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January 2006 Newsletter
Outlook For 2006
In my December Newsletter, I discussed the
progress CII had made during the past year.
For the first issue in 2006 of our Newsletter,
I would like to share some my thoughts about
the outlook this year both for our air freight
industry in general and Consolidators
International in particular.
Barring any new war as in Iraq or a natural
catastrophe like Katrina where all bets are
off, many of the trends begun a few years ago,
will strengthen in 2006. The merger mania
exemplified by Deutsche Post acquiring Exel
and BAX Global by Deutsche Bahn in 2005, will
continue. Fewer large freight forwarders will
remain independent while smaller
consolidators, following the lead of their big
brothers, will merge with each other. The fact
that bigness does not mean superior service
but often results in a decrease in service
standards hardly seems to bother either buyer
or seller. Survey after survey of corporate
traffic executives indicate they are not happy
with mergers among airlines, shipping
companies or forwarders. They claim service
levels drop and customer service almost ceases
to exist amidst the confusion of two companies
becoming one. Traffic managers point to Exel,
up until its acquisition by Deutsche Post, as
one of the best forwarders in the business.
With the German Post Office cutting personnel
with an ax rather than a scalpel (250 Exel
operating personnel in the U.K. alone were
given pink slips), how can service standards
be maintained?
China, the King Kong of the Far East, will
moderate its trade growth in 2006 for two
basic reasons. One is the slow but steady
increase in costs. Employees in China no
longer are content to work for 25 cents per
hour and live in military style barracks. The
Chinese government, fearing unrest, is
acceding to these demands. Second is the
belated but growing effort by the U.S. and
other developed nations to place tariff
barriers on Chinese exports very much like the
textile agreement which is reducing Chinese
exports of that commodity. A very pertinent
question; can other countries, particularly in
Asia, make up any slackening of Chinese trade?
I don’t believe so. Costs in countries like
Japan, Thailand, Korea and Singapore are
considerably higher than China and world
demand for merchandise may well slacken. Most
economists predict a slowdown in the U.S.
economy later this year while Europe will
continue stagnating. European air freight was
so weak last year, many airlines serving that
destination charged only a fuel surcharge with
a nominal penny rate for legal reasons. The
South Pacific will continue to be a bright
spot for international air freight with
Australia and New Zealand continuing to show
economic strength.
International air cargo volume will continue
rising modestly, perhaps 2 to 3 per cent in
2006. The once held belief that air will take
a significant share of international traffic
from ocean has proven to be an impossible
dream. New container ships are too big, too
fast and too cheap on a per container basis.
Domestic air freight will remain flat and
perhaps even decline, which would be the first
annual drop since air cargo became an industry
fifty years ago. Truckers have proven to be
remarkably adept in moving expedited LTL
freight on a time definite basis to every part
of the U.S. and at much cheaper tariffs than
by air. They will continue to make inroads.
How does CII fit into the overall 2006 cargo
picture? Coming off a successful 2005, with
greater dollar volume, number of shipments and
new forwarder customers, we believe our growth
will continue at a measured and controlled
pace this year. CII will grow only at a level
that will ensure no lessening of our high
standards of service. While we expect to
upgrade our technical capabilities during the
year, personal service will continue to be the
hallmark of our services. Last year, CII had
its greatest staff expansion in the company’s
nine year history to better serve our
customers. Staff additions in 2006 will be
made as needed.
While our Los Angeles headquarters will
continue to be the center of operations, a
greater role will be played at our offices in
New York (JFK) and Atlanta. Both facilities
had banner years in 2005 and we expect every
greater growth in 2006. Internationally, CII
has developed an excellent network of
experienced, skilled agents.
The picture at CII for 2006 is sharp and
focused. Our emphasis never will swerve from
the belief that our customers come first, last
and always. This belief has guided our
operations during almost a tenth of a century
and will continue even stronger in 2006.
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Score One For Old Fashioned
Freight Forwarding
 TNT made perhaps a not so surprising
announcement last month that the huge Dutch
transportation company was planning to sell
off its $4 billion logistics business to
concentrate on traditional mail, express and
freight forwarding. What TNT clearly saw is
that the “supply chain solution” business is
not all it is cracked up to be. At TNT,
while logistics made up about a third of
gross revenues, it contributed only 5 per
cent to profitability. Many of TNT’s
competitors should take a closer look at
their profit and loss statements.
The fact is that margins in the logistics
business are just terrible, despite all the
hoopla about supply chain “solutions”
emanating from every kind and size of
transportation company from the Schenkers to
the mom and pop one lane segment operators
down the street. Logistics services is a low
margin business and greater profitability
for a wide diversity of services from
warehousing to inventory control is
increasingly difficult—with customers
keeping an eagle eye on the cost of every
aspect of the supply chain. Little wonder
that TNT wants to expand its “old fashioned”
freight forwarding business and extend its
ground and express networks around the world
while dumping its low margin contract
logistics that was draining the
multi-billion dollar organization.
People in our industry have called me a
Luddite; a man who refuses to be swayed by
every new hi-tech innovation. My conviction
is that the many tiered supply chain tracks
will be getting increasingly rusty as
logistics providers begin to realize that
while they are trying to become all things
to shippers, their profits are going down
the drain. Egged on by literally hundreds of
articles in the trade press predicting that
a many sided logistics service organization
is the wave of the future, hundreds of
companies rushed in to offer a variety of
options to their customers in which they
were illequipped either financially or
operationally to do the job. Many of these
companies now are looking at bleeding red
ink balance sheets. Perhaps they should
concentrate more on simply moving cargo for
their customers and less time on a great
many complicated, profitless ancillary
services which are difficult to perform.
