December 2007 Newsletter
Air Cargo Volume To Grow in ’08; Capacity To Grow Faster
It’s crystal ball gazing time again. Everyone in our
industry; from Boeing and IATA down to the assorted
learned professors of transportation, is spewing forth
with predictions for 2008 to answer that annual
question—where is air freight heading next year?
Unlike others living in ivory towers of varying heights,
allow me a few guesses from a person down in the
trenches— dealing with shippers, airlines and other
forwarders every working day of the year. My central
prediction; international air freight will grow slightly
next year, about 2 to 3 per cent. Capacity, however,
will grow even faster placing rates under pressure.
Domestic air freight will go nowhere in 2008.
"My central prediction;
international air freight will
grow slightly next year,
about 2 to 3%.
Capacity, however, will
grow even faster placing
rates under pressure.
Domestic air freight will go
nowhere in 2008."
Even the perennial optimists on Wall Street don’t expect
a particularly strong economy in 2008. The sub-prime
mess is spreading into the general credit market at a
much faster pace than anyone surmised originally, with
ominous ramifications for the general economy. The U.S.
increasingly lives on credit. The credit windows are
being shut by banks and other lending institutions who,
in typical fashion, are over-reacting to the sub-prime
situation. As the economy goes, so goes air freight. We
always have been dependent on the general economy. When
it booms, we boom. When it contracts, air cargo
struggles. The U.S. economy will be fortunate if it
grows by even 2 or 3% next year. A growing number of
economists are actually using that R word for recession.
What about China, the source of so much growth in
international trade? Won’t that industrial phenomenon
continue to generate huge traffic increses? Yes, China
will continue to grow but her 8 to 10% annual growth
rate simply is not sustainable, particularly with head
winds starting to blow in her direction. The recall of
millions of toys and other production items is causing
second thoughts in the board rooms of many U.S.
companies about the feasibility of manufacturing in
China. China’s labor costs; its primary advantage as a
source of production, continues to rise as the
government is determined to placate its work
force—particularly with the Olympic Games hosted by
Beijing next summer.
Optimists believe that even if growth in China slackens,
other nations will pick up the slack. They point to
India as the next great trading nation, emphasizing its
strong growth during the past few years. India is
growing far differently than China, however. China is an
old fashioned manufacturing center, pumping out physical
goods that can be carried by ship or plane. India’s
expansion, however, is not based on manufacturing, but
rather is a product of the Internet generation, with its
sharpest growth coming being generated not from making
things but in crafting software solutions and providing
outsourcing professional services. Hardly the stuff for
air freight. Limited growth also is expected from the
former “tiger” nations of Asia; Malaysia, Singapore,
Korea and Thailand.
The inevitable result next year will be softer rates as
all-cargo and combination carriers fight for business.
Already on many routes, fuel surcharges are higher than
cargo rates. As we celebrate the new year, let’s
remember that the law of supply and demand still rules
our business.
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What’s In A Name? 3PL Or Freight Forwarder?
I’ve been reading many stories and articles recently
about Third Party Logistics companies (3PLs) which made me stop
and think. Just who are these companies and exactly what do they
do? 3PLs never tire of boasting how they offer supply chain
“solutions” to even the simplest transportation problem and how
indispensable they are in meeting shipper requirements.
Unfortunately, 3PL management seem incapable of conversing in
clear, simple English and the more they talk, the more
incomprehensible they seem to be. In reality, 3PL organizations
are no different than forwarders—they provide the same
services—but with one big difference. They provide hype as well
to justify a higher fee. 3PLs are very skillful in disseminating
clouds of misinformation but they never seem to be able to
answer a few basic questions. Like, how much faster does cargo
move under their supervision? Or how much money does the shipper
actually save when using a PL? Or why do many 3PLs subcontract
much of the actual work to “old fashioned” forwarders? Shippers
must be getting wise to the inflated claims of the 3PLs. The
business of 3PLs is peaking and many are looking to merge or to
be acquired to remain in business. A number of shipping
companies have established 3PLs to “provide a greater number of
services” to their customers. Yet, when examining balance sheets
of these direct carriers, one notices immediately that their
traditional business of carrying goods from Point A to Point B
still generates about 98 per cent of their revenue. There is no
doubt that all of us in the air freight industry will have to be
creative, and also to evolve in order to survive this fast
changing and fiercely competitive business. Let us, however,
provide services with honesty and integrity and not obfuscate,
misstate or exaggerate our services.
"...they provide the same
services—but with one big
difference. They provide hype
as well to justify a higher fee"
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Kitty Hawk—R.I.P.
A striking indication of the genuinely awful situation in domestic
cargo is the abrupt disappearance of Kitty Hawk, one of the largest
intra-U.S. carriers, from the air freight scene. One day Kitty Hawk
was flying its regular schedule; the next it was going out of
business throwing 500 people out of work and transforming useful
aircraft into little better than useless pieces of junk. The
specific reasons for Kitty Hawk’s liquidation are any, but one cause
towers above all others. The domestic air freight business is the
sick man of our industry. Kitty Hawk management reacted too late to
the patient’s acute condition and suffered the consequences.
