Literature review for Seminar Paper AIR FREIGHT: GLOBAL AND INDIAN SCENARIO. Under guidance of. Prof. Pramod Shetty

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1 Literature review for Seminar Paper AIR FREIGHT: GLOBAL AND INDIAN SCENARIO Under guidance of Prof. Pramod Shetty By Abhijeet Sinha Roll No.-149 PGDM (Operations) K.J. Somaiya Institute of Management Studies and Research 1 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

2 Introduction Air transport is a vital component of many international logistics networks, essential to managing and controlling the flow of goods, energy, information and other resources like products, services, and people, from the source of production to the marketplace. It is difficult or nearly impossible to accomplish any international trading, global export/import processes, international repositioning of raw materials/products and manufacturing without a professional logistical support. It involves the integration of information, transportation, inventory, warehousing, material handling, and packaging. The operating responsibility of logistics is the geographical repositioning of raw materials, work in process, and finished inventories where required at the lowest cost possible. World air cargo growth will expand at a 5.8 percent annual rate over the next two decades, with worldwide air freight traffic tripling through 2027, according to Boeing's World Air Cargo Forecast 2008/2009. According to industry forecasts, the cargo segments of the airline business will more than triple by During , total air cargo traffic at the airports in India was1.71milliontonnes, registering a growth rate of 10.32% over According to AAI, Indian air cargo market in terms of volume is expected to grow at CAGR of 11.5% from to The size of air transport sector in India during the year was estimated to be Rs billion compared to Rs billion during the year India is on its way to become a cargo hub after staking claim to be the global MRO hub. Emergence of Air Cargo business in India Tata Airlines, a division of Tata Sons Ltd. (now Tata Group) was founded by J. R. D. Tata in 1932 as Tata Sons. It was started as a mail service over the route Karachi to Bombay and on south to Madras. On 15 October 1932, J. R. D. Tata himself flew a single-engine De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi's Drigh Road Aerodrome to Bombay's Juhu Airstrip via Ahmedabad. The aircraft continued to Madras via Bellary piloted by former Royal Air Force pilot Nevill Vintcent. Tata Airlines initially consisted of one Puss Moth aircraft, one Leopard Moth, one palm-thatched shed, one whole time pilot assisted by Tata and Vintcent, one part-time engineer and two apprentice-mechanics. 2 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

3 Initial service included weekly airmail service with a Puss Moth aircraft between Karachi and Madras via Ahmedabad and Bombay, covering over 1,300 miles. In its very first year of operation, Tata Airlines flew 160,000 miles, carrying 155 passengers and ton of mail. In the next few years, Tata Airlines continued to rely for its revenue on the mail contract with the Government of India for carriage of surcharged mail, including a considerable quantity of overseas mail brought to Karachi by Imperial Airways. In March 1948, after the Independence of India, 49% of the airline was acquired by the Government of India, with an option to purchase an additional 2%. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International. In 1953 all airlines of India including Air India and Indian National Airways were nationalized to form Indian Airlines Corporation. Evolution of the Indian Air Cargo Industry Traditionally, air cargo in India has been a much-neglected segment with most of the domestic cargo moving primarily through rail and road. A highly regulated air transport sector with an inefficient, state-run monopoly of Air India and Indian Airlines has been key impediments. This coupled with serious infrastructure constraints and high taxation of the industry stifled growth in the industry for four decades until But things began to change through the 1990s and 2000s. Gradual liberalization of the air transport sector created an influx of private air carriers in the passenger air transport segment. New business models like the low-cost carrier model evolved. Airports were privatized and new green-field airports were developed with Public Private Participation (PPP). With this, the country witnessed a revolution in air transportation at the turn of the century, though the air cargo segment did not enjoy the limelight as much as some other segments. Blue Dart, which is an end-to-end logistics service provider operating dedicated freighter aircraft, has been performing exceedingly well, registering revenue and profit growth in excess of 20 percent over the last 3-4 years. But despite strong growth in the sector, even today, the share of air cargo in the Indian domestic logistics sector as compared to other modes is negligible by global standards. Most of the air cargo is still transported as belly cargo on passenger aircraft and therefore becomes merely an ancillary source of revenue for airlines and not the primary line 3 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

