6. Case Examples
International Air Transport Association (IATA): Electronic Declarations for Air Cargo Would Yield Large Savings – But Only if Everyone in the Supply Chain Moves to Adopt Them
The movement of goods by air is the sinew of 21st-century global trade, but the air cargo industry still relies heavily on slow and inefficient paper-based shipping processes. In 2005, the International Air Transport Association (IATA), in partnership with other major associations in the air cargo supply chain, launched an industry-wide project to adopt lower-cost, more reliable electronic documentation. To date, government regulations, barriers in information and communications technology, and the failure to achieve a critical mass of users to achieve network-effect benefits have prevented the e-freight initiative from being universally adopted. But if fully implemented, e-freight benefits would be substantial. According to the analysis undertaken in this report based on IATA projections, e-freight could yield annual savings for shippers and the air transport industry a total of nearly US$ 12 billion.
Air cargo transport represents less than 2% of total commercial transport by volume but accounts for approximately 35% of total value. Air shipments differ by industry and fall into four broad categories, each requiring distinct type of service. Emergency freight includes time-critical shipments of spare parts as well as business or financial documents that cannot be transmitted electronically. High-value freight like gold, jewellery, currency, artwork, electronics and luxury goods rely on air freight for security and speed. Perishables such as seafood, fruits, vegetables, pharmaceuticals and flowers require fast delivery and temperature control to preserve freshness. Rapid replenishment shipments used by industries with fast turnover like fashion, electronics, or just-in-time manufacturing help control inventory when demand is volatile. More than 60% of air freight travels in the belly of passenger planes, with the balance carried by cargo aircraft. Shipment volumes also vary considerably by category across trade routes.
Air cargo transport continues to rely on reams of paperwork, with the average shipment typically generating more than 30 documents. These include customs forms; transportation docs, like airway bills and flight manifests, as well as commercial documents such as invoices, packing lists and certificates of origin. That blizzard of forms, moreover, passes through the hands of up to seven distinct parties, including shippers, freight forwarders, ground-handling agents, airlines, customs brokers, customs agents and other government authorities. With each step in the shipment’s chain of custody, the volume and complexity of paper expands, along with its cost and susceptibility to human error.
The paper burden does not end upon delivery of the goods. The physical documents must be stored for future reference or audits, making them cumbersome to access. Retrieving an archived invoice or air waybill in a storage facility can take as long as 40 minutes. Paperwork-related delays carry additional costs to shippers in terms of higher freight rates to expedite time-sensitive shipments by air, or insurance charges to cover loss of perishable products and lost sales.
Much of that inconvenience, cost and delay can be prevented by switching to e-freight. Using digital technology to pre-clear shipments before they arrive at the airport, for example, could prevent between 70% and 80% of paperwork-related delivery delays at destination. E-freight can also help break through other shipment choke points. For example, freight forwarders’ warehouses are often not in the same location as the office, requiring that documents be moved physically before a shipment can proceed. With e-freight, the goods can already be on the move while the electronic documentation is being completed.
The IATA e-freight initiative: Obstacles and opportunities
To eliminate extraneous costs and reduce trade barriers faced by the air transport industry, IATA launched an e-freight initiative in 2005. For e-freight to succeed, the new paperless system would need not only standardized electronic customs declarations but also industry-wide acceptance of common procedures for digitizing all commercial support documentation.
Making paperless border crossing a reality depends critically on the willingness of governments to lift regulatory roadblocks to electronic customs processing. The countries that have already taken that step represent just one-third of global air cargo by volume. IATA’s and its partners’ efforts to persuade other governments to adopt e-freight measures so far have met with only varying success.
Notable among the nations that do not yet permit electronic customs clearance are the four largest and fastest-growing emerging markets – Brazil, Russia, India and China – that stand to benefit most by reducing long customs delays. Efforts to bring them on board are underway in Russia, where a private-public partnership has been formed to develop an administrative framework to streamline regulations, and in China, where a pilot programme has begun. To date, e-freight has made little headway in India or Brazil.
Electronic customs procedures are a necessary but far from sufficient precondition for participants in global air shipment to reap e-freight’s full benefits. One condition for true success is for all parties to support and adopt the paperless process. The industry is still far from that goal. Even in markets where customs procedures have been digitized, only 10% to 15% of all air cargo stakeholders have fully implemented an electronic system, from shipper to carrier to forwarder, resulting in a global e-freight penetration of just over 4% of global air cargo shipments.
Who will take the first step?
Getting all parties in the air cargo transport supply chain onto the same digital page presents a classic game theory dilemma: A large part of the benefits of e-freight only accrue to an individual participant when everyone else along the chain automates simultaneously. Using an electronic system for one only part of the process makes little sense if another part of the chain remains manual.
Compounding the challenge, the parties that would potentially see the greatest benefit from e-freight are not necessarily the ones that are best positioned to influence its implementation. IATA’s model, reviewed by the authors of this report, shows that, if universally adopted, e-freight could generate total annual savings of US$ 12 billion62 for shippers and the air transport industry when fully phased in after eight years, but the gains and costs from achieving them are not born equally.
