One of the most insightful and eloquent portrayals I have come across about the changing nature of demand is in the book, The Long Tail, by Chris Anderson. A demand that is perhaps confined to the small segment of internet users today, but would increasingly touch the lives of many more across the globe, and necessarily define the way a significant quantum of business would be conducted in future. There is an almost imperceptible shift from the ‘blockbuster’ mindset, the mindset that stocks and caters to popular demand the products that attract the highest sales. This model was the result of inefficient distribution that was unable to match demand with supply because retail space was finite and constrained. We are now witnessing boundless choice driving niche demand that is almost limitless (the ‘long tail’ of the demand graph that declines but never falls to zero). This demand is fuelled by unconstrained channels of online retail and innovative distribution, unrestricted by inventory in brick-and-mortar space, and delivered with almost as much ease across borders as within neighbourhoods. A bookstore with limited shelf space catering to a small segment of customers within a given area is now replaced by a vast online store visible to the world and feeding an enormous customer base. Even the smallest demand, aggregated over a wide geography, and enabled by effective technology and logistics, can be large enough to sustain a profitable business.
I find here a close analogy to the evolution of air express distribution. Air express demand registered universal growth trends, even pre-dating popular internet usage. Internationally, it outpaced air cargo demand with a CAGR of 17% since 1997, growing from a 3.5% market share in 1991 to 11.0% in 2005. In the USA, it posted a dominant market share of 60.9% in 2005 from 3.2% in 1975, and the same trends have been witnessed in Europe. Though India lagged behind by almost two decades, the growth trends were comparable at a steady 30% - 35% for over a decade, outgrowing the passenger airline support infrastructure and ushering in an aviation system dedicated to air express distribution. Express packages were typically small in size, large in numbers, and urgent in nature, serving a large audience over a wide geography door-to-door.
Reliability of delivery within a short time window differentiated the product offering from all other modes of transportation, and formed the basis of the business model. The product fulfilled a latent need and there was no looking back. What airmail did for the individual by bridging distance and time, air express achieved for business, only faster and more reliably, enabled by technology. By a strange coincidence, airmail was the genesis of commercial aviation, both in India and the USA – almost as if small packages possess a proclivity towards their own space and a natural affinity for proprietary air transportation!
Typically, the aviation network forms an intrinsic part of the air express system, and almost 81% of the world’s freighters are utilized by air express operators. This is significant, in view of the fact that the major share of the world air cargo capacity, about 42%, is proffered in the belly holds of passenger airlines. Belly-hold capacity is passenger-focused, a by-product of passenger airlines and, though globally air cargo contribution to total revenue of passenger airlines sways wildly between 4% to 50%, the passenger takes precedence and air cargo does not necessarily meet the requirements of commerce in terms of schedules or capacity. Air cargo distribution is limited to airports, and final delivery to the end customer is fragmented and performed by other service providers. The strong progress of air express since its inception confirms that, in effect, belly-hold capacity is not the preferred option for commerce and trade that are the primary users, regardless of the fact that it comes at lower costs. Customers have voted with their loyalty for demand capacity that is consistent, reliable, safe, secure and dedicated to their business. The aviation component is just one element in this vast network of infrastructure, technology and people, but an important one. Control over the entire process that is time-constrained and time-bound is key and, invariably, all the peripheral activities of self ground handling, aircraft maintenance and dedicated hubs form an essential part of the process in order to deliver a consistently high level of quality. Consequently, investments into the integrated air network are vital and have been significant.
The prudence of investing in dedicated air networks have been a source of great debate for as long as I can remember – to pledge to a fixed cost model of high capital assets or a less reliable variable cost of commercial lift on passenger airlines? The call must be even more acute in the kind of downturn confronting us today. Air express is considered a barometer of economic health, and a strong co-relation exists with the growths of manufacturing and services. Very simply, what is produced needs to be distributed and, in an era of high rates of obsolescence of products (what is popular today could lose relevance six months down the line) and security paranoia, the fastest, most reliable mode of transportation is by air and, more specifically, by air express. The first impacts of any change in the economic environment are, therefore visible almost immediately in the air express network that is patronized by a large segment of industry.
Quality has been the determining factor. Without the high quality levels that have defined air express distribution, the service would degenerate into an undifferentiated product offering that would destroy the very basis of the business model. And, sustained service quality excellence can only happen in a controlled environment where the process elements of operations of aircraft, ground handling and the availability of support infrastructure at any given time are assured.
We are witnessing some of the most difficult times in recent aviation history, the only positive aspect being the welcome decline in fuel prices from the unprecedented highs of 2008 that crippled so many airlines and pushed an unfortunate few out of business. Various strategies have emerged to deal with the unanticipated and unpredictable economic predicament confronting us globally, but I have observed no dampening of quality deliverables. Most cutbacks have been in the areas of salaries, increments, recruitments and a freeze on replacements and indirect costs; basically, how to achieve more with less, but without impacting service to the customer. We are putting everything under a scanner and subjecting everything to close scrutiny, including routes. Schedules are no longer a seasonal exercise, but a subject of daily study, and dynamic solutions are sought for each variation in demand. A similar focus exists for daily fuel consumption which forms a significant proportion of direct operating costs, and optimizing fuel uplift can bring about substantial gains. These are just a few among a multitude of actions that are being minutely studied.
This is an opportunity for each of us, and there is no better time to introspect and to consolidate. As a service organization, people have been at the heart of our operations and have created the brand. They are ideally positioned to bring about the much needed cost savings because of their knowledge, skill and, most importantly, a sense of ownership and awareness that each one contributes towards the profitability of the organisation, Consequently, people at all levels have a key role to play in innovating and finding cost-effective solutions in each of their areas. The upturn will happen and when it does, we would have raised the bar and emerge a leaner, more efficient and effective organization.
The focus on lean and green also presents an opportunity for technology to innovate and find wider access through the use of the internet by small business, and a wider customer base. The benefits are enormous – from 24x7 availability of online manuals for maintenance, moving to a paperless world and saving our trees, to driving niche markets and demand in semi-urban and rural areas by enabling visibility, access and logistics. The mobile revolution in India that has now reached over 300 mn users has proved that demand, even in the most unlikely markets, cannot be underestimated. The customer, who is increasingly cost-conscious, would eliminate unnecessary travel to purchase by using the internet, and save on fuel which is fast earning the dubious distinction of being a precious commodity. Air express airlines would be happy to reciprocate to the new world demand with a continuation of their back-end support to the increasing volumes of packages, however small, because they have the unique, proven capability of serving such markets. Small is beautiful!
Re print, published June 15, 2010