It’s no secret that the trucking industry has taken over much of
what once was the domain of air freight. Over the past number of
years, the trucking industry has been transformed from ‘dese, ‘dem
and ‘dose guys more at home breaking each other’s heads in barroom
brawls into sophisticated management that placed their trucks on
time definite schedules. Shippers began realizing they didn’t
require overnight delivery for a majority of domestic shipments,
just the assurance their freight would arrive at destination when
promised. Truckers increasingly made good on that promise, so why
pay the far higher rates for air? The sad fact is that no domestic
all-cargo carrier ever has made money. Kitty Hawk is the latest and
most dramatic manifestation of this seemingly immutable law.
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Freight People
Also Are Airline Passengers
Air freight people are so busy moving cargo, we sometimes forget
that we also are airline passengers. As passengers, we suffer
the same indignities and inconveniences as everyone else flying
the “friendly skies.” After continuing and consistent series of
delays during the past year (25 per cent of all scheduled
flights were “signifcantly” delayed in 2007), the U.S. Congress
in its wisdom, has decided to take up the issue. A number of
so-called Passenger Bill of Rights now is in the Congressional
hopper. None is worth the paper it is printed on. Our friends at
the passenger airlines are making sure any laws passed are
toothless. The airline lobby is very powerful and focused. It
consists of the Air Transport Association (ATA), IATA and the
big carriers like United, American, Delta, etc. All the airlines
contribute to Congressional campaigns and, of course, all
Congress people whose districts are far from Washington, use the
airlines to get home and campaign for the next election.
The airline lobbyists go before Congress and the Administration
to present scary arguments about the financial and safety
concerns of any new regulations. In contrast, the passenger
lobby is weak, scattered and gives nothing to political
campaigns—the determining factor with most Congressional
legislators. If any new law emanates from Congress, you can be
assured it will a watered down piece of legislation.
The Department of Transportation does have the authority to
bring the airlines to heel with directives that have the force
of law. In true bureaucratic tradition, however, the DOT is
“studying” the current situation. Don’t expect fast action as
the DOT has been “studying” every other airline problem for a
generation. Ironically, freight often receives better treatment
from the airlines than their passengers.
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How Much Money Is Really Saved By Outsourcing?
Outsourcing of manufacturing, or to use a far more
pretentious phrase, globalization of industry, has become a
way of life for U.S. companies of every size and
description. While substantial savings are generated down on
the manufacturing floor, somewhat surprisingly, the ultimate
impact is far less. Lower labor costs don’t always show up
on the bottom line. In fact, to many close observers of the
U.S. industrial scene, outsourcing actually is a losing
proposition. Half of the U.S. companies adopting outsourcing
as their primary manufacturing operation, ended up with no
savings at all. The lower cost of labor was offset by the
need for increased inventory to serve as a hedge against
longer supply lines and also higher costs for the need to
comply with complicated regulations both in the U.S. and the
manufacturing country plus lengthy documentation and greater
security.
What to do to solve this dilemma? Let’s be realistic.
American companies are not about to bail out of China and
other low cost labor nations en masse and return to
manufacturing back to the U.S. They are too committed to
manufacturing abroad. But U.S. companies should realize
there are few, if any, competitive manufacturing advantages
remaining via the outsourcing route. To make outsourcing
genuinely successful, companies must adopt a unified
approach so that purchasing, finance and most important of
all, logistics, work together. However, most company
transportation strategies are fragmented and don’t work in
concert with other departments.
Too often, the forwarder is looked upon as just a guy
picking up freight on a loading dock and not part of a
complicated supply chain that may stretch 10,000 miles.
Let’s drive some sense not only into the heads of traffic
departments but more vitally, to senior management. If U.S.
manufacturers are determined to make their products abroad,
let them adopt systems that are profitable and utilize
forwarders as important allies.
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At Least The
Freight Got Through
Airlines almost never tell the public about their cargo
activities. Why hide them under a bushel? Cargo at some carriers
amounts to fully 35 per cent of total revenues. Case in point re
airlines’ shyness about cargo.
Last month, British Airways operated a number of flights from
Heathrow to New York, Los Angeles and Toronto—with return to
Heathrow—completely empty of passengers. Why did this ludicrous
turn of events occur? Because BA’s flight scheduling department,
in its wisdom, forgot that up to 700 of its flight attendants
would not be legal for these flights. Rather than cancel a
number of scheduled trips, BA decided to fly the planes devoid
of people. Primary reason for this seemingly strange decision;
the bellies of these widebodied aircraft were packed with
profitable freight. BA not only did not wish to lose an
important source of revenue, but also did not want to disappoint
shippers who had must get through Holiday cargo. In its public
defense of these passengerless flights, did BA announce that
cargo was an important responsibility of the airline—
particularly at Holiday time? No. BA never mentioned cargo in
its public statements but rather gave a lame and
incomprehensible excuse about honoring schedules whether
passengers flew or
not.
Cargo is an important part of BA’s business. Why ignore it?
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Christmas; A Time To Reflect
Christmas is the one time of
year when all should reflect what is meaningful and
important in our lives. These qualities are friendship,
family, a spirit of giving, kindness and tolerance to
others. These are the qualities that make life worthwhile.
Let’s shut down our computers, turn off our cell phones and
gather round hearth and home. To our friends and associates
wherever they may be, a Merry Christmas to all.
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Julian
Keeling
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