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While time- and temperature-sensitive biopharma shipping will grow dramatically in coming years, the capacity of air freight carriers is becoming constrained
Air cargo is a $50-billion business that transports 35% of the value of goods traded internationally. It is a critical component of the airline industry as a whole; generating approximately 12% of overall airline revenue, and it is essential to the success of global commerce.
Prevailing global drug manufacturing processes cannot occur without the services the airline industry provides. It is among the most valuable cargo the airlines handle, not just in terms of its retail value but in terms of the quality of life the drug therapies provide. But there is no reciprocity in value between the industries as healthcare cargo represents only a small fraction of the airlines’ overall cargo revenue stream, while the pharmaceutical industry is nearly completely dependant on the airline industry for the manufacturing and delivery of its miracle medicines.
This is particularly relevant for the transport and distribution of time- and temperature-sensitive biologics, vaccines and biopharmaceuticals. Over the past decade, as the healthcare industry experienced unprecedented changes in manufacturing, the movement of these products has also changed. There has been a transition from single manufacturing sites to global manufacturing, which in many instances requires a drug — long before it ever reaches the patient - to be processed in multiple steps at multiple sites located in multiple countries around the world.
Air transport is the mode of choice for most drug manufacturers for these high-value products. Speed of delivery, security, visibility and minimal exposure to environmental risks such as temperature extremes, which can have a profound effect on the quality and efficacy of such drugs, are often the reasons cited for selecting domestic and intercontinental air transport over that of ground or ocean. “A select or premium air service, like those preferred for some critical healthcare products can cost up to six times more than ocean freight,” says Bob Gahan, VP of global sales, health care vertical for DB Schenker Transportation and Logistics. “Bio and pharma companies choose air transport as relatively low-cost insurance against potential product loss that may result from mishandling, delay or extended exposure. It’s a means of protecting their brand equity and their drug manufacturing pipeline,” Gahan added.
More, better service offerings
In some respects, the pharmaceutical industry is enjoying what could be described as the halcyon days of biopharmaceutical air cargo. “Where freight rates and yields have fallen drastically for other commodities, the temperature-controlled [pharmaceutical] market has been a haven of stability,” commented Kyle Betterson, VP, Cargo, United Airlines, in Canadian Transport & Logistics recently. Currently, there are few reliability issues concerning air transport for these products. Global manufacturing and trade in other industries has created excess capacity. Load factors and yields are down and airlines are eager to accommodate high yielding pharma cargo.
The airline industry has recently made strides to upgrade their services to woo the demanding, highly-regulated and lofty expectations of the biopharmaceutical market, beginning with extricating healthcare products from the abyss of the “perishable cargo” category of products, where they have long mired. The International Air Transport Association (IATA), has recently established separate regulations for healthcare logistics (Chapter 17 of the IATA Perishable Cargo Regulations), “because,” as one its authors stated, “bananas and Botox, although both perishable, have vastly different handling requirements; just as the results of mishandling of either, or both, have vastly different consequences.” The pharmaceutical industry has responded favorably to this heightened attention, and the airline industry is ramping up the range of specialized services targeting the healthcare industry. In less than three years’ time the number of airlines launching pharma product offerings has grown from four: KLM, Emirates, Singapore and Lufthansa, to more than a dozen: Delta/Northwest, Continental, American, United Cargo, British Airways, Cathay Pacific, KLM/Air France, Kenya Air, and Air Canada. This is in addition to integrator niche services such as UPS Healthcare Logistics, FedEx Custom Critical, and DHL/Lufthansa LifeConEx.
Container and logistics solutions
As the size of pharmaceutical shipments increases, active temperature-controlled container manufacturers, who currently own about 10% of the temperature-controlled pharmaceutical shipping market, have stepped up their game. Competition is increasing as the solution providers are tripping over each other to meet growing demand and many are anxiously awaiting approval from the appropriate aviation agencies of the next generation of mechanical unit-load devises (ULD) that can both heat and cool.
Passive container manufacturers have been equally aggressive, incorporating new technologies, designs and programs to meet drug manufacturers’ demands for tighter temperature controls, as well as more sustainable or reusable packaging solutions.
Freight forwarding companies, often the intermediaries between the drug manufacturers and the airlines, are partnering with cargo carriers and secondary airports, who can offer greater flexibility and less expensive landing fees than major hubs. Additionally, they provide a network of ground transportation service providers for end-to-end logistics with greater visibility and control of healthcare products. There are more choices and solutions than ever before and money to be made no doubt, as yields, in addition to expectations, are high for healthcare products.
