Air benefits from cash-flow crunch

16.3.2009   (International Freighting Weekly)

Shippers choose dearer but faster mode to speed up payments

Plummeting air freight rates, smaller orders and the need to speed cash flow
are prompting some manufacturers of high-value finished products to switch from
sea to air on AsiaEurope routes.

“I’ve never seen this trend before, ” said Onno Boots, MD of TNT for south-east

“We’re already moving more goods by air for a number of hi-tech clients that
have done the maths and decided that air is cheaper overall, despite the higher
transport costs.”

The economic downturn has seen order sizes from Europe contract, forcing Asian
suppliers to choose between delaying goods and consolidating them in FCL [full
container load] ocean shipments, using LCL [less than container load] services
or paying a premium for air.

One Asian forwarder told IFW that with air freight rates now as low as HK$14-17/kg (US$1.20-$1.40/kg) from
Hong Kong to Europe for “decent-sized accounts”, the modal tipping point between
LCL and air had shifted for some shipments, with the need to speed payments adding
urgency to the equation.

“Cash is king these days, and the amount of capital tied up at sea is high when
a shipment might take six weeks, ” said Karel van de Pijpekamp, sales and marketing
director for TNT Express Asia.

Falling air freight rates made shipping to Europe by air in three to four days
viable, because it reduced capital requirements, removed the need for warehousing
and reduced operating expenses, even though transport costs may be higher.

The trend had been most apparent since the end of last year among big shippers
in the computing sector, he said.

“Customers in Europe started ordering smaller quantities from our Asian clients
because they didn’t want to be stuck with inventory, ” he added.

“The downturn is really hurting these companies and they need to be paid faster.”

Gunnar Lundgren, GAC’s regional logistics manager for the Europe, Mediterranean,
Black Sea and Africa region, agreed that smaller purchase orders could see more
high-value cargo shippers gravitate from sea to air, rather than using LCL options,
as they sought to free-up capital and reduce stock levels.

European forwarders had noted a decline in air freight of about 20-25% in recent
months, but now the purchasing patterns, involving smaller lots more suited to
air freight, may lead to a rebound for air freight, he added.

Robert Frei, head of air freight at Panalpina, said he had observed some conversion
of sea freight to air freight for these reasons, but overall volumes for both
modes remained down, year-on-year.

Van de Pijpekamp calculated that one of the world’s leading hi-tech companies
could save US$45m by moving cargo via TNT’s Integrated Direct Express air freight
service instead of sea because of the pipeline inventory cost savings.

The customer’s current inventory costs totalled some $100m a year, plus $15m
in sea transportation costs, he said.

Shipping the same volume by air would increase the annual transport cost to $60m,
at current freight rates, but cut the pipeline inventory costs by $90m to just

This was only possible with an advanced supply chain based on built-to-order,
not builtto-stock, he added.

Shippers previously using the sea/air mode for its cost advantage and those operating
with low inventories in rapidly changing industries such as electronics, fashion
and footwear could also now find it equally cost-efficient to use pure air freight,
Lundgren told IFW.

Air freight also brought other benefits, such as fast transit times, less risk
of damages and claims, lower insurance costs and increased flexibility to meet
changing customer demands.