April 2008 Newsletter
With the U.S. In Recession; What’s Ahead For International Trade?
 Despite the Pollyannish assurances from President Bush
and his Secretary of the Treasury that the U.S. economy
is “sound,” (shades of Herbert Hoover!), there is no
doubt the nation is sliding into a recession. Financial
markets are in turmoil, consumer spending has slowed,
housing prices are way down and unemployment is rising.
The price of oil, fueled by speculation on the Chicago
Mercantile Exchange, is hovering around $100 a barrel
despite softer demand not only in the U.S. but abroad as
well.
"Financial markets are in
turmoil, consumer spending
has slowed, housing prices
are way down and
unemployment is rising."
Airlines are doing the unthinkable; cutting a number of
domestic flights because the cost of jet fuel is making
many routes uneconomic. While international routes have
remained largely unaffected. they too may be impacted if
the price of jet fuel continues to rise.
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What effect has the weakening of the U.S. economy had on international trade?
Surprising little, considering the almost complete
collapse of financial markets here in the U.S. International
trade around the edges has taken some hits. Container volume at
the key Los Angeles-Long Beach ports is down about 5%.
East coast ports also are reporting declines in revenues and TEU
shipments. Cargo volume at LAX and SFO are also losing ground at
about a 7 per cent rate but the global transportation system
hardly has collapsed. Shipping companies are introducing huge,
6,000-TEU vessels onto their most heavily traveled routes while
airlines continue to place in service new Boeing 777 and 747
freighters.
International forwarders are keeping busy. A number of the very
largest forwarders actually are doing quite well—for now.
Companies like Expeditors and Panalpina are reporting record
revenues and profits.
Mid-sized consolidators, by and large, are following in the “big
boys’” footsteps with good revenue gains. Profits are being
pinched, however, due to incredibly fierce competition.
""The future is very hazy. The
so-called “de-coupling” of
world markets from the U.S.
recession is more myth than
reality. Slowdowns in orders
at Chinese, Malaysian, Thai
and Vietnamese factories are
becoming the order of he
day."
There is definite concern about the future in
forwarders’ offices but certainly no panic. The future is very
hazy. The socalled “de-coupling” of world markets from the U.S.
recession is more myth than reality. Slowdowns in orders at
Chinese, Malaysian, Thai and Vietnamese factories are becoming
the order of he day. The American consumer, although shopping is
in her blood, is definitely scaling back with gasoline at $4 per
gallon and food and other essential costs rising. Forwarders,
whose primary business is domestic, will bear the brunt of the
slowdown. The trucking industry is in a depression, not a
recession. Shipment count is down considerably with truck stocks
75 and 80 per cent off their highs. The remainder of the year
will be a difficult one, but forwarders have experienced tough
times before. We have the flexibility, experience and knowledge
to weather any but the most severe economic storms.
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Where Are International Trade Agreements Heading? Nowhere
 Fifteen years ago, everything was coming up roses for
international trade agreements. President Clinton and his
Administration were congratulating themselves on the passage of
NAFTA which would free restrictions on trade between the U.S.,
Canada and Mexico. Other trade agreements were contemplated with
an entire group of nations including South Korea, Colombia and
Peru. Fifteen years later, how the atmosphere has changed! While
trade under NAFTA has increased through the front door, hundreds
of thousands of American jobs were being lost through the back
door.
"While trade under NAFTA
has increased through the
front door, hundreds of
thousands of American
jobs were being lost
through the back door."
Today, the once highly touted multi-lateral and bi-lateral trade
negotiations are entirely off the radar screen. Negotiations
between nations to lower trade barriers have heen postponed
indefinitely. Unlike fifteen years ago, when there was a
consensus that unlimited trading between nations was good for
everyone concerned, the current atmosphere is totally different.
Political opposition, and not only from Democrats, is building.
Opponents of free trade, which has become a code word for
globalization, will continue to prevail in the media and
Congress. For both political parties, free trade is becoming a
convenient scapegoat for every ill in our economy.
