Tr ng V n Liên in his Final Report, namely Analysis to Build a Competitive Strategy for Korean Air Cargo in Ho Chi Minh city until 2016, I found out that Liên proved to be hard working,
Trang 1(PART-TIME)
Ho Chi Minh City (2011)
MBAVB4
Trang 2I also use the guidelines and instructions from the Tutor, Associate Professor Doctor Ha Nam Khanh Giao from the University of Economics in Ho Chi Minh city (UEH) to accomplish this project
Ho Chi Minh city, February 2012
TRUONG VAN LIEN
Trang 3Special thanks to Mr Nguyen Khanh Diep, Cargo Sales Manager of Korean Air Cargo in
Ho Chi Minh city who inspired me with this subject and who dedicated strong support to
me during the thesis accomplishment
I would also like to thank my classmates for their exciting support during the two-year MBA program and in my thesis as well
Last but not least, I would like to dedicate this paper to my wife who has given full support and understanding to me during the writing time of this study
Ho Chi Minh city, February 2012
TRUONG VAN LIEN
Trang 4COMMENTS FROM THE TUTOR
As tutor working with Mr Tr ng V n Liên in his Final Report, namely Analysis to Build
a Competitive Strategy for Korean Air Cargo in Ho Chi Minh city until 2016, I found out that Liên proved to be hard working, and disciplined
His Final Report analyzed the environment and suggested some possible ideas about the strategy of Korean Air The strong point of this report is based on Mr.Liên’s knowledge of the air cargo business as he has been working in the area for years
I strongly recommend Mr Tr ng V n Liên to present his work to the jury panel as part of his Master of Business Administration And I do believe that he will be successful in the future
Ho Chi Minh city, the 1st of March, 2012
Assoc.Prof Dr Ha Nam Khanh Giao
Trang 5TABLE OF CONTENTS
DECLARATION 3
ACKNOWLEDGEMENTS 4
COMMENTS FROM TUTOR 5
EXECUTIVE SUMMARY 10
ABBREVIATIONS 11
LIST OFTABLES 13
LIST OF FIGURES 14
REFERENCES 95
APPENDIX 1: LIST OF AIRLINES IN HCMC 2011 96
APPENDIX 2: LIST OF CARGO AIRLINES IN HCMC 2011 97
APPENDIX 3: DESTINATIONS SERVED BY KOREAN AIR 98
APPENDIX 4: CUSTOMER SURVEY FORM 99
APPENDIX 5: CUSTOMER SURVEY RESULT 102
CHAPTER 1: INTRODUCTION 15
1 Rationale of the study 15
2 Objectives, limitation of the project 17
3 Methodology of the project 17
CHAPTER 2: LITERATURE REVIEW 19
1 Previous studies on competitive strategy & related issues 19
2 General concept 20
3 Porter’s five forces and three generic competitive strategies 21
3.1 Porter’s five forces 21
3.2 Three generic competitive strategies 23
4 The generic value chain 25
4.1 Primary activities 25
4.2 Support activities 26
Trang 6CHAPTER 3: HO CHI MINH CITY AIRFREIGHT MARKET 27
1 Overview of air freight market 27
1.1 History of world air freight 27
1.2 Some figures about airfreight market 28
1.3 Role of air transport in the economy 29
1.4 Air cargo industry key drivers and trends 29
2 HCMC air freight market analysis 31
2.1 General information about HCMC airfreight market 31
2.2 Customer behaviors 36
2.3 How the process works 40
2.3.1 The players involved in the process 41
2.3.2 Process flow 42
2.4 Porter’s five forces driving industry competition in HCMC market 44
2.4.1 Intensity of rivalry 44
2.4.2 Potential entry of competition 47
2.4.3 Threat of substitute product 50
2.4.4 Bargaining power of Buyer 52
2.4.5 Bargaining power of Supplier 55
2.4.6 Summary of Porter’s five forces analysis 56
2.5 Trends of airfreight industry in Ho Chi Minh city 58
CHAPTER 4: ANALYSIS TO BUILD A COMPETITVE STRATEGY FOR KOREAN AIR CARGO UNTIL 2016 60
I Competition in HCMC market 60
1 Competition intensity in HCMC market 60
2 Strengths, weaknesses and strategies of key competitors in HCMC 61
II Analysis of Korean Air Cargo HCMC business 62
1 Porter’s generic value chain analysis 63
1.1 Primary activities 63
1.1.1 Inbound logistics 64
1.1.2 Operations activities 65
1.1.3 Outbound logistics 66
Trang 71.1.4 Marketing and sales 67
1.1.5 Service activities 67
1.2 Support activities 68
1.2.1 Corporate support activities 68
1.2.2 Quality control activities 68
1.2.3 Human Resource Management 68
1.2.4 Security activities 68
2 Korean Air Cargo SWOT analysis 68
2.1 Strengths 69
2.2 Weaknesses 71
2.3 Opportunities 72
2.4 Threats 74
3 Korean Air vision and mission 76
III Suggested Competitive Strategy for Korean Air Cargo HCMC 77
1 Three levels of strategy 77
1.1 Corporate-level strategy 78
1.1.1 Growth strategy 78
1.1.2 Portfolio strategy 82
1.1.3 Parenting strategy 82
1.2 Business-level strategy 82
1.2.1 Cost Leadership strategy 82
1.2.2 Differentiation strategy 83
1.2.3 Focus strategy 87
1.2.4 Competitive Tactics 87
1.3 Functional strategy 88
1.3.1 Marketing strategy 89
1.3.2 Financial strategy 89
1.3.3 Production strategy 89
1.3.4 Human Resources strategy 89
1.3.5 Information System strategy 90
1.3.6 Research and Development strategy 90
Trang 82 Strategy Implementation 90
2.1 People 90
2.2 Resource Allocation 90
2.3 Structure 91
2.4 System 91
2.5 Culture 91
CHAPTER 5: CONCLUSION AND FURTHER RESEARCH 93
1 Conclusion 93
2 Further research 94
Trang 9EXECUTIVE SUMMARY
Since Ho Chi Minh city is growing fast and continues to be the biggest city of Vietnam, the airfreight market here is also an attractive business for all airlines The growing market generates big opportunities as well as tough challenges to existing airlines in Ho Chi Minh city
As a leading cargo airline in the world, Korean Air Cargo extended their business network
to Ho Chi Minh city since 1989 with passenger aircraft and since 1997 with all-cargo flight Since then, the competition in the market is getting harder with the presence of several other carriers The market demand is growing but the capacity from airlines is also very much expanding, making the competition between airlines harder than ever
