Will Bachman 00:01
Hello and welcome to Unleashed the show that explores how to thrive as an independent professional Unleashed is produced by Umbrex, which connects you with the world’s top independent management consultants. And I’m your host Will Bachman. I am extremely excited to be here today with Roger samways, who is the vice president of cargo sales at American Airlines. I was a proud executive Platinum on American for a number of years while I was at McKinsey, no longer as an independent consultant, but I certainly flew a lot on American. And it’s very exciting. Roger to have you on the show today. Welcome,
Roger Samways 00:37
Greg. Thanks. Well, it’s a pleasure to be here. And thanks for your support of American Airlines.
Will Bachman 00:41
So Roger, hope I thought we could do two things on the show today. One, just kind of you giving us a primer on air cargo industry in general, for listeners who don’t know much about it. And then in the second half, after we get through that, talk a bit about what’s going on with the Coronavirus pandemics and maybe start with a primer. For people that only haven’t really thought about air cargo a lot. Help us understand a structure. Are there dedicated airlines, you know, that are just focused on that talk about passenger airlines. How does Air Cargo work?
Roger Samways 01:15
Yeah, well, it’s a it’s a hugely important industry and one that we all rely on day to day, but actually many people don’t know a huge amount about wheels. So there are really two major groups of carriers transporting cargo. On the one hand, we have airlines that are afraid to operators, operating freighters, including them in that number are what we call integrators. So companies like ups, DHL, and FedEx. And they are transporting cargo in planes, which which are only carrying freight. So those those planes are called freighters. And then on the other side of the spectrum, you have the rest of the airline industry, passenger carriers that utilize the belly capacity in their aircraft to carry cargo and American Airlines fits into into that particular group. Actually, belly capacity and hugely important majority of business around the world actually moves in the belly of passenger aircraft. That situation that dynamic has changed over the last few years, as more modern aircraft have been introduced into service. So typically the capacity, the cargo capacity on those aircraft grows. And so, you know, we find aircraft like 787 dash nines and triple seven, three hundreds, incredibly cargo capable aircraft. In fact, we recently set a record, this is great timing, we’re having this call Well, a couple of weeks ago, we set a record for one of our passenger aircraft, a triple seven 300. That was transporting seeds from when Osiris up to Miami, we actually transported a little over 118,000 pounds. So that’s 50 something 1000 kilos, for those of you thinking metric, you know from from assays are up to up to Miami, so hugely capable. All sorts of products rely on air freight, if you can imagine air freight is relatively expensive, it’s certainly much more expensive and other modes of transport, such as rail and and see. And so what you typically find under ordinary circumstances, is the bulk of material of flies via air tends to be very time sensitive, and often is very expensive. And so we move lots of things like laptops, cell phones, on the one hand, but we also move lots of highly perishable cargo, such as foodstuffs and flowers. You know, very different depending on the on the markets that that we’re serving, give us just a
Will Bachman 03:53
rough idea of the price difference. So I don’t know how it’s typically structured if it’s sort of by the by the cubic volume or by the weight or both. But could you compare, you know, if I wanted to ship 100 kilos from Peru or something to United States, by air versus by sea? What’s the right way to compare it? I’d love to get some way to compare sort of air versus sea in terms of
Roger Samways 04:21
Yeah, yeah, it’s difficult well, to give a direct comparison, so in answer the question, do we sell in volume or weights? The answer to that is yes, is both. So there are two different metrics we use the weight of the cargo but also the the capacity, the volumetric capacity that it takes. You know, it’s so much depends on the routing. So much depends on on the particular market conditions. But you know, typically air freight compared to sea freight, I mean, it wouldn’t be unusual to find a competitor, a difference of 10x or more in terms of cost.
Will Bachman 04:57
So it’s a really very different mark. If you’re if you need to fly it by air like flowers, you can’t have it be on a cargo ship and take a month to get here. Exactly, exactly right. So you’re not making the comparison probably it’s, it’s if, if you need to fly by air, you’re not going to worry about the price.
