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August 2006 Newsletter
Should DHL Pull Out Of The U.S.?
 Almost
three years ago, with great fanfare, Deutsche Post acquired Airborne
Express to form a partnership with another of its subsidiaries, DHL.
How has this partnership fared during the past two and one half years?
In one word; disastrous. Accumulated losses in the U.S. for the “new”
DHL now total almost $1 billion.
The company’s ambitious goals to grab market share from FedEx and UPS
has proven to be a bust. Both of these package express companies are
moving more cargo than ever before. Inevitably, as losses mount,
dissension also mounts in the corporate office which percolates down
to middle management. Morale is sinking fast throughout the company.
So, what’s holding up DHL? Little more than corporate ego. No one
likes to admit a mistake. But DHL’s mistake is a beaut.
It is time for Deutsche Post to consider seriously pulling the plug on
the DHL American operation before losses climb to even greater
Olympian heights. If DHL were making a genuine contribution to the
package business here; to foster competition among all the players,
the company could retain an honorable place in our business. DHL has a
first rate operation in just about every part of the world—except the
U.S. For some reason, DHL never could establish a meaningful footprint
here, even as an independent company before the acquisition. As a
famous German military strategist once declared, “it is the wise
general who knows when to cut his losses.” Deutsche Post should follow
this sage advice.
"Accumulated losses in the U.S. for the “new” DHL now total
almost $1 billion. The company’s ambitious goals to grab market share
from FedEx and UPS has proven to be a bust."
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Ribar Replaces
Sidler As Head Of Panalpina
 The
announcement that Monika Ribar is replacing Bruno Sidler as head
of Panalpina is interesting for a number of reasons. Unlike most
American CEOs who rarely take the blame for the mistakes of
subordinates, Sidler is taking responsibility for a Panalpina
employee losing $25 million in profits. Also, Sidler’s decision to
hire Dave Beatson and move Panalpina’s North American operations
from Miami to the San Francisco suburb of Foster City was an
unmitigated disaster.
Beatson almost wrecked the forwarder’s North American operations,
which was one of the largest and most successful division in the
Swiss-based company. Panalpina’s Board neither forgot nor forgave
Sidler’s role.
Also, it is of interest to note that a woman, Ribar, is replacing
Sidler. Very few, if any females occupy the corner office at
large, or even mid-sized freight forwarders. Monika is a 15-year
veteran at Panalpina and from all accounts, quite capable. Perhaps
our industry would be in better shape if more of our better half
would occupy CEO positions. For many profitless forwarders, it
could be only an improvement.
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Asian Airlines Take
First Place In Cargo
That Asia is the dominant factor in international air freight is
hardly news. Now comes further proof that the Asian continent
continues to dominate our industry. For the second consecutive year,
Korean Air Cargo has been ranked the world’s top commercial airline
cargo operation. Korean Air achieved top ranking for the second
straight year. Perhaps more significantly, three other Asian airlines
filled out the top five cargo spots. Singapore Airlines ranked third;
Cathay Pacific (which just placed its largest freighter order, ever
with Boeing) was fourth and China Airlines placed fifth. Only
Lufthansa, which had been in first place for many years, placed in the
top five
 with
a number two ranking.
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Is Logistics
Outsourcing Cooling?
Call me old fashioned, but I always have believed that outsourcing
of logistics functions signified more sound and fury than genuine
progress in our industry. Now, surveys indicate that customers are
cooling their ardor for outsourcing of logistics functions,
particularly technical ones. Outsourcing costs have risen; no
surprise there. But the benefits of outsourcing are getting harder
to find. Companies are reassessing their outsourcing benefits in
light of their own financial results.
The old arguments that outsourced functions would result in 40%
savings was sheer hyperbole that never did materialize under
actual conditions. Corporate management may be like sheep; they
follow the herd instinct but eventually they wake up to reality
and want to see cost benefits on their P&L statements.
Recent surveys indicate that the outsourcing bloom is off the
rose. Less deals are being struck between customer and outsourcer.
And of the deals that are being made, less money is involved.
Contract duration of outsourcing contracts also have shrunk; from
seven to less than five years. Since most outsourcing
organizations now offer pretty much the same IT and other
services, they are starting to commoditize their services. It is
the same old story. Outsource providers have over-promised and
under-served their customers. More and more logistics companies
are starting to believe in the old fashioned idea that we can do a
better and cheaper job ourselves.,
"The old arguments that outsourced functions would result in
40% savings was sheer hyperbole that never did materialize under
actual conditions."
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New Head Of CNS
 After
thirty years on the job, Tony Calabrezze is retiring as head of CNS,
the cargo marketing arm of IATA. He is being replaced by Jens
Tubbesing, who joins CNS from freight forwarder ABX Logistics (USA).
In his thirty years, Tony has witnessed almost unimaginable changes in
the air freight business. Three decades ago, the typical air freight
office consisted of a typewriter, telephone and tele-type machine.
Today, airlines and forwarders routinely communicate through the
computer and the Internet. The industry has grown enormously,
particularly the international segment. Thirty years ago, China was in
the midst of a political “great leap forward” and was an insignificant
factor in world trade. Today, the world beats a path to its door.
We wish Tony a pleasant retirement and Jens a successful stint as head
of CNS. His job will not be an easy one. Paralleling the enormous
growth of air cargo also has generated enormous problems. “Profitless
prosperity” is perhaps air cargo’s most intractable dilemma. We are
moving more cargo than ever before and making less money than perhaps
at any time in air freight’s history. Security also is a serious
problem. How to reconcile fast moving freight and security of the
shipment still has not been fully resolved. Jens must bring airlines
and forwarders closer together, to convince both groups they will
generate greater amounts of profitable business as partners rather
than adversaries.
