Industry Base Case Study: Korean Airline Ground Handlers

Executive summary

This industry review is a study of the Korean air cargo handling service. It identifies the current operations and the challenges facing the airline. It will be outlining the operational efficiency, financial and workforce efficiency in the cargo handling service and the underlying factors behind a successful cargo handling service in the modern world.

The purpose of the research was:

• Check the reliability and accuracy of the company’s cargo handling system.
• To prove and establish the true and fair value of the company’s state of affairs about the provision of these services.
• To provide advice to the management in terms of:
  • Examination of the internal control system in the cargo handling system.
  • The solutions or recommendations to the problems highlighted.
  • The impending dangers to the business.
• To identify/detect errors and constraints incurred in the process by both the employees and the suppliers involved in this process.
• Identify the benefits of carriers handling their own handlers instead of outsourcing to provide optimum level of service.
• Identify reasons as to why cargo theft has continued to become a challenge even after complete overhaul of the handling systems.
• To give the management the views of the employees on the ground relating to the handling issues and also ways they can be motive them.
• Give recommendations on the ways the company can solve its problems and improve its business both locally and internationally.

This was done in the event of establishing the overall operational processes of the company in terms of accuracy, efficiency and reliability. The case study was done as a preliminary measure to guide the management in establishing measures to improve the financial status of the company with the main goal of increasing profit margins and increasing the client base by increasing the Customer satisfaction and speed of documentation and handling to facilitate faster service in the cargo handling service in the market.

Korean airline is faced with both opportunities and threats which will include:

Opportunities

Threats

The company is faced with many issues in the current market trend some of these include:

• Overcapacity; There is increasing growth in the capacity in the recent past due to linearization of the Asian continent, this has caused overcapacity
• Ground handling service carrier management; the airline needs to establish an effective cargo handling relationship with the outsourced carriers in the different destinations they operate.
• The uncertain regulatory environment across many sectors of the Korean economy is already leading best‐in‐class foreign operators to re‐consider their entry into the market and the same may occur in the ground handling sector
• This is evident as the airline has partnered with the Uzbekistan Government to develop the Navoi international airport to make it a strategically logistical hub in the cargo trade in Asia
• Workforce is the core of any business operation and the goal is to efficiently and beneficially utilize them to achieve organizational goals. The objective is to maximize the number of assigned tasks
• Sea-air multi-modal transport of cargo to Central Asian Republics using the ports in South Korea as the interchange point. Korean ports could serve as a convenient interchange point provided an efficient logistics supply chain is developed, whereby the urgent delivery cargo arriving by sea or air could be transferred to the other mode of transport within hours with the minimum essential processing formalities
• Limited services are offered in the other airports in the Korean republic in terms of cargo handling. The other important factor affecting the transport of cargo by air is the availability of cargo handling facilities at the airports
• Security has become an important issue for international transport of cargo, especially by air. Unless the cargo is screened through a modern screening machine capable of detecting explosives the cargo has to be held back at the airport for 24 hours cooling period.
• An integrated computerized business process system is an essential requirement for efficient handling of air cargo in the Korean airlines. At present different agencies are involved in the process i.e. Customs.
• Monitoring the effectiveness of the operations in the cargo handling sector and is usually the basis under which improvement and expansion measures could be improved.

The airline has the following remedies or recommendations in its exposure to try and maintain its current market leader in the cargo industry:

• The other airport in Korea should also be utilized by the airline to increase its handling capacity and speed.
• Development of new markets is designed to form the basis of future growth and thus the company is entitled to make prudent choices in the decision-making process.
• The process of resource optimization of the available resources should be conducted to basically tap in the benefit and the unutilized potential in the process of increasing the inbound efficiency and capacity before looking for other expansion measures. Optimized resources could be done in the following ways;
  • Fleet restructuring and management.
  • Redesigning the whole organization to come up with the best model which maximizes both space and capacity.
  • Work smart in all the operations.
• The quality of their services should be increased to meet the consumers’ demands and expectations in the market. This can be done using the following measures in the air cargo transport;
• There should be branding solutions to customer needs in the market.
• Their systems should be designed in a manner that they are able to promptly respond to the emerging issues.
• There should be an introduction of VIP cargo service
• Increase efficiency as possible to ensure zero-defect services.
• Develop standardized forms to contain specific, safety-critical information in load documentation, load manifests, and other forms used in the loading or cross-loading of an aircraft.
• Develop a uniform weight scale tolerance and frequency of calibration for scales used in air cargo operations.
• Develop standard procedures and guidance material to allow personnel performing or supervising safety-critical tasks to verify that all task steps are completed in the proper sequence.
• Ensure training programs for cargo supervisors, loaders and ramp personnel include familiarization with the safety implications of aircraft being loaded incorrectly. This curriculum should contain modules that include operational information used by the flight crew and awareness of the potential problems that incorrectly loaded, unsecured or damaged cargo placed in a ULD or on a pallet may have on ground personnel, occupants of the aircraft when in flight, and the aircraft fuselage and structure.
• Develop a non-punitive reporting process to allow identification and correction of observed hazards by anyone involved in the cargo loading, packaging, or transport process. Such a program should include a means to disseminate such information to all.

All those involved are learning along the way. However, the frustrating issue for the main parties involved is that the key policy decisions have been taken without sufficient consultation with stakeholders and are announced late in the day, creating significant planning challenges. Confusion has reigned on the issues of the metro airport policy, the Airports Authority of Korea tender and the application of ceiling prices.

Overview of company

Korean air is the largest airline in South Korea and Incheon international airport serves as its hub for its operations. Its main headquarters are located in Gonghang-dong, Gangseo-gu in Seoul. Korean air handles 65% of the cargo in Incheon airport.

Since Incheon airport was developed into a free trade zone it has strengthened the logistical advantage and has made the airport become a hub for Northeast Asia thus bringing additional revenue for the airport.

Korea air is part of sky team cargo alliance (SKTC) with membership in all over the different continents of the world.

In the recent years Jehu has grown to become one of the largest airports in Korea while Gimhae international airport in Pusan opened a new international terminal in 2007.

Korean air cargo boasts to be the biggest air cargo fleet in the world with an operating fleet of 25,747 freighters with an additional four new freighters due in 2010. Korean air cargo network services 117 cities in 39 different countries which also include passenger transport destinations. In this sector it has been experiencing a 27% growth on average in the recent past.

The airline handles the following categories of services;

Since it handles such a high percentage of air cargo it needed a cargo handling system that was efficient to suit its services in the competitive world thus it adopted the FAST system from Alitalia in the 1980s for the purposes of tracking, handling and tracing cargo.

Korean air uses some cargo handling partners located in different parts of the world with a main oversight in the important factors like security, quality operations, and cost-efficiency thus enabling its system to be the most efficient in this sector. It insists on the training of its personnel to meet its growing needs in its growth strategy.

With high competition growing Korean air has formulated expansive strategies among them creation of new markets e.g. Hanoi, shanghai, Beijing etc to try and create demand for its services in central Asia. The main objectives of these policies in to bring high efficiency in the ground cargo handling service and also maintain a high level of ethics while maintaining its number one spot in the sector.

Aim and scope of report

The main aim of this research is to identify the following;

1. The factors behind its success in the cargo handling market.
2. Ways in which the airline handles ground handlers.
3. Ways in which the cargo handling service provided by cargo handling serving customer carriers in contract will be maximized.
4. Identify the carriers’ need in the maximization of its effectiveness in the ground handling service.
5. Challenges in the outsourcing the cargo handling service and the possible solutions for these challenges.

Ground handling activities covers a diverse number of services and activities which include;

1. Catering (in-flight food and beverage, although this sector is having to adapt to the changing airline business models where a meal is either no longer offered or is available for purchase).
2. Cabin service (cleaning, replenishment etc., sometimes carried out by local companies).
3. Ramp service (aircraft guidance, towing, low-grade maintenance and visual aircraft inspection, water and lavatory drainage, ground power, air conditioning, engine start, baggage handling, gate baggage, refueling/de‐fuelling, passenger stairs, staff transport, wheelchair lifts and handling, de‐icing).
4. Passenger services.
5. Field operation.