Roger Samways 05:14
No, no, exactly. And in fact, many of the customers that we deal with, you know, our customers on a cargo side are typically what are called freight forwarders. They’re a bit like the old agency companies used to be on the passenger side of the business. And so we move business for all all types of major manufacturers. You know, Apple GSK, you name it, we move the product, but we’re typically working and engaging directly with what are called freight forwarders. And the freight forwarder deals with the often the packing of products, they deal with things like customs requirements, picking a product up from the manufacturer, and dropping it at the airport. And then the airline deals with all of the logistics involved with transporting that that shipment from one airport to another airport. And then the freight forwarder performs their, their work in reverse. And so, you know, we deal with freight forwarders. And freight forwarders typically will have sea freight and air freight departments. And so often we’re talking to the same company, and they’re able to make a determination of whether a shipment needs to move via air of IC, depending upon the transit requirements that the end user has.
Will Bachman 06:22
What are some of the major trends been over the past few years in air cargo? any major kind of developments, innovations, new things going on?
Roger Samways 06:33
Yeah, I mean, that there’s been, there’s been, you know, substantial growth of the total business. I mean, ultimately, that’s been driven by the way that the manufacturing is working and supply chains work. And so you know, we’ve seen a trend towards manufacturing being concentrated in one or two locations around the world, not in every country. And so that brings in the four components to be moved around, and for a finished product to be moved around. And often that those those components, or those, those finished products, need to find their way to a factory or to auto market quickly. And that’s where air freight really becomes attractive and is performing an essential part of many supply chains.
Will Bachman 07:17
And I suppose that’s for, for laptops. I suppose that’s partly because not only they high value, but also the the components sort of decline in value so quickly, that if he spends a month on an ocean liner, ocean freight, it’s, it’s the decline in value of the of the components.
Roger Samways 07:39
Right, right. Oftentimes, that’s the case. I mean, it you know, and therefore, you know, products such as that can can be described as perishable in nature for that exact reason. You know, it’s funny, well, one of the, the items that caused us great surprise, and probably the industry, gosh, three or four years ago now, one of the biggest single movements of an item from China, to the US, was fidget spinners. And if you remember, there was a craze and every kid in in the states and probably around the world, you know, had to learn a fidget spinner. Now, fidget spinners are actually, you know, very low value, right? I mean, not the sort of product you would anticipate moving by Ed ordinarily. But fads and crazies tend to pass very, very quickly. And so we had this really odd situation for for a couple of months, where, you know, everybody in in the US wanted a fidget spinner. You couldn’t send fidget spinners from Asia to the US via ocean and supply demand quickly enough. And so we and every other carrier that was operating flights between Asia and the US was carrying, you know, tons and tons of fidgets going as we calculated in the end that we carried over 25 million fidget spinners in a in a three month period, which is crazy. And that’s a product you know, ordinarily you’d scratch your head and wonder why it would ever move by air but it’s, it’s a good example of, you know, manufacturers trying to to ensure that their product actually is in market at a time where there’s there’s still demand for it.
Will Bachman 09:15
So something that’s quote unquote perishable, I suppose that also might apply to I don’t know, apparel that gets printed after the World Series when or something like that. Where or where people want to get it right away.
Roger Samways 09:28
Yeah, yeah, exactly right. When we move a huge amount of high fashion, we actually move a lot of fashion for a major retailer based in Spain, and their whole supply chain is based around the whole business model in fact, is based around providing very very up to date refinements of their product lines. And so typically in the world of fashion, what happens is is fashion houses would spend, you know, months building their their ultimate or Winter Collection. You know, they’re planning for that many, many months in advance. And of course, it’s a little bit hit and miss because you don’t know exactly. You know, in March, what people are going to be demanding in October November. Well, this particular organization has a network around the world. And they rely on very rapid inputs from all of their retail outlets around the world, they literally have a team of people sitting in their facility in Spain, speaking to store managers on a daily basis, and getting feedback from those store managers around the world about what consumers are demanding. So you know, do they want shirts with four buttons, or five buttons and is one particular color more attractive than another particular color. And all of that feedback is being integrated into designs, which are being produced, and then shipped in the next couple of weeks back out to market. So constantly, as consumer demand is evolving. So this, this organization is got a business model that allows their products to continually evolve. Really interesting.