Do we need trade agreements at all? We have no trade agreement
with our single biggest trading partner—China. Yet, trade
between our two nations is flourishing. Ditto with our most
important European trading partners—the U.K., Germany, France
and the Scandinavian countries. Trade agreements provide
employment for hundreds of government bureaucrats who busily
write up the complicated clauses but have little use in the real
world. I never have met a forwarder who told me his business has
increased because of a government trade agreement.
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Mayhem At Boeing
 A year ago, Boeing was on top of the aviation world. Orders for
the new 787 “Dreamliner” came rushing through the door. Its
older aircraft like the 777 and 747 were finding new life as
freighters. The company’s military business was flourishing with
Boeing prepared to bid on the $40 billion U.S. Air Force tanker
contract.
What a difference a year makes! Boeing’s bright future has
turned to ashes. Reflecting the company’s problems, its stock
has declined sharply from more than $100 per share to the low
seventies. Production of its 787 “Dreamliner” is hopelessly
behind schedule. In one of its greatest mistakes in the
company’s 100- year history, Boeing decided to “outsource” much
of its 787 production to companies with little experience in
building complicated aircraft components. Boeing management
believed they could save millions of dollars per aircraft by
turning over much of its production to outside companies, many
of whom were in “emerging” nations. Instead, the fateful
decision to outsource much of its production will cost Boeing
hundreds of millions of dollars in late deliveries and the
ill-will of many airline customers.
On the military front, Boeing also has stumbled badly. Because
the company had the original U.S. Air Force tanker contract for
almost forty years, Boeing believed it could “coast” to a new
one without worrying about any real competition. The Air Force
invited competitive bids and a consortium led by Northrup-
Grumman and Airbus decided to enter the battle. Boeing was
dismissive. The Air Force never would award a major contract to
a consortium with a European partner. They would never gamble
with an airplane that literally was still on the drawing boards.
They would stick with the tried and true—Boeing. How wrong
Boeing was!
The Northrup-Grumman consortium won the bid with a bigger,
faster and greater payload aircraft. Boeing submitted its 30-
year old 767 with few modifications, believing it was adequate
for the job. The Air Force believed otherwise and Northrup-Grumman
won one of the largest military contracts in history—with Boeing
reduced to taking ads out in the Wall Street Journal to protest
and requesting a review of the award.
The Boeing fiasco proves once again that arrogance is no
substitute for sound judgment and plain hard work in
submitting a bid. Boeing believed it had a God-given right to
government business based on past performance. The Air Force
thought otherwise and the American taxpayer will benefit with a
better airplane at considerable savings in cost. Heads should
roll at Boeing after these humiliating defeats. “Wonder Boy” CEO
Jim McNerny. whose office gave final approval to these
decisions, should admit these major mistakes and shoulder much
of the blame. He should at least by reprimanded by the company’s
Board and perhaps even asked to resign. Boeing is a great
company. But even great companies stumble. It remains to be seen
how long Boeing will take to revive its greatness.
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Air Freight Caught In Climate Change Controversy
With all the worries our
industry is facing; a weak global economy, overcapacity,
jet fuel surcharges, etc., air freight hardly needs
another problem. But one concern, once no bigger than a
tiny cloud on the horizon, is turning into a
thundercloud. The hot topic increasingly discussed in
airline executive offices and aviation trade
organizations, is global warming. Our international
cargo association, TIACA, sees the issue as one of the
most important facing air freight today and in the
future.
Environmentalists care only about the socalled carbon
footprints airplanes make in the sky, and seemingly have
no regard for the importance of air cargo in
international trade. Through a recent schedule mix-up, a
BA 747 flew empty of passengers from London to Toronto.
It did carry a belly load of freight, however.
Environmentalists vociferously complained about the
“wasted flight.” When BA explained that it had a
commitment to its cargo customers to deliver the freight
on time despite lack of passengers, the
environmentalists replied the cargo was far less
important than “polluting” the skies.