Current situation

According to IATA world air transport statistics (2010) Korean air is currently the largest cargo operator in the world since 2004 with a handling capacity of 8822 million tonnes per kilometer in 2008.

Korean air cargo handling service has been growing averagely at 27% annually with the highest growth experienced in the cargo handling service. I can be illustrated as follows;

The total Korean air cargo output per capita was US$ 2.55 million in 2008 and 2.42 million tons of cargo. We further believe it is in the best interest of the air cargo industry to use this consistent set of procedures to safely move cargo even if that cargo changes containers, aircraft, and/or operators. Operators should provide adequate staffing to safely perform the duties and functions required and their supervisory personnel should maintain surveillance and oversight of their operations, including those provided by contractors and at their outstations

Identified issues in the company

Korean air is face with increasing challenges in the recent past as analyzed by Eva International.com (2010) among them being;

Overcapacity

There is an increasing growth in the capacity in the recent past due to linearization of the Asian continent, this has caused overcapacity. This increased in demand can be represented as follows;

“The original design of the airport cargo handling facility which has 3 terminal complex and five separated warehouses was initially 1.7 million tonnes of cargo every year and due to increased demand the facility was forced to increase its capacity to 2.7 million tonnes a year by expanding the existing two terminals to meet the growing demand as seen in the airport technology analysis (2010).

Ground handling service carrier management

The airline needs to establish an effective cargo handling relationship with the outsourced carriers in the different destinations they operate. Since they use these outsourced services they have to ensure that their corporate objectives are achieved in the whole supply chain therefore a stringent measure in the selection and monitoring of these handlers is necessary to ensure full optimization of the airlines’ potentials. The Korean airline has introduced the following measures and amendments to its systems;

1. Customer carrier requirements, Service legal agreements and Ground handling agreement introduction.
2. Limited resources maximum and efficient utilization to serve customer carriers
3. Cost-saving carrier and freighters purchase.
4. Facilities improvement and expansion
5. Manpower maximization with up to 65% utilization.
6. Types of equipment servicing availability without delays.

Developing new markets

The airline has partnered with several governments to try and create demand e.g. central Asian market expansion. It hopes to develop other partnerships with the Chinese in Beijing or shanghai airports in the future.

Workforce management

Workforce is the core of any business operation and the goal is to efficiently and beneficially utilize them to achieve organizational goals. Applying branching rules to enforce integrity as well as synchronized execution of divided tasks, enables us to arrive at optimal solutions in half of the test instances.

Competition from sea

The review has not taken into consideration the sea-air multi-modal transport of cargo to Central Asian Republics using the ports in South Korea as the interchange point. Korean ports could serve as a convenient interchange point provided an efficient logistics supply chain is developed, whereby the urgent delivery cargo arriving by sea or air could be transferred to the other mode of transport within hours with the minimum essential processing formalities. This would also require frequent air services to various destinations in the world. At present Dubai is serving as a hub for such multi-modal transport, where transfer from sea to air takes place within hours.

This has become evident in that the competition between these two modes of transport is increasing with an average growth of sea transport being faster than that of air transport in Korea.

Services offered and consumer needs

There are very limited services offered in the other airports in the Korean republic in terms of cargo handling. The other important factor affecting the transport of cargo by air is the availability of cargo handling facilities at the airports. At all the airports there are constraints of space for handling the cargo. PIA and Aero Asia handle their own cargo, while Air Blue and foreign airlines make use of the services of the cargo handling agents like SAPS and Gerry’s Dnata. Because of lack of integration of operations the available facilities are not efficiently utilized. All airports require modern cargo handling facilities extending over much larger areas as observed by Xystouri and Bamford (2005, pp. 306-320).

