The Hong Kong Air Cargo Terminals Ltd or HACTL - Research Paper Example

1. Introduction The air cargo terminal is a critical ground support structure for facilitating air cargo transportation. The air cargo terminal operations face both internal and external risks to the achievement of organizational strategy initiatives. The external influences pertain to the industrial environment as defined by the nature of the air cargo trade itself and the unique position of Hong Kong as an international air cargo transportation and logistics hub, the internal factors that influence sustained competitive advantage of a terminal include human factors and resource elements that are critical to the proper functioning of the entire terminal activities. This paper examines the case of a particular air cargo terminal and acknowledged leader in the industry in Asia - the Hong Kong Air Cargo Terminals Ltd or HACTL – and concludes that human elements appear more critical in determining organizational strategy success than even the industry environment related factors that pose (lower) risks to satisfactory competitive position attainment. In such effort, it first examines the external industry conditions in which the terminal operates, by conducting a PESTEL and Porter’s 5-forces analysis for the industry as well as a SWOT analysis for HACTL for determining the company’s competitive position in the industry. It then examines the internal environment including human elements involved in the air cargo terminal industry, which includes the various skills necessary in the human resources employed so as to create and sustain efficiency, productivity, speed and quality of operations. In this effort, the paper also considers the nature and types of goods transported as well as the special care and treatment required for transporting various goods like hazardous chemicals, breakable goods, etc. Again, due to heightened terrorism concerns and need for increased safety and security concerns, the continuous efforts to counter (human caused) terrorism through suitable measures in the airline industry as a whole and with particular focus on the air freight industry is also explained in some detail in arriving at the conclusions of the paper. 2. Overview of the air cargo terminal industry The air cargo terminal occupies a critical position in the air freight industry. A cost-efficient freight transport system plays a significant role in facilitating trade, creating markets and also in improving manufacturing and agricultural industries (Senguttuvan, 2006). The terminal is the vital center of ground operations for handling, storing and transporting freight along the entire operational cycle. Again, in addition to managing physical distribution and materials handling, air cargo terminals also have to handle information flows and exchanges regularly. The complexity of the functions spans logistics and information technology and requires technically qualified and skilled human resources for facilitating a smooth, safe, secure, cost and time efficient as well as qualitative freight transportation services. The international cargo terminals like HACTL need to evolve customized service, provide the shippers information on cargo tracking, safety, transportation modes, etc. The trend in the international air cargo transport ground handling industry has been to evolve systems for better distribution efficiency, speedier deliveries, and overall ground cargo handling convenience (Hamoen F.A.M.,1999). Air cargo terminals attempt to provide quality of services, precision timings, and capacity for handling and storage (Han & Chou, 2003). Ohashi, et al (2004, p. 3) aver that air cargo transportation is quite complicated and fundamentally a very competitive business since it is concerned with providing end-to-end transportation without the need to consider the route followed by transporters. Christiaanse & Damsgaard also observe that time is by far the most significant factor that determines a need to better coordinate and optimize all operations on the ground (2000, p. 6). The development of the air cargo terminal industry has been driven by the developments in the global economy due to globalization, greater internet penetration and adoption of information technology; thus, speed of operations as well as enhanced security both have dictated a larger reliance of the air cargo industry and its stakeholders, including air cargo terminals to go in for capital intensive information technology structures (Schwarz, 2006). Also, it is commonly observed by various experts that macroeconomic forces relating to both regional and global domain largely shape the growth of the air cargo industry itself, which in turn have a marked effect on the profitability and sustainability of air cargo terminal operations. Schwartz also highlights how international air cargo movement operations (in which the airline terminal or ground handler is a vital part in the overall logistics chain) involves physical movement of goods as well as the exchange and management of critical information and also requires knowledge of cross-cultural factors and diverse regulations pertaining to customs, licensing, security, etc., (Schwarz, 2006, p. 1468). The air cargo terminal is usually located adjacent to an airport and performs the physical support functions; it picks up cargo from the trucks and reaches it to aircraft or transfers goods from truck to aircraft or from aircraft to aircraft. The cargo needs to be loaded or offloaded, as the case maybe, during such transfers, and also sorted by its destination. Physical movement of cargo is also complemented by billing and documentation functions. The lack of available space is a constraint to expansion of a terminal which is often solved by the establishment of so-called offsite bulk freight processing terminals which are terminals located away from airports. Such process involves use of containers and also includes their storing and staging. Another requirement of terminals is also for warehousing since the cargo often has to be held pending transport, which again means a