Will Bachman 11:05
Could you tell us a bit about so you’re the VP of cargo sales? Could you tell us a bit about how cargo sales works? Do you mainly integrate, you know, interface with the freight forwarders? Or with the, you know, in with their, with their clients, and sort of just how does that whole world work of cargo sales?
Roger Samways 11:23
Yeah, so that the bulk of our direct engagement is with freight forwarder. So about 95% of the business that we transact where we’re transacting with, with a freight forwarder. We’ve got very long and well established relationships with, you know, many, many companies, we’ve got, you know, well over 30,000 customers around the world, but actually, you know, we have a huge portion of our business, it’s given to us through our through our top 100. And many of those customer relationships extend regionally globally, their relationships that we’ve maintained for for a very long period of time. And so we have a sales team that structured fairly traditionally, I would say, to meet the needs of those customers. So we’re set up geographically, with teams in Europe, Asia, and then North and South America, engaging with each of those customers locally, and then we have a headquarter corporate sales team that are located in our headquarter campus at Fort Worth. And that team is maintaining and fostering corporate relationships with those same customers. And so, you know, we might have a situation with with one of our largest customers where we’re engaging with them at a headquarter level. So you know, having global discussions, we’re engaging within regionally. And those two levels are being handled through our global and key account team based at headquarters. And then we’re also engaging in local conversations. So the key for us is making sure that our strategy is aligned across across all of those conversations, we’re actually doing an effective job of meeting customer needs, you know, in all three, in all three areas across all three areas. Now, the other piece that’s perhaps changed evolved over the last couple of years, is our focus on on some of the smaller customers, we see a great opportunity to build strong relationships and an even bigger business base with with SMEs. We’ve set up a team of people in the US to actually manage those relationships now. And that’s been very, very successful. You know, particularly with some specialty specialty niches around shipments of things like live animals, you know, some some very, you know, sensitive types of products. That’s a strategy that we are currently in the process of rolling out in other parts of the world.
Will Bachman 13:50
And how are the arrangements typically structured? Is it with a large freight forwarder with a contract for desert of a fixed amount of space? on, you know, on an ongoing basis on a given route? Or is it like mostly spot purchases? So every time they put something on there, though, they’ll go get quotes for buddy? Like, how is the whole cargo space to kind of structured?
Roger Samways 14:15
It’s a little bit of both will And the answer to that question really depends upon the prevailing market conditions. So we, we have block space agreements with customers, which are very firm contractual commitments, where a customer signs up typically for six or 12 months to provide us with a certain amount of business. And typically, those agreements are very, very granular in nature. So, we will commit a certain amount of capacity by day on a certain flight and the customer commits to using that space. We have slightly broader agreements which which commit pricing in return for a certain amount of business over a given period of time again, typically three or six months And then we have the spot market. And that is literally a negotiation on a case by case or shipment by shipment basis and subject to the demands on that particular day or week and, you know, the amount of business that’s that’s transacted under each of those different different fashions, it really depends on you know, how demand is at any moment in time. So, if I go back 13 or 14 months, the market was incredibly strong. And we were not surprisingly finding that many more of our customers are wanting to enter into longer term agreements, they wanted the surety of knowing that they could get access to capacity, and they wanted consistency in terms of price, you know, as market as demand relative to supply weakens, you typically find that customers are more likely to move towards more of a shorter term or spot price discussion.
Will Bachman 16:01
That’s super helpful. Let’s use that to transition to kind of the impact of the coronavirus pandemic. So, as passengers, we can you know, we sort of just know from the news that just passenger travel is way way down. What’s been going on with cargo shipments?