This paper is trying to analyze internal as well as external factors of the market, of Korean Air Cargo, and of the competitors in Ho Chi Minh city market Based on Korean Air Cargo SWOT analysis, Ho Chi Minh city airfreight market analysis, Customer Survey results, and other elements that affect the air transport business, this paper recommends some ideas about competitive strategy to Korean Air in Ho Chi Minh city market In Corporate-level Strategy, the company should achieve growth by implementing Horizontal growth Strategy In the Business-level Strategy, this paper recommends the company to implement the Differentiation Strategy and Focus (Differentiation) Strategy which best fit Korean Air business in HCMC
Trang 10ABBREVIATIONS
AFAS: ASEAN Framework Agreement on Services
ASEAN: Association of Southeast Asian Nations
AWB: Air Way Bill
BR: Eva Air
CAAV: Civil Aviation Administration of Vietnam
CI: China Airlines
EU: Europe
FDI: Foreign Direct Investment
FOB: Free On Board
FTK: Freight-Tonne-Kilometers
GDP: Gross Domestic Product
GSO: General Statistics Organization of Vietnam
HCMC: Ho Chi Minh city
IATA: International Air Transport Association
IEA: International Energy Agency
KE: Korean Air
KPI: Key Performance Indicator
M&A: Merger & Acquisition
NAFTA: North American Free Trade Agreement
OPEC: Organization of the Petroleum Exporting Countries RTK: Revenue Ton Kilometers
SAGS: Saigon Airport Ground Service
SCSC: Saigon Cargo Service Corporation
SGN: Ho Chi Minh city
SWOT: Strength, Weakness, Opportunity, Threat
TCS: Tan Son Nhat Cargo Service
TIAGS: Tan Son Nhat International Airport Ground Service ULD: Unit Load Device
USA: United States of America
Trang 11VINAPCO: Vietnam Air Petrol Company
VINATEX: The Vietnam National Garment and Textile Group WTO: World Trade Organization
Trang 12LIST OF TABLES
Table 1: Top 10 air cargo operators 2011 28
Table 2: HCMC export commodity 2011 35
Table 3: HCMC import commodity 2011 35
Table 4: Vietnam top 15 export markets 2011 36
Table 5: Vietnam top 15 suppliers 2011 36
Table 6: HCMC export revenue 2007-2011 37
Table 7: Fleet of BR, CI and KE 46
Table 8: Air/Sea cost example 51
Table 9: Top 10 freighters 2010 69
Table 10: World’s top 10 busiest cargo airport 2010 70
Table 11: Boeing GDP growth forecast 2010-2029 72
Table 12: Boeing air cargo traffic growth forecast 2009-2029 73
Trang 13LIST OF FIGURES
Figure 1: Forces Driving Industry Competition 21
Figure 2: Porter’s Generic Strategies 24
Figure 3: Porter Generic Value Chain 25
Figure 4: International air freight and passenger volumes 2005-2010 29
Figure 5: Import Export revenue 2010 in HCMC by month 32
Figure 6: Air cargo export – import in HCMC 2005-2010 32
Figure 7: Export commodity in 2011 37
Figure 8: Airfreight processing flow 41
Figure 9: SWOT of Korean Air Cargo in HCMC 69
Figure 10: Korean Air employee 71
Figure 11: World fuel price 1998-2011 75
Figure 12: Value chain for KE 84
Trang 14CHAPTER 1: INTRODUCTION
1 Rationale of the study:
Ho Chi Minh city is considered a potential market for air cargo transportation There are certain reasons to believe that this market is growing fast in coming time Firstly, Vietnam
in general and Ho Chi Minh city in particular is just walking out of the old time in which the economic exchanges are very limited The demand to exchange economic activities between the country and other countries is booming Several shipping lines and air carriers have come here to do business They bring goods from overseas to Ho Chi Minh city for local use and local production and take goods out of it for export
Airfreight movements can be seen as a way to promote trade exchanges between countries all over the world, and also in the same time an evidence of a country’s growth There are some certain ways to move products from one place to another place, and two main modes are by sea freight and airfreight Seafreight is usually for big and less urgent shipments while airfreight is for smaller and urgent ones As a result, airfreight is more expensive then sea freight and thus more secured Airfreight also requires more complicated process
in handling shipments between points of loading and during the flight since shipments are travelling together with passengers
Airfreight is quick and reliable Usually airfreight transit time is just one-tenth of sea freight That’s the reason why when a shipment is going to miss the deadline if shipped by sea, shipper will move it by air to save some transit time In addition, facilities of air transportation are much better then sea transportation which include warehouse condition, safety and security, customs services, … Therefore, when shipper accepts to pay more money for airfreight, they tend to require quick and reliable service from airlines who carry their goods from origin to destination and vice versa
Vietnam economy in general, and Ho Chi Minh city in particular, is relying on export to expand the local economic scale and to maintain growth rate The main export items are garment, furniture, agricultural products, and fresh fruits and vegetables In order to make the end products, Ho Chi Minh city needs to import certain raw materials and semi-
Trang 15finished products from overseas These activities will generate import and export needs from enterprises With the annual economic growth rate of from 10-12% for a long period and an import-export value of over USD 47 millions (estimated for 2011), it is obvious that
Ho Chi Minh city is a really promising market for air and sea transportation
In order to be a leader in air transportation, a carrier needs to have a big enough network that links many places all over the world into a huge circle to ensure a quickest, reasonable price, and most reliable service to customers Not all the carriers in the world are ready to
do that because of huge investments needed into that network The real leader is the one who is willing to invest enough money to create real values to customers in that area
Recognizing the potentials of Vietnam market in general and Ho Chi Minh city in particular, several carriers have come here to do business and try to get as more market share as they can Up to now, there are about 44 airlines coming to Ho Chi Minh city connecting the country with many key points in the region and other places over the world