Security and risk management

Security has become an important issue for international transport of cargo says Ekwal (2009, p 48), especially by air. Unless the cargo is screened through a modern screening machine capable of detecting explosives the cargo has to be held back at the airport for 24 hours cooling period. This defeats the very objective of quick delivery through air shipment. Many of the cargo handling facilities at the airports lack suitable screening machines. Physical examination of cargo damages packaging, and also makes the cargo susceptible to pilferage affecting its acceptability by the importer.

Risk management is concerned with the assessment of the risky exposure in the airline’s operations. The emergence of terrorism increased the risk exposures and thus the airline has to adhere to highest possible security and threat detection measures possible as observed by Equal (2009, p 49).

Uncertainty

The uncertain regulatory environment across many sectors of the Korean economy is already leading best‐in‐class foreign operators to re‐consider their entry into the market and the same may occur in the ground handling sector. It is important that Cabinet sends a strong message by issuing clarity on the policy as soon as possible. Examples of these uncertainties identified by Ingrid and Mohamed (2009, pp302-309) include;

1. Global financial crisis.
2. Unstable oil prices damages carriers profitability.
3. War against terrorism which is hindering a smooth flow of cargo.
4. Anti-trust enforcement is contracting already slumped airfreight industry.

Integrated computerized systems

An integrated computerized business process system is an essential requirement for efficient handling of air cargo in the Korean airlines. At present different agencies involved in the process i.e. Customs, KAS, airlines and cargo handling operators have their own IT systems without being interlinked to each other. For the system to work efficiently as a Single Window it is essential that a collaborative system should be introduced at all international airports and IT systems of all agencies involved in the air movement of cargo should be integrated together.

When airplanes fly the most direct routes and spend less time idling before takeoff and after landing, less jet fuel is used. Advanced air traffic management technologies available today for aviation communications, navigation, and surveillance (CNS) systems improve airline fuel efficiency by enabling planes to calculate the most efficient routes and altitudes to take more direct routes between destinations, use more airspace at currently prohibited lower elevations, and minimize time waiting for landing and take-off strips. Airlines can develop and introduce sophisticated flight planning software that can better calculate the effects of wind and weather patterns. This will mean a lot to the airline since it can even invest in non-petroleum jet fuels in the future as seen by Aghahowa and Stephen (2007, pp 296 -315).

Performance measurements

This is essential for the purpose of monitoring the effectiveness of the operations in the cargo handling sector and is usually the basis under which improvement and expansion measures could be improved as noted by Xystouri and Bamford (2005, pp.306-320).

It identifies the following measurements; long-term planning and control, resource allocation, system improvement and control, motivation of the personnel etc.

A review of the reports revealed the continued problem of incorrect loading and securing of ULDs and pallets. Representative instances included:

• Cargo not being properly tied down.
• ULD not locked into position.
• Pallet moved due to cargo crash net not properly installed (the report stated:.the ground handling staff was unable to open the door of the forward hold.)
• Pallet not properly locked, no center locks on left side (which left uncorrected would have allowed the pallet to move laterally into another pallet).
• Pallet had moved more than three feet during the flight.
• Load shifted during flight.

Solution to overcome issues

SWOT Matrix

David (2009, p. 224) indicated that a SWOT analysis matrix helps the manager make four important strategies in management of enterprises; they include;

SO strategies (strengths-opportunities)

David (2009, p. 224) stated that

“The manager should use the firm’s internal strengths advantageously to take advantage of the external opportunities.”

WO strategies (weaknesses-opportunities)

David (2009, p. 224) defined it as;

“These strategies aim at improving the internal weaknesses by taking advantage of the external opportunities that come it’s way. By doing this it will gain a competitive advantage over the other companies in the market.”

ST strategies (strengths-threats).

Here the company aims at increasing its strengths and reducing the impact of the external threats it faces.

WT strategies (weaknesses-threats)

David (2009, p. 224) described these strategies as:

“They are designed as defensive tactics directed towards reducing the internal weaknesses and also avoiding them. If an organization is faced with these factors it acts precariously to prevent its collapse by merging with other companies, declaring bankruptcy, retrenching or liquidating.”

The matching of both the external and internal factors and also opportunities and threats is a very efficient way of analyzing both the micro and the macro environment of the company.