strain on available space as well as air terminal space congestions, in turn hampering time efficiency, quality of services and terminal productivity. Mechanization of terminals has somewhat improved operations although sorting of shipments due to the variety of contents and sizes, is still done manually at most terminals. Containerization is usually accompanied by huge set-up costs although the decrease in handling costs more than offset this in the long term. 3. The Hong Kong Air Cargo terminals Ltd or HACTL The HACTL is the foremost air cargo terminal in Asia located in Hong Kong which city is commonly perceived as the premier air cargo hub of the Asia Pacific region. It provides cargo handling on the ground as well as complicated logistics support. Indeed, Hong Kong is noted as an important logistics hub and the government also envisages logistics as a vital driver of the regional economy. Hence, HACTL is an important contributor to the economy of Hong Kong as well as significant provider of employment to local people. HACTL recognizes the intense competition that it faces from competitors or new entrants and already ahs in place steps to add value to its operations and customer services. HACTL presently has two terminals and a super terminal and its services include freight handling, freighter ramp handling, air cargo documentation and logistic support services (source: www.hactl.com). HACTL has achieved a throughput of 248,027 tons in April 2010 with a strong y-o-y growth of 41.9 percent as against year 2008 while the daily tonnage was also exceeded over 10,000 tons in April (www.hactl.com). Over the current period, the company also sees a continuous increase in cargo volumes handles. HACTL is considered a model cargo facilities hub which has been possible only due to automation, available capacity and enhanced security that it provides (Petersen, 2007). 4. PESTEL analysis of industry macro-environment Political The Hong Kong government is stable and pro-reforms. Due to global privatization trends in the airline industry as also the realization of the government that transportation and logistics form one of the major pillars for economic growth of the country, increasingly the government is playing an enabling role in supporting the setting up of air cargo terminals and in establishing technological infrastructure facilitating speed and quality of air freight movement. The Hong Kong Transport and Housing Bureau administers the industry overall. The government is committed to provide a safe, quality, efficient, eco-friendly transportation system. It is also committed to better integrating information technology into the air cargo and logistics infrastructure. Economic The macro-economic cycles and exchange rates as part of the larger external macro environment greatly affect the growth of the air cargo terminal industry. The current economic downturn too has adversely impacted cargo volumes and hence this also has impacted the terminal business. The International Air Transport Association or IATA as well as the HKIA have forecast increased growth in cargo volumes in the Asia Pacific region which means that the air cargo terminal industry can face space crisis as well as efficiency constraints unless there are realistic expansion plans, including establishing an off-site cargo terminal. One adverse factor affecting growth is the oil prices that can impact sustainability of a terminal from the cost aspect. However, national growth rates that affect are conducive. Social International cargo operations invariably have to factor in socio-cultural multiplicity and the need to deal with customers from various countries and the understanding of different languages becomes important. Technological Technology is important for adding value to the terminal operations. Technology affords convenience, quality, reliability, safety, security, speed, capacity, etc. to the increasingly demanding customers. Automation has been of immense significance in making Hon Kong a preferred logistics and transportation hub in the Asia Pacific. The know-how and capital investment is available and needs only adequately trained and skilled personnel for rendering efficient terminal operations. Containerization and use of information technology have assumed importance in modern times for the terminal industry. Parallel to efficient transport of physical cargo, a terminal also needs to manage and exchange crucial information sought by customers on cargo status, arrival time, etc. Environmental The industry is impacted by the environmental considerations also. While terminals are located near airports, they may also be located in other areas remote from human settlements. Environmental factors like lighting, temperature and humidity conditions under which workers perform needs to be as per international norms. Transport of hazardous goods needs extra care and precautions during transport or storage. While explosives and gases are not permitted aboard airplanes, hazardous materials are permitted. Transport of dangerous goods is regulated by laws owing to the need for environmental protection. There are various regulations governing storage of hazardous substances also. Storage of some substances also involves licensing and fire safety requirements. Hence, an air cargo terminal needs to follow existing laws and adhere to international environment protection norms in conducting its operations. Environment considerations also mandate specific shape of warehouse or storage buildings, proper ventilation and maintenance of correct temperature or humidity, use of specified transport vehicles, containers or pipes, etc. Legal The air cargo terminal has to function under a multiple law regime. The laws include laws pertaining to the region or country, the bilateral arrangements between international trading partners, the animal welfare, safety and hygiene laws (in case animals are transported), the laws relating to storing and transport of hazardous and dangerous materials, environment related laws, agency law, insurance law, licensing law, company law, business related laws, etc. Aviation related laws and regulations, both national and international, also need to be scrupulously followed. 