Under control

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Panalpina is something of an exception among air freight forwarders, operating a “controlled” air freight network for some of its capacity needs – including via long-term charter or “wet lease” (ACMI) agreements with carriers such as Atlas Air, and with a deeper involvement than most forwarders in the handling and operations – alongside a more traditional network using third-party commercial carrier uplift. The “controlled” air freight network also includes whole and part-charters with carriers other than Atlas – notably Cargolux – to ensure space is available for customers’ shipments, but the partnership with Atlas Air has formed the backbone of the network, and so the Swiss forwarder’s decision this year to significantly adjust its partnership arrangement with Atlas is noteworthy on a number of levels.

On the surface, reducing the number of wet-leased freighters provided by Atlas to Panalpina from two full-time aircraft to one suggests that the forwarder may be taking a step back from the commitment to its controlled network. But not so, insists Lucas Kuehner, global head of air freight. Indeed, Panalpina says it is expanding its air freight network by replacing of one of the freighters with more than 200 scheduled charters per year, in order to add Brazil’s Viracopos (VCP) airport to the programme.

Kuehner comments: “We are not really changing our approach there; we are reinforcing our focus on this controlled air freight network, and we plan to keep it – but also expand it into the future – hence the ‘Brazil Wings’ service.”

Why now?

He continues: “We obviously analyse our setup fairly continuously, from the commercial airline side – which continues to be 85% of our business – and our ‘controlled’ network, which is about 15%, and there we had an opportunity with our partner Atlas to change the setup so that we better meet customer requirements: in that we keep one wet-leased –8 on the contract and we swap the other aircraft into a more flexible setup that allows us to align our capacity with the cargo streams of our customers.”

This additional service down into Brazil would not have been feasible in the old setup with Atlas, says Kuehner. “With the old programme, we were flying around the world with the –8 and we just didn’t have enough hours to get the plane down into VCP during that round trip. So, that was one of the constraints. And so we earned this flexibility and we can now really bring the aircraft where the customers are demanding it; where our customers have cargo.”

Panalpina continues to operate with the –8 on the transatlantic, “but the other programme with the –400 is that we fly from Hong Kong twice a week into the US, and then from the US down into Viracopos (VCP) twice a week – and then we basically end the programme there from a Panalpina perspective, give it back into the Atlas network to fly the ‘backhaul’ leg, and they do whatever they need to do with the aircraft and operate northbound through South America back into the US.”

He says the 200 annual charter flights within the new programme is basically taken up by these two flights a week from Hong Kong to Huntsville (HSV), and two flights a week from HSV feeding down into VCP. “And the service connects, so we are able to offer a transit time of less than 40 hours from Asia down to Brazil, which is a major benefit in that market. But obviously we are also able to serve our customers in the Midwest United States down into VCP, or Hong Kong into the US.”

Kuehner says that, although he can’t go into details, the contract with Atlas, is scalable or expandable, and Panalpina is looking at other parts of the world for opportunities where its customers would benefit from this kind of ‘controlled’ capacity.

“One market that we have been looking at is the transpacific, from another origin into the US, and with an opportunity to connect further into that schedule down into Brazil, for example – or through another gateway into Latin America. And then there are other opportunities – which might be more in the future – on the Far East eastbound, meaning Europe over to Asia. We currently have a service there between Luxembourg and Shanghai, the ‘Panda Star’, but we think there are also opportunities into other markets in the northern Asia region. So those are two that we are specifically looking at.”

He says there is also a ‘long list’ of other potential places in the world, but where it doesn’t have firm plans yet. “And the key is really to line up the customer requirements with the specific capabilities of this network, which is, of course, not just about being able to fly a plane – because this is what airlines can do just as well,” he says. “But it is the end-to-end offering, including the SOPs and standards that we can provide on the ground – even feeding into the gateways with our own trucking networks; being able to interfere with cargo at these hubs that we operate, either ourselves or we set the standards and processes for the ground handling procedures.

“And also we control the schedule of the aircraft so that we can ensure uplift – and also, even more importantly, we decide what flies when, rather than leaving that this decision up to an airline – which, especially in congested markets, is an issue for our customers sometimes, because shipments get split over many services. Those are some of the aspects that we can guarantee with a high level of quality and consistency to our prime accounts.”


This level of premium service naturally attracts a premium. “Yes, but not in the sense that we charge a higher rate just because…” he explains. “But the service that we provide and the sense of schedule integrity and uplift guarantee, we must make sure we get an adequate rate for that, because otherwise if we have to go out on the ad hoc market, there is a risk aspect there. And on the other side of the scale, for special cargo – for example temperature-controlled cargo or dangerous goods, where we again ensure the integrity of the cargo and the chain of custody control – that is another aspect where also we control the processes ourselves, and so we are able to set high standards and ensure them throughout the supply chain. That would be another aspect where the customer sees value and is willing to then pay us a fair share for that.”

