the innovation issue – AIR CARGO’S LAND TRANSPORTATION PUSH TO RULE THE SKIES

EXPOLANKA HOLDINGS PLC

JAGATH PATHIRANE
EXPOLANKA HOLDINGS PLC
REVENUE: RS63.5 BILLION
EMPLOYEES: 2,720
FOUNDED: 1978

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AIR CARGO’S LAND TRANSPORTATION PUSH TO RULE THE SKIES

Declining air cargo margins are forcing airlines to offer value added land transportation services to capture volumes from high-growth sectors like fast fashion, super foods, and online retail—but they can only do this by partnering end-to-end logistics companies like listed Expolanka Holdings.

Air cargo revenue fell 31% industry-wide since 2011 to $48 billion in 2016 as freight volumes grew less than 2% annually during this period due to the global trade slump. Airlines adding capacity by 5% each year hit margins as excess capacity dragged down air freight rates.

“Airlines are trying to lure fast-growth business by offering value added logistics services. But they can only do this by partnering end-to-end logistics companies like us who grew despite the global trade slump,” says Jagath Pathirane, Chief Executive at EFL (Expolanka’s logistics business), which has proven capabilities around warehousing, order fulfilment, packaging, and last mile delivery.

While the air cargo industry slumped, EFL which operates in 55 cities in 18 countries including India, China, Kenya, and the US grew its revenue from air freight forwarding by 15% annually during the three years to end March 2017. Around 80% of EFL’s revenue is generated by air freight forwarding, a business thatsells air cargo space to exporters and importers (EFL contributes 86%  to Expolanka group’s Rs. 63.5 billion revenue).

Now, EFL is well placed to grow its global business further as airlines try to expand their markets by building partnerships with end-to-end logistics companies.

Apart from logistics, the company already handles ground operations including passenger and cargo sales for 16 airlines in nine countries—Virgin Atlantic’s operation in Dubai is one example. Its experience will make it attractive to other airlines.

Expolanka has a reputation for taming difficult markets in South Asia and Africa. It’s already changing its business model away from commodity-driven and price-driven strategies. “We have a more customer-centric business model and this is because globally, manufacturers and consumers are beginning to view logistics as a waste of time,” Pathirane says.

The customer-centric approach entails providing a range of technology driven value added services. Constant pressure on prices and demand for faster delivery are shrinking margins and cutting lead times shorter. Consumers don’t foot the freight bill anymore, and expect free-delivery from anywhere in the world, fast. “We don’t have direct control over transportation costs and speed, so the only way to attract exporters and importers is to improve services. This way, we make up for squeezed margins with volume,” he says.

Some such services are warehousing, inventory management, and distribution. EFL’s largest clients include global fast fashion brands Victoria’s Secret, Gap, and Zara sourcing clothing from Sri Lanka, Asia, and Africa. The company specializes in delivering clothes from factory floors in Sri Lanka and Asia to retail stores in Europe and the US quickly, at a lower cost. Clothing is brought to its 550,000 sq.ft. warehouse in Sri Lanka to be labelled, packaged and air freighted to the destination country and distributed direct to fashion stores across Europe and the US.

A couple of years ago, clothing accounted for 90% of EFL’s revenue from freight forwarding. Today, its share has declined to around 70% with perishable goods exports growing in recent years, putting new demands on the company, says Pathirane.

To attract new clients, EFL is investing in technology that allows customers to track their goods at every stage of the logistics chain, which is critical for exporters of perishables who find a lot of comfort in being able to ‘see’ their cargo right up to the buyers’ door step. Technology is also helping EFL to process documents online with banks, insurance companies and border agencies. EFL recently subscribed to a cloud-based logistics management platform called GT Nexus which makes all this possible. “We were concerned the IT cost would shrink our margins, but we took the plunge because we knew it was necessary to attract new customers to grow volume,” says Pathirane. Logistics is typically a low margins business and EFL makes around 2-3%, he says.

EFL has grown its global business without investing in warehouses and vehicle fleets of its own. This asset light model allows it to be nimble and avoids heavy overheads dragging the business. The company is also building its last-mile delivery capabilities to capture growing e-commerce volumes. Express delivery tends to deliver higher margins, as much as 15%. This is why companies like EFL are attractive to global air cargo companies who don’t have the capacity, nor the expertise to set up end-to-end logistics services of their own.

EFL, delivered an ROE of 17.5% in 2016, compared to 15.2% the previous year. The North American trade lane generates over 40% of EFL’s annual freight forwarding volume, growing at an average of 9% each year. European trade accounts for 22% of the company’s  volume also growing at the same rate. Asia is a booming market for EFL accounting for 19% of its volume and growing at 17% annually. The company is continuing to expand its presence in the US and China.

The Sri Lankan logistics company that grew during a global trade slump is in a propitious position: the global air cargo slump is ending.

Demand for air cargo space grew 10% during the first half of 2017, nearly four times the annual growth rate over the last few years. The growth in air cargo volume is led by products around which EFL has already built expertise around.

Air cargo volumes for perishables like processed food, milk powder, fresh fruits, vegetables, and flowers are growing faster than any other product category, even surpassing electronics. Air cargo volume for online retail purchases is another bright spot with sales increasing 30% in 2016 to $400 billion; so is fast fashion with sales growing twice as fast as the entire clothing industry.

Airlines have one worry: Trump enacting protectionist trade policies in their biggest market, the US. However, EFL is creating jobs for US citizens. Its offices in Chicago and New York are staffed by US citizens and its network of warehouses and trucking fleet are owned and operated by third-party US companies.