5. Porter’s Five Forces Analysis The air cargo terminal industry structure can be analyzed using Porter’s Five Forces as follows. These shed light on the attractiveness of the industry to new entrants and hence may (or may not) pose danger of competition to the existing terminal operators like HACTL. Threat of entry Entry to the industry is not easy as it requires huge capital investments, modern technology capability and expertise, capacity to handle huge volume of cargoes by providing large land space, a knowledge of local customs, laws and requirements, an understanding of international transport and logistics operations that can call for multi-country, multi-cultural, and multi-legal frameworks in order to sustain operations. The greater the technological reliance and the skill-sets of the workforce, the higher is the barrier to entry of new firms into the industry. Indeed, this factor alone could act as a formidable barrier to any new terminal which implies that HACTL’ s competitive position is well safeguarded by such external factors. Also, economies reached on attaining scale of operations also appear prohibitive to the new firm. It is again hard to train and equip new workers with the right skills to satisfactorily effect efficient and productive operations in the terminal industry. Additionally, the new entrant would require active support from the local government to put up operations there at all. Perhaps, one adverse factor seems to be the provision of value added services, which even new entrants can hope to provide well. Another is the limited scope for price differentiation in the industry since the major costs are static and hence afford limited variances. Threat of substitutes One way that shippers can affect their fright transport is by using road or ships. But in an industry where delivery timeline is declining and customers demand leaner delivery times, ships or trucks do not appear a viable option. Hence, from this aspect, air cargo transportation appears to be a preferred choice for cargo shippers. This is particularly true for international freight transportation, which involve air, ships and trucks. Air cargo transportation generally involves inter-modal transfer of goods end-to-end. Since the threat of external substitutes appears negligible, the entry of new firms into the industry appears all the more possible. Power of buyers Buyers are the shippers who receive the services of the air cargo terminal for getting their goods transported to the required destination. Obviously, customer demands have modeled the growth and direction of the industry. In the future too, this trend is expected to continue. Customers demand speedier delivery of cargo, quality of services, efficiency of operations, safety and security of their goods, and also greater technology use that can afford their shipment better transportation speed, efficiency and security. The power of buyers is therefore an important factor in this industry too. Therefore, HACTL and other terminal operators are constantly seeking new ways for adding value to their customer services. A service differentiation can decide the fate of a terminal in both the long and short terms. Added to this factor, the low switching costs also impact competitive strategy. Backward vertical integration from airline carriers is also a possibility. Power of suppliers A sufficient and timely supply of resources can make for a superior customer focused company. The resources that the air cargo terminal requires to operate are manpower, surface transport like trucks, funds to invest for expansion, etc. In view of increasing technology orientation of the air cargo terminal, technological equipment and techno-savvy workforce also constitute a significant factor in successful operation of the terminal. The huge funds required for terminal operations means that it is also costlier to switch from to supplier to another. Extent of rivalry The nearest rival of HACTL is the Asia Airfreight Terminal or AAT. AAT also operates and services air freight from the Hong Kong International Airport. However, in terms of technology adoption and expertise, HACTL is far ahead of AAT as well as handles the majority of freight customers. In view of huge capital invested and in the current sluggish market, the rivalry between the two terminals operates appears more intense. Such rivalry is also increased due to the low differentiation in services offered as also the high exit barriers due to huge funds invested in building the terminal infrastructure. 6. Critical Success Factors The critical success factors in the air cargo terminal industry that can determine where HACTL stands in the industry in relation to customer servicing is given as follows. 1. Least time for delivery of cargo is essential in the air cargo terminal industry. Express cargo facilitates this at extra pricing for the service. 2. Safety and security of cargo shipped is also extremely important for the shipper. This implies that a terminal has to minimize incidences of cargo damage or pilfering during transit or storage. 3. Technology can provide automation, convenience, speed of services as well reliability and efficiency. 4. A well trained and skilled labor force is necessary for providing optimal customer experiences. 5. Value additions can provide that extra differentiation in services. 