Gap Analysis

A Gap Analysis is used to figure out what needs to happen at Korean air to improve the current state of affairs. It is basically the study of the difference in the standards and the delivery of those standards by a company.

These are basically a number of gaps which are important to measure in the service quality at Korea air; the reference for business encyclopedia has formulated them as (2010);

1. Service quality gap.
2. Management understanding gap.
3. Service design gap.
4. Service delivery gap.
5. Communication gap.

Gap analysis is broad but it will basically measure the target results

Implementation

Korea airlines have designed measures to counter these trends in the market to make it a market leader in its business operation. It has been implementing the following strategies;

Developing of new markets

Currently the airline is developing new market in central Asia in Uzbekistan. It is a partnership with the government to;

1. Modernize the existing airport in terms of facilities and equipment purchase, education and training in the cargo handling operations, process improvement etc
2. There will be also the development of transport networks in rails, roads etc to facilitate the cargo handling in the various destination in central Asia.
3. After these facilities are developed there will be the need to create demand in the region by development of tourism and leisure, complex construction, etc. that will increase the aggregate demand in the cargo industry

Network expansion

The airline is considering an expansion in the Asian market and also establishing partnerships with cargo handlers to make the best in this industry.

Hub and gateways

The Korean air hub operation is in the major cities in the world to most cargo destinations. In Incheon airport its terminals capacity has been increased by a considerable margin in the recent past. It has the ability to handle 1.6 million tones in 2007.

High qualified manpower

The Manpower Allocation Problem with Time Windows, Job-Teaming Constraints and a limited number of teams arises in crew scheduling contexts where cooperating teams/workers are required to solve tasks. An example is the home care sector, where the personnel travel between the homes of the patients who may demand collaborative work.

The practical Manpower Allocation Problem with Time Windows, Job-Teaming

Constraints and a limited number of teams are successfully solved to optimality using a Branch-and-Price approach. By relaxing the synchronization constraint, the problem is divided into a generalized set covering master problem and an elementary shortest path pricing problem. Applying branching rules to enforce integrated as well as synchronized execution of divided tasks, enables us to arrive at optimal solutions in half of the test instances. Running a second round of the optimization, initiated from the best solution found in round one, uncovers the optimal solution to all but 1 of the 12 test instances. The test instances are all full-size realistic problems originating from scheduling problems of ground handling tasks in major airports as observed by Xystouri and Bamford (2005, pp.306-320).

Cultural codes and values

Codes and values for growth in the airline are one of the industry drivers in terms of efficiency in the handling systems of the company. The company maintains a high level of ethics in the following ways:

1. It has a speed and flexible system for handling cargo.
2. It has a pioneer and can-do spirit in the workforce.
3. It is well organized in on and off-line training system.
4. It has a policy of timely and reliable decisions.

