January 2009 Newsletter
A Doubled Down Recession?
The current recession is a strange animal. If, as
generally believed, the current recession started in
December, 2007, what can we make of the really
horrendous decline that occurred since the financial
panic took hold in September of this year?
My belief; we are experiencing a recession wrapped in a
recession. This current recession is the downturn that
has caused such havoc in our industry. The initial
recession, the one that started about a year ago, was a
lumbering, garden variety decline not even identifiable
until months after it had started. In contrast, there is
no doubt about the pace and seriousness of the decline
that began with the collapse of the financial sector
this past September. It still is continuing and may be
getting worse. We don’t need economists to tell us our
economy is going to hell in a handbasket. It has been
doing so since banks and Wall Street houses began to
fall like tenpins. The first recession was a whisper,
our current one is a shout.
The implications of a recession within a recession are
enormous. Whereas the recession that began last December
barely sent a ripple across the air freight industry
with slight growth still occurring, the more recent
collapse has made a mockery of predicted cargo growth
for well into 2009.
On the ocean side, there is nothing less than mayhem
with 10,000-TEU capacity ships being laid up. Air
freight is suffering less than our ocean cousins because
of the types of commodities carried, but it is hardly
comforting to know that we can book cargo today for a
flight tomorrow to almost any destination—capacity is so
abundant and demand so weak.
The key question is; how do we interpret the current
spate of bad news? Is the current recession largely an
overreaction to the financial crisis last fall,
suggesting the U.S. and world economy will get back on
its feet relatively soon? Or, is the financial crisis a
harbinger of continued weakness in the world economy? If
so, fasten your seat belts—it’s going to be a bumpy
landing.
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DHL Retreats From U.S. With Tail Between Its Legs
I hate to be right on this one. Five years ago, when DHL
announced it was buying Airborne Express and entering the U.S.
package express market “in force,” I wrote in my Newsletter the
attempt was doomed to failure. The competition from UPS and
FedEx was too strong, Airborne was a rickety platform upon which
to build an express service and the people hired to run the U.S.
operation generally were incompetent. Why am I sorry to be
right?
The elimination of 9,500 jobs and the loss of $10 billion in
five years are sufficient reasons for anyone. In beating a
retreat from the U.S. market, DHL’s CEO expressed the reasons in
pure corporatese, stating, “it will serve the best interests of
our customers, employees and shareholders around the world.”
Tell that to the 9,500 people laid off, many long serving
employees.
An interesting sidelight to this whole debacle is the situation
involving DHL and UPS. Before shutting down, DHL had concluded
an agreement for UPS to handle almost all of its domestic
shipments totaling about $1 billion in revenues. With no U.S.
presence, there are no shipments. The UPS-DHL “agreement” is
another indication of how meaningless contracts are in the air
freight business.
My major concern is that FedEx and UPS may raise their rates now
that a competitor, admittedly a weak one, is no longer in the
picture. Here was an undertaking doomed from the start.
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Dubai—A Nation Built On Sand
The recent announcement by Emirates Airlines that profits had
dropped by almost 90 per cent during the first half of the year
is another striking indication of how precarious are the
fortunes of the various city states along the Persian Gulf.
Dubai, the city state in which Emirates Airlines is based and
which has received the most attention from the world’s press,
has been decimated by the double whammy of collapsing oil prices
and a financial meltdown.
Most people think of Dubai as another Middle East oil producing
state. It is not.
Dubai has no oil under its sands, but derives almost all of its
wealth from the billions of dollars flowing in from oil rich
states like Kuwait, Saudi Arabia and Bahrain. Lacking any real
financial management experience, the ruling sheikhs hired hot
shot financial managers from the U.S. and Europe. Carried away
by $150 per barrel oil and with almost no oversight, these
mostly young managers poured billions of dollars into every kind
of investment from glitzy, overpriced Las Vegas hotels to
acquiring major stakes in shaky banks like Citibank. Dubai’s
ruling elite, with billions of other people’s money, became
convinced they were the Switzerland of the Middle East.
Thousands of companies (almost all of them financial services)
with hundreds of thousands of employees would flock to their
sun-baked nation where summer temperatures often reach 130
degrees. Huge office towers sprang up; thousands of private
homes and condominiums were built and hotels that would make the
Taj Mahal look like a public housing project were constructed.
Even an indoor ski run was built.
Currently, the office towers wait for tenants. The streets upon
which the houses and condominiums were built are devoid of life.
Hotels, with their $1,000 per room per night rates echo to bare
corridors. Today, Dubai is literally and figuratively a nation
built on sand.
What about Emirate Airlines, the flag carrier of Dubai?
Reflecting the arrogance of its nation’s rulers, the airline
became one of the biggest customers of Boeing and Airbus. It
placed the largest single order for Airbus’ jumbo 380s,
believing Dubai would become the principal transfer point
between Europe and Asia for passengers and the main
transshipment center for cargo. Little of these grandiose plans
have come to fruition. With oil prices mired in the less than
$40 a barrel and the financial holocaust continuing, Abu-Dubai
may well become the ghost city of the Middle East.
"With
oil prices mired in the
less than $40 a barrel and
the financial holocaust
continuing, Abu-Dubai may
well become the ghost city
of the Middle East."
