7 ms·

The Dual Optimization of Air Freight: How Many iPhones Fit in a 747?

75 points by thedogeye 12y ago

tempestn 12y ago
So at the scale of Apple, I wonder if it would make sense to actually own 747s and sell the remaining space themselves. I guess the problem is that they must have a large spike in demand around launch dates; perhaps not enough the rest of the time to make all the overhead of operating the fleet worthwhile.
- awad 12y ago
  Precisely why they charter flights. In fact, if I recall correctly, there was a global lockup of all available freight flights out of China going to Apple and no one else during the last iPhone spike. Another competitive advantage for Apple.
- ggreer 12y ago
  They could operate their own aircraft for typical shipment volumes, then augment that by paying Fedex/UPS/etc during spikes. I don't know what the margins are on air freight, but it seems like there's enough competition to keep them low. Also, Apple is big enough to negotiate better deals than typical customers. For those reasons, I don't think it's worthwhile for Apple to do it themselves.
  - tempestn 12y ago
    For sure; my meaning was that since their volume wouldn't be as high typically, it may not be worth operating the fleet (whereas if every day was launch day, perhaps it would be). Basically I agree with you.
- robzyb 12y ago
  Possibly from a purely financial perspective, but unlikely from a holistic perspective. The headaches involved with owning aeroplanes would be immense. They're large expensive heavily-regulated mechanical beasts.
- peteretep 12y ago
  > So at the scale of Apple I suspect Apple's "scale" is a rounding error of air freight volume, and unlike - say - retail, there's very little consumer value-add for owning your own freighting service.
  - ubernostrum 12y ago
    The unit used in the air cargo industry is the RTK -- revenue tonne-kilometer. On PVG-ANC, the route by which iPhones enter the US, a single 77-tonne load of iPhones (what the article estimated) is around 530,000 RTK. Boeing estimates that in 2013, worldwide air cargo was 208 billion RTK. In other words, that plane-load of iPhones is around 25 ten-thousandths of a percent of global air cargo capacity. So yes, iPhones are absolutely a drop in the bucket. Just saturating the existing scheduled cargo capacity into the US for a few days would probably exceed Apple's manufacturing capabilities.
    - thedogeye 12y ago
      I'd love to chat about how you calculated their share for my upcoming post on Apples share of transpacific freight. Email me if you'd be down? Ryan@flexport.com
      - ubernostrum 12y ago
        PVG-ANC = 6,933 km great circle distance. 77 tonnes of cargo on that route is 6,933 * 77 = 533,841 RTK. Boeing reports[1] 208 billion RTK worldwide in 2013. 533,841 / 208,000,000,000 = 2.566543269230769e-06. So that's the percentage of worldwide air cargo a 77-tonne load on a PVG-ANC cargo flight would represent. [1] http://www.boeing.com/assets/pdf/commercial/cargo/wacf.pdf http://www.boeing.com/assets/pdf/commercial/cargo/wacf.pdf
        thedogeye 12y ago
        I think the hang up here is on Apples scale. That single shipment of 300k phones weighs just 77 tons. But Apple sold 74.4M phones last quarter of which about 30% went to North America.
- pcurve 12y ago
  I would guess they calculate shipping cost on 'per phone'. 14 hour flight from China would cost give or take $300,000 on a large cargo jet. If a plan can pack in 300,000 phones, the cost of shipping would be $1 / phone for a product that costs $800. If they sell 250 million phones per year, it's $250 million in air freight cost for iphones. Even if we are generous and pretend margin for air cargo business is 20%, Apple would say maybe $50mil/year by operating their own fleet.
  - thedogeye 12y ago
    EBIT margins of a well run freight forwarder are closer to 5%, so this looks aggressive. And it's so far outside their core competency, to save even $50M that'd be a big risk to take.
- notahacker 12y ago
  Freight operators are extremely good at selling space and solving the problems described in the article and operate a dispersed global network in a difficult space on extremely thin margins. It barely makes sense for Apple to charter, except perhaps to max out loads to the US and Europe in the run up to new product launch. Apple's iPhone sales vary between 12 and 40m units per quarter, so it makes far more sense for third parties to balance that variable demand for them. Now I'm off to pick up a MBA with a new SSD that apparently took four days to get to London!
NamTaf 12y ago