Our basic problem; what can air freight do about this
legitimate concern? The issue is becoming more serious
because major corporations increasingly are considering
climate change as a major problem. They are seeking to
pitch themselves to customers as doing everything in
their power to limit carbon emissions. More ominously,
they are telling their vendors to shape up on this issue
or lose their business. Among the big names joining the
climate change brigade is Wal-Mart, Dell Computer, News
Corporation and HSBC Bank. Other corporations are sure
to follow.
Except to cut carbon emissions by limiting our growth,
there are few practical options for the airlines and the
forwarders who use them, to reduce emissions. Of course,
our industry does not want to add to this problem, but
environmentalists and their political allies must
realize that international trade has been a major factor
in the economic success of many countries—particularly
emerging nations who were mired in poverty for literally
thousands of years. A balance must be found.
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Australia’s Economy Defies Global Cooling
 One happy exception to the economic malaise surrounding much of
the industrial world is Australia. CII is indeed fortunate that
Australia remains our single largest market. The country is
booming and so is CII’s business “down under.” The Australian
economy is so strong, the nation’s central bank is raising
interest rates while the U.S. is cutting them. Corporate
earnings are up and the Australian dollar recently touched 94
cents to the U.S. dollar—a 25-year high.
"Corporate earnings are up
and the Australian dollar
recently touched 94 cents to
the U.S. dollar—a 25-year
high."
While the U.S. worries about how long and how deep our current
recession will last, Australia’s economy continues to grow at
about a 5 percent annual rate. There is strong demand for
Australian commodities; iron, coal, uranium, wheat, cotton and
wool. Australia has become the chief supplier of raw materials
to Asia and is benefiting from that continent’s explosive
growth. Billions of dollars are being spent on Australian roads,
ports and airfields to improve the nation’s infrastructure while
the U.S.’ transportation network languishes. Trade between the
two nations also is booming. Earlier this year, air freight
volume between the U.S. and Australia was so heavy, Qantas
slapped an embargo on cargo shipments. While volume has eased
somewhat during the past month, Australia remains one of the
strongest trading partners with the U.S. and one of the few
where America enjoys a trading surplus.
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Postscript To DHL
 DHL can’t seem to escape press notice, particularly when the news
is bad. Latest negative item to hit the world press is the
enforced resignation of Klaus Zumwinkel, Deutsche Post’s CEO.
Deautsche Post, of course, is the parent company of DHL,
acquiring it some years ago. It seems that Zumwinkel, after
serving as CEO for almost twenty years, was forced out by the
company’s Board of Directors because he had become embroiled in
a German tax scandal. German authorities claim Klaus owed almost
$1.5 million in back taxes. Zumwinkel was a leader in DHL’s
expansion into the U.S. package express market and also purchase
of Airborne Express. It will be interesting to see how Klaus’
successor, Frank Appel, will handle the DHL-American situation.
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Landmark Open Skies For Australia
The U.S. and Australia recently concluded a landmark open skies
agreement that will eliminate restrictions on U.S.-Australian
air services. Under the new agreement, airlines from both
countries will be allowed to select routes and destinations
based on passenger and cargo demands without limitations on the
number of carriers serving the route or number of flights.
Unlike the “open skies” agreement that went into effect last
month between Europe and the U.S., the new agreement is healthy
for both countries’ airlines. In Europe, untrammeled competition
will result in grief for the airlines rushing in to serve
destinations from non-home-based originations. Australia,
however, is in the midst of a vigorous economic expansion and
could benefit from additional airlines serving the U.S.-South
Pacific market.
Initial beneficiary of this new agreement will be Virgin Blue,
which plans to expand its current domestic Australian network to
the U.S. Qantas and United, the two combination carriers
currently serving the market, probably will witness an initial
drop in passenger and cargo volume. But there is enough business
“down under” for both new entries and current airlines in this,
one of the strongest global markets.
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Julian
Keeling
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