Roger Samways 16:22
Well, it’s a it’s a really interesting dynamic right now. Well, you know, it’s it’s been very widely reported that passenger demand, as you mentioned, is down substantially. To give you an indication, American Airlines is flying about 20% of the shedule. In May, that we flew a year ago. And that’s consistent with Delta, it’s consistent with United. If you look at some of our European competitors, Lufthansa flying less than 5% of the capacity that they flew the flights they flew a year ago. So it’s had a huge impact upon what we’re doing. And at the same time, so obviously, as I mentioned, at the beginning of this of this discussion, the business that American moves the cargo business that we move moves on our passenger aircraft. So you can imagine if we, if we operate dramatically fewer passenger flights, so we have dramatically less capacity to offer in the marketplace. And yet, at the moment, there’s been a huge increase in demand in some markets, primarily linked to the need to move PPA around the world to places you know, which are in critical need. And so you have less capacity at a time where demand is increasing. That’s led to a sharp increase in pricing, particularly from Asia to the US. From our perspective, we don’t serve. We don’t operate flights between Asia and Europe. But it’s the same dynamic there. And so actually, we’ve been able to work with various groups within American Airlines to set up cargo only flights. So we’ve done something that we’ve really never done before American used to operate freighters. In our dim and distant past, we stopped operating them in 1984. But really, since that time, we haven’t operated any flights that have just carried cargo. And in the last month, we have done exactly that. And so we set up operations, initially between the US and Europe. And then as we saw the demand situation beginning to unfold, we’ve we started operating cargo only flights between Asia and the US in actual fact, between some Latin America markets in the US, which is which is incredible. And so you know, through doing that we’ve been able to to provide a really important humanitarian purpose. We were moving critical PP pharmaceutical business, medical supplies to markets where they really needed, we’re providing some really much needed work for our teammates around the network, and actually providing cash as well positive cash flow at a time where the company really needs it.
Will Bachman 18:58
What is involved in making that kind of quick transition I, I can imagine under normal scenarios, going to something like that would take, you know, months of planning and thinking about and deliberation. So what’s what’s been required operationally to create these cargo only flights?
Roger Samways 19:17
Gosh, I think we’ve all learned a huge amount well over the last few weeks. So you know, firstly, I’ve got to stress it’s a it’s a team effort. So our cargo revenue management team has done an amazing job of building networks getting involved with with various groups across the airline, as diverses on network planning team. They’re the group of within American Airlines that typically build the network we fly. Obviously, typically, those are passenger centered decisions. We have a group of people in our integrated operations center that handle questions like crews so you know, it’s one thing to decide to operate a flight, but you’ve actually got to crew that flight. You’ve got to find pilots. To operate it, you’ve got to find hotels, those pilots to stay in, you’ve got to arrange for things like overfly approval. So, you know, we’ve we’ve had to go to specific governments to ask for approval to fly through their airspace over the last few weeks our pilot group have been incredibly helpful at, you know, finding, finding answers solutions to some of the challenges and challenges they’ve been presented to us. So it’s been, it’s been a lot of work, but incredibly exciting and hugely rewarding to see flights departing carrying cargo, much needed cargo. And seeing our team, our team members reactions, you know, we’ve had our teams in Asia when our American Airlines flights began landing last month, you know, making signs welcoming flights back to to places like Hong Kong and Shanghai because they hadn’t seen that American tale in in two or three months since it started the crisis.
Will Bachman 20:58
Well, that that’s really, you know, so encouraging. I, one of the highlights of my consulting career was I did a brief project for a cargo airline where I got to watch them loading a 747 cargo plane, which was one of the coolest, coolest days in my consulting career. So and that was, you know, a cargo airlines set up for that where they could bring in these big pallets and strap them down. Yep, is involved the operationally in getting a passenger flight to be ready to have cargo? Did you just leave all the seats onboard the plane and kind of strap it to the seats with the seat belts? or How did they tie it all down? And what was that conversion? Like?
Roger Samways 21:41
Yeah, so actually, when not using the passenger cabin, so we’re not loading freight in the passenger cabin. Some airlines are. It’s a very, very complex process. And lots of there are lots of hurdles to overcome. Before it makes sense to do that, you know, one of the biggest limiting factors for us will preventing us from from doing that is downtime. And so you can imagine, when we use the belly of an aircraft as you’d like to typically do, then freight is actually built on to you LDS unit load devices. So they’re basically metal pallets. And those pallets would be like the ones that you described when you saw the 747 being loaded and unloaded. Those pallets are built in a warehouse and then transported out to the aircraft, and loaded quite quickly into the belly of an aircraft. And so that’s a a, you know, it’s a complex process made to look very easy by our operations team. When you talk about loading freight in the cabin of an aircraft, well, there are all sorts of issues to overcome, the freight has to be physically carried on to the aircraft through the door, you can’t fit a big metal pallet. On as you mentioned, you’ve got seats on board. So you’ve actually got to figure out a way of attaching freight and securing it to those seats, or putting in overhead bins. And all of that takes time. And unfortunately, that the length of time that we have for our turnaround in in Asia doesn’t allow for for that to happen. But yeah, the operations teams are just doing an incredible job at fully utilizing the cargo capability that we provide in the belly. And yeah, I mean, it’s, it’s amazing what they’re able to fit onto those blinds.