The good news is that Apple certainly isn't just shipping iPhones and nothing else. It wouldn't surprise me (if we hold the assumption that Apple charters planes themselves for freight) that Apple also mixes their freight (i.e.: heavy iPhones and lighter 'other stuff') precisely to optimise this problem. That's Cook's bread and butter, after all. For other operators of lower volume, of course outsourcing that problem represents a win-win for both customer and supplier. The customer gets overall lower costs of freight and the supplier leverages their breadth of sources to make a cut of the difference they can save. It's a good example of where outsourcing certain tasks can make sense for some parties but not others.
- zachrose 12y ago
  I wonder what the lighter 'other stuff' would be from Apple. Store window displays and boxes of software? Do they still sell software in boxes?
  - floppydisk 12y ago
    Little things like cables, headphones, and other accessories that don't take up a lot of weight but could be packaged voluminously to fill the remaining space.
    - bigiain 12y ago
      Traditionally, in the airline industry, the answer was "tulips". Out of China it looks like it might be roses: http://www.nytimes.com/2006/09/25/business/worldbusiness/25flower.html http://www.nytimes.com/2006/09/25/business/worldbusiness/25f...
- thedogeye 12y ago
  I'd venture that the odds of Apple having a product that is the best available match for its cargo is very low. The more scale and diversity you have, the better your mix. There are real economies of scale in air freight resulting from this.
hydrogen18 12y ago
>Airlines consolidate heavy freight with light freight to get the ideal mix that lets them charge the companies with heavy goods by weight and the companies with light freight by volume. The result is called “free margin,” and is one of the best kept secrets in the air cargo industry. This assumes that the cost of fuel doesn't increase with the mass on the aircraft. It does. But the cost of fuel doesn't increase with the volume of the payload because the fuselage is statically sized. In other words, they aren't losing money if they are shipping around a bunch of lead bricks that only take up 15% of the available cargo space.
- jerf 12y ago
  "In other words, they aren't losing money if they are shipping around a bunch of lead bricks that only take up 15% of the available cargo space." They may not be literally losing money, but it's a pretty clear-cut opportunity cost if there was anything they could do with that volume that produced profit meaningfully more than $0. I wouldn't care to stand in front of the airline's financial officer and try to make your argument.
  - hydrogen18 12y ago
    The opportunity cost you are paying would be in not having enough flight capable planes, not in having the cargo hold half empty by volume.
- repiret 12y ago
  The fuel use increases with weight, but not as much as you might think, for two reasons: 1. Even at max weight, the cargo is only half the mass of a 747; put another way, you only decrease the mass by 50% when going from full cargo to empty. 2. Reducung weight reduces induced drag (the drag that you get in exchange for lift) but leaves parasitic drag unchanged. I don't know for sure, but I'd be willing to bet the parasitic drag dominates.
  - spectre256 12y ago
    Pilot here. Induced drag dominates at low airspeeds (i.e. takeoff and landing). At higher speeds parasite drag does dominate, so for most of the flight its what matters the most.
bigiain 12y ago
This is, of course, just The Knapsack Problem: http://en.wikipedia.org/wiki/Knapsack_problem http://en.wikipedia.org/wiki/Knapsack_problem It's proven to be NP-Hard, but with a well known "good enough" approximation ("the knapsack problem has a fully polynomial time approximation scheme (FPTAS)")
- ojbyrne 12y ago
  Actually that's not quite correct. The knapsack problem has 2 constraints: weight and (traditionally) "utility." This problem has 3 constraints - weight, volume and utility. That probably makes the problem more tractable.
- deleted 12y ago
  [deleted]
- millstone 12y ago
  It's not the knapsack problem. The task is similar: maximize (some relation between) the carried volume and weight. But instead of a finite collection of different items, you have an essentially infinite set of a few items. Also, the weight and volume of each individual item is negligible, so you don't have to worry about the integer nature of the problem, i.e. it's sufficient to give a fractional answer and round down. (That's what makes the knapsack hard - the fact that you can't add fractional items.) This seems like a straightforward linear programming problem, solvable via the simplex method.
  - MrBuddyCasino 12y ago
