ECONOMIC CONDITIONS

•  Economic conditions drive supply and demand, which in turn affects air freight pricing.
• In times of economic prosperity, air freight demand rises and exceeds capacity leading to higher prices.
• Conversely, in times of economic downturn demand decreases which lead to lower prices as carriers try to fill unused cargo space.
•  International Air Transport Association (IATA) reported that North American airlines and air cargo carriers saw both demand and capacity increase over the past year thanks in part to strong domestic economic performance.
• On the other hand, air freight revenue and cost are expected to be affected with the tightening US-China tension, which impacts both economic trade conditions and air cargo demand.
• IATA CEO Alexandre de Juniac said that "Cost inputs are rising, trade tensions are affecting confidence, and global trade is weakening. ...Governments should respond by easing trade barriers in order to drive economic activity," which would also help air freight volume and pricing.

PEAK SEASON AND HOLIDAYS

•  Peak seasons and holidays also affect air freight cost structure as well as other freight markets.
• As holidays such as Christmas approaches, demand increases and air cargo capacity is exceeded, leading to higher air freight/cargo rates.
•  IATA projected that peak season and holidays have affected air freight outcomes and pricing this 2019, with Chinese New Year and Easter causing volatility in air freight volumes.
• Flexport also reported that air cargo rates are rising in proportion to air freight capacity consumption as peak season approaches.
• In the US, air freight peak seasons revolve around Christmas and New Year, as well as Black Friday as stores replenish their stocks for the holiday.

REGULATIONS

•  Regulations affect air freight cost structures as extra expenses in research and compliance are passed on to consumers.
•  Traditional regulations such as flight patterns, time restrictions and safety affect operating expenses, which contribute to overall cost structure.
•  New regulations revolving around environmental impact particularly emissions are causing air freight carriers to adjust their infrastructure and operations, the cost of which are also passed on to consumers.
• Air freight carrier Lufthansa reported that its security costs has increased tenfold from 2001 to 2012 to comply with safety regulations.
• Another example is London Heathrow's airport which recently announced hiking up environmental fees to address noise pollution.
• The International Maritime Organization's mandate to reduce all emissions from 0.5% to 3.5% under the recent Emission Control Area regulation is also expected to push carriers' pricing between 2019 and 2020.

TECHNOLOGY

•  Supply Chain Beyond identifies technology aside from regulation as a factor that could affect air freight profitability and cost-effectiveness.
• New air freight shipping technologies include robotics, augmented reality, drones, artificial intelligence and big data.
• If used effectively, these technologies can help air freight reduce operational and logistics costs as well as increasing efficiency which impacts overall cost structure.
•  Technology can also enable air freight forwarders to comply with environmental regulations cost-effectively.
• A highly digitized air freight brand also leaves less room for human error, reducing losses and attracting clients.
• On the other hand, a digital transformation of a traditional air freight player entails high costs which can significantly affect cost structure.
• One air freight player that leverages new technology is Boeing, which is currently developing unmanned cargo aerial vehicles (CAV).
• SCB states that such developments will open the industry to more digital breakthroughs as well as intensify competition between traditional and tech-savvy air freight players, all contributing to their cost structures.
• Technology also affects demand as e-commerce sustains consumer demand for goods between holidays.
• Flexport reports that "Because e-commerce draws out the amount of time consumers have to purchase goods, a break in the market is not expected between the December holidays and Chinese New Year."

ROUTE

•  Destination/route and weight determine marginal cost of air freight according to World Bank.
• Charter services usually charge higher rates to account for incremental distances flown, empty legs of the flight, and balance between demand and capacity.
• The World Bank states that air freight rates per kilometer are higher for shorter flights as more time is spent on the ground and aircraft ascent/descent.
• Cargo transfers which involve several carriers also contribute to final cost.
• For single carriers, the route from source to destination to the nearest metro city is usually taken into consideration.
• Air freight carriers also combine routes to reduce flights and optimize fuel, which impacts cost structure.

