By Ludwig Hausmann, Associate Partner, McKinsey & Company
McKinsey & Company is a global management consulting firm that serves leading businesses, governments, non-governmental organizations, and not-for-profits. Ludwig Hausmann is Associate Partner, having joined McKinsey in 2010 after having worked in aircraft finance since 2006. In the last seven years, he led strategic and operational transformation projects at air cargo carriers, freight forwarders, integrators, and container lines around the world. He is also responsible for McKinsey’s proprietary airline benchmarking database and authored the firm’s recent publications on long-term outlook and value creation in the transport and logistics sector.
Freight forwarding has evolved to address a number of shipper pain points, in part owing to high global transport chain fragmentation and complexity. Increased pressures in recent years coincided with sluggish freight rates, since belly capacity alone increased faster than cargo volumes. A changing freight ecosystem has proven a challenge for freight forwarders throughout their existence. But now, the threats to their value pools are even more disruptive than in the past. Among these threats: digitization driving rising customer expectations. Market competition moves up a few notches as digital forwarders emerge, air carriers expand their value pools with more comprehensive offerings, and new specialists attack specific value pools such as creating rate transparency (Exhibit). In a world where data and connectivity have become driving forces — and not only in the business context — new entrants could set their sights on disrupting an air cargo sector that often clings to legacy technologies.
Almost all value sources of forwarders and carriers are set at risk by players leveraging new technologies
E-forwarders such as Flexport could take on a key role in catalyzing digital transformation in air forwarding, since they can automate a large share of repetitive front- and back-end processes, thus likely being able to produce 5–10 percent cheaper.. At the same time, incumbent forwarders are significantly larger than any of the emerging e-forwarders which enables them to achieve larger discounts in procured freight capacity. But despite this disadvantage in procurement costs, e-forwarders will further catalyze the digitization and automation of the air cargo industry. While strongest in ocean freight forwarding, about 15 percent of Flexport’s revenue already is air freight. Moreover, they managed to attract small shippers as loyal customer base, which they grew 15 times year-over-year recently: ~ 70 percent of Flexport’s revenue comes from medium-sized companies that spend up to $5 million on freight.
Such new challengers can also enhance market transparency for customers, while emerging specialists could tailor their solutions to single value chain elements. One example: Freightos, specializing in price and market transparency along with booking platforms. Nothing stands in the way of a fully digitized sales and customer service experience becoming the industry standard and setting customer expectations — especially for small customers and those with simple transactions. Over 80 percent of the leading air cargo carriers already offer online quote request or booking tools on their Web sites (although fully automated end-to-end cargo booking is still a rarity). This could allow carriers to in part disintermediate forwarders, driving direct shipper-air carrier bookings which is estimated to be under 10 percent today.
However, this will not necessarily oust freight forwarders from the air cargo value chain completely. While these upcoming challenges will certainly change the role of intermediaries, traditional forwarders still hold a couple of aces they can leverage in the game. Apart from the ability to consolidate significant physical volumes from their existing customers, they also hold the key to managing complex air cargo operations and orchestrating numerous stakeholders along the transport chains.
Air freight forwarders that choose to embrace the potential of digital and agility while leveraging the direct access to physical freight volumes, develop a recipe for smart consolidation, and specialize on hard-to-commoditize services and products to shield them from emerging competition will play a key role in the game going forward.
By 2025, 15–20% of air freight shipments will be booked directly with the airline according to a recent survey by McKinsey — does this spell the end of the traditional air cargo industry or the beginning of a new exciting chapter?
Ludwig will participate in the Plenary Session “Digitization — Revolution or Hype?” at TIACA’s 2017 Executive Summit.