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Often, It Pays To Tend To Your Knitting
Fifteen years ago, when Consolidators International
opened its doors, Australia generated 75 per cent of our
business.
Fifteen years later and with a ten-fold increase in
sales volume, Australia together with New Zealand, still
provides CII with 90 per cent of our revenues. We never
have regretted that decision to concentrate on the
market “down under.” Australia is one of the most active
trading partners with the U.S. Australia also is one of
the few nations which has an unfavorable balance of
trade with the United States, importing far more of our
goods than it exports.
Five years ago, CII formed a division, Corrigan’s
Express, to offer even greater service to the Australian
and New Zealand markets. To celebrate five years in the
business, Corrigan’s Express is offering Australian
forwarders a series of cutting edge rates and a schedule
and variety of services that often is superior to the
Big Three in international forwarding; DHL, Schenkers
and Expeditors International. Corrigan’s Express
believes it can be the agent of choice for Australian
forwarders/ brokers requiring a professional partner in
the U.S. who offers a potent combination of personal
services and hi-tech capabilities. Too often in the
past, Australian forwarders have been disappointed with
their American “partners” who have promised much and
delivered little. Australian shippers are no different
than their American counterparts.
In these recessionary times, they are demanding the
highest quality of services from their forwarders to
retain the business and goodwill of their customers.
Corrigan’s Express will respond to these demands in
every respect.
"Australia is one of the most
active trading partners with
the U.S. Australia also is one
of the few nations which has
an unfavorable balance of
trade with the United States,
importing far more of our
goods than it exports"
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Supply Chain Strategists Have Few Answers Today
In the days of heady transportation growth, supply chain
strategists had plenty of “solutions” to move goods
faster and with greater efficiency. In today’s
recessionary climate, these same “experts” have little
to say. The sobering fact is that supply chain
strategists are on the sidelines. Shippers are demanding
old fashioned price medicine from their forwarders and
let’s forget all those complicated supply chain
theories. The decline in air and ocean volume is placing
a new perspective on what is effective and what is not
in moving goods. Complicated supply chain strategies are
out. Back to basics in moving goods from Point A to
Point B are in. It is indeed ironic that double digit
increases in air and ocean freight volume of a few years
ago was not due to the efficiency of the various modes
of transport nor the globalization of industrial
production but was the result of over the top consumer
spending driven by enormous levels of debt.
"It is indeed ironic that double
digit increases in air and ocean
freight volume of a few years
ago was not due to the
efficiency of the various
modes of transport nor the
globalization of industrial
production but was the result
of over the top consumer
spending driven by enormous
levels of debt."
All those new 10,000- TEU container ships; all those
widebodied freighters were actually the result of 90-lb
housewives and their open pocketbooks. When those
pocketbooks slammed shut, the entire logistics industry
went into a tailspin. If air and ocean volumes are to
make a comeback and to resume its growth, the consumer
will have to stage a spectacular revival of what famed
economist John Maynard Keynes called “animal spirits.”
This comeback may take years, particularly as the entire
psychology of spending has changed. After years of zero
growth, Americans actually are starting to save. Result,
a scenario that will show modest growth rates. We in the
cargo business should plan accordingly.
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Boeing 787 “Dreamliner;” Dream Or Nightmare?
Boeing’s principal line of
business seems to be changing. What was once an airplane
manufacturer has become a company whose main product is
a line of excuses. If Boeing keeps delaying the rollout
of its 787 much longer, it risks becoming aviation’s
laughing stock. I have commented on Boeing’s snafus
before but every time I bring the subject up, another
delay is announced.
It seems hard to believe today, but when Boeing began
selling this aircraft (from a sales point of view the
most successful airplane in Boeing’s history) almost
three years ago, the company announced its first flight
would take place in September, 2007—more than two years
ago. Now, the most optimistic date for its initial
flight is the final quarter of 2009 and deliveries to
the airlines are scheduled to begin in the first quarter
of 2010. In another era, people responsible for this
debacle would fall on their swords. Today, despite lower
sales and earnings, Boeing executives, most noteworthy
CEO Jim McNerny, receive pay increases and bonuses. In
American business today, failure is rewarded.
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What’s The Largest “Airline” In The U.S.? Not Delta, American Nor United
The recent Delta-Northwest merger makes that airline the
largest in the world. But is it?
There is an “airline” whose aircraft are sitting in
airports throughout the Southwestern United States. It
is the “Desert Air Force,” which is growing by leaps and
bounds. This “Air Force” consists of older airplanes
grounded, usually permanently by the airlines. The
number is staggering. Currently, about 2,100 aircraft
are resting quietly in the U.S. Southwestern desert with
about 1,100 more expected to join them in 2009. These
aircraft represent a history of jet aviation ranging
from the earliest Boeing 737s built over forty years
ago, to the relatively recent MD-80s and 747s. What are
the airlines going to do with all these airplanes? And
how will they affect new aircraft orders? Here’s another
vexing question airlines and aircraft manufacturers must
answer to restore health to the airline industry.
Let’s Hope 2009 Will Be A Year To Remember
2008 was a year to
forget. Let’s hope 2009 will be a year to remember. A
safe, sane, healthy and prosperous New Year to all!
Julian
Keeling
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