Kuehner says the main driver behind the new arrangement with Atlas is “the greater flexibility that we get with the new setup”. Although, of course, there is a different cost structure that comes with that, the change was not principally about making cost savings by switching to a lower-cost aircraft. “But what I personally like in the setup is that we have two different aircraft – one the most modern one, the –8, which is a fantastic aircraft, especially for high fuel prices, and the other one is the second-newest aircraft, the 400, which is very good but where we benefit to some extent from lower fuel prices right now. And depending on where the fuel price goes, we benefit if it goes up on one end and we benefit if it goes down on the other end.”

Unique service proposition

Kuehner is confident that the changes in no way undermine the USP of the controlled network. “I think the question is really in the eyes of the customer: would there be any reduction in integrity or flexibility of the network? We talked about this a lot internally, and we believe that there is really no negative impact to our clients. We are able to provide a service early in the week or a weekend service or a midweek service out of Asia, which is what we had before out of Hong Kong – and now same day out of the US into VCP. And where we are able to offer some flexibility is the transatlantic, where we are not changing the metal.

“And the key USP of this product is really on the ground, and not just in the air, and there nothing changes in terms of how we handle the cargo, how we control the freight, how we can intervene if the cargo doesn’t feel comfortable. And that, I think, is the amazing benefit that we are able to expand into Latin America, specifically Brazil, which is not an easy market to go to – and which, especially from the US, we have an opportunity now to serve out of an airport (HSV) that has no issues of congestion on the ground.” That means not have to deal with a limited number of truck doors at a “super busy” cargo handling terminal and delays getting to the ramp.

Handling control

This ability to exert control over handling and intervene on the ground is something Kuehner says Panalpina is able to achieve in Luxembourg, Huntsville, Stansted in the UK, and Mexico – both Guadalajara and Mexico City, “and also now, to some extent, in VCP. In these key hubs, we work with a subcontractor to actually handle the cargo, but all of the SOPs and all of the work procedures, all of the processes – even a system where we communicate between the office and the ground floor in the warehouse – is basically Panalpina copyright material.

“And we train the people and so on and so forth. If we take a temperature-controlled shipment, we pick it up from a major pharmaceutical account, eg in Europe, it goes on our own controlled reefer truck to Luxembourg. So from the time we pick it up, the chain of custody starts until we hand it over at destination. We don’t have to hand over to an external ground handling agent or an external airline, or have all these other touch points – for example in Luxembourg, the distance between the truck dock and the aircraft loading area is around 100 metres. That airport is focused on cargo, and the same in Huntsville, for example.

“And because we have visibility of the cargo that is in transit, and in the hub, the warehouse, if the temperature logger that we have in the cargo shows a deviation or any kind of other issue, we can literally send someone down to the warehouse floor to check on the cargo and see what’s going on. That is an ability that you just don’t have at the big airline hubs like Frankfurt, Heathrow, or JFK,” Kuehner says.

Panalpina’s ‘African Star’ service also provides ‘controlled’ access to some of Africa’s more exotic destinations, in which it charters an MD-11 freighter from Ethiopian Airlines every Sunday that flies from Luxembourg to Pointe-Noire (PNR) in the Republic of Congo. “There we take possession of the cargo, we unload the aeroplane and we take it off the airport into one of our transit warehouse facilities a couple of hundred metres away,” says Kuehner. From there, cargo can also be transferred via a ‘Panalpina-operated’ cargo ship to customers in the oil and gas industry along the West African coast and by a designated trucking service to Cabinda in Angola.

“It is not easy to get customers to the airports sometimes because they are little off the beaten track, but when they do come and see how we babysit and take care of their cargo, the value is immediately apparent,” he adds.

Amsterdam comparison

This level of control is significantly different to what it can achieve at major hubs – even compared with its setup at Amsterdam Schiphol airport, where Panalpina is one of a handful of forwarders that has a warehouse with airside access. “So, at the facility there, we handle the cargo up to ready for carriage. But then, like everybody else, we have to hand it over to a ground handling agent that has been appointed by an airline, and from that moment onwards we are not in possession of the cargo anymore, and it’s much more difficult to intervene and to monitor,” Kuehner says.

This lack of control applies to almost all airports, although the company is looking at ways to address that. Kuehner explains: “It is one of the aspects that we also have strategic plans for with the expansion of our controlled airfreight network, to work more closely with handling agents – also on the commercial side – because there is obviously a benefit, because we do that in our controlled network. But that is really something for the future.”