4 of business. Of these, Jet Airways and Air India carry the most belly cargo with 37.7 percent and 28.3 percent market share respectively (in terms of traffic carried). Kingfisher Airlines has a share of 8.7 percent. Blue Dart currently enjoys a monopoly in the air express delivery space. It has seven freighter aircraft and has about 17 percent market share in terms of traffic carried. The total airfreight traffic in was 1.77 million metric tons of which the domestic airfreight was about 0.62 million tonnes and international airfreight the balance of 1.15 million tonnes. For a country with a billion plus people and a trillion dollar economy, these penetration levels are quite low. Going forward these numbers are expected to rise significantly in the coming decade. In the near term, over the next three to four years, the impact of the global recession is expected to constrain air-cargo demand growth, since the recession has significantly impacted trade growth with most of the developed economies registering negative growth. Future of Indian Air Cargo Industry Although foreign airlines are not allowed to Fry air cargo on domestic routes within India, recent relaxations in Foreign Direct Investment (FDI) limits have allowed foreign airlines to acquire equity stakes of up to 74 percent in Indian cargo airlines. This is likely to bring in the muchneeded foreign capital and global best practices to the air cargo industry, which in turn will drive further growth. High GDP growth and exponential growth in imports and exports are key drivers for growth in the air cargo sector. Increasing globalization, integration of the world economy and evolution of India as a major IT service provider resulted in a rapid growth of the Indian economy. This has hiked the aggregate demand and is the single most important driver for air cargo services. For international air cargo, the government has already enacted an Open-Sky Policy, which essentially means that there is freedom of pricing and that there are no bilateral restrictions on tonnage carried or number of operators allocated on international routes. As a result a large number of international carriers currently fly air cargo in and out of India. Due to the open-sky policy, the international airfreight market is a highly fragmented one with intense competition from various international airlines. The market leaders are national airlines 4 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

5 of India's biggest trading partners such as Singapore, Germany, the U.A.E and the U.K. The dominant airline in terms of market share is Singapore Airlines with only 11.1 percent share of traffic. Others such as Lufthansa, Emirates, Air India, and British Airways, all have market shares between five and 10 percent. The key to establishing a dynamic and well developed, private sector-led domestic air cargo network in India lies in the implementation of a carefully drafted policy document aimed at tackling various issues faced by the growing industry. Firstly on the infrastructure front, it is necessary to establish multi-modal air cargo hubs in the country that are required for operators to establish efficient hub-and-spoke distribution networks. This will result in lower costs, greater economic viability of operations, and the ability to compete effectively with cheaper alternative modes of transport such as rail and road. Focus is required on the development of cargo complexes, warehousing and storage facilities and improved aviation facilities for cargo handling. This may be done with private participation in investment through effective PPP (Public Private Participation) models. The MIHAN (Multi-Modal International Hub Airport) project at the Central Indian city of Nagpur is a step in the right direction. Nagpur is strategically located in the center of the country to set up effective hub-and-spoke distribution networks. Focus is also necessary in developing cargo complexes and facilities in all the major airports, particularly the new green-field airports that are coming up. That, alongside development and upgrading of smaller regional airports and unused airstrips across the country, some of which are already under development by the Airports Authority of India (AAI), will automatically make feeder network operations with smaller freighter aircraft feasible. This will enable air cargo operators to establish effective door-to-door air express delivery networks. Such feeder networks are expected to be particularly important for the transport of perishables and time-sensitive cargo and also in hilly terrains such as in India's Northeast region, where rail and road networks are poor and extremely inefficient due to the nature of the terrain. With the Indian economy slowing from 8-9 percent growth levels to 6-7 percent, air cargo is expected to register a CAGR of 8.3 percent up to , which is good given the 5 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

6 circumstances. However, the demand should begin to pick up strongly in a post-global economic recovery. Regardless of the economic scenario, it is a fact that air cargo penetration levels in India are much below the potential and are constrained by various infrastructural, economic and regulatory issues that need to be addressed. On the regulatory front, the relaxation of FDI limits is a welcome step, but this alone may not produce the desired results. On the regulatory front, the Indian government can ease customs and regulatory procedures that would allow easy movement of goods on international routes. It is important to ensure that regional cargo feeder operations are economically viable. This may be done through specific targeted incentives such as relaxation of taxes on fuel as well as lower landing and parking charges for small freighters. In the domestic air cargo segment, the fast-growing air express segment, where Blue Dart enjoys a monopoly currently, is beginning to see some competition with new players like Avicore Aviation, Quick-Jet and Flyington Freighters. Deccan Express Limited, an air cargo venture floated by Capt. Gopinath, the architect of India's LCC revolution and founder of the erstwhile Air Deccan, has already begun operations and has generated some buzz in industry circles. Major players in the Air Cargo Industry The air transport industry is quite large. Korean Air, Lufthansa, Singapore Airlines, Cathay Pacific, and China Airlines are the largest combination passenger-cargo carriers, measured by tons of capacity. American Airlines and United Airlines provide substantial cargo service without the use of dedicated freighters. Several, particularly European, airlines such as, Lufthansa, Air France, and KLM, have particularly broad geographic coverage, offering service to more than 50 countries each. British Air offers cargo service to over 100. However all of these are not active in India. The major players in India are NACIL (National Aviation Company of India Limited (merger of Air India and Indian), Jet Airways, Deccan 360 Cargo, Kingfisher Airlines, Blue Dart, Spice Jet 6 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