Will Bachman 23:26
Yeah, so Okay, so that was a naive question. So when we say cargo only flight, the passenger cabin is empty. They’re using the normal belly place, and then the place where normally passenger baggage would go, is that being used for for cargo? Right? Yeah,
Roger Samways 23:42
yeah, exactly. Exactly. So passenger bags are normally loaded into the belly. There is a small bowl cold on on aircraft, which we’re utilizing as well. But that’s that’s also in the belly as well. So that would require, you know, physically, hand loading smaller shipments.
Will Bachman 23:57
Okay, got it. And then any, any other kind of changes, like, you know, is that the pilots have to do anything different? Or is it It sounds like it’s pretty much they’re flying a normal passenger flight, it just, there’s no passengers on board?
Roger Samways 24:13
That’s exactly right. Well, yeah, as far as the the pilots are concerned, it’s just a normal operation. And, and they operate as per normal.
Will Bachman 24:22
So I can imagine When, when, you know, you said that the number of flights is down to 20% of normal, that means that just the capacity would be so far reduced. So you’re finding then that you’re adding backs and flights that that are that are cargo only to support the demand?
Roger Samways 24:39
We are Yeah, so I’m pretty substantial numbers. So for the last two weeks, we operated 50 cargo only flights. We’re going to be up to almost 100 a week from from this week moving forward, which is great. And we’re actually in the process of building our June schedule. So on the tomorrow morning, we’ve got a Meeting with our, our network planning team to to really assess where we’re going to be operating as cargo only flights in June.
Will Bachman 25:07
Yeah. So how do you, you know, with so much uncertainty in a role like yours? How do you plan for the different potential scenarios of how, you know, things might play out over the next six months to a year?
Roger Samways 25:24
with difficulty? It’s really challenging. I mean, I don’t think anybody could have foreseen where the, the industry is headed in the last, gosh, two months. I mean, it’s literally two months, it’s incredible how quickly things have changed. I think what’s key is ensuring that we’re nimble enough as an organization to be able to respond. So, look, some of it is obviously being proactive, right? We’ve got some fantastic customer relationships in pro in place. And we are utilizing those relationships to to, you know, to begin to enter into longer term conversations around where capacity might be needed, how are we going to meet those needs? How do we need to structure agreements, and then some of it is just being prepared to be nimble as an organization. And that’s one thing that I think American cargo has done really well, over the last couple of years. And a good indication of that has been, you know, our work for our teams has changed substantially over the last couple of months. And so, you know, we have a lot of people who are incredibly busy dealing with, you know, short term challenges, but we also have some groups whose day job has changed a little bit, and there may be less work for them to do. And so those organizations, those those people, we’ve been able to repurpose into smaller project teams, and have them focus on short term revenue and cost initiatives. And so we’ve got about 13 workstreams now focused on things like, you know, how can we improve capacity utilization in the short term? How can we streamline our booking process to ensure that we, we know, we utilize as much of our capacity as possible and, you know, don’t expect experience no shows or reduce the number of no shows, we will also looking at things like pickup and drop off, how can we provide additional service to our customers by, you know, extending the the value that we provide to them.
Will Bachman 27:23
Any other innovations that have come up that have almost been accelerated, or kind of caused by the news, the new way of working folks either working from home or, you know, in my discussions with other executives have heard things like, you know, customer acceptance testing, where they used to have the customer fly over from Korea, but now they do it by video conference, things like that. Any any other changes that you’ve that you’ve developed?