In addition, The WTO membership of Vietnam in 2007 has brought bigger opportunity to airlines when the air cargo business is growing fast thanks to the market openness required
by WTO regulations
However, the global economic downturn in 2008 put all of the airlines in a very difficult situation when the cargo demand dropped down sharply All of airlines have suffered a combined loss as much as USD 8 billions (IATA source) Vietnam market which mainly relies on export to Europe and the USA also suffered the same situation Many airlines reduced their capacity to reduce loss and some airlines withdrawn from market to re-structure their business
In order to survive and to be growing, Korean Air Cargo needs to review their business strategy to overcome the difficult time and to maintain the leading position in the cargo industry They need to be very much effective and efficient in a very tough competition environment The fact shows that Korean Air market share compared to competitors’ market share in Vietnam is shrinking from 2008 until now This is the sign proving that Korean Air Cargo is facing certain problems in competing against competitors
Trang 16Taking the inspirations from the above point, this study is made to fully understand the situation of Korean Air cargo and try to find out some solutions and in the mean time to make some recommendations to the mentioned problems
2 Objectives, limitations of the project:
The objective of the project is to make an analysis about the air freight market in Ho Chi Minh city to gain a deeper understanding about the competition in this market In particular, Korean Air Cargo business in HCMC will be analyzed in details to help build up a competitive strategy for Korean Air to gain more market share in HCMC Finally, the study will point out bottleneck that affects the output of the air freight system and give some recommendations on how this could be treated
Due to the size of the task, some limitations must be established on what will be actually treated in this project The scope of the project is limited to below points:
- Air cargo market in HCMC only Sea cargo is excluded
- Air export and air import movements in HCMC Domestic transport is not included
- Airports involved: Tan Son Nhat International airport
- Regular dedicated cargo operations Ad-hoc charter operations will be excluded
- Airlines operating in HCMC only
- Time concerned: from 2004 up to now and future perspectives
- The ultimate objective of this research is how Korean Air gains more market share
in HCMC market through differentiation, therefore, the research mainly focuses
on market share perspective only
3 Methodology of the project:
Firstly the project will review literature on theories from Michael E Porter about competitive strategy Analysis techniques such as: five forces analysis, three generic strategies, generic value chain, SWOT analysis … will be practically analyzed in accordance with Korean Air Cargo business environment
Trang 17Secondly, the project will also review previous studies related to this subject and extract some related data and figures to support for the analysis
Regarding the data collection method, the project will select and analyze secondary data and analysis related to Vietnam and HCMC general economy to support the status of import-export situation of HCMC, through which Korean Air business in HCMC will be analyzed In addition, the research will also take information from company data, annual reports, information from International Air Transport Association (IATA) and from Tan Son Nhat International Airport, to make analysis about Korean Air operations in HCMC
In addition, some primary data will be collected through interviews with key managers of Korean Air Cargo about the company business and through customer survey to identify customer’s needs and their satisfaction
Finally, based on the above literature review and analysis, the project will make some recommendations, which align with company’s mission and vision, on how Korean Air Cargo differentiates itself and how to expand its market share in HCMC in coming time
Trang 18CHAPTER 2: LITERATURE REVIEW
1 Previous studies on competitive strategy and related issues:
Competitive strategy and related issues have been analyzed in numerous studies and researches from numerous perspectives Besides the theories from books, this study also reviews certain key points relating to competitive strategy in the below studies and researches:
1 Economic Feasibility study into
viability of air cargo in the Pacific
Northwest
Michael Peter Kant
2006 Five forces analysis for
air cargo transport
2 Analysis of strategic alliances as a
source of competitive advantage in
the airline cargo business
Juan Carlos Serna Velez
2006 Value chain analysis for
a cargo airline
Zondag
2006 Air cargo history,
demand for air cargo services, air cargo supply chain, integrated express services
4 The Swedish air freight industry Niclas Anderson 2001 Players in air freight
industry
5 Freight transport for development
toolkit : Air Freight
Heinrich Bofinger
2009 Role of air cargo, case
studies of some commodities of air freight
6 Key factors contributing to
management strategy development
at air cargo carriers
Wouter Dewulf, Eddy van de Voorde and Theirry Vanelslander
2011 Air cargo industry key
drivers and trends
Trang 197 The aggregated and disaggregated
relationship between air freight and
merchandise trade
Franziska Kupfer, Hilde Meersman, Evy Onghena and Eddy Van de Voorde
2010 Air freight and trade
imbalances, trends in the air business
8 The oil crisis and its impact on the
air cargo industry
Gal Luft 2006 Impact of oil costs on
the air cargo business
9 Airport development and air cargo
logistics: Korea’s initiatives in
Northeast Asia
Oh Kyoung Kwon and Yonghwa Park
2003 Review of business and
Incheon Airport facility
review
10 Air freight Industry – White Paper J.Peterson 2007 Players, process flow in
air freight business
11 Transitioning the U.S Air
Transportation System to higher fuel
costs
James K.D.Morrison, Brian Yutko, and R.John Hansman
2010 Fuel costs
