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Airlines Missing Out on Ecommerce Trend?

The COVID pandemic has greatly changed the world we live in today. Over this last year, we have seen a lot of consumers shift away from spending money in brick-and-mortar establishments, such as malls and restaurants. Instead, consumers are now spending more money online, fueling unprecedented growth in the e-commerce sector. Taking note of this consumer trend, many businesses have greatly reduced inventory levels, or have even closed down some locations in an effort to push customers to their online options. Most of this change can be credited too “Amazonization”, meaning consumers now expect quick and efficient delivery right to their doorstep. Generally, the shipping efficiency expected by customers today can only be achieved by utilizing air transportation. This new consumer expectation for extremely fast deliveries of online orders has opened up the opportunity for airlines to further invest in their air cargo capabilities. Airlines in the past have always participated in logistics services but was never considered to be a core part of their business. But today, e-commerce cargo yields much greater returns per pound compared with general cargo, prompting many air carriers to look into investing into e-commerce transportation. Going forward, I believe airlines are going to shift a lot of their focus from passenger transport to efficient e-commerce delivery.

Everyone today knows that most of the time ordering online from small retail businesses usually only happens if the product you are looking for is not listed on Amazon. Amazons ability to deliver in a matter of a day or two on most products is a massive order winner for consumers. Part of what allows Amazon to have such short order-to-delivery lead times is their investment in their air transport capabilities. I bet a lot of people are less aware that Amazon even has its own airline to reliably meet there level of service promised in their value proposition. Amazon is continuing to expand on its air cargo capabilities, the question is will passenger airlines soon realize they have capabilities that can be matched with state of the art technology in order to provide a e-commerce shipping solution to compete with that of Amazon’s?

To help facilitate the relationship between air carriers and e-commerce, a company called SmartKargo has shifted their focus towards building software air carriers can use to take advantage of the growth in e-commerce. SmartKargo was able to develop software that enables air carriers to collect e-commerce products in their own cargo warehouse (access to airport tarmac) that were shipped from varying retail stores, which can then be loaded onto planes and transported. SmartKargo is the worlds “only technology with a comprehensive end-to-end ecommerce shipping solution for global airlines” (Innovative). This end-to-end solution from SmartKargo utilizes a cloud based system that provides visibility to all cargo chain members on the status of shipments. As a result, airlines can be more efficient at utilizing cargo space to meet demand while saving money in the process. Generally, it is assumed that 80% of the time, no more than 20% of cargo capacity will be used for passenger luggage, leaving nearly 80% of available capacity open to other cargo. The SmartKargo system processes e-commerce orders and then allocates shipments in the most optimal way using information shared in the cloud based system. The cloud based system allows information from all supply chain parties to be compiled and ultimately the system decides the most efficient and cost effective ways of using excess cargo space to transport these products. One early adopter of SmartKargo’s technology was Azul Brazilian Airlines, which increased cargo revenue 65% in a single quarter alone, just showing the power e-commerce shipments can have on air cargo carriers (Flight Global). Another success story comes from the only adopter of SmartKargo in the United States currently, Hawaiian Airlines. According to SmartKargo founder and CEO Milind Tavshikar, “Hawaiian Airlines has increased its cargo business more than 40% in the last three years, and SmartKargo will facilitate further growth.”

Going forward, I believe airlines will start placing a much greater emphasis on their cargo transport over their passenger transport capabilities. Today, most airlines revenue is only 3-5% from cargo operations. Given that air freight costs have nearly tripled in many places and passenger air fair rates have drastically declined, a shift towards cargo capabilities seems like a good way to decrease their exposure to fluctuating air fare prices. It also makes sense that given airlines were recently considered at risk for bankruptcy, they will now be much more aware of the level of risk exposure they have to a public health crisis. Before the pandemic airlines were already hardly profitable. Now coupled with declining air fare rates that are not expected to fix themselves for years to come, I believe airlines will need to adjust to more profitable, risk adverse areas, such as air freight transport, in order to increase revenues and stay in business (Diamond). Airlines already have an established system of quick and efficient transport. All that needs to be done is linking that system to the growing e-commerce sector through services such as SmartKargo. By taking advantage of rising shipping costs and higher margins on e-commerce products, airlines could partially offset declining revenue from passenger transport operations. In todays age, the largest gains in consumer value are often found through the integration of new technology in a current system to increase efficiency and lower costs. I believe that given the trends in e-commerce we are seeing today, the technology of SmartKargo could be matched with the current capabilities of many airlines and ultimately revolutionize our supply chain. The major bottleneck in this becoming adopted in the United States, is majorly due to airport infrastructure lacking required capabilities to deal with a large scale ecommerce shipping solution such as this. This solution could provide a new medium for terrorist attacks if each and every individual e-commerce package are not screened. But if an investment in airport infrastructure was made in order to ensure proper screening of millions of packages per day, this might just be the holy grail of supply chain innovation.

Authored by: Payne Garrison

References:

McIntosh, Andrew. “Amazon Adds First Ever Refurbished Boeing 737 to Prime Air Cargo Fleet.” Bizjournals.com, http://www.bizjournals.com/seattle

Flight Global. “Opportunity in the Air.” Flight Global, Flight Global, 3 Sept. 2021, http://www.flightglobal.com “Innovative Airline Solution to Drive E-Commerce Revenue.” SmartKargo, http://www.smartkargo.com/products/e-commerce

Diamond, Mark. “Airlines Must See Cargo as a ‘Core Business’ from Now On.” The Loadstar, 26 May 2020, theloadstar.com/airlines-must-see-cargo-as-a-core-business-from-now-on

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