"My conviction is that the many tiered
supply chain tracks will be getting
increasingly rusty as logistics providers
begin to realize that while they are trying
to become all things to shippers, their
profits are going down the drain."
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Is Kitty Hawk Throwing In The Towel On Domestic Air?
 What’s happening to domestic air freight? As
indicated earlier in the Newsletter, it’s
going nowhere. Latest manifestation of the no
growth trend is the buildup of a ground
services network by Kitty Hawk Cargo Airlines.
Of course, that airline had been created and
built entirely for overnight freighter
operations. The Dallas-based carrier said it
would add seven cities along the East Coast
during January and add eleven more in the
first quarter of 2006 for its ground service
operations.
The airline simply is facing reality.
Expedited shippers increasingly are
transferring their shipments from air to
cheaper trucks, accelerated by high airline
fuel prices. One problem Kitty Hawk faces is
that in the midst of a greater role for its
surface network is expensive replacements of
its older, gas guzzling 727s to more efficient
and newer 737s. The substitution of the newer
aircraft is costing millions while its surface
carriers move more of the carrier’s freight.
My prediction; Kitty Hawk will be utilizing
its aircraft for a smaller and smaller
percentage of its business.
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The Message
From Dubai
 The Ninth Dubai Air Show, which took place
this past November, is another indication of
the growing importance to the aircraft and
airline industries of this tiny Gulf State.
Together, Boeing and Airbus racked up nearly
110 orders for new, large commercial
aircraft worth about $20 billion at list
prices. The Dubai Air Show clearly
outclassed the traditional Paris Air Show at
LeBourget Field (where Lindbergh landed in
1927) where far less aircraft orders were
recorded.
During the past few years, Dubai has come
out of nowhere to become a major player in
the international passenger and air freight
business. Its flag carrier, Emirates
Airlines, now is the second most profitable
carrier in the world. It was the first to
order the jumbo Airbus 380 and remains the
largest purchaser of these aircraft with an
order for 45 airplanes. The airport at Dubai
is now the most important “crossroads”
airfield between Europe and Asia with
Emirates Airlines generating a larger
percentage of this business each year.
The success of Emirates Airlines gives
credence to the belief that if Arabs stop
fighting among themselves (and everyone
else) and forget political animosities, they
can be an effective force in
business—particularly if they are backed by
extremely wealthy rulers and rich private
citizens. In making its mark in the airline
business, Emirates seemingly has turned its
back on politics and runs the carrier
strictly as a business. More Arabs should
take their cue from United Arab Emirates.
"The success of Emirates Airlines
gives credence to the belief that if Arabs
stop fighting among themselves (and everyone
else) and forget political animosities, they
can be an effective force in business—"
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There’s
Something Strange About All Those Billions Pouring
Into The U.S.
 We keep reading about the hundreds of
billions of dollars flowing into the U.S.
from foreign investors who are supposedly
helping our acute imbalance of trade with
their investments. At least, that’s what the
economic apologists tell us when they
announce our growing trade imbalance each
month. But has anyone stopped to think what
a crazy world we are living in? All the
economic text books tell us that rich
countries export their surplus capital to
poor nations to take advantage of investment
opportunities there. Yet, what actually is
happening is that poor nations of the world
are net exporters of capital to the richest
country in the world—the United States. This
is in contradiction to every economic
theory. In September of 2005 alone, the last
month in which statistics are available,
foreign investors pumped a record $102
billion into U.S. assets, which equates to
almost $3.5 billion per day. Most countries
don’t attract $3.5 billion of other people’s
money in a month, or even a year, let alone
a day.
In fact, not many countries can handle a
tidal wave of $100 billion in net capital
inflows in one month. Such a sudden and
large infusion of money would trigger an
economic tsunami in most parts of the world.
"Something is wrong with the world
when the most popular destination for
foreign capital is a nation currently
engaged
in a seemingly endless and expensive war in
Iraq, running massive deficits and sporting
a stock market that has gone nowhere in the
past year."
It is indeed ironic that the richest nation
in the world is depending on some of the
poorest countries to redress its balance of
trade with huge net inflows of cash. It is
rumored that the Chinese Central Bank alone
is sitting on $100 billion in Treasury notes
and other U.S. government obligations.
Something is wrong with the world when the
most popular destination for foreign capital
is a nation currently engaged in a seemingly
endless and expensive war in Iraq, running
massive deficits and sporting a stock market
that has gone nowhere in the past year. One
effect of all that capital washing ashore on
the U.S. is a possible credit bubble that if
burst, would wreck not only our economy but
also most of the world’s. There are only two
possible solution; borrow less or produce
more to reduce our trade deficit. But no one
in Washington seems to be listening. They
are too busy fighting a disastrous war
abroad and wire tapping Americans illegally
at home.
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New Boeing
747-8 Saved By Air Freight
 While
the fortunes of Boeing have risen
dramatically during last year, with hundreds
of new aircraft orders, one major “new”
airplane has been given the cold shoulder by
the world’s airlines. It is the 747-8, an
advanced version of Boeing’s venerable 747
which first took to the air almost forty
years ago. The 747-8 is an attempt by Boeing
to position itself against the Airbus Jumbo
380. On the passenger side, it is a flop
with airlines showing absolutely no
interest.
Freight is another story. The airplane makes
sense as a step up from the 747 both in
range and cargo capacity without the huge
expense and almost too much capacity of the
380. It should be remembered that the 747
truly created the international air freight
business as we know it today. Two major
cargo carriers; Cargolux and Nippon Cargo
Airlines together have ordered almost 20 of
this improved aircraft, allowing Boeing to
start cranking up production for the 747-8.
More orders are expected from cargo carriers
and combination airlines’ freighter
divisions.
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And to all,
the best of New Year’s!
Julian Keeling
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