Regarding literatures on competitive strategy, the study will mainly base on theories about strategy from Michael E Porter, which is defined in the book Competitive Advantage: Creating and Sustaining Superior Performance, and Competitive Strategy: techniques for analyzing industries and competitors
2 General concept:
Competitive strategy is the search for a favorable competitive position in an industry, the fundamental area in which competition occurs Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition (Competitive Strategy – Michael E Porter)
In fact, profit is the ultimate target for any company No matter in what business the company is, the owners or shareholders of the company will always drive their company in
Trang 20such a way that they can get profitable as much as possible They will do anything including manufacturing the best products and offering them to customers at best rates in a quickest and most effective way They always want to be the first choice of customers and they want to sell as much their products or services as they can to ensure that they can get the highest profits possible In addition, they want to maintain this good position over the competitors as long as they can to ensure sustainable growth time over time
However, this is not that easy since other competitors will also do the same In theory, what this company does can also be done by other companies when they are in the same business environment Competitors in the same area of business tend to imitate or copy same tactics to attack the same market and same customers Of course, the tactics applied
by different competitors can be more or less different which is usually more favorale to customers in order to win the business The competition will get tougher and tougher in this way and the winner is the one who can make themselves the most different and most efficient among others and can maintain the leading position in a long time
3 Porter’s five forces and three generic competitive strategy:
3.1 Porter’s five forces:
Figure 1 : Forces Driving Industry Competition
INDUSTRY COMPETITORS
(Rivalry among existing firms)
POTENTIAL ENTRANTS
BUYERS SUPPLIERS
SUBSTITUTES
Bargaining power of buyers Bargaining power of
suppliers
Threats of new entrants
Threats of substitute products or services
Trang 21The state of competition in an industry depends on five basic competitive forces which are shown in Figure 1.1 The goal of competitive strategy for a business unit in an industry is
to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor (Michael Porter)
3.1.1 Threat of Entry:
New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources Prices can be bid down reducing profitability The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reactions from existing competitors that the entrant can expect Below are major sources of barriers to entry:
- Economies of scale: refer to declines in unit costs of a product as the absolute volume per period increases The entrant will face 2 undesirable options: forced to come in at large scale and risk strong reaction from existing firms, or come in at small scale and accept a cost disadvantage
- Product differentiation: refers to customer loyalty to established firms
- Capital requirements: the need to invest large financial resources to compete
- Cost disadvantages independent of scale: refer to proprietary product technology, favorable access to raw materials, favorable locations, or government subsidies
3.1.2 Intensity of rivalry:
This is one of the most powerful force of competition Rivalry occurs because one or more competitors feel the pressure or sees the opportunities to improve position In most industries, competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move The below factors will have affects on the intensity of rivalry:
- Numerous or Equally Balanced competitors: there are numerous players of the same size with similar business strategies
- Slow industry growth: the need to expand market share
- High fixed or storage costs: create strong pressures for all firms to fill capacity
Trang 22- Lack of differentiation or switching costs: when the products or services are similar between competitors, price and service result
- High exit barriers: due to high costs of specialized assets, strategic interrelationships between the business units in the company
3.1.3 Threat of substitute products:
This threat exists when customers can identify substitute products that can perform the same function The threat of substitute products is high or low depends on:
- The price performance trade-off of the substitute products or services
- Switching costs
- Buyer inclination to substitute
3.1.4 Bargaining power of Buyers:
The bargaining power of Buyers depends on below factors:
- Buyer volume: more volume, down price
- The products represent a significant fraction of the buyer’s costs
- Product differentiation
- Switching costs
- Buyer low profit, more price sensitive
- Importance of products to buyer’s products
- Buyer has full information
- Backward integration: in-house production
3.1.5 Bargaining power of Suppliers:
Below key points will determine how strong is the bargaining power of Suppliers:
3.2 Three generic competitive strategies:
In coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry:
Trang 23- Overall cost leadership
Broad (Industry wide)
Cost Leadership Strategy
Differentiation Strategy Narrow
(Market segment)
Focus Strategy (low cost)
(differentiation)
Figure 2: Porter’s Generic Strategies
Cost leadership Strategy:
This strategy requires a firm to be a low-cost producer in an industry for a given level of quality by construction of: efficient scale facilities, tight cost control, efficient distribution channels, investment in technology to reduce costs, efficient logistics, or a low cost base (raw material, labors, facilities,…) However, this strategy can also by copied by other competitors, eliminating the competitive advantage
Differentiation Strategy:
This strategy calls for the development of a product or service that offers unique attributes better valued by customers than products from competitors This may allow the firm to charge a premium price for it However, the risk of this strategy is that market share may shrink
Focus Strategy:
This strategy concentrates on a narrow segment or particular niche market By understanding the dynamics of that market and the unique needs of customers within it, the firm will develop a uniquely low cost or well-specified product for the market This strategy can bring the firm a high degree of customer loyalty and this will discourage other firms from competing directly The risk for this strategy is that it can lower down the firm’s bargaining power to supplier due to smaller volume, and changes in the target segments
Trang 244 The generic value chain:
Figure 3: Porter generic value chain
According to Porter, “in competitive terms, value is the amount buyers are willing to pay for what a firm provides them Value is measured by total revenue, a reflection of the price
a firm’s commands and the units it can sell A firm is profitable if the value it commands exceeds the costs involved in creating the product Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy” (Porter, 1985, p.38)
The Porter’s Value Chain Model identifies nine generic categories of activities which are linked together and divided into 2 types: primary activities and secondary activities Primary activities are the activities involved in “the physical creation of the product and its sales and transfer to the buyer as well as after-sales assistance (Porter, 1985, p.38) Support activities, on the other hand, “support the primary activities and each other by providing purchased inputs, technology, human resources, and various firmwide functions” (Porter, 1985, p.38)
4.1 Primary activities:
In the model, Porter identifies five sub-activities in the primary activities as below:
4.1.1 Inbound logistics: Porter defines inbound logistics are “activities associated with receiving, storing, and disseminating inputs to the product, such as material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers”
Trang 254.1.2 Operations: these are “activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, equipment maintenance, testing, printing, and facility operations.”
4.1.3 Outbound logistics: “activities associated with collecting, storing, and physically distributing the product to buyers, such as finished goods warehousing, material handling, delivery vehicle operation, order processing and scheduling.”
4.1.4 Marketing and sales: “activities associated with providing a means by which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force, quoting, channel selection, channel relations, and pricing.”
4.1.5 Service: “activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment
4.2 Support activities:
Porter divided this into four categories including: procurement, technology development, human resource management, and firm infrastructure However, due to the specific business area of air cargo transportation, this study will define four categories of support activities as below:
4.2.1 Corporate support activities: include all the organizational activities related to general management, finance, legal, and administration
4.2.2 Quality control activities: activities to measure service quality offered to customers, including aftersales services and irregularities solving
4.2.3 Human Resource Management activities: relating to activities to arrange labor forces, training, and performance
4.2.4 Security activities: include activities to ensure the highest level of security of air cargo business and comply to all international regulations on security
Trang 26CHAPTER 3: HO CHI MINH CITY AIR FREIGHT MARKET
1 Overview of air freight market:
1.1 History of world air freight:
There is not much written about the earliest period in the airfreight history but since the first recorded movement of air cargo in India in 1911, air transport industry has developed enormously, especially during the 20th century It is generally considered that the development started after World War I with air mail transportation In the 1920s most airlines started operations by carrying mail which was subsidized by the government
The real starting point for airfreight as a real alternative to other transport mode was after World War II There were two main factors that influenced the industry’s development, one internal and one external The internal driver was the technical development of airplanes and other related products during the World War II Radar equipment and the jet plane are just two examples The external driver was the consequence of the war, since it exemplified the need for the transport of all kinds of goods The demand was so large, that even shipments that were normally moved by sea were transported by air The demand surge introduced new categories of aviation activities such as chartered flights, ad-hoc, and dedicated cargo flights
With ongoing globalization, air cargo transport has developed very rapidly during the past
30 years Some time ago, air cargo was considered as a by-product of passenger transport Currently, however, it is gaining importance and a number of airlines specialized themselves in the air cargo business Furthermore, a number of airports now consider air cargo as their core business At the same time, a number of industrial-economic evolutions took place in the sector, such as co-operation agreements
According to Boeing Air Cargo Forecast 2010-2011, world air cargo traffic will expand at
an average annual rate of 5.9% for the next two decades Asia’s air cargo markets will continue to lead the industry in average annual growth The intra-Asia market alone is expanding 7.9% per year Markets connecting developing economies to established economies will equal or exceed the average world growth rate
Trang 271.2 Some figures about world air freight market:
IATA forecasts that global airlines revenue in 2011 will reach about USD 594 billions, in which air cargo revenue is about USD 67 billions Boeing forecasts that worldwide air freight is expected to more than triple over the next 20 years, increasing from 160.3 billions RTKs (Revenue Ton Kilometers) in 2009 to 518.0 billions RTKs in 2029