Roger Samways 27:53
Yeah, I think like a highlight a couple. I think, you know, as far as the whole customer relationship is concerned, it’s really interesting, you know, I mentioned the relationship that we have with with freight forwarders. And, you know, we have freight for was hugely important for American Airlines will be in the future. But we also are working to establish relationships with with some of the end users, some of the manufacturers and shippers, mainly because we want to understand exactly what those customers needs really are. So we’re able to hear directly from, from the manufacturer, what their need is, as far as transit is concerned, for example. And actually, as a result of conversations with our passenger team, over the last couple of months, we’ve been able to, you know, to increase the number of direct conversations we’ve been having with, you know, with with major manufacturers who might be both a customer to American Airlines on the passenger side. And they customer to us and indirect customer to us on the cargo side. So you know, that dynamic has been interesting, and one that I think will continue to grow and evolve over the coming the coming weeks. I mentioned a few months ago that we’ve been working on processes to ensure that our capacity is utilized most effectively. One of the biggest challenges that we face as an industry and I’ll stress that this isn’t an American Airlines issue. This is a an industry industry industry issue for the cargo industry as a whole is is the fact that the airline’s carry all the risk. And so today, when a or prior to May the first I say on American, when a customer makes a booking for a significant proportion of the business that we take bookings for the airline carries the risk and so by that, I mean if a customer decides to cancel that booking at short notice, or worse not to show up and not to even tell us then there is no penalty. And frankly, you know that’s a crazy situation if you compare that to almost any other transaction that takes place when think about hotels, for example, you know, you book a hotel, you know, you have Have a period within which you can make a change or a cancellation. But once you get beyond that period close into the booking, there’s a penalty for booking and that’s that’s appropriate. I mean, why should the hotel, you know, lose out? Why should they protect capacity, and then and then not be able to utilize that because customers change their mind. And it’s the same for us in the cargo world. And one of the biggest challenges we face as an industry is the fact that, you know, customers will often change bookings late on in. And there may be very legitimate reasons for that. Well, as a result of of the way that we’ve changed our thinking, over the last few weeks, we’ve been able to introduce a fair booking policy. And this is one of the workstreams I’ve touched upon earlier. And the purpose of this policy is to ensure that the customers give us fair notification of booking changes or booking cancellations. It’s something that we’ve talked about for two years, we’ve been unable to implement, because, frankly, we’ve had a lot of other stuff going on. And we just haven’t done a good enough job of prioritizing this perhaps. But in the current climate, where capacities is absolutely critical, particularly given the nature of goods in a moving pharmaceutical PP, that sort of thing, we felt that it was fair and reasonable to introduce a policy that actually ensured that when customers made a booking, you know, they they turned up with, with what they were booked. And if they if they don’t, if they if they cancel a change late in, we are applying a fee to help compensate. But this is less about collection of the fee. I mean, really, you know that the fee revenue is not something we’re interested in, it’s really about changing behavior. All we want is to to create an environment in which customers are giving us, you know, as much notification as possible when bookings are changing. Because that way, we have better insight as to as to what’s actually going to show up for our flights. And so we’re able to, to say yes to more customers, you know, we’ve in the environment today, we have customers who are calling to make a booking for a flight tomorrow, the flight looks to be full, we turn them away. And if if a customer no shows that flight actually goes out with empty capacity.
Will Bachman 32:12
Well, just on the other side of that cargo wall on the passenger cabin, it’s certainly you. You don’t refund my ticket if I just don’t show up for it. Exactly. Yeah, exactly. No, that’s interesting. It’s interesting, you know, how it just, it’s kind of something that would just make sense to do and you’ve been wanting to, and it’s an example of using this time effectively to get projects done that, you know, that have been on your on your on your list of to do items. Yeah, exactly. You know, any other thoughts on on any kind of changes that you expect to potentially persist after things, you know, kind of get back to close to normal? or?
Roger Samways 32:58
Will Bachman 33:58
Or, or thanks for that. Roger, thank you so much for joining today. It’s fascinating to hear what’s going on in you know, Air Cargo industry and innovations that you’ve, you’ve taken recently. I really appreciate you taking the time to be on the show.
Roger Samways 34:13
Well, thanks again for the invite. Well, it’s been a real pleasure chatting this morning.