LOAD/CARGO

• Weight, volume, time and temperature sensitivity affect load or cargo and its contribution to air freight cost structure.
•  Weight and distance are the major factors determining the overall cost structure of an air freight delivery.
•  Volume is also computed aside from weight as a cargo might be lightweight but take up a lot of space.
•  Urgent cargo (such as needed medicine) require both time and temperature-sensitive conditions, adding to regular costs.
• Food, chemicals, and other temperature-sensitive cargo can also require unit load devices (ULD) or other service upgrades which can hike up costs.
• Load/cargo product classifications also determine cost structure based on weight, density and value.

OPERATIONAL EXPENSES

• Operational expenses include fuel, wages, taxes and fees, tariff, and security among others.
• The biggest operational expenditure for air freight is fuel, accounting for about half the annual operating cost of an aircraft according to World Bank.
•  Fuel consumption is roughly proportional to the aircraft and cargo weight plus distance flown, though this may vary for advanced aircrafts with fuel efficiency technology.
• Flexport also points out that new environmental regulations increasing pressure for lower emissions will likely affect cost structure as air freight players upgrade to more environmentally-friendly fuel.
•  Regional differences in wages as well as tariffs and tax regulations will also affect overall air freight cost structure.
• Depending on airports, taxing and landing fees will vary in their final contribution to cost structure.
• Local and international regulations on implementing security will also affect operational expenses, impacting overall cost structure of air freight players.

UPS AIR FREIGHT OPERATIONAL COST STRUCTURE

• In 2018, revenue for Next Day Air products and Deferred Air were up by 7.5%.
• In 2017, UPS added nine new Boeing aircraft to their fleet as well as 18 facilities including 3 new regional hubs.
• The company owns or leases over 4 million square feet of floor space in regional air hubs around the world.
• Their regional air hubs in the United States are located in Dallas, Texas; Ontario, California; Philadelphia, Pennsylvania and Rockford, Illinois.
•  International air hubs are located in Cologne, Germany; Shanghai, China; Shenzhen, China; Hong Kong, China; Hamilton, Ontario; Miami, Florida (which serves Latin America and the Caribbean).
• UPS owns 189 Boeing aircraft and 52 Airbus aircraft with 45,000 containers used to transport cargo in our aircraft.
• Surcharges for fuel increased by 1.5% for domestic air freight and 2.7% for international air freight in 2018.
• In order to determine the cost-per-ton and cost-per-kg for UPS, we searched the company website and press room, annual reports, media sources such as DC Velocity and American Journal of Transportation, as well as research studies published in the past 24 months relating to UPS operations. Through this search we were unable to find these metrics, however, we were able to find the following data per-package in 2018:

• UPS shipped 1.542 million packages over air freight per day domestically.
• UPS shipped 1.482 million packages over air freight per day internationally.
• Yearly operating costs in 2018 were $39.95 billion domestically and $11.913 billion internationally.
• Domestic cost-per-package is estimated at $102.40 (operating cost/operating days= cost per day; cost per day/packages per day — $39.95 billion/253 operating days= $157.91 million per day/1.542 packages=$102.40).
• International cost-per-package is estimated at $30.54 (operating cost/operating days= cost per day; cost per day/packages per day — $11.913 billion/253 operating days= $47.087 million per day/1.542 packages=$30.54)
• UPS estimates the average package size at 10lbs or 4.53592 kg meaning that the average cost-per-kg for domestic air freight is $22.52 and average cost-per-kg for international air freight is $6.73. (cost per package/4.53592 — $102.40/4.53592=22.52; $30.54/4.53592=6.73).
• Average cost-per-ton for domestic air freight is $22,520 (cost-per-kg*kg-per-ton — $22.52*1000=22,520)
• Average cost-per-ton for international air freight is $6,730 (cost-per-kg*kg-per-ton — $6.73*1000=6,730)