Over the next 20 years, the number of airplanes in freighter fleet is forecasted to expand by more than two-thirds, from 1,755 airplanes in 2009 to 2,967 airplanes in 2029 Large freighter aircraft will lead fleet additions, growing from an overall share of 27% to 33% as traffic continues to build on long-haul, international trade lanes
Below is the list of world’s top air cargo operators in terms of freight-ton-kilometers flown published by IATA in 2011:
Table 1: Top ten air cargo operators in 2011 (Source: IATA)
Trang 281.3 Role of air transport in the economy:
Air cargo is one of the major means by which the globalized world moved its valuable consumption goods and manufacturing components Through its role in the supply chain, it facilitates worldwide economies and their international trade It has also proven to be an effective way of connecting mainly Asian labor with Europe and North American consumption markets
With time-definite international transactions in an increasingly globalized and complex supply chain, enhanced production flexibility and speed characterizing much of the new economy, air cargo will undoubtedly play an increasing vital role in the global economy The last decades, global export growth has consistently outpaced production growth, global airfreight growth has outpaced GDP growth, despite recessions and other setbacks
to air transport (the outbreak of the Asian currency crisis, SARS, the event following 11/9 terrorist attack, the recent monetary crisis and worldwide recession, …)
The global air cargo industry represented in 2010 about 554 billion USD in revenue (IATA Annual report 2011) Therefore, this industry can nowadays be judged as a mature industry, where strategy is being drafted far beyond the basic entrepreneurial framework in which an emerging industry tends to operate
Figure 4: International air freight and passenger volumes (seasonally adjusted): 2005 to
2010 Source: IATA
1.4 Air cargo industry key drivers and trends:
Trang 29A number of key drivers and trends in the air cargo industry and environment can be included such as the GDP growth, high fuel prices, the rise of express service and the increasing usage of e-commerce
A first driver is GDP or trade volume growth As general freight transport is the result of economy activity, traditionally the world demand for freight transport is related to world GDP Significant research has been performed on the relation between the growth of airfreight and GDP growth Recent research by Kupfer et al (Kupfer, Meersman, Onghena and Van de Voorde, 2008) demonstrated that in international traffic where air cargo consists mainly of high value goods, the evolution of world air freight can better be explained by an indicator for world international trade in high value goods Moreover, the continued and high projected GDP growth (through export and import of merchandise) of Asian countries will be a main driver for intra-Asia and Asia European/ North American trade flows in the present and near future
Another key driver for the growth of air cargo is the globalization of trade and the subsequent need for increasing complex supply chains The rise of global and regional trade agreements during the last decade (WTO, NAFTA, ASEAN, Mercosur, ) and the signature of “open skies agreement” had a beneficial spin-off effect on cargo operations Moreover, globally outsourced production has lengthened supply chains and increased their complexity Concepts as lean manufacturing and Just-In-Time production have increased significantly the demand for time-definite services in the international market place
High fuel price is also an important factor in air cargo business The cost of aviation fuel increased 244% between July 2004- July 2008, becoming the largest operating cost for airlines (James K.D Morrison, 2010) This seems to be the obstacle for airfreight growth in coming time Customers will consider very carefully before they decide to move a shipment by air due to increasing costs they have to bear In the meantime, together with the technology development, airlines have to purchase new type of aircraft which is really fuel-efficient to maintain good service and rate to customers
Trang 30A major trend influencing airfreight market is the growth of express market International express market expanded from 4.1% of total international air cargo traffic in 1992 to 12.8% in 2008, reflecting higher-than-average annual growth (Boeing, 2010) Following a double-digit growth in the US in the 1970/1980s, express traffic continues to growth at more than twice the rate of overall air freight market However, the distinction between traditional express and general air cargo operators continues to blur due to the traditional air cargo operators expanding their time-definite offerings and value-added services Moreover, in some cases, express carriers, freight airlines, freight forwarders and postal authorities are consolidating either in a partnership or through vertically integrated M&A paths
A final trend currently featured in the cargo industry is the rapid of alliances, both horizontally and vertically Following the horizontal alliances (Sky Team, One World, Star Alliance) initially created to exploit synergies on the passenger side of the business, these alliances increasingly stretch on the cargo side Especially the Sky Team Cargo alliance is building and integrating their networks around their major hubs
2 HCMC air freight market analysis:
2.1 General information about Ho Chi Minh city airfreight market:
Ho Chi Minh city is the one of the biggest city of Vietnam located in the South of the country This is the busiest city in Vietnam in terms of production and trade exchanges It
is the southern gateway of the country with the population of over 10 millions of people living in it Several big companies, both local and FDI, set up their business or representative offices in the city A major part of import-export activities of the country take places in this city HCMC is also the heart of the region which induces a major part of foreign investments and labor forces