Airlines get their wings clipped
Like most industries, airlines have not been immune to the global economic meltdown. As the worldwide recession intensified, its effects were felt almost immediately by the airlines. Revenues plummeted as airlines faced emptier aircraft; along with it, a precipitous fall in cargo—a key indicator for world trade. Cargo demand cycles, which mirror global economics, collapsed. By the end of 2008 cargo traffic bottomed out, posting a dismal 25% decline. Many airlines, particularly in the U.S., responded with aggressive capacity adjustments. With unprecedented fourth quarter losses, the airline industry ended 2008 $16.8 billion in the red.
Airlines scrambled to resize their fleets. Older and less fuel-efficient aircraft were mothballed. But by the end of 2008, the number of aircraft taken out of service was exceeded by the number of new aircraft delivered. Fleets were actually expanding, forcing airlines to drastically reduce capacity by cutting both flight frequencies and uneconomic routes. In addition to misfit aircraft utilization, the lag between capacity cuts and nose-diving demand created a significant rift in load factors - defined as the percentage of revenue ton-miles divided into available ton-miles, resulting in disastrous fall in yield by 20%.
2009 contained few economic high notes for the airline industry. International cargo traffic improved by 12% over the December 2008 low point, but is still 18% below pre-2008 levels. “To date, a total of 227 all-cargo aircraft, or 12% of available equipment, has been parked [taken out of service],” said Gahan of DB Schenker. As we turn the corner to 2010, we may be looking at the worst of the recession in our rear view mirror, signaled by generally marginal increases in passenger and freight volumes, but it is unclear how long the airline industry can troll along the economic bottom before snagging a significant recovery. The near-term results will surely be a smaller, leaner industry, reshaped and resized for profitability beginning with carefully matching cargo capacity with demand.
When asked by Air Cargo News to describe the current situation in global air cargo, Aleks Popovich, SVP for distribution and financial services at IATA said, in a word, “Fragile.” He continued, “Load factors are returning to pre-crisis levels at 50.8%. While demand has been slowly coming back, it’s far too early to call this a recovery. Yields continue to be a major cause for concern and the industry has to hold its nerve in learning how best to match capacity with demand.”
Matching capacity with demand is key as airlines continue to struggle to find equilibrium. When the general global economy begins to recover, airlines, understandably, will be cautious to increase capacity. This given the licking they took over the past couple of years which was compounded by significant volatility in fuel prices, an operating cost completely out of their control. The cat-and-mouse fuel hedging game remains the biggest operating gamble for the airlines.
Rising demand, shrinking capacity
The pharmaceutical industry has not suffered the deep losses other industries that typically transport their goods by air have experienced. As a result, there is currently ample space available onboard most aircraft, even though capacity has been cut. But as world manufacturing and trade slowly begins to return to normal levels, and with an optimistic 6% year-on-year demand growth beginning in 2011 predicted by IATA,  trouble is brewing. The healthcare sector projects that 50% of all new drugs will be biologicals by 2015, and many existing patents begin to expire opening the gate for biosimilar manufacture by generics houses. The surge in both prophylactic and therapeutic vaccine manufacturing, the fastest growing segment of the biologics market at 13%, is expected to continue to grow through 2012. According to a report from Scientia Advisors, worldwide sales of vaccines are predicted to rise from $16 billion in 2007 to $35 billion in 2014.
Further evidence of a burgeoning vaccines market was presented in December at the World Health Organization (WHO) Performance, Quality and Safety Consultative Meeting with Industry, in Geneva, Switzerland. Twelve new vaccines are expected to be approved by 2015 for distribution in developing and middle-income countries according to a presentation by representatives of PATH (The Partnership for Appropriate Technology in Healthcare). PATH is an international nonprofit organization that creates sustainable, culturally relevant solutions for communities worldwide to break longstanding cycles of poor health by collaborating with diverse public- and private-sector partners. A joint initiative between WHO and PATH, called Project Optimize, projects a five-fold increase in cubic volume with the introduction of the first three vaccines alone. A major contributor to this growth is a change in current presentations - fewer doses per vial means more voluminous packaging. While this goes a long way to minimize the nearly 50% spoilage rate of vaccines by the time the drugs make it to patient level as administered by WHO, UNICEF and other such organizations, it creates the potential for a logistics logjam and a storage nightmare.
There is also increased awareness by industry and additional scrutiny given by FDA and other national regulatory bodies, for more transparency and documentation to support the distribution of drugs under controlled room temperature (CRT) conditions. Temperature assurance is extending beyond the traditional “cold-chain”—drugs whose temperatures must be maintained between 2-8° C. This move toward greater control of all “temperature-sensitive” drugs is also being driven by changes and revisions to existing guidance and best-practice documents, led by the World Health Organization, the United States Pharmacopeia, the Parenteral Drug Assn. and IATA, among others.