7 Cargo, Foreign players - FedEx, Malaysia Airlines (MAS) and Heavy-Lift Cargo Airlines (Australian). Market Share of Airlines in the Indian Domestic Air Freight Traffic Market Jet Airways Blue Dart Indigo Air India Kingfisher Others 9% 4% 28% 38% 17% 5% Source: Air Cargo World; Sep2009, Vol. 99 Issue 9, p20-23 Competition from Indian Railways Major competition for the air freight business in India comes from railways which has a vast network. The huge network strengthens the position of railways as compared to air freight in terms of its reach, however it is very slow in comparison to air transport. The railway freight business is expected to grow at a decent rate in the coming years especially as the ministry is 7 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

8 planning to come up with dedicated freight corridors in the country. The growth rate of rail freight can be plotted as below. India - Freight Carried, by Rail, (bn tonne km) If we try to compare the volume of goods transported by rail freight and air freight, we find that railways play a dominating role in, mainly because of its capacity to carry heavy loads and vast network. Hence it will not be justified to compare the two modes based on volume. Instead we try to compare the two in terms of projected business growth rate. It is represented in the graph below. 8 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

9 Growth Rate % Rail vs Air Freight Rail Freight Air Freight Thus we can see that as per the forecasted growth rate, air freight is expected to grow at a faster rate, hence there is a possibility of some of the rail freight business getting shifted to air freight considering the advantage of speed in air freight. However the chances of this happening is very low because of cost and weight considerations, however to support the growing Indian economy, air freight is going to play a major role. Air Cargo: Challenges Ahead With the globalization of manufacturing and companies increasingly incorporating the movement of their parts and products by air, projections for the air cargo industry are optimistic. In fact, experts tracking the movement of airfreight globally, particularly Boeing and Airbus, project roughly 6 percent growth per year through Certain factors and challenges are weighing heavily on the air cargo industry that now has a direct impact on capacity, yields, and rates. At the very top of the list are concerns about high fuel costs and the fact that capacity is growing faster than tonnage--the new passenger aircraft, for example, offers a whopping 25 tonnes of space. Carriers servicing China, once regarded an easy and lucrative market for outbound shipments, are particularly vulnerable. The Asian market, especially Hong Kong, has suffered as a result of 9 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

10 overcapacity following a host of new market entrants, which has, in turn, seen prices drop and yields decline. Yields may be a major issue, but of bigger concern is the high cost of oil and its impact on the airline industry as a whole. Simply put, every additional $1 per barrel of oil costs an airline roughly $50 million. Another factor turning consigners to ocean freight is exchange rates associated with the weak U.S. dollar. For many products, cost competition is steep and reducing logistics costs is a major cost reduction strategy. Still, air cargo offers the perfect solution for time sensitive or specialist consignments. However, the jury is out as to the impact increased freighter business will have on cargo volumes for belly hold. Ultimately, however, service quality will be the deciding factor of future competition. The major challenges applicable to the Indian Air cargo industry are as listed below. Lack of proper infrastructure Dedicated cargo airports International standard warehouses Better road networks Speedy paperwork through automation Trained, knowledgeable and qualified staff Major Indian airports running out of capacity High waiting time and congestion in airports High fuel cost Aviation security 10 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

11 Conclusion The Indian Air Cargo Industry has come a long way and there is still much to do. The high growth rate of the Indian economy will need a major support from the air cargo industry. Government has taken several steps in the right direction and it should provide support and incentives to the players. Deccan 360 has made a fresh start in the industry by following a huband-spoke model and taking advantage of the geographical location of Nagpur. Such services would help the tier2 and tier3 cities to contribute to the development of the economy. One of the major challenges that the industry is facing is due to high ATF rates as compared to other countries. Ones the government takes some steps in this regard, the air cargo will become more feasible transport option for industries. Also there is a great potential in the industry to contribute in multimodal transport. However there are several challenges as highlighted above which must be taken care to make the Indian air cargo industry at par with international standards. 11 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o

12 References 1) 2) 3) 4) Narayanan, Arun (Sep2009). Air Cargo World, Vol. 99 Issue 9, p ) Karen E. Thuermer (2002), Air Cargo: Challenges Ahead, Highland Ranch. 6) 7) 8) 9) United Parcel Service of America, Inc. UPS 12 A i r f r e i g h t : G l o b a l & I n d i a n S c e n a r i o