Accounting for 0.6% of Vietnam’s total land area and 6.6% of the total population, HCM City is part of the Southern Focal Economic Zone (SFEZ), which comprises the city, Dong Nai, Ba Ria-Vung Tau, Binh Duong, Long An, Tay Ninh and Binh Phuoc provinces
Trang 31HCM City is the country’s largest economic hub As the most economically dynamic city
in Vietnam, HCM City has always reported high levels of economic activity, constantly leading in terms of economic growth
Figure 5: Import export revenue in 2010 in HCMC by month
During 2010, HCMC had a export revenue of USD 20.9 billions and import revenue of USD 21 billions The growth rate of export is forecasted to be at 17% in the period 2011-
2015 with the total export revenue of about USD 100, and this is a good opportunity for transport companies Tan Son Nhat International Airport is the only airport of HCMC until now which can be replaced by a bigger one namely Long Thanh International airport from
2020 The latter one has been projected and the first phase is going to be conducted in 2015 and will be put in operations in 2020
Figure 6: Air cargo export – import in HCMC from 2005-2010 Unit: tons
Import
Trang 32In a recent visit to Ho Chi Minh city, the general director and CEO of International Air Transport Association (IATA) highly appraised Vietnam’s air transport market, saying the country ranked third in the world despite a slump in the global aviation industry
“By 2014, Vietnam is projected to be the world’s third fastest growing market for international passengers and freight after China and the United Arab Emirates, and the second fastest for domestic passengers after China.” said Giovanni Bisignani
According to Bisignani, the forecast is based on the average annual growth of the world’s airline industry, at about 5% By 2014, the growth in Vietnam will be more than 10% while this year the country’s aviation market will grow 9.5%
Tan Son Nhat International Airport is Vietnam's largest international airport in terms of area (800 ha/1,977 acres compared with 650 ha/1,606 acres of Hanoi's Noi Bai International Airport and Da Nang's Da Nang International Airport) It has a handling capacity of 15-17 million passengers per year, compared with the capacity of Hanoi - Noi Bai airport of 8 million passengers and Da Nang's 2 million passengers It is also the largest airport of Vietnam in terms of passengers handled (with an estimated number of over 12.5 million passengers per year in 2009, accounting for more than half of Vietnam's air passenger traffic), serving Ho Chi Minh City as well as Dong Nam Bo in southern Vietnam Its IATA code SGN was derived from the city's former name of Saigon In 2010, the airport handled 15,500,000 passengers and 130,547 aircraft movements
At the current time, HCMC has about 44 airlines are operating here in which 8 airlines operate all-cargo flights (or freighters) Freighter is the flight which carries all cargo in the belly This is different from passenger flight which can carry both passengers on the upper hold and cargo in the lower hold Capacity for a freighter is about 100 tons of cargo while
a passenger flight capacity varies from 10-15 tons of cargo depending on type of aircraft
In addition, the capacity of each airline depends on what type of airplane being used and
on the frequency of the airlines
The bigger an airline’s capacity is, the bigger its market share will be in some ways Of course, market share will also depends on its network, its price strategy and the overall service quality the airline is offering In addition, market share depends strongly on what
Trang 33type of customer that airline is serving i.e local forwarders or global forwarders, and on what commodity of cargo it is carrying
Usually, carriers who have more global forwarders tend to have more market share since the global forwarders will have more cargo from global customers In HCMC, among over
500 freight forwarders, there are over 40 global forwarders who handle major global accounts such as Nike, Adidas, Gap, … These global accounts take about 50% market share of the total export market in HCMC
Due to the complex procedures in handling the cargo, all airlines in HCMC assign a ground handling company to handle all inbound as well as outbound cargo to HCMC and out of HCMC Until 2009, Tan Son Nhat cargo Services (TCS) was only one ground handling company offering ground service to all airlines From 2009, Saigon Cargo Service Corporation (SCSC) joined the business and becomes the competitor of TCS Since then, there is competition in this area which brings another alternative to customers and pushes the service quality to a higher level
Main export commodities of HCMC market include: garment, rubber, footwear, rice, electronic parts, seafood, furniture, … The below figures show the importance of major commodities:
1 Textiles and garments 10,393 15%
Trang 3413 Cashew nuts 1,037 1%
14 Wire and cable 1,015 1%
15 Other 21,466 31%
Table 2: export by commodity until Sep/2011
1 Machines and spare parts 11,152
8 Cell phone & accessories 1,708
9 Foodstuff for cattle 1,688
10 Auto spare parts 1,497
11 Fertilizer 1,235
12 Plastic products 1,218
13 Fiber 1,159
Table 3: Import by commodity until Sep/2011
Trang 35Table 4: Vietnam’s top 15 export markets in 2011
of air freight industry Therefore, the following paragraphs will mainly focus on these 4 commodities to have a deeper understanding about Ho Chi Minh city air freight market
Textiles:
As per the forecast from Vinatex (Vietnam National Textile and Garment Group), export revenue of textile and garment from Vietnam in 2011 can reach USD 13.5 billions,
Trang 36accounting for 3% of the world’s market share and becoming one of the seven biggest countries in exporting garment and textile products (after China 36.6%, Bangladesh 4.32%, Germany 5.03%, Italy 5%, India 3.9% and Turkey 3.7%) (Source: Habubank Securities Analysis 2011) Up to now, there are about 2.5 millions of people working in the industry This is understandable as the result of low labor costs and quality of labor force in Vietnam
