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Auto’s dirty secret

Car-makers claim they only want and need sea freight – yet moving auto parts by air is on the rise. The challenge for carriers is large fluctuations in volumes and shifting supply chains, finds Ian Putzger

Nippon Cargo Airlines had a busy few months in February and March. On top of its scheduled trans-Pacific flights, it ran a lot of charters between Japan and the US, thanks to the near-paralysis that was choking West Coast ports, reports Shawn McWhorter, president for the Americas. Much of this traffic was for Japanese auto-makers, which were anxious to keep their North American production plants supplied with parts. According to one report, Subaru’s transportation costs for February were up $60 million as a result of the need to shift US-bound traffic from ocean to air.


For air freight providers, automotive business has been a rollercoaster ride in recent years. Traditionally a staple of the air cargo industry, this segment saw a pronounced migration to slower modes over the years, but more recently air freight volumes have been on the rise again.


The biggest increase has played out on the trans-Pacific lanes, but transatlantic volumes have also gone up, observes Antonio Fondevilla, executive vice president of CEVA Logistics and responsible for the company’s global automotive business.


After a few years of economic downturn, car sales are picking up again, buoyed by regained consumer confidence, he notes. The creation of new production facilities in some regions is adding to the increased use of air freight. Konrad Moser, key account manager for the automotive segment at Lufthansa Cargo, agrees that the global expansion of car-makers has been a major driver in the rise of air freight demand, particularly in the establishment of new production facilities.


Mexico, above all, has drawn in charters as well as scheduled freighter services due to new production plants being added at a vigorous pace. The list of car-makers that have opened factories in the country since 2013 includes Nissan, Honda and Mazda, while BMW, Mercedes and Kia Motors have started construction of their own production facilities. In April, Toyota announced plans to invest $1 billion in its first plant in the country, and Ford intends to spend $2.5 million on two plants there.


“I think we will see continued growth of capacity demand for Mexico,” remarks Han Roest, regional vice president of automotive business development in the Americas at DHL Global Forwarding (DGF).


Other areas have also shown a rise in activity. Moser reports sustained growth in Western Europe, the US and China, adding that India has stabilised at about 6% growth. “There has been a lot of investment in manufacturing plants in Europe and Asia,” Fondevilla says. “We have also seen a lot of development in India.”


Some regions have suffered setbacks. In Brazil and Russia growth has shifted into reverse, Moser notes. Roest does not expect to see a rebound in Brazil, or the similarly placed Argentina, in the future. “We could see some reduction in their production capacity,” he remarks.


Overall, indicators point to rising demand for air freight in the automotive industry. “I expect 2 to 5% growth this year in air freight for Lufthansa Cargo,” says Moser.


Likewise, Fondevilla anticipates air freight demand to improve further, but he stresses that this will be driven by the overall growth in output, not by a shift back to air freight. Roest agrees that the increase in demand does not reflect a changing role of air freight in auto-makers’ supply chain strategies. “As a rule, all the OEMs and their suppliers, in a perfect world, would move 100% of their traffic by ocean” he says.


The world is rarely perfect, though. Dirk Steiger, principal of air freight research and consulting firm AAA Advisory, notes that one German auto-maker’s official stance is that it does not use air freight. In fact, the company actually has regular shipments by air. One carrier executive privately confirms that some large manufacturers officially do not “use air freight”, but do in fact send parts by air freight on a weekly, if not daily, basis.


“There is regular need [for air freight] to those points where manufacturers have set up production plants,” reports Moser. This is particularly pronounced to gateways that serve multiple manufacturers’ locations, such as Johannesburg or Atlanta. Most of these plants are supplied two or three times a week, he says.


Fluctuations and hiccups in production are a huge factor in the use of air freight, but reduced cycle times in the industry also necessitate an increased use of airlines. Roest points out that vehicle development time-frames have contracted because of the shorter lifecycles of individual car models. “Speed to market is absolutely critical. Vehicle development time from concept to production has been much reduced over the years,” he notes.


Consumer behaviour has also been changing, especially in Asia, he continues. As with electronic gadgets, where many scramble to get the latest ‘hot’ item, they tend to purchase new, trendy cars more frequently. “They do not wait five years to get a new vehicle,” he says. This increases pressure on timelines and on the ‘just-in-time’ aspect.


The sheer number of parts that populate automotive supply chains has been another factor that has augmented their complexity. For one thing, a broader range of models has played a role there, as Moser explains, but even individual models pack in a lot more today than in the past. “Vehicles are becoming more complex. The number of parts that go into a vehicle has doubled,” says Roest.


Moreover, supply chains are stretched around the globe. “Some 10 or 15 years ago, auto-makers had more local supply chains, but these have largely disappeared, giving way to global flows,” remarks Fondevilla.


He adds that a growing tendency in the industry to try and produce some cars for multiple markets, instead of building models for individual regions, is impacting supply chains. This allows for greater global flows, which in turn benefits air freight. Since most plants are producing near their limits, spikes in demand in one market are more likely to trigger flows from other regions.


Interestingly, air freight even gets fed from aftermarket parts flows. Fondevilla reports that CEVA has seen ‘quite significant moves’ in air freight from this segment, including tyres in some cases. One arena in which this has been playing out is China.


From an airline vantage point, the growing volume of flows that car-makers would prefer not to send by air creates a number of challenges in their capacity and schedule planning. As air freight is not seen as a strategic mode of transportation in their supply chain, this traffic is booked at short notice, with huge fluctuations from one day to the next.


“It could be 500kg, it could be five tons,” says Moser. “To some extent you can plan, but the auto industry itself has big fluctuations in production. They usually do not know on Monday what goes out at the end of the week.”


It helps, of course, that the forwarders rather than the shippers book the allocations and can balance out volumes, but spikes in output keep operators scrambling. >>

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