To address this challenge, IATA has paired with other representative associations from the air cargo supply chain, and designed a joint roadmap for the implementation of the initiative,63 aiming to accelerate change. While this will help, unique challenges will remain.
Shippers: Shippers stand to benefit the most, largely in terms of the time they would save and the flexibility faster shipments would give them (see figure). In aggregate, an IATA model estimating e-freight effects forecasts that by cutting delays by a full day, shippers could reap some US$ 4.2 billion in savings – US$ 2.8 billion stemming from lower inventory buffer stocks and another US$ 1.4 billion from a lowering of their cost of capital. Shippers would also participate in the resulting 1% increase e-freight could generate in total value of international trade. Their 12% share of the US$ 41.8 billion trade boost would add US$ 5.2 billion to shippers’ bottom lines.
Shippers’ customers would also benefit from accelerated, lower-cost deliveries. Zara, a “fast fashion” retailer, exemplifies the benefit of reducing air cargo shipment total transit times. Zara updates clothing lines at least once a month. Its ability to track, in real time, what is selling lets management know immediately what styles and colours are drawing customers to its stores – information it immediately sends to its manufacturers. But the Zara business model works only if it is able to get its designs into stores in a matter of days or weeks, not months, which makes it a heavy user of air transportation. Less encumbered air-freight shipment in the future is likely to boost opportunities for more business models based on speedier turnover.
As big as these benefits are, however, shippers have little influence on e-freight’s adoption. They are a fragmented group of air transport users, and their involvement in freight and customs documentation is minimal. The bigger role in determining how – or whether – e-freight is implemented will be played by air carriers and freight forwarders.
Though not as big as the cost savings and volume increases the shippers would reap, the carriers and forwarders stand to realize substantial gains. When fully implemented, they would share in savings of US$ 1.7 billion from reduced document processing costs alone, according to IATA’s forecasting model, with the carriers pocketing a little over 40% of those savings and the balance accruing to the forwarders. They also stand to split US$ 1.8 billion resulting from an estimated 1% increase in the volume of air cargo shipments.
Freight forwarders: As intermediaries between shippers and carriers and serving clients across a wide range of industries and geographies, forwarders have a strong incentive to pursue e-freight’s attractive potential. But the balkanization of their business landscape makes it difficult for them to unilaterally impose their individual e-solutions on customers or carriers. And some forwarders, whose business is based in part on the ability to help their customers navigate the complex, paper-based documentary procedures involved in shipping cargo, may be reluctant to switch to e-freight.
One area where forwarders can act on their own to achieve efficiencies is applying digital technologies to the vast archives of paper documents they maintain. An analysis by IATA quantified the benefits to be gained from e-archiving. Electronic document storage boosts productivity by reducing the need for manual printing and organizing of forms, while making information accessible from any location at any time. One case study showed that freight forwarders can reduce document processing time, eliminate paper, ink and printer maintenance costs, and free up office space, saving between US$ 1 and US$ 2.40 per shipment. An added bonus: e-archiving improves customer service by increasing responsiveness, improving record security and boosting environmental sustainability. Totalling up the costs and benefits of converting to e-freight solutions, IATA estimates that a forwarder that handles 1,000 shipments per month can break even on its investment in electronic archiving technology in just two years.
Carriers: Because they are generally large players operating in consolidated markets, carriers have much to gain from digitization. E-freight implementation has generally proven easier in Asian markets, where air cargo transport is more centralized than in Europe or the US, around key shipping centres, and where air carriers’ relative market power is higher thanks to a higher need for capacity going from Asian markets to Europe and America, than on the return trips.
In Hong Kong SAR, for example, locally headquartered carrier Cathay Pacific led a switchover from paper airway bills to a paperless system supported by a data messaging platform called Ezycargo. As Hong Kong’s dominant carrier, Cathay Pacific was able to create and enforce a process where freight forwarders it works with use Ezycargo data entry for all shipments it carries. Cathay has enjoyed a boost in both productivity and traffic gains from the change to electronic documentation. As e-freight came into full effect between 2010 and 2011 in Hong Kong, the number of shipments Cathay carried jumped from 300 to 3,600, while those carried by its rivals increased from 600 to 6,400. Productivity at Cathay, measured by the level of manpower saved or reassigned to other tasks, rose 19%. IATA calculates that were e-freight fully adopted at airports worldwide, productivity in airlines’ export, import and accounting processes could increase by nearly one-half.
Figure 21: Based on pilots, there is an estimated 60% to 80% increase in cross-border sales by reducing barrier
Note: Assumes same average revenue per listing in domestic and international. Author calculations based on US eBay pilot studies preliminary results.
Source: Company data; interviews; based on preliminary, targeted US pilot results. Authors’ calculations
Source: International Air Transport Association/Bain model.