7. Strategic Capability & Core Competencies Strategic competencies and resources define a firm’s strategic capability (Johnson, et. al., 2008). The resources of the air cargo terminal include the following: Physical Resources: This includes the physical infrastructure, building, land space available, warehouses, surface loading or unloading vehicles, etc. Land space is vital and so also is warehouse capacity. Financial Resources: This includes set-up funds, partner capital, loans, bank balance, etc. In a company shareholders contribute to the share capital. Human Resources: Human resources are vital in as much as most processes within a cargo terminal like loading, unloading, sorting, etc. still need human intervention. Additionally, marketing, sales, customer servicing, licensing, insurance, billing, documentation , etc. still require human function in spite of technology initiatives undertaken. Intangible Resources: This includes knowledge, reputation, brand value, etc. of the firm. In HACTL ’s case, reputation is high. The knowledge of existing workforce is also current and provides an edge in the services. In addition to resources, a firm also needs competencies to effectively deploy its resources. The competencies need to be unique and core competencies. The efficient management of cost, delivery time, safety and security of goods stored or transported, etc. Employees and management both need to possess the skills and knowledge to help the firm achieve competitive advantage in the industry. In this respect, human resources play a vital role. Also, the industry is reliant on the vital capability and critical knowledge of employees. Hence, the employees’ competencies have the danger of being easy to transfer to other competitors for better pay or terms. Since the industry is reliant on the built-up experience of these employees, it is difficult to compensate their transfer through suitable recruitment immediately. Again, the rare competencies that need time and experience to possess by the industry employees may well be acquired by others in rival firms. Hence, such competencies are often by no means sustainable in the long term, particularly in cases of extreme competition. In another aspect, managers also need to prevent against rigidities gained over the years at service in the organization; this envisages suitable change management strategy, continuously to be affected. 8. Role of human elements in air cargo industry From the above analysis, it is apparent that the external industry environment is not posing any significant risks in the implementation of competitive strategy at HACTL. However, the vital role of human elements is evident. Safety and security of cargo shipped required sufficient care and attention on the part of ground handling workforce and security persons. In the industry, there is continuous need for checking incidences of cargo pilferage, damage during transport or storage, etc. The transport of hazardous material needs extra care in order to prevent pollution or harm to humans or property. Animal transport needs knowledge of animal welfare, hygiene, diseases and ways to tackle them, etc. Use of automation and information technology requires employees to be skilled in the same. Above all, the work force has to be alert to safety and security infringements, particularly in view of heightened terrorism scares, as well as perform efficiently, quickly and productively. It is difficult and too specialized to train and equip employees with the rare knowledge and skills needed to make for efficiency and productivity of air cargo terminal operations. Hence, losing such employees to a rival or increased employee turnover- due to intense stress and complexity of the work involved, even at odd hours of the night as part of a 365 x 24 service industry-are critical risks that an organization like HACTL faces. The Hong Kong SAR government Education Bureau has even enumerated several key competencies for acquiring by employees in the air freight and logistics industry, as part of a qualifications framework. The framework has seven levels and attempts to define the set of competencies that can well equip a worker for industries like air freight handling (HKSAR Edu. Bureau, 2008) Human factors include human behavior patterns and professional trainings of workers. Human factors are also greatly related to the efficiency, safety and social impacts in transport sector. 9. Conclusion Human elements thus play a vital role in the air cargo industry, including in the air terminal industry, in spite of technological advances made. While the above analysis established that external environment in the company operates do play a role in defining its competitive strategy, human elements playa far critical role and pose more risks to the firm in achieving its competitive position through strategy. In the Hong Kong SAR, logistics and air freight have assumed critical significance for the economy of the entire country. The government too perceives the importance of training and creating knowledgeable workforce for the industry. The heightened safety and security needs of airports have impact cargo operations also. Accordingly, the training of the workforce has to factor in such threats to aviation like terrorism, hijacking, etc. It is also important to help retain the workforce in the industry and help reduce stress and ill-effects of the exposure to the particular industry that deals in transport of hazardous materials, perceived terrorist threats, and increased customer demands for safety, security, time and cost efficiency of services. 9. 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Ohashi, H., Kim, Tae-Seung, Oum, T.H., and Yu, C., 2004, “Choice of Air Cargo Transshipment Airport: an application to air cargo traffic to/from Northeast Asia”, pp.1-24, Available online: http://www.e.u-tokyo.ac.jp/cirje/research/03research02dp.html Petersen, J., 2007, “Air Freight Industry” White Paper, The Supply Chain and Logistics Institute, April 2007, pp. 1-46 Schwarz, G., 2006, “Enabling global trade above the clouds: Restructuring processes and information technology in the transatlantic air-cargo industry”, Environment and Planning A 2006, Vol. 38, pp. 1463-1485 Senguttuvan, P.S., 2006, “Air Cargo: Engine for Economic Growth and Development – A Case Study of Asian Region”, National Urban Freight Conference – 1-3rd February 2006, METRANS Transportation Centre, School of Policy, Planning and Development University of Southern California, Los Angeles, US, pp. 1-30 The Government of Hong Kong Special Administrative Region Education Bureau, 2008, “Units of Competency Standards- Air Freight and Express”, Copyright Education Bureau. 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