February 2009 Newsletter
Lesson For ’09; Assume Nothing
Don’t be surprised if the totally unexpected happens
this year. If 2008 taught us anything, it was that if we
thought something was so, it probably wasn’t.
What kind of unexpected happenings occurred in 2008?
Almost too numerous to count. Last year, plunging oil
prices saved the airline industry just months after
nearly destroying it. The dollar regained five years of
losses almost overnight, turning economists’ predictions
of a continuing “soft dollar” on its ear while the
suddenly “hard dollar” caused most of the U.S. gains in
foreign trade to evaporate. Once arrogant bankers turned
into despairing beggars clamoring for government
hand-outs. The free market, so beloved by followers of
Adam Smith, collapsed into a morass of government
bailouts and rescue programs.
Against this backdrop, can we assume anything in 2009?
Since the U.S. government now is printing money like
there is no tomorrow ($2 trillion and still counting),
the dollar could take another reversal and nosedive.
With the Middle East in one of its periodic upheavals
led by the Israeli-Palestine conflict, oil prices could
reverse themselves and shoot past $100 per barrel once
again. The airlines then would face a double whammy;
less passengers and freight because of the deep
recession coupled with higher fuel prices.
Seemingly least likely of all would be a miraculous
recovery in the latter half of 2009, with cargo holds
filling up once again and rates firming. I wouldn’t go
to Las Vegas with that prediction, but on second
thought, Vegas could use the business.
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Airports; Latest Sites For Protestors
With a worldwide recession, overcapacity on every major cargo
route between the U.S., Asia and Europe—with resultant declining
rates—the last thing airlines need is political disruptions of
their flight schedules. Yet, that is exactly what happened last
year in Asia and Europe, and may occur again in 2009. The late
November seizure of Bangkok’s Suvarnabhumi Airport by political
protestors who kept the airport closed for almost a week and the
more limited incident by environmentalists at London’s Stanstead
Airport in closing a runway, illustrates the airline’s extreme
vulnerability to anyone with a picket sign and wire cutters to
cut through an airport fence.
The incident in Bangkok, in particular, received worldwide
negative publicity. It crippled Thailand’s tourist industry and
left thousands of tons of cargo lying on the airport’s tarmac.
Worse yet, the political demonstrators at Suvarnabhumi Airport
achieved their principal goal of toppling the government in
power and replacing it with a more friendly administration.
Their victory could encourage other protest groups who may
decide their radical causes will generate more attention by
closing airports than marching down a few city streets.
Unfortunately, too many governments, particularly in Europe.
coddle these demonstrators. Why any government would side with
the protestors and not the victims in the face of a worldwide
recession, is beyond my comprehension. The international airline
industry pays billions of dollars in direct taxes to their
governments and generates billions more in fostering
international trade and tourism.
Governments should not stand idly by. They should do much more,
in concert with the airlines, to educate and explain to their
citizens the importance of the airline industry to their
nations’ health and welfare.
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4PLs—Do We Need Another Middleman?
American capitalism is a remarkable animal. Where else will you
find three operational layers interposing themselves between
shipper and consignee with each one claiming to save the
customer money. There is the traditional freight forwarder,
moving his customer’s cargo from Point A to Point B in a direct,
efficient manner. A number of years ago, the 3PL organization
came on the scene claiming it could oversee the forwarder and
choose independently among various logistics options. The latest
entry in the supply chain derby is the 4PLer, who asserts he can
save the customer even more money by casting a wider net by (a)
choosing a forwarder, (b) selecting a 3PL organization and (c)
supervising the entire “supply chain” process. Of course, each
company in this chain is charging a fee for his services.
Instead of saving money, the shipper or consignee are paying
triple charges.
The old adage that too many cooks spoil the broth is right on
target here. In today’s economic climate, companies are
searching for ways to cut costs—not increase them by hiring
generally useless “consultants” who spew out techno-babble about
supply chain “solutions” but would never dirty their hands by
actually moving cargo. There are too many middlemen in American
business; each one taking a cut and adding to costs.
The wise freight forwarder is changing; morphing into other
services like inventory control, warehousing, etc. He never
forgets, however, that his primary role is to move his
customer’s freight in a timely and hassle-free manner. A shipper
never hires a forwarder based on his controlling inventory or
whether he can pick and pack. He selects the forwarder for his
skill and experience in moving cargo.
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American Consumers; Will They Or Won’t They Continue To Spend?
It generally is agreed that 75 per cent of America’s
Gross Domestic Product (GDP) is generated by consumer
spending. Until the current recession hit, consumer
spending constantly was on the uptick. From SUVs to flat
screen television sets; from ever bigger houses to
designer wardrobes, the American family spent like there
was no tomorrow. We became an affluent society
unequalled in human history. With this recession,
however, the most serious downturn since the Great
Depression of 1932, consumer spending has come to a
screeching halt.
The pressing question today is; will consumers return to
their spendthrift ways once the recession inevitably
ends?
Or will there be a sea change in the way Americans
apportion their earnings similar to Europeans and the
Japanese whose spending habits are far more carefully
controlled? Will the American family, whose savings rate
was zero for many years, return to that “old time
religion” of socking money away for that rainy day and
future retirement? No one really knows. But the answer
is crucial to the economic future of the U.S. and its
trading partners around the world. Today, consumers no
longer are racing to the mall to buy Asian-manufactured
electronic devices or $1,000 handbags made in Italy.
