February 2010 Newsletter
2000-2010—A Decade Of Change And Not Always For The Best
The passing of a decade seems to bring predictors and
prognosticators out of the woodwork. Predicting the next
decade becomes a favorite indoor pastime while analyzing
the past 10 years becomes almost an obsession with
pundits and experts of all stripes. Air freight is no
exception. Everyone from cargo execs to academic types
weigh in with their thoughts about the past and
estimates of the future.
As one who has been in the cargo trenches for almost 35
years, let me add some thoughts to what I believe are
some of the most important changes and trends in our
industry during the past ten years.
They are:
The most important change, I believe, is a more
realistic assessment of what freight can and cannot do.
At the beginning of the decade, air cargo growth was
seemingly unstoppable. During the nineties, air freight
volume was increasing as high as a 10 per cent annual
rate.
Growth was aided greatly by the increasing acceptance of
the Just-In-Time or J-I-T method of production. J-I-T
was sweeping the industrial world after originating in
the 1980s by Japanese car companies. The philosophy of
J-I-T was simple and persuasive. Why tie up capital in
inventory when transportation by air, with its speed and
preciseness of delivery, can deliver both components and
finished goods to the assembly line or retail store
almost at the last minute of production or distribution?
Millions could be saved in over-all plant efficiency and
inventory costs. Like so many seemingly logical
strategies, there were flaws in the concept.
Yes, J-I-T would work perfectly in a perfect world. But
our world is not perfect. It is subject to man-made
obstacles like terrorist attacks and increased security
rules and regulations which slow the flow of traffic. It
is subject to natural disasters like major earthquakes
(see Haiti), tsunamis (see Indonesia) and swine flu
epidemics which make adhering to flight schedules
difficult if not impossible.
Manufacturers found they were winning millions in
lessened inventory costs while losing hundreds of
millions in lost sales and good will with an over
dependency on J-I-T. The end of the decade saw a more
realistic appraisal of JI-T; useful in certain
situations, counter productive in others.
"Shippers increasingly were
willing to sacrifice rapid,
expensive delivery schedules
if they were assured of a
specific, if slower, time of
arrival."
Another important trend in the first decade of the 21st
century was the realization by many producers and
distributors that WHEN a shipment was delivered was just
as important as the speed in which it arrived. Shippers
increasingly were willing to sacrifice rapid, expensive
delivery schedules if they were assured of a specific,
if slower, time of arrival. Contributing to this trend
away from international air was the faster sailing time
of the new, larger container ships with their two week
scheduled time to the U.S. west coast from Asian ports.
Air freight’s single greatest advantage; speed was
minimized. On the domestic side, trucking firms were
becoming far more sophisticated in technology allowing
freight to be moved over the road from east or west
coast ports to inland points in a matter of hours rather
than days. The lessened use of air for domestic business
has been highlighted by the enormous growth of FedEx
Ground. Barely a company statistic ten years ago, FedEx
Ground now contributes a rising share of company
revenues today while the package express company’s
expensive overnight volume contracts.
Air freight will continue to play an important role in
the world’s transportation mix. It has its limitations,
however, which were dramatically exposed during the
recent recession. In short, volume nosedived. As the
world’s economy improves, as it seems to be happening,
so will the fortunes of air freight rise. This is
particularly true in those industries like electronics,
apparel, pharmaceuticals, where speed to market still
count.
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Airlines Put Profits Before Service—What Else Is New?
Last year’s Christmas season was a strange one for air freight.
Throughout 2009, air freight was in the doldrums. Volume between
Asia and the U.S. was down about 20 per cent. The decline in
cargo activity between Europe and the U.S. was even greater.
Airlines went into a crisis mode, slashing flights with abandon
and substituting smaller aircraft for larger ones. About a month
before Christmas, however, everything changed. Retailers in the
U.S. suddenly realized with horror they had reduced inventory
far too much, anticipating a disastrous selling season.
Americans were hurting but they weren’t suffering enough to
abandon the shopping malls entirely. Christmas volume, while not
breaking any records, was showing reasonably good gains after a
genuinely disastrous previous year.
"About a month before
Christmas, however,
everything changed. Retailers
in the U.S. suddenly realized
with horror they had reduced
inventory far too much,
anticipating a disastrous
selling season."
Out went retailers’ orders to their Asian suppliers. We need
more merchandise and we need it in a hurry. Air was the only
transport method to satisfy a quick replenishment of inventory.
Orders began piling up in Asian factories for everything from
shoes to toys.
Where were the airlines during this upsurge in business?
Nowhere. The carriers refused to expand their schedules, keeping
equipment on the ground. Cargo aircraft remained parked in
remote deserts. Freight began piling up on the tarmacs of Asian,
and to a lesser extent, European airports. “You want to move
freight?” asked the carriers to their forwarder customers.
“Fine, but that will be $6 per kilo. You don’t like the price?
Charter one of our airplanes and that will be $500,000
ex-Shanghai to Los Angeles.” Airlines put profits before service
in the most brutal possible way. Forwarders, their most loyal
and consistent customers, were told in effect, “drop dead.”
"Where were the airlines
during this upsurge in
business? Nowhere. The
carriers refused to expand
their schedules, keeping
equipment on the ground."
What about 2010? Factories around the world, and particularly in
Asia, are starting to hum with activity. A resurgence of
international economic growth is in the air. Will airlines
resize their fleets to meet the growing need for traffic by air?