DHL AIR FREIGHT COST STRUCTURE

• In 2017, DHL shipped 24 million Tonnes over air freight 5.1 million of which was shipped domestically.
• In 2019, DHL will be contracting with Boeing to purchase 14 new 777f aircraft, each with a range of 9,070 km and 102 ton load capacity. The company noted that they believe this will prove more cost effective than smaller crafts.
• In addition, the company converted an Airbus A330-300s from passenger to freight capacity increasing load capacity by 33%.
• Air Freight operating expenses for domestic and international services amounted to €31.697 billion or $35.83 billion.
• Overall cost-per-ton over air freight in 2018 amounted to $1,492.91 (operating cost/total tonnes — $35.83 billion/24 million). 
• Overall cost-per-kg over air freight in 2018 amounted to $1.49 (tons converted into kg; operating cost/total kg — 24*1000=24 billion; $35.83 billion/24 billion=1.49)
• After searching the company website and press room, annual reports, media sources such as DC Velocity and American Journal of Transportation, as well as research studies published in the past 24 months relating to DHL operations, we were unable to find operating cost specifically relating to domestic and international air freight individually.

UPS VS DHL COMPARISON

• UPS cost-per-kg is significantly higher than DHL at $22.52 per-kg domestically and $6.73 per-kg internationally compared to $1.49 per-kg overall.
• Up focuses their efforts of maintain air hubs world-wide to cut costs relating to storage and distribution of products as opposed to DHL which has focused efforts on increasing load capacity and air craft quantity.
• In the last two years UPS has increased their fleet by 9, while DHL has increased their fleet by 14 in addition to converting their passenger space to freight space.
• UPS operating cost for air freight exceeds DHL operating cost by over $15 billion, however, the company's overall revenue exceeded DHL with $71.86 billion compared to $69.62 billion respectively.

Findings

Overview for Domestic and International Air Freight Services Offered

•  FedEx offers Same Day and Next Business Day domestic services that are further stipulated as First Overnight, Priority Overnight, and Standard Overnight.

•  UPS offers Next Day Air Saver, 2nd Day Air, 2nd Day Air A.M., Next Day Air Early, and Next Day Air domestic services.
•  FedEx offers International Next Flight, International First, International Priority, Flat Rate International, and International Economy services.
•  UPS offers Air Freight Direct, Air Freight Premium Direct, and Air Freight Consolidated international services.

Similarities in Cost Structure for Domestic and International Services

• Both FedEx and UPS offer a flat rate service.
• Both FedEx and UPS base their cost structure on origination, destination, and delivery times.
• Both FedEx and UPS had a 4.9% general rate increase in 2019.
• In 2019, both FedEx and UPS increased the surcharge for larger heavier packages in their cost structures.

Differences in Cost Structure for Domestic Services and International Services

• FedEx has significantly more surcharges than UPS.
•  Examples of surcharges that FedEx adds into their air freight cost structure for domestic services that UPS does not include are: a storage surcharge, Saturday pickup or delivery surcharge, live entry processing surcharge, and a change of air waybill surcharge.
•  Examples of specific surcharges that FedEx adds into their air freight cost structure for international services that UPS does not include are: international out of area delivery surcharge, international out of area pickup surcharge, and a northern Canada surcharge.
• UPS increased the cost of their domestic second day air service more than FedEx with a UPS rate of 7.7% compared to the FedEx rate of 7.3% that had no increase in 2019.
• UPS increased the fuel surcharge for domestic services in their cost structure more than FedEx in 2019.

FedEx Approach to Air Freight Cost Efficiency

• FedEx favors an approach that balances volume, pricing, and capacity.
• FedEx is purchasing up to 100 new air freight planes that are larger, faster, with twice the volumetric capacity of the older models.
• The new SkyCouriers will improve fuel efficiency, reliability, and operating costs.

UPS Approach to Air Freight Cost Efficiency

• UPS favors an approach that increases air freight capacity.
• UPS is also increasing its air fleet by adding 32 new Boeing 747 aircraft.
• These new aircraft will be larger, with approximately 16% more freight capacity.

Research Strategy