    Yeah linear programming was my first thought, too. How is that "one of the best kept secrets in the air cargo industry"?
    - raverbashing 12y ago
      > How is that "one of the best kept secrets in the air cargo industry"? I guess it's only part of the problem, solving for one plane. In practice you would want to solve for varying demand, for multiple customers, for planes that eventually are delayed, crews that get sick/delayed, for different planes, for routes that pick/drop different cargo at different places. And of course, you want to price all of that in a way that makes you money.
TorKlingberg 12y ago
Am I the only one who finds this a bit grating? > If it was any company besides Apple I’d probably say 10% inefficiency, but they are pretty much the best at everything they do.
- zaroth 12y ago
  I think the impressive bit is not just having the scale to be able to afford to be worrying about that level of detail. There are a lot of companies that would benefit from the 5% of reduced waste in packing their devices into crates, but it does seem like Apple is uniquely adept at achieving fringe optimizations which turn around incredible ROI.
- hydrogen18 12y ago
  Not really, Apple makes the best Apple products in the universe. How dare you question the legacy of the late Steve Jobs?
- thedogeye 12y ago
  I do too.
berntb 12y ago
Ah, it is weight limited? When reading about this in earlier years, I wondered if they sent just the phones and did packaging locally.
callesgg 12y ago
How is that a secret... You would have to be a complete moron to not realize that solution when faced with the issue.
- thedogeye 12y ago
  Ask any friend what the secret to making money in air freight is and see if that's true. Even people who ship cargo by air every day have no idea the game being played on the other side of the transaction.
  - callesgg 12y ago
    Well that answer to that question could be anything. I would say the secret is to have people pay you for shipping cargo.... If i ask some fright company to ship some cargo from point A to point B i assume the freight company wont waste money doing it. They don't know exactly how stuff is done cause it does not mater to them.
    - thedogeye 12y ago
      Do they know they are being charged by weight if their product is dense, and by volume if their product is not-dense?
jheriko 12y ago
i am very skeptical that they use air freight. having worked in large scale logistics, its like the very last choice you use when you are going to be guaranteed a lot of money because it is expensive. there are not that many planes, they are tiny and relatively expensive to run. i can imagine that apple plan ahead, and make sure that the long boat journeys are factored into their plans. is there any evidence of what they actually do? i'd put my money on boats. iphones don't magically devalue in transit afaik and the lead time is short enough to be practical... it just makes no sense, from what i understand, to use planes unless its an emergency.
- twinspop 12y ago
  I know a pilot that has flown iPhone shipments many times for a major carrier. He's not a fan due to the potential (heh) in-flight battery issues.
- thedogeye 12y ago
  The cost of bulk shipping an iPhone by air from China to the U.S. should be around $0.25-$1.00 and by sea would be about 1/5th that price. Assume they can earn 5% on their cash hoard with smart, conservative investments. If they have a $600 phone (they sell them all for that price) at sea for 1 month they would have earned about $2.50. They sell the phones as fast as they can make them, and if they don't have a phone in stock and someone desperately needs a phone, they may buy an android, so that's revenue they'll never see again. When we're talking about $0.40 savings to have to delay $600+ in guaranteed revenue by a month. That's all I need to see to know do air every time. Of course we also know that Apple manages their entire supply chain with just 5 days of inventory in stock at any give time. Much harder to do that with ocean freight.
  - jheriko 11y ago
    this only works if there is a delay. part of organising this sort of thing is doing it upfront to avoid the delays, the deliveries can all still arrive at the same time. the trade off is that you can not react to supply/demand change so quickly... even then surely you would use planes to fill that gap only, not for everything... one thing that probably skews me is time... air freight has probably gotten cheaper continuously over the last 15 years.. given the problems when there is a lack of supply of phones, i'm still dubious that air freight is the standard option... such shortages last longer than a week.