The jury is still out. Airline executives are playing their
cards close to the vest when discussing expansion in routes or
fleet size, refusing to commit themselves. Yet, airlines are in
a far stronger position today than the comparable period in
2009. The major carriers have stronger cash balances, have
raised new funds on capital markets through sales and leasebacks
and find that fuel costs are manageable. They should realize
that with better service, profits will take care of themselves.
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Cats Meowed For Their Favorite Food—CII Responded
Cat lovers know how finicky their little pets can be. Del
Monte-Star Kist discovered that truth when the company’s pet
food division began to run low on its Star-Kist canned pet food
line, a favorite among felines. A feline emergency was declared
and CII responded. We had been working with Star-Kist in
American Samoa for some time, helping to supply their canneries
and fishing fleets. Star-Kist called Tony Feist, our VP in
charge of CII’s tuna division and asked, “could we help?”
Tony sprang into action and on very short notice, arranged a
charter flight from American Samoa to Los Angeles to rush
200,000 lbs. of canned pet food to the U.S.
"Tony sprang into action and
on very short notice, arranged
a charter flight from American
Samoa to Los Angeles to rush
200,000 lbs. of canned pet
food to the U.S."
Working with Peter Lamy, our chief operating officer, CII
contracted with Connie Kalitta’s airline to charter a Boeing 747
to make the trans-Pacific flight.
Peter accompanied the first leg of the flight from Los Angeles
to Hawaii. Emergency supplies were loaded there because relief
supplies still were needed due to the earthquake and tsunami
that had devastated the islands of Samoa and American Samoa last
autumn. With hungry felines waiting impatiently for their
favorite Star-Kist meal, no time was wasted in loading the 100
tons of cat food, with turn-around time in just a few hours. The
big Boeing flew to Hawaii for refueling then continued on to Los
Angeles. There, waiting trucks rushed the cat food to
Star-Kist’s distribution centers for delivery throughout the
U.S. While arranging charters are not an every day occurrence at
CII, our team led by Tony and Peter, did an outstanding job to
help Star-Kist satisfy legions of cat lovers.
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Who Wants To Be Consolidated Out Of A Job?
With the global cargo industry facing the worst
contraction in volume in 80 years and with recovery
taking but halting steps, a supposedly logical reaction
to this state of affairs is consolidation—consolidating
the weak into the strong. This is what is taught at all
the business schools in the U.S. and elsewhere. The cry
for transport consolidation is heard more among shipping
lines and trucking firms than among the airlines, but
carriers are not immune to the siren song of merger and
acquisition.
"The cry for transport
consolidation is heard more
among shipping lines and
trucking firms than among the
airlines, but carriers are not
immune to the siren song of
merger and acquisition."
While consolidations are a favorite theory in academia,
how do they work in the real world? In practice, they
almost never succeed. The simple truth is that
consolidations fail for any number of reasons.
Consolidations almost never produce a better company and
more times than not, a worse organization results. Not
infrequently, a consolidated company slips into chaos.
On the ocean side, when Maersk acquired P&O a few years
ago, the surviving company (Maersk) spent so much time
dealing with the amalgamation and sorting out of their
separate computer systems, customers didn’t receive
satisfactory service for almost a year. On the air side,
the horror stories coming out of the U.S. Air-America
West merger still are being repeated two years after
U.S. Air became the surviving carrier.
About 90 per cent of promises go unfulfilled in mergers
and acquisitions. The synergies promised, with savings
going right down to the bottom line, never occur. In
fact, companies generally face greater expenses trying
to make the consolidation work with resultant lower
profitability. Customer service goes right down the tube
as employees fight the bureaucratic wars to remain
employees. Ironically, it often is a company
consolidating into a bigger partner that provides a much
higher level of service. Perhaps the greatest obstacle
to a successful consolidation is the human factor.
People simply don’t like to consolidate themselves out
of a job. Who wants to become redundant?
The transportation business needs more competition, not
less. I don’t mean competition in price, which harms all
of us, but in service. Manufacturers now are competing
in a worldwide arena. Transportation has become a vital
part of this international competition. We have long
since moved from those simple days when a product was
made in Akron was sold in Chicago, a few hundred miles
away. Today, that same product is sold in China. How and
when that item is transported becomes a key factor in
the success or failure of its salability. As we move
into the second month of the New Year, let’s hope 2010
will be far more successful than the previous
forgettable 12 months.
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D.B. Schenker Shows Courage In Raising Rates
The big Swiss freight forwarder is showing courage in
raising U.S. domestic rates and trans-border to Canada
and Mexico. The increase takes effect March 1. I have
long argued for compensatory rates for forwarders.
Happily, at least one forwader, Schenker, is moving in
that direction. More should follow its example. For far
too long, forwarders have been emphasizing lo-ball
pricing which may generate sales but does nothing for
the bottom line. Isn’t making a profit the name of the
game? Let’s hope other forwarders, and not just the big
international consolidators, get the message and raise
their rates. We’ve been working for 1 and 2 per cent
yields for too many years. Let our customers be made
aware they must pay a fair price for the premium levels
of service we offer.
"For far too long, forwarders
have been emphasizing loball
pricing which may
generate sales but does
nothing for the bottom line.
Isn’t making a profit the
name of the game?"
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Julian
Keeling
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