Recommendation

• The other airport in Korea should also be utilized by the airline to increase its handling capacity and speed.
• Development of new markets is designed to form the basis of future growth and thus the company is entitled to make prudent choices in the decision-making process. A study on the viability should be done first to determine the true profitability of the endeavor thus an cost-benefit analysis and investment appraisal is the best option to undertake in the decision-making process.
• The process of resource optimization of the available resources should be conducted to basically tap in the benefit and the unutilized potential in the process of increasing the inbound efficiency and capacity before looking for other expansion measures. Optimized resources could be done in the following ways:
  • Fleet restructuring and management.
  • Redesigning the whole organization to come up with the best model which maximizes both space and capacity.
  • Work smart in all the operations.
• The quality of their services should be increased to meet the consumers’ demands and expectations in the market. This can be done using the following measures in the air cargo transport:
  • There should be branding solutions to customer needs in the market.
  • Their systems should be designed in a manner that they are able to promptly respond to the emerging issues.
  • There should be an introduction of VIP cargo service
  • Increase efficiency as possible to ensure zero-defect services.
• Develop standardized forms to contain specific, safety-critical information in load documentation, load manifests, and other forms used in the loading or cross-loading of an aircraft. Design and use of such forms should minimize the potential of incorrectly reporting weight and location information pertaining to the cargo loaded and operation of an aircraft.
• Develop a uniform weigh scale tolerance and frequency of calibration for scales used in air cargo operations. KAS recommends a tolerance of plus or minus one percent (±1%) and a frequency of calibration of the weigh scale sufficient to maintain the tolerance.
• Develop standard procedures and guidance material to allow personnel performing or supervising safety-critical tasks to verify that all task steps are completed in the proper sequence. This process would be enhanced by efforts to ensure that supervisory personnel is not overloaded in their responsibilities such that it would prevent them from properly exercising safety responsibility to ensure the integrity of the loan documentation and the cargo on the aircraft.
• Ensure training programs for cargo supervisors, loaders and ramp personnel include familiarization with the safety implications of aircraft being loaded incorrectly. This curriculum should contain modules that include operational information used by the flight crew and awareness of the potential problems that incorrectly loaded, unsecured or damaged cargo placed in a ULD or on a pallet may have on ground personnel, occupants of the aircraft when in flight, and the aircraft fuselage and structure.
• Develop a non-punitive reporting process to allow identification and correction of observed hazards by anyone involved in the cargo loading, packaging, or transport process. Such a program should include a means to disseminate such information to all

Conclusion

We have identified several areas relating to cargo handling that need to be addressed to increase the safety of moving cargo from origin to destination. We believe that standardized procedures and actions should be implemented by operators, carriers, and cargo facilities to prevent cargo with inaccurate weights from being improperly loaded onto pallets that have incorrect documentation and are not properly secured on a cargo aircraft. We further believe it is in the best interest of the air cargo industry to use this consistent set of procedures to safely move cargo even if that cargo changes containers, aircraft, and/or operators.

Operators should provide adequate staffing to safely perform the duties and functions required and their supervisory personnel should maintain surveillance and oversight of their operations, including those provided by contractors and at their outstations.

The airport modernization program and associated developments such as the new ground handling policy are ultimately at a nascent stage of their development. Consequently, it is not unexpected that there will be teething problems, delays and some pain as the system adjusts to a new paradigm. All those involved are learning along the way. However, the frustrating issue for the main parties involved is that the key policy decisions have been taken without sufficient consultation with stakeholders and are announced late in the day, creating significant planning challenges. Confusion has reigned on the issues of the metro airport policy, the Airports Authority of Korea tender and the application of ceiling prices.

Cargo handling has been an existing trade but with new environment and recent developments it is becoming one of the fastest-growing businesses in the world. Korea air is the largest company in the world and as evident in its strategies and development projects it’s striving to remain the largest. It has seen most development on both the local and the global scale with billions worth of assets. Korea airline review above is evidence that the company is well-positioned to face any challenges in the future and with the implementation of those strategies it will surely become the largest cargo freight handler company not only in the Korea but in the world.

References

1. Airport technology, 2010. World’s top ten cargo hub airports. Web.
2. Boeing Company, 2010. World air cargo forecast 2008-2009.
3. David, Fred R. 2009. Strategic Management: Concepts and Cases. 12^rd ed. USA: Pearson Education Inc.
4. Ekwall, Dl. 2009. The displacement effect in cargo theft. International journal of physical distribution and logistics management, 39 (1) pp. 47-62.
5. Enoma, Aghahowa. & Stephen, Allen., 2007. Developing Performance Indicators for Airports Safety and Security. Facilities, 25 (7/8) PP. 296-315.
6. Eva International. 2010. Handling record-breaking volumes at Korean Air Cargo.
7. International air transport association, 2010. Fact sheets.
8. Lobo, I. & Mohamed, Zairi., 1999. Benchmarking: an international journal competitive benchmarking in the cargo industry, l6 (4) pp. 302-309.
9. Reference for Business Encyclopedia for Business, 2010. Gap analysis. Web.
10. Xystouri, T. & Bamford, Davids., 2005. A Case Study of Service Failures and Recovery Strategies within an International Airline. Managing Service Quality, 15 (3), PP.306-320.