75 points by thedogeye 12y ago

So at the scale of Apple, I wonder if it would make sense to actually own 747s and sell the remaining space themselves. I guess the problem is that they must have a large spike in demand around launch dates; perhaps not enough the rest of the time to make all the overhead of operating the fleet worthwhile.

awad 12y ago
Precisely why they charter flights. In fact, if I recall correctly, there was a global lockup of all available freight flights out of China going to Apple and no one else during the last iPhone spike. Another competitive advantage for Apple.
ggreer 12y ago
They could operate their own aircraft for typical shipment volumes, then augment that by paying Fedex/UPS/etc during spikes. I don't know what the margins are on air freight, but it seems like there's enough competition to keep them low. Also, Apple is big enough to negotiate better deals than typical customers. For those reasons, I don't think it's worthwhile for Apple to do it themselves.
- tempestn 12y ago
  For sure; my meaning was that since their volume wouldn't be as high typically, it may not be worth operating the fleet (whereas if every day was launch day, perhaps it would be). Basically I agree with you.
robzyb 12y ago
Possibly from a purely financial perspective, but unlikely from a holistic perspective. The headaches involved with owning aeroplanes would be immense. They're large expensive heavily-regulated mechanical beasts.
peteretep 12y ago
> So at the scale of Apple I suspect Apple's "scale" is a rounding error of air freight volume, and unlike - say - retail, there's very little consumer value-add for owning your own freighting service.
- ubernostrum 12y ago
  The unit used in the air cargo industry is the RTK -- revenue tonne-kilometer. On PVG-ANC, the route by which iPhones enter the US, a single 77-tonne load of iPhones (what the article estimated) is around 530,000 RTK. Boeing estimates that in 2013, worldwide air cargo was 208 billion RTK. In other words, that plane-load of iPhones is around 25 ten-thousandths of a percent of global air cargo capacity. So yes, iPhones are absolutely a drop in the bucket. Just saturating the existing scheduled cargo capacity into the US for a few days would probably exceed Apple's manufacturing capabilities.
  - thedogeye 12y ago
    I'd love to chat about how you calculated their share for my upcoming post on Apples share of transpacific freight. Email me if you'd be down? Ryan@flexport.com
    - ubernostrum 12y ago
      PVG-ANC = 6,933 km great circle distance. 77 tonnes of cargo on that route is 6,933 * 77 = 533,841 RTK. Boeing reports[1] 208 billion RTK worldwide in 2013. 533,841 / 208,000,000,000 = 2.566543269230769e-06. So that's the percentage of worldwide air cargo a 77-tonne load on a PVG-ANC cargo flight would represent. [1] http://www.boeing.com/assets/pdf/commercial/cargo/wacf.pdf http://www.boeing.com/assets/pdf/commercial/cargo/wacf.pdf
      - thedogeye 12y ago
        I think the hang up here is on Apples scale. That single shipment of 300k phones weighs just 77 tons. But Apple sold 74.4M phones last quarter of which about 30% went to North America.
pcurve 12y ago
I would guess they calculate shipping cost on 'per phone'. 14 hour flight from China would cost give or take $300,000 on a large cargo jet. If a plan can pack in 300,000 phones, the cost of shipping would be $1 / phone for a product that costs $800. If they sell 250 million phones per year, it's $250 million in air freight cost for iphones. Even if we are generous and pretend margin for air cargo business is 20%, Apple would say maybe $50mil/year by operating their own fleet.
- thedogeye 12y ago
  EBIT margins of a well run freight forwarder are closer to 5%, so this looks aggressive. And it's so far outside their core competency, to save even $50M that'd be a big risk to take.
notahacker 12y ago
Freight operators are extremely good at selling space and solving the problems described in the article and operate a dispersed global network in a difficult space on extremely thin margins. It barely makes sense for Apple to charter, except perhaps to max out loads to the US and Europe in the run up to new product launch. Apple's iPhone sales vary between 12 and 40m units per quarter, so it makes far more sense for third parties to balance that variable demand for them. Now I'm off to pick up a MBA with a new SSD that apparently took four days to get to London!