Today, people are standing in line at post offices using
old fashioned postal services to send their packages
rather than picking up the phone to call FedEx for
package deliveries at ten times the price. Today, once
best selling, huge SUVs that are living rooms on wheels,
are sitting unsold on dealers’ lots while small cars
roll off showroom floors.
"The future of the
transportation industry, sea,
air and truck is riding to an
enormous extent on the
spending habits of the
American consumer."
The future of the transportation industry, sea, air and
truck is riding to an enormous extent on the spending
habits of the American consumer. All those huge
10,000-TEU container ships; all those shiny new
freighter aircraft from Boeing & Airbus either will be
used productively or laid up as useless junk depending
upon open or shut pocketbooks. When world economies are
growing and international trade is humming, air freight
thrives. Its higher cost than ocean is seen as the price
of doing business.
But when global economies take a collective dive and
international trade declines, air no longer is viewed as
critical and down goes air cargo volume. Somewhat
surprisingly, lower cost ocean traffic is taking an even
bigger hit than air.
The only downturn to which the current recession can be
compared is the Great Depression of 1932. That economic
catastrophe lasted almost ten years and ended only with
the start of World War II. The memory of 1932-41 is
burned into the memories of the still living senior
citizens who experienced it. Will our current recession
strike fear and terror into the hearts of people today,
paralyzing their actions in the future? Let’s hope a
balance is struck between reasonable spending habits and
a sensible savings rate. The future of our industry,
indeed the entire U.S. economy depends upon the answer.
"The only downturn to which
the current recession can be
compared is the Great
Depression of 1932. That
economic catastrophe lasted
almost ten years and ended
only with the start of World
War II."
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China’s Airlines; No Longer Wine & Roses
If any further proof were needed of China’s rapidly
declining growth, it’s the dire condition of that
nation’s airlines. Airlines flying the flag of China are
in for major changes and “restructuring.” All of the
Chinese carriers are struggling with falling revenues
from passengers and cargo plus colossally wrong hedging
bets on the price of fuel. These negative factors will
generate the highest losses in the history of the
nation’s fledgling airline industry; some $1.5 billion.
China’s honeymoon with Boeing and Airbus is over. The
Chinese Civil Aviation Authority is urging all state
carriers either to cancel or at least delay new aircraft
orders in 2009. Since Chinese airlines have on order 180
aircraft from the two airplane makers, the command from
the CAAC is another body blow to Boeing and Airbus. Two
of the principal Chinese carriers; China Southern and
China Eastern are receiving bailouts from the government
of almost $500 million. China’s flag carrier to
international destinations; Air China, also is on the
hand-out line for almost $1 billion in aid.
The hope that China almost alone could pull the world
out of its deep recession now is seen as a vain
delusion. Instead of stimulating the world’s economies,
China is dragging it down. Its domestic consumer market
has collapsed for western goods. The single ingredient
which fueled China’s enormous growth; foreign trade, is
a pale imitation today of what it was in past years.
Shipping lines which built enormous 10,000-TEU container
vessels primarily for the China trade, are laying up
ships due to sharply diminished demand. In the air,
Cathay Pacific is delaying “indefinitely” construction
of a huge cargo terminal at Hong Kong’s airport which
was to be used almost exclusively for the China trade.
Many of the international forwarders, particularly the
larger ones, were depending almost entirely on China
traffic to grow their business. How wrong they were. As
I have said repeatedly over the years; don’t put all
your eggs in the China basket. The chickens are coming
home to roost.
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Drop In Cargo Volume Could Bring Forwarders Shakeout
While anything could
happen this year (see first item in our Newsletter), the
chances of a miraculous economic recovery during the
latter part of 2009 is a sucker’s bet. Perhaps all the
government bailouts and rescue programs with a price tag
of $2 trillion will help firm up business in 2010, but
that will be too late to save many businesses—including
those in our industry.
Back in September, when the financial crisis really took
hold, there was some hope that air freight would escape
the worst effects of the downturn. That hope now has
faded. Major sectors of the economy; from the crucial
financial markets to construction to retail, are in full
retreat. The auto industry, particularly our domestic
makers, has fallen off a cliff. What initially looked
like a downturn similar to the six recessions since
World War II, now appears to be a replay of 1932.
"Perhaps
all the government
bailouts and rescue programs
with a price tag of $2 trillion
will help firm up business in
2010, but that will be too late
to save many businesses—
including those in our
industry."
There is no question in my
mind that the forwarding industry will witness a
shakeout this year. Some weak forwarders will be sold
off, with their owners receiving far less than they once
had imagined. Others simply will shut their doors and
hope to sell off their accounts for a percentage.
Airline consolidation will continue with a number of
“perhaps” situations like the merger of British Airways
and Qantas actually being consummated.
Shakeouts can be ultimately beneficial to our industry,
or they can be ugly. I predict this round will witness
both. I also believe our industry will be smaller when
2010 rolls around than it is today.
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George Bush—He Kept Us Safe
Supporters of George Bush claim that whatever disasters
his Administration may have inflicted on the American
public, the former President “kept us safe from
terrorist attacks.” Perhaps so, but with an unending war
in Iraq and a growing one in Afghanistan, a financial
meltdown unequalled since 1932 and the highest
unemployment rate in decades, the needless local
suffering after Katrina, and a once unimaginable budget
deficit, the terrorists may have figured, “why bother?”
Julian
Keeling
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