THIRD INTERNATIONAL CONFERENCE ON RESEARCH IN AIR TRANSPORTATION FAIRFAX, VA, JUNE 1-4 2008 The Integrator Market Actors and Their Strategies Evy Onghena Department of Transport and Regional Economics University of Antwerp B-2000 Antwerp, Belgium [email protected] Abstract— Integrators – companies that offer vertically companies’ catchment area and their options for the location integrated, time-definite, door-to-door transport – have a of production and assembly facilities [2]. significant market power. However, insight into the market structure and the cost structure of these companies, as well as Besides the importance of integrators for shippers, the into the consequences of their expansion and cooperation competitiveness of a region is also partly determined by the strategies, is lacking. The purpose of this paper is to analyse the presence of one or more integrators. This can be illustrated integrator market from an organizational perspective, describing the strategic behaviour of the market participants. This paper very well by the relocation of DHL’s hub activities from provides a clear insight into the major actors of the integrator Brussels National Airport to Leipzig in 2008, which will have market and their expansion and cooperation strategies. far-reaching microeconomic and macroeconomic consequences for the airport and for the Belgian economy in Integrators; strategic behaviour; expansion; cooperation; general. industrial economics Over the past decade, international express has grown at 1 I. RATIONALE AND SETTING more than twice the rate of total worldwide air cargo traffic, 2 The globalization of the world economy involves that averaging 12.9% annually [3]. The integrators account for companies are reorganized, resulting in a worldwide spread of almost 85% of the world’s express shipments [4]. Currently, their production systems. In the ‘global village’, where only four players are fully integrated across all transport production and consumption are increasingly modes, including air transport: UPS, FedEx, DHL and TNT. internationalized, transport and logistics services are crucial to reduce cycle times and increase products’ speed to market. A market structure in which only a few sellers account for Logistics service providers with an extensive network allow to a substantial proportion of total sales, is an oligopoly. The keep the transport costs of international trade down, while main challenge for the analysis of an oligopoly is strategic realizing a more efficient use of production factors. behaviour or strategic interdependence between competitors, which means that each firm’s optimal behaviour depends on However, during the past decade, the requirements for its assumptions about its rivals’ likely reactions [5]. transport and logistics have become stricter and more numerous. The share of high-value and/or time-sensitive Despite the importance of integrators for shippers and goods with a short economic life cycle (e.g. high-tech economic regions (embedment), the strategies of integrators products, textiles, pharmaceuticals, etc.) has increased. are hardly examined in literature. Insight into the market Therefore, there is a growing need for fast and reliable structure and the cost structure of these companies, as well as transport that allows companies to gain access to global into the consequences of their expansion and cooperation markets and supply chains. strategies, is lacking. Integrators are crucial for the delivery of those transport This paper aims at an analysis of the integrator market services. Since they are able to control the total supply chain form an organizational perspective, focusing on the growth (‘one-stop shopping’), the strategic and operational and relational strategies of the market participants. This importance of integrators for the commercial and production analysis fits in a broader industrial-economic analysis of the processes of shippers is extremely high. Inventory costs and 1 total distribution costs can be minimized by factors such as According to Boeing, air cargo consists of freight, express speed, reliability, guaranteed delivery within a certain time, and air mail. In some publications, air cargo is used as a more visibility and flexibility [1]. In addition, integrators enlarge general term than air freight. In this thesis however, both terms will be used without any distinction. 2 Measured in revenue tonne-kilometers (RTK). 489 ISBN: 978-0-615-20720-9 THIRD INTERNATIONAL CONFERENCE ON RESEARCH IN AIR TRANSPORTATION FAIRFAX, VA, JUNE 1-4 2008 integrator market. Section 2 gives an overview of the research 2. New players will enter the integrator market. questions and the methodology. The results of this paper 3. Total costs for vertically integrated companies correspond with the first step of a four step methodology. (integrators) offering an integrated, door-to-door Section 3 provides a definition of integrators. Section 4 supply chain are lower than the sum of costs for outlines the business positioning of integrators within the air companies offering parts of the supply chain. cargo industry. In section 5, the Big Four integrators and their 4. Integrators will get involved into different types of main expansion and cooperation strategies are considered. horizontal and vertical cooperation outside the Section 6 deals with new competitors in the market. Section 7 integrator market. finally summarizes the main conclusions of this research. For testing these hypotheses, a four step methodology will II. RESEARCH QUESTIONS AND METHODOLOGY be used. The research methodology, including inputs and This paper gives the framework in which four main outputs, is depicted in figure 1. hypotheses will be tested: 1. Each integrator will finance its growth independently. Literature review 1. Description of the market, the major actors and Conclusions about Sector and their strategies strategic decisions company data Insight into current market Literature review 2. Analysis and assessment of structure current and future strategies Interviews Insight into potential scenarios for future Understanding of 3. Selection and development of strategic decisions industrial-economic tools Temporary conclusions about future market structure Insight into supply function and Company data cost structure of integrators 4. Modelling and forecasting Interviews Quantitative forecasts about future market structure Figure 1. Research Methodology First, the integrated express market will be analysed from to make forecasts about the future market structure and the an organizational perspective, describing the behaviour of the economic consequences of strategic decisions. market agents. The first step will result in some important conclusions about the expansion and cooperation strategies III. INTEGRATED EXPRESS CARRIERS OR INTEGRATORS: A adopted by the integrators in the past. In the second step, the DEFINITION integrators’ expansion and cooperation strategies will be Many definitions of integrators can be found in the analysed from an industrial-economic perspective. Based on literature. In this paper, the following definition, based on [6], this analysis, an insight will be gained into the current market will be used: “integrators are vertically integrated express structure and the future development of the market. In a next companies that provide time-definite, door-to-door services step, industrial-economic tools will be selected and developed and, for that purpose, perform their own pick-up and delivery in order to understand the expansion and cooperation services, operate their own fleet of aircraft and trucks and tie it strategies adopted by the integrators in the past. Subsequently, all together with advanced information and communication an industrial-economic simulation model applicable to the technologies.” integrator market will be developed. This model will allow understanding, explaining and forecasting strategic behaviour This definition contains the most important characteristics of the current market players. Finally, the model will be used of integrators, namely: 490 ISBN: 978-0-615-20720-9 THIRD INTERNATIONAL CONFERENCE ON RESEARCH IN AIR TRANSPORTATION FAIRFAX, VA, JUNE 1-4 2008 • integrated door-to-door service; The air cargo industry consists of different actors, which • own transport assets; can be categorized into three main sub-industries: • strongly developed ICT-skills (e.g. tracking and 1. general or traditional air cargo industry; tracing) 2. air express industry; 3. postal services industry. IV. BUSINESS POSITIONING OF INTEGRATORS WITHIN THE AIR CARGO INDUSTRY This categorization is presented in figure 2. Within the air cargo industry, two major cargo types can be distinguished, namely general cargo (heavy lift) cargo and express cargo [7]. General Air Cargo Air Express Industry Combination Industry carriers Air cargo forwarders All-cargo carriers Couriers Indirect air Express carriers carriers Integrators Postal Services Industry Figure 2. Categorization of the air cargo industry The general or traditional air cargo industry consists of full tracking control of shipped goods. Two main types of actors providing airport-to-airport services. General air freight players are part of the air express industry, namely couriers is the most common type of air cargo movement. General air and express carriers. Examples are GeoPost, General Logistics freight companies focus on the transportation of specialized Systems and Ziegler Express. and/or consolidated freight, consisting