One way that the company has been able to retain and demonstrate some additional control of quality and processes – at least for pharmaceutical and life sciences cargo – has been via GDP certification, which Panalpina has at Schiphol, for example.

But it wants to go further. “Today’s traditional model is the freight forwarder picks up freight from the customer and brings it to his depot or transit warehouse, puts it back on a truck to truck it to the airport; at the airport we consolidate cargo, then we hand it over to the ground handling agent, and then the ground handling agent puts it on the aeroplane,” Kuehner observes. “First of all, the transit time there is not fast enough; I think there are some inefficiencies in the steps that we are looking at – in how the traditional freight forwarder handles the cargo – and I think that what we would like to do is to explore ways to set up processes that are more efficient by hopefully also eliminating some of the steps in between.

“And we believe that if we find a way to cooperate closely with the ground handling agent at a local site, there are ways to find synergies and speed up the transit processes, which is exactly what customers are demanding when they contract airfreight: by definition, they want a fast and reliable product.” This fits with IATA’s initiative to reduce transit times by 48 hours, from there current level of “six point something days”, observes Kuehner. “So we need to find a way to reduce the transit time as an industry, and this would be one of the avenues we would want to explore. Because we have proved that it is possible in our controlled network.”

One element of that achievement, which is also related to IATA, is also more automation, for example via moving to an electronic air waybill (e-AWB). “In our controlled airfreight network, we operate our planes completely paperlessly,” says Kuehner. “So there are no air waybills, there is no document pouch, there is no manifest – even for customers into the US, for example. And if it is possible within our own controlled airfreight network, what should stop us on the commercial side?” He says this digitalisation has helped to speed up the process and is also a way of improving quality.

But he agrees that in most cases, extended air freight transit times occur because the freight forwarder is either holding on to cargo to consolidate it or leaving it at the cargo handler’s warehouse before coming to pick it up.

“It is certainly not in the air, so it is on the ground,” admits Kuehner. “I think part of it is, of course, that the different entities are trying to save money, and so they consolidate. The business of a consolidator is to consolidate cargo… By definition we would have to save or hold some cargo or optimise it with some other cargo.

“But I think the bigger part is really the different entities and the different touch points – the connections at the airport with the ground handling agents, with the truckers, with the depots – that need to be pushed through. I think it’s probably a combination, and we are interested to take the inefficiencies – the process or the pieces – out of the equation that are not adding any value to the shipper in the process.”

But in the meantime, the limitations of the standard general air cargo product only underline the value that premium guaranteed or express products offer. So, could Panalpina perhaps do more to increase awareness about its own unique controlled-network product?

“I think it is well known by insiders in the industry, but in the wider marketing perspective there are many more opportunities,” Kuehner agrees. “Certainly the customers that we are able to show this to on a day-to-day basis understand the value, and they are our best advocates in the industry to promote this further.”


Indeed, the company is considering a relaunch or rebrand of the service. “We took out the word ‘own’ out of ‘own-controlled network’, so it is now the ‘controlled network’, because we have a higher level of control on the ground as well as in the air and with the schedule. But we are contemplating to also re-launch it on the branding side,” says Kuehner. Currently, the focus has been on the change in the network structure, and especially with the new service down to Brazil. And all of the capacity within the controlled network is already pretty well filled.

“Yes – otherwise we would not operate the network, because you can imagine that it is a costly proposition to fly aeroplanes,” says Kuehner. “So we are very diligent in making sure that we put the services in place where we can offer an actual benefit to the customers. Otherwise we would not be able to afford this. Around 85% of our business is on the commercial side, where we work with our key airline partners, where there is no reason for us and really no additional benefit for the shipper or the customer if we operating our own aircraft.”

Integrated model

For the time being, Kuehner says there is no equivalent product offered by other forwarders – or even the integrators. “In the integrator world, it is being provided for parcels but not for heavy freight. So it is a bit of an integrated model that we operate in the freight forwarder world.”

While Kuehner would like this side of the company’s business to grow further, he says it will remain a niche part of the overall market. And that is one of the reasons he believes no one else is offering it. “I don’t see this model being one that is going to be copied. We are looking to expand, but the share that is flown by the commercial carriers is always going to be significantly larger than this controlled part, even in Panalpina.”

He says many of the other major forwarders have tried to offer similar products, but none with any great success. “I think there is a lot of attention to this network among the competition. But we have been doing this for a very long time: this year will be the 25th anniversary of the Dixie Jet transatlantic service,” Kuehner observes. “We have a history with this; we have the expertise; we have a network and the wider airfreight setups that have been geared around this. So I think it comes back to a lot of things like culture and strategy, and this is not just something that I see a freight forwarder set up from one day to the other. I think there is much more to it.”