Adding to the mix of concerns are the increases in security measures like the TSA’s 100% Cargo Screening Program which is to take full effect August 1, 2010. Similar security programs are likely to be adapted and enacted by other countries. All this will surely lead to longer lock-out times at airports, delays, missed flights, bumped and waylaid cargo - all obstacles for predictable and reliable delivery of time- and temperature-sensitive drugs.
Ocean freight to the rescue?
The slowly increasing flow of “pull-through” freight offered for consignment to the airline industry signals global manufacturing, trade and economies are beginning to return to normal. By most estimates, a return to a steady stream of cargo is expected to take a few years. Coincidentally, the increase in the global pharmaceutical market is predicted to rise modestly at around 4-6% for 2010 and with a 4-7% expansion by 2013. Biological drug are expected to grow at a much faster clip, 12% year-on-year through 2014,  with “pharmerging” markets in China, India and Brazil. This far outpaces the airlines’ anticipated recovery. If the airlines move too cautiously, capacity will become an issue. Even though pharmaceutical freight has a higher priority index than general cargo, there is a real potential that demand could exceed available capacity.
Many biopharma manufacturers are already looking into alternative methods of transport. While the risk of putting multi-million dollar shipments of brand equity on the waves is not a consideration most pharma companies have entertained in the past, developing technologies for refrigerated sea containers and logistics has caught the attention of some and an argument in favor of sea transport is beginning to emerge from within the pharmaceutical industry. Historically, the industry has shied away from this option because of increased shipping times and lack of visibility. Other concerns were about environmental issues at sea such as temperature and security (theft, diversion and counterfeiting). 
The recovery of the airline industry and the balance between capacity and demand will be predicated in large part by the price of oil, which represents 40-50% of airlines’ overall operating costs. When oil prices hit a record $147 a barrel in July 2008, jet fuel costs soared 60%, crippling the industry. A repetition of this experience is unsustainable for many air carriers. Ocean transport is considerably more energy efficient than air, with a reduction in carbon emissions by as much as 94% [per kilo] over that of air transport.
The greatest threats to ocean shipments of time-and temperature-sensitive drugs are visibility, on/off-loading procedures and reliable power supply during these transitions. Until the industry is confident with solutions to overcome these obstacles by ocean carriers and their supply chain partners, the pharmaceutical industry is keeping its fingers crossed that the airlines can deliver.
1. International Air Transport Association, Welcome to IATA Cargo, http://www.iata.org/whatwedo/cargo
2. O’Donnell, K., et. al. Chapter 17 — Air Transport Logistics for Time- and Temperature-Sensitive Healthcare Products. IATA Perishable Cargo Regulations. 9th Edition. Section 17.1, p.193.
3. Bitterson, K., Why Temperature-Sensitive Air Cargo Is Not So Hot On Price Bargains, Canadian Transport & Logistics, September 2009
4. Bisignani, G., Director General, IATA. Remarks of Giovanni Bisignani at the Royal Aeronautical Society, Montreal, Quebec, Canada. December 01, 2009.
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8. PR Log Global Vaccine Market Forecast to 2012, October 29, 2009. http://www.prlog.org/10393151-global-vaccine-market-forecast-to-2012.html
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10. Gatyas, G., IMS Forecasts Global Pharmaceutical Growth of 4-6% in 2010; Predicts 4-7% Expansion Through 2013, IMS Health Report, Norwalk, CT, October 6, 2009.
11. Hoovers, November 29, 2009.
12. Emond, J. P., Sea Transport of Biopharmaceutical Products, Pharmaceutical Outsourcing, Volume 10, Issue 7, November/December 2009, p. 18.
13. IATA Annual Report, 2008.
14. Wright, T. and Emond, J.P. CO2 Report. Cool Chain Association Newsletter, May 2008. PC
Biopharma To-Do List
Negotiate long-term contracts with service providers to lock-in incremental fees and surcharges
Establish Quality Agreements between appropriate stakeholders
Develop a “Plan B” and escalation procedures for critical shipments
Evaluate the feasibility of ocean freight for some portion of international deliveries
Review planned service expansions of current carriers and freight forwarding companies
Include logistics in future plant and distribution site planning
About the author
Kevin O’Donnell is Director and Chief Technical Advisor to Industry for ThermoSafe Brands, Tegrant Corp. His current role is that of an advocate for advancing the quality of healthcare products through improved packaging, distribution practices and education. He is the current chair of the IATA Time & Temperature Task Force, and frequently blogs at www.coolerheadsblog.com