NamTaf 12y ago

The good news is that Apple certainly isn't just shipping iPhones and nothing else. It wouldn't surprise me (if we hold the assumption that Apple charters planes themselves for freight) that Apple also mixes their freight (i.e.: heavy iPhones and lighter 'other stuff') precisely to optimise this problem. That's Cook's bread and butter, after all. For other operators of lower volume, of course outsourcing that problem represents a win-win for both customer and supplier. The customer gets overall lower costs of freight and the supplier leverages their breadth of sources to make a cut of the difference they can save. It's a good example of where outsourcing certain tasks can make sense for some parties but not others.

zachrose 12y ago
I wonder what the lighter 'other stuff' would be from Apple. Store window displays and boxes of software? Do they still sell software in boxes?
- floppydisk 12y ago
  Little things like cables, headphones, and other accessories that don't take up a lot of weight but could be packaged voluminously to fill the remaining space.
  - bigiain 12y ago
    Traditionally, in the airline industry, the answer was "tulips". Out of China it looks like it might be roses: http://www.nytimes.com/2006/09/25/business/worldbusiness/25flower.html http://www.nytimes.com/2006/09/25/business/worldbusiness/25f...
thedogeye 12y ago
I'd venture that the odds of Apple having a product that is the best available match for its cargo is very low. The more scale and diversity you have, the better your mix. There are real economies of scale in air freight resulting from this.

hydrogen18 12y ago

>Airlines consolidate heavy freight with light freight to get the ideal mix that lets them charge the companies with heavy goods by weight and the companies with light freight by volume. The result is called “free margin,” and is one of the best kept secrets in the air cargo industry. This assumes that the cost of fuel doesn't increase with the mass on the aircraft. It does. But the cost of fuel doesn't increase with the volume of the payload because the fuselage is statically sized. In other words, they aren't losing money if they are shipping around a bunch of lead bricks that only take up 15% of the available cargo space.

jerf 12y ago
"In other words, they aren't losing money if they are shipping around a bunch of lead bricks that only take up 15% of the available cargo space." They may not be literally losing money, but it's a pretty clear-cut opportunity cost if there was anything they could do with that volume that produced profit meaningfully more than $0. I wouldn't care to stand in front of the airline's financial officer and try to make your argument.
- hydrogen18 12y ago
  The opportunity cost you are paying would be in not having enough flight capable planes, not in having the cargo hold half empty by volume.
repiret 12y ago
The fuel use increases with weight, but not as much as you might think, for two reasons: 1. Even at max weight, the cargo is only half the mass of a 747; put another way, you only decrease the mass by 50% when going from full cargo to empty. 2. Reducung weight reduces induced drag (the drag that you get in exchange for lift) but leaves parasitic drag unchanged. I don't know for sure, but I'd be willing to bet the parasitic drag dominates.
- spectre256 12y ago
  Pilot here. Induced drag dominates at low airspeeds (i.e. takeoff and landing). At higher speeds parasite drag does dominate, so for most of the flight its what matters the most.

bigiain 12y ago

This is, of course, just The Knapsack Problem: http://en.wikipedia.org/wiki/Knapsack_problem http://en.wikipedia.org/wiki/Knapsack_problem It's proven to be NP-Hard, but with a well known "good enough" approximation ("the knapsack problem has a fully polynomial time approximation scheme (FPTAS)")

