect competition with combination carrier and mail cargo. The rivalry among charter operators is another competitive threat for charter air cargo operators. In fact, big all cargo operators offer all cargo and also charter services such as, Cargolux, Emirates Sky Cargo, and Lufthansa Cargo. So these big players also have competition with both operators.
According to Air Charter Guide (2016), an online directory for charter air cargo operators (CACO), there are 333 cargo charter operators globally, listed with this website. The regional breakdown shows that 54% CACO belongs to North America, 29% operators belong to Europe, 5% are based in Asia / Pacific, 5% based in Africa, 3% are based in Latin America, 2% belong to Middle East and 2% belong to the Caribbean region (Appendix 11).
So, these statistics also help in understanding the competition areas, such as, in North America, the competition among CACO is very high. The Coppinger (2015) indicates towards emerging opportunities in china and developing countries, because the competition is not higher in those markets.
4.4 Findings of SWOT Analysis:
The SWOT framework has been employed in order to analyse the overall health of global chartering air cargo market in terms of strengths, weaknesses, opportunities and threats (Johnson, Scholes, & Whittington, 2008).The findings of SWOT analysis are helpful to understand the attractiveness of chartered air cargo market in terms of its strengths, weaknesses, opportunities and threats.
The quotation, “a friend in need is a friend indeed” prefects fits on charter air cargo. The nature of services, being offered by charter air cargo operators, shows its significance at the time of crises and emergencies. Talking about World War II (Belin and Burma air cargo saga) or Ebola crises in 2014, the charter air cargo services made it possible. There are many other reasons, which make charter air cargo market attractive. The unscheduled trips enable it to fly around the clock, even at late night, so that the customer prefers it, especially when they need specific timings as per their needs. In the result, the charter air cargo operators are able to provide customized solution according to customer needs.
Further, the charter operators also enjoy the operational cost benefits, because they don’t need to bear the fixed cost of crew, infrastructure and administration as compared to full cargo carriers. One additional benefit is load factor, the charter operators usually have 80 to 85% load factor, higher than schedule, cargo carriers (which have 58% to 65%) (Radnoti, 2002, p199). Moreover, due to small operations and saving fixed costs, the charter operators can outsource some of operations such as, ground operations, brokerage and maintenance.
The Boeing report shows that in 2013 the charter air freight RTK volume has been recorded only 7.9% in whole global air cargo (Boeing-WACF, 2014, p62). The reason of low share is because of the weakness, which are being faced by the charter air cargo operators. As Radnoti (2002, p197) states, the CACO face cost inefficiency problems, as they are not able to have discounts on fuels and operational charges. So, unless the customer doesn’t have a specific need, then charter trips are highly expensive than full cargo carriers. Moreover, the regulatory restrictions for CACO are stricter than other cargo operators (Wensveen, 2015, p138), which is another barrier to growth. Moreover, the small scale of business of pure CACO is another weakness, which affects competitiveness as compared to all cargo CACO.
The Boeing report about growth expectation and Coppinger (2015) report about the emergence of developing countries have shown actually opportunities for charter air cargo operators. The emerging markets such as, China, India and Pakistan are showing expected growth rate between 6% – 8%, which is higher than the annual global growth rate (4.7%), so the CACO should focus on those markets. Moreover, the decline of fuel prices has created more space for CACO to expand their services. Moreover, the opportunities can be created through product development (having different aircrafts) and market development strategies (finding more markets). Overall, currently, there exists lots of opportunities for CACOs.
Similarly to passenger carriers and full carrier, carriers, the charter air cargo operators (CACO) also face many market threats, which are affect likely to affect the strategic decisions of CACO’s. The primary threats are external factors and competitive factors, while, the other threats include uncertain mishaps (Crashes), terrorism, operational bans or natural disasters. The contingency planning can help in minimizing the impact of these threats.
4.5 Reasons of Chartering:
Unlike to scheduled cargo, a charter cargo trip purely needs based, initiated upon request of customer. According to Wensveen (2015, p138), a charter is attractive only when a customer is in need of an infrequent air trip or supplementing his fleet. Moreover, the need for specific aircraft such as helicopter, air ambulance or fuel tanker aircraft also raises the need of charter air cargo. For example, when General Motors have constructed new manufacturing plant in Italy, the plant and equipment were transported by air charter operator (Morrell, 2012, p82). In the example of Atlas air military passenger charter, as the US military was not having enough capacity of transporting military personnel, so it has fulfilled its demand through chartering. According to Aerovista (2016), the customer goes for chartering in order to get value in terms of convenience, safety, quality, efficiency, privacy and experienced services.
4.6 Factors Affecting Chartering Decisions:
When it comes to chartering, there are many factors which affect the purchase behaviour of customers. Especially, in a competitive market, a customer would evaluate the charter air cargo operators on a few factors such as, cost of charter flight, delivery time, security level, service quality and frequency of trips (Morrell, 2012). Being no. one charter air cargo operator in Europe, the Cargolux offers certain promises such as, reliability, speed, competitive pricing, bespoke services, safety standards, service assistance at every step and door to door services upon request. This shows the importance of these factors in terms providing value to customers (Cargolux, 2016) (Appendix 7).
After experiencing the stagnation period, the air cargo sector has shown growth trends in year 2015 and first quarter of 2016. Being a sub-group, the charter air cargo sector is expected to grow in coming years, which has led charter air cargo operators to develop strategic plans for capitalizing emerged opportunities. However, the successful strategic planning involves clear assessment of environment and understanding customer needs. This research paper consists of market analysis of charter air cargo operators in terms of the current situation, external environment, internal environment, competitive environment, customer needs and customer buying behaviour.
The findings of the PESTEL analysis have shown that the strategic decisions of charter air cargo operators are highly affected by external forces, especially legal factors and economical factors. Similarly, the SWOT analysis show that the charter air cargo market is highly attractive due to the increase of international trade and reduction of fuel prices along with available opportunities due to the emergence of new trends. However, the weaknesses are also there, which are mainly due to shortage of financial and operational weaknesses. The threats are mainly due to external environmental forces, which are highly influential. Moreover, the five forces analysis also showed the competitive pressure from market forces, especially from the bargaining power of suppliers, substitute threat and competitive rivalry, which affect the strategic decisions of charter air cargo operators. These all of factors actually create “uncertainty” for executives, which can be reduced through careful scanning and information about the environment.
Moreover, the findings of research have shown that the charter air cargo market is highly demand driven, time sensitive and customization oriented. The customer demand is infrequent, highly diversified and require all process on time with accuracy. This requires a maximum integration among all levels of supply chain in order to fulfil customer request. Last, besides general influencing factors, the customer buying behaviour is dependent upon the nature of the product that is to be delivered, which require maximum customized solutions from charter air cargo operators.
The research findings are helpful to understand the current issues, being experienced by cargo charter operators. The following recommendations may help cargo charter operators to resolve the underlying issues. First, although the market studies are indicating towards growth, but still there exists uncertainty. The cargo charter operators should go for in-depth investigation of reasons, which are causing growth, so that they should not get plan on temporary growth indicators. Second, a deeper level of customer segmentation will help the CACO to reach at more niche customer segments (such as group charter) and also provide customized solutions. However, the economies of scale should be maintained before targeting a new segment or offering services. Third, the investment in IT applications, such as, online quotation and reservation system, will be helpful in responding to customer needs quickly and also in improving competitiveness.
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