In case you haven’t noticed all the news about the Trans-Pacific Partnership Agreement (TPPA), it’s a trade agreement involving 12 economies. It promises to bring them closer together as trading partners and boost trade volumes. TPPA will eliminate over 11,000 tariffs, and remove or substantially lower barriers to trading of goods, services, and investment.
TPPA has reached its first major milestone in the approval and implementation process. Representatives of all participating economies have come to an agreement. The next step is to present the proposal to national legislatures. If all goes well, the ratification process will take place over the next few months.
Who will benefit the most from TPPA?
The consumer-oriented e-commerce is expected to be one of the big beneficiaries of the TPPA. A number of express packages, the medium most frequently associated with online purchases, is expected to skyrocket. And, if many of those packages cross the Pacific waters, or generally travel farther than 600 kilometers, the air cargo shippers specializing in express packages will also stand to benefit from that wave of volume.
But is air cargo really going to change when consumers across the TPPA member nations flock to online stores located outside their countries? It all depends on the price differences, delivery time, and cost of shipping.
The consumer benefit and business opportunities
One of the strategies manufacturers and online stores will take is to price their products uniformly across the participating economies. This would mean that a consumer in Malaysia buying from Amazon in the US would not experience significant differences in pricing of the same product bought from an online store in Malaysia or neighboring Singapore. The expected shorter waiting time for the package to arrive would naturally steer them to shop closer to home.
We can already imagine what will happen to the airfreight business due to the TPPA-fueled growth in e-commerce. For example, it could follow the trend of the ground segment. In the US, UPS has been investing to keep up with the swelling tide of online shopping. To compete with UPS and catch the same e-commerce shipment opportunities, FedEx has also started investing in the ground segment and expanding the network.
Generally speaking, if we use the ground segment as a guide, we should expect expansion of volumes moving by air. However, the opposite might also happen. If manufactures and e-stores across any TPPA economy offer similar prices, then the growth will predominantly occur in the ground segment, leaving the airlines wanting. Since the island economies of Indonesia and Philippines are not participating in the TPPA, the volumes of goods moving by air may eke out only small gains.
Challenges for TPPA economies
Why is it important to take note of this? Well, the last few quarters showed steady deterioration in volumes and profitability of air shipments. Partly to blame for this situation is the slowdown in Europe and China. Even as both economic blocs continue to recover at a decent pace, more and more of the demand for air freight will shift to sea and rail.
That leaves the trans-Pacific air freight lane as the key engine of growth, both in volume and revenue. I am less sure about the profit margins, as all TPPA area airlines will be vying for a substantial piece of the pie. This could keep the profitability depressed.
Looking at the TPPA economies, it appears that any growth in air cargo would come from the food and pharmaceuticals segments. Serving these particular segments is not without risks. Transportation of food/fruit low-value products is time-sensitive and requires specialized cold chain infrastructure, agile cargo processes, strict observance of chain of custody, and compliance with destination country regulatory processes.
In the case of food, carriers also need to understand their customers and the nature of demand and supply fluctuations, which can be caused by weather, irregular timing of harvests, or unrelated events. Pharmaceuticals are much higher in value, but they also require carriers to make similar investments in cold supply chain.
Let’s continue the discussion offline
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This post was previously published on LinkedIn.