ojbyrne 12y ago
Actually that's not quite correct. The knapsack problem has 2 constraints: weight and (traditionally) "utility." This problem has 3 constraints - weight, volume and utility. That probably makes the problem more tractable.
deleted 12y ago
[deleted]
millstone 12y ago
It's not the knapsack problem. The task is similar: maximize (some relation between) the carried volume and weight. But instead of a finite collection of different items, you have an essentially infinite set of a few items. Also, the weight and volume of each individual item is negligible, so you don't have to worry about the integer nature of the problem, i.e. it's sufficient to give a fractional answer and round down. (That's what makes the knapsack hard - the fact that you can't add fractional items.) This seems like a straightforward linear programming problem, solvable via the simplex method.
- MrBuddyCasino 12y ago
  Yeah linear programming was my first thought, too. How is that "one of the best kept secrets in the air cargo industry"?
  - raverbashing 12y ago
    > How is that "one of the best kept secrets in the air cargo industry"? I guess it's only part of the problem, solving for one plane. In practice you would want to solve for varying demand, for multiple customers, for planes that eventually are delayed, crews that get sick/delayed, for different planes, for routes that pick/drop different cargo at different places. And of course, you want to price all of that in a way that makes you money.

TorKlingberg 12y ago

Am I the only one who finds this a bit grating? > If it was any company besides Apple I’d probably say 10% inefficiency, but they are pretty much the best at everything they do.

zaroth 12y ago
I think the impressive bit is not just having the scale to be able to afford to be worrying about that level of detail. There are a lot of companies that would benefit from the 5% of reduced waste in packing their devices into crates, but it does seem like Apple is uniquely adept at achieving fringe optimizations which turn around incredible ROI.
hydrogen18 12y ago
Not really, Apple makes the best Apple products in the universe. How dare you question the legacy of the late Steve Jobs?
thedogeye 12y ago
I do too.

berntb 12y ago

Ah, it is weight limited? When reading about this in earlier years, I wondered if they sent just the phones and did packaging locally.

callesgg 12y ago

How is that a secret... You would have to be a complete moron to not realize that solution when faced with the issue.

thedogeye 12y ago
Ask any friend what the secret to making money in air freight is and see if that's true. Even people who ship cargo by air every day have no idea the game being played on the other side of the transaction.
- callesgg 12y ago
  Well that answer to that question could be anything. I would say the secret is to have people pay you for shipping cargo.... If i ask some fright company to ship some cargo from point A to point B i assume the freight company wont waste money doing it. They don't know exactly how stuff is done cause it does not mater to them.
  - thedogeye 12y ago
    Do they know they are being charged by weight if their product is dense, and by volume if their product is not-dense?

jheriko 12y ago

i am very skeptical that they use air freight. having worked in large scale logistics, its like the very last choice you use when you are going to be guaranteed a lot of money because it is expensive. there are not that many planes, they are tiny and relatively expensive to run. i can imagine that apple plan ahead, and make sure that the long boat journeys are factored into their plans. is there any evidence of what they actually do? i'd put my money on boats. iphones don't magically devalue in transit afaik and the lead time is short enough to be practical... it just makes no sense, from what i understand, to use planes unless its an emergency.

twinspop 12y ago
I know a pilot that has flown iPhone shipments many times for a major carrier. He's not a fan due to the potential (heh) in-flight battery issues.
thedogeye 12y ago
The cost of bulk shipping an iPhone by air from China to the U.S. should be around $0.25-$1.00 and by sea would be about 1/5th that price. Assume they can earn 5% on their cash hoard with smart, conservative investments. If they have a $600 phone (they sell them all for that price) at sea for 1 month they would have earned about $2.50. They sell the phones as fast as they can make them, and if they don't have a phone in stock and someone desperately needs a phone, they may buy an android, so that's revenue they'll never see again. When we're talking about $0.40 savings to have to delay $600+ in guaranteed revenue by a month. That's all I need to see to know do air every time. Of course we also know that Apple manages their entire supply chain with just 5 days of inventory in stock at any give time. Much harder to do that with ocean freight.
- jheriko 11y ago
  this only works if there is a delay. part of organising this sort of thing is doing it upfront to avoid the delays, the deliveries can all still arrive at the same time. the trade off is that you can not react to supply/demand change so quickly... even then surely you would use planes to fill that gap only, not for everything... one thing that probably skews me is time... air freight has probably gotten cheaper continuously over the last 15 years.. given the problems when there is a lack of supply of phones, i'm still dubious that air freight is the standard option... such shortages last longer than a week.