Source: GSO of Vietnam
Table 6: HCMC export revenue 2007-2011
Obviously, textile is a major export driver in Vietnam from the above figures In general, textile industry contributes about 15% into total export revenue of the country and gains a very high growth rate It is forecasted by Vinatex that textile continues to be the biggest contributor to Vietnam export in coming 5-10 years thanks to production transfer from China and to the new market exploration in Taiwan, South Korea, and ASEAN
Textiles and garments 15%
Crude oil 8%
Footwear 7%
Seafood 6%
Cell phone 6%
Rice 4%
Woods and products 4%
Machines 4%
Computers and parts 4%
Rubber 3%
Coffee 3%
Fibre 2%
Export commodity in 9 months of 2011
Trang 37Labor costs in textile and footwear industry in Vietnam are usually lower than other industries This explains why several textile factories have been built up in Ho Chi Minh city to utilize this advantage Usually garment and footwear factories need manual workers and do not require high-skilled or well-educated workers, and these factories are the mass users of manual labors of this kind For other kinds of work like accountant, technical engineer,… it takes from 3-4 years for training and education While a textile worker needs only 3-4 months of training to obtain the job In addition, most the textile production in Vietnam in the time being is processing work, i.e factories import raw materials and manufacture the finished products under the brand name of another company This processing work does not create much added value into the products produced by Vietnamese workers For instance, a women top pullover is sold at about 5-6 USD FOB HCM while it can be sold at 30-40 USD in a fashion store in Europe or the USA under another brand name like Zara, GAP or Mango,…
In addition, the main part of labor force (about 60%) in textile factories in Ho Chi Minh city comes from rural areas of other provinces Among this force, about 83% of them are at the age of 18-35 years old With the low earning from the industry, they can easily switch their job and jump around to seek for better places The living condition in Ho Chi Minh city is too hard for them to stick to a company offering poor salary for a long time They need to live with better quality and they need money to support their family as well The annual turnover rate in labor force in Ho Chi Minh city reaches about 20% which causes difficulties for textile factories Especially, after long Lunar New Year holiday, a big number of workers do not go back to work and they try to look for another job The turnover rate after Lunar New Year can reach at 40% which strongly affects the business
of the textiles companies
Footwear:
Behind textile, footwear is the second biggest contributor to Vietnam export with the estimated export revenue of about USD 6 billions in 2011 Currently Vietnam is the world’s ten biggest footwear exporters with annual growth rate of over 30%
Trang 38The nature of footwear business is very much alike with textile industry as analyzed above This is also a mass user of manual and less-educated workers and the main job is to do the processing work for other big brand names such as NIKE, Adidas, Puma, Reebok, … The industry is also very much affected by the fluctuation and high turnover rate from the labor force from neighboring provinces This puts a high pressure on shoulders of footwear manufacturers who need to strongly compete with other industries locally and with the same business globally
The specific characteristic of this industry is the perishableness of the products That is why those cargos need special handling procedures including keeping them in cool conditions, and quick transit time from origin to destination All the necessary documents required for customs clearance must be also timely available for consignee to pick up the cargo in the quickest way possible
In addition, the availability of this kind of cargo depends mainly on the capacity of the catching people and the seasons In Vietnam sea areas, there are two seasons to catch tuna fish: the main season begins from April until August and the extra season starts from October till February of the following year However, the weather also seriously affects the availability of the products at shore for export Therefore, it is very hard to have an early shipping plan until the tuna fish reaches warehouse and usually the shipping plan is informed to airlines at last minute
Cell phones:
With the export revenue growing 200% compared to 2010, cell phones and its parts become one of the biggest export areas of Vietnam The main revenue comes from
Trang 39Samsung Electronic Vietnam in the northern province of Bac Ninh which accounts for about 70% in the total export revenue of this industry Samsung Group decided an investment of USD 1.5 billions into its factory in Bac Ninh province for the period of 2015-2020 to make it one of the biggest Samsung factory in the world with the export revenue forecasted at USD 16 billions in 2015
In Ho Chi Minh city, there are just some factories manufacturing parts for cell phones such
as ear phones, lithium batteries and other parts of the phone The revenue is not as big as Samsung revenue in the North, but is increasing and is becoming a major part in the air freight industry Currently, cell phones and its parts account for about 20% in the total air freight revenue of Ho Chi Minh city market
2.3 How the process works:
The general process of how an air shipment is handled can be summarized as below:
Trang 40Figure 8: Air freight processing flow
2.3.1 The players involved in the process:
The below agents along the chain of air cargo are all important to the efficacity of the air cargo process
a Shipper (or Consignor): the one who requests service in transporting the cargo
Shipper
Freight Forwarder
Freight Forwarder
Consignee
Ground handling at Departure Airport
Ground handling at Arriving Airport
Yes
No
AIR FREIGHT PROCESSING FLOW