We look forward to Jens, as head of CNS, to help open clearer channels
of communication between every segment of our industry.
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Technology
“Advances” Hit A Speed Bump
 When
assessing supposed technological progress, it often profits to
keep a cool head and a skeptical mind. Two recent “advances” bear
out this sage advice.
One is the new radio-frequency or RFID identification system which
is being touted as an error free method of identifying cargo
shipments. RFID sparked a great deal of publicity when Wal-Mart
announced it would accept only RFID identified shipments from its
vendors. Other retailers rushed to join the bandwagon.
Unfortunately, Wal-Mart and its copiers did not look before they
leaped. It seems the much vaunted RFID is plagued by fraud and
security problems. Viruses are spreading across RFID networks,
demonstrating how hackers could compromise the security of these
systems. To counter these viruses and guarantee security cost
money—and lots of it. Shippers are starting to question of the
benefits of RFID versus the costs. The benefits simply don’t add
up.
Another supposed technological advance, electronic processing of
freight, is running out of steam. This initiative by IATA to
remove all paper documents from air freight processes, is facing a
mid-life crisis. The scheme, announced with great fanfare by IATA
only a year ago and to be activated next year after extensive
testing by a number of airlines, is quietly being placed on the
back shelf. IATA’s enthusiasm for the project has been cooled by
the complexity of the project and the unenthusiastic response by
international forwarding community—a group whose support and
assistance is vital. Chalk up one more victory for the old
fashioned airway bill.
No industry can stand still. Air freight requires both operational
and technological progress. Let’s make sure, however, that new
methods genuinely move our industry forward and make delivery of
cargo more efficient and less costly.
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One Swallow Doesn’t Make A
Summer, But—
 As
more new airlines join established carriers in serving the Chinese
market (there are incredibly 90 airlines now delivering cargo and mail
in China), the first faint whiff of a reversal trend has emerged
within the past few months. Martinair Cargo, one of the first, and
shrewdest, all-freighter airlines in the China market, has sniffed the
wind and has cut one of its weekly flights into China. The airlines
are finding that for the first time since China became such a dominant
force in international trade, capacity is growing faster than growth
in shipments. It is not a major trend; most airlines still report
strong volume out of China, particularly to other destinations in
Asia. But the slowdown in the U.S. economy due to higher interest
rates and fuel costs, plus the continuing sluggish European economy,
is starting to have an effect.
The Chinese juggernaut eventually must slow down. Economic growth
rates of 10 and 12 per cent cannot continue indefinitely. The question
then becomes; who will take China’s place as engines of economic
growth? My bet is on two places; the remainder of Southeast Asia with
emphasis on India, and eastern Europe. One of the principal reasons
for China’s export surge was its famously low costs. The average cost
per hour for the Chinese worker was $5.50 including dormitory and food
charges. Talk about a minimum wage! No Asian country could compete
with that. But China’s wage costs are starting to rise; in some
regions of the nation quite dramatically. The government in attempting
to quell unrest among its hundreds of millions of workers, is starting
to grant pay rises. In other east Asian nations like Malaysia,
Thailand and the subcontinent of India, wages are stable. Example;
Symbol Technology, the largest world maker of bar code devices,
considered moving its components plant from Penang in Malaysia to a
new factory in China. With Chinese wage costs rising, the company
scuttled its plan.
Eastern Europe, which had been under communist rule since the end of
World War II, and became free in a domino effect after the fall of the
Berlin Wall, is another prime prospect for growth. Nations like
Poland, Hungary, Slovakia are becoming more enthusiastic about
capitalism than the traditional capitalist nations of western Europe.
Economy growth, though admittedly springing from a much lower base, is
far higher than in the nations we consider the leaders in Europe.
"...for the first time since China became such a dominant force
in international trade, capacity is growing faster than growth in
shipments."
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When Will U.S.
Airlines Start Ordering New Planes
 The
Farnborough Air Show, held in Farnborough, England, and the
biggest aviation get-together of them all, recently ended its
weeklong run. The show echoed with announcements both by Boeing
and Airbus for new aircraft orders. All of the equipment
purchasers came from Asia, the Middle East and to a lesser extent,
Europe. The world’s single biggest aviation market noticeably was
silent; airlines of the United States. A subcurrent of talk among
those in attendance was, “when will U.S. airlines start ordering
airplanes?”
Five years ago, after 9/11, when the U.S carriers were thrust into
record losses and bankruptcies among the largest like United,
Delta, Northwest and U.S. Air, the question was strictly academic.
Today, the U.S. airline picture is much brighter. United and U.S.
Air have emerged from bankruptcy. Healthier carriers like
American, Continental and Southwest are reporting solid profits
despite sky high fuel costs. The U.S. fleet is getting older.
With the exception of a few Boeing “Dreamliner” orders from
Continental, no new aircraft orders have been placed by U.S.
carriers since the traumatic effects of 9/11.
Sooner or later, American carriers will have to join their Asian,
Middle East and European competitors in ordering new equipment. I
believe the answer will be sooner. U.S. carriers will not stand
idly by while foreign airliners fly into the U.S. with brand new,
fuel efficient and passenger preference equipment. I predict that
before the year is out, a number of U.S. airlines will be placing
aircraft orders. If I were a betting man, my wager would be on
American Airlines as the first U.S. carrier to plunk its money
down on a deposit for new equipment. The airline now is
profitable, has a huge cash flow and perhaps psychologically
important, American considers itself the leader in U.S. civil
aviation. The legacy of C.R. Smith and Bob Crandall still remains.
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Julian
Keeling
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