July 2008 Newsletter
Mid-Sized Forwarders Will Do Well Despite Recession
 Last month, I was invited by the Chicago Air Freight
Forwarders Association to give a talk at its monthly
luncheon. The Association asked that I discuss the
effect of the current recession on air cargo in general
and freight forwarders in particular. In my talk, I told
the audience in no uncertain terms of my conviction that
forwarders, and particularly the smaller and mid-sized
consolidators, would do well despite our sluggish
economy. Middle forwarders are tough, flexible and can
turn on a dime; abilities the large, multi-nationals do
not share. I believe personal service to customers will
be a far more important consideration than ever before
despite our world of hi-tech. In an uncertain
environment, shippers will require more of the human
touch and it is the mid-sized forwarder who can deliver
that kind of attention.
"Middle forwarders
are tough,
flexible and can turn on a
dime; abilities the large,
multi-nationals do not share.
I believe personal service to
customers will be a far more
important consideration than
ever before despite our world
of hi-tech."
I believe international and domestic freight are
following different paths. Unfortunately, domestic cargo
is little more than a basket case today. Ever increasing
fuel charges, the growing penetration by truckers in the
domestic market and the soft economy are combining to
make mince meat out of domestic freight. I see no growth
in domestic cargo for the remainder of 2008 and all of
2009, and perhaps even a decline. International cargo
presents a brighter picture although the heady growth of
10 to 15 per cent per annum is perhaps gone forever. I
believe international cargo will grow at a more modest
pace in the range of 2 to 5 per cent per year, aided by
the U.S. increase in exports due to the weakened dollar.
Those companies who refused to cripple their domestic
manufacturing facilities by off-shoring their factories
are benefiting from increased overseas demand. The
pendulum definitely is swinging back to domestic
manufacture. All is not milk and honey on the
international front, however. Too many all-cargo airlines
have sprung up, particularly in Asia, to remain viable
in a soft global economy. I believe a number of them
will have to fold their wings due to a weakening Asian
market with a resultant overcapacity in aircraft. Even
the strong legacy, combination carriers with major cargo
operations, like Korean Air and Lufthansa, will be
reducing their all-freighter fleets, particularly the old
Boeing 747-200 series and DC-10s, which are such gas
guzzlers.
I suggested five steps
forwarders could take to make them more valuable to
current customers, and to generate more business.
Improve customer service, strengthen overseas networks,
do more traveling to destinations in which you you carry
customers’ freight, improve margins per shipment and
offer additional services.
"International cargo
presents
a brighter picture although
the heady growth of 10 to 15
per cent per annum is
perhaps gone forever. I
believe international cargo
will grow at a more modest
pace in the range of 2 to 5
per cent per year, aided by
the U.S. increase in exports
due to the weakened dollar."
Looming over the U.S. and global economies is the
relentless rise in oil prices. With oil hovering near an
unprecedented $150 a barrel, I reminded my audience that
it is the reckless person, indeed, who would predict
that prosperity is just around the corner.
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CII Continues To Expand With New Personnel
While the nation’s recession continues to hang heavily
and our’s and the global economy, Consolidators International
continues to expand. In last month’s issue of the Newsletter, I
discussed a number of key personnel. They included Graham
Burfurd, Vice President, Global Sales; Tony Feist, Director of
Special Projects and Fabiano Ferreira, Director, Customer
Operations. I am proud to announce additional personnel at our
Los Angeles headquarters and Atlanta office. Jeremy Vergara has
been appointed Vice President, Information Technology. We had
outsourced our computer maintenance program, but decided to
bring it in-house for greater efficiency and control. Jeremy is
a graduate in computer technology and has an operational
background in forwarding. A terrific combination for this new
position.
Jack Brown is our new regional Vice President for the Southeast
Region, operating from our Atlanta office. Jack was one of the
original employees at FedEx and knows the air cargo business as
few people do. He has spent the past twenty five years in
Atlanta and has a deep and thorough knowledge of the entire
southeast section of the U.S. Jack has a simple philosophy; keep
the customer happy. That philosophy has made him one of the most
popular and effective air freight executives in Atlanta. I am
confident Atlanta will be even more successful with Jack on
board.
Christian Calderon is now Operations Manager in Atlanta.
Transferred from our Los Angeles headquarters, Christian has
risen rapidly through the ranks under the tutelage of our
President, Peter Lamy. Christian will complement Jack’s sales
ability on the operational end.
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Forwarders, Watch Your Receivables
 Upscale electronics retailer Sharper Image filed for bankruptcy
a few months ago, owing UPS $6 million in unpaid freight bills.
On a much smaller scale, Domain Home Furnishings went bankrupt
at the beginning of the year, sticking On-Time Express with an
unpaid $30,000 receivable. Retailers are the most sensitive to
consumer spending and feel the most pain when the economy slows.
Retail bankruptcies are at a three year high with a troubling
number of retailers leaving forwarders either with unpaid or
partially paid bills.
Retailers generate an enormous amount of transportation volume
by ocean, air and truck. This volume is decreasing as even
strong retailers are pulling in their horns. Home Depot recently
cut 500 jobs at its headquarters and announced a severe
reduction in the opening of new stores. Foot Locker said it will
close 140 stores and apparel retailer Talbots will reduce its
number of retail shops by almost 100. Smaller retailers by the
thousands throughout the U.S. are quietly closing their doors
and going out of business.
With retailers in such a state of disarray, can other types of
companies be far behind? Forwarders should be watching their
receivables like a hawk. The current weakening economy
definitely is much wider and deeper than anyone expected. The
bloom is off the rose. We unequivocally are in a recession. For
a forwarder not to get paid or to be paid long after the
shipment has been delivered is tantamount to a death sentence
with expenses so high and yields so low. Unlike FedEx or UPS
with their billions in revenues, the vast majority of forwarders
simply are not in a position to weather the financial storms by
allowing late or unpaid bills.
In the current economic environment, our accounts receivable
personnel may be the most important people in our companies.
Make sure they are on top of their jobs.
"For a forwarder not
to get
paid or to be paid long
after the shipment has been
delivered is tantamount to a
death sentence..."
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DHL Finally Sees The Light; Shrinks U.S. Operations
 When DHL purchased Airborne Freight four years ago and
decided to become a major competitor to FedEx and UPS in
the U.S. domestic package express market, I wrote at
that time the effort was doomed to fail. I argued that
FedEx and UPS were simply too strong for any competition
to take no more than a tiny share of the express market.
I urged DHL to forget the U.S. domestic market and
concentrate on its successful international business.
Four years later and more than $3 billion in losses, DHL
is beginning to see the light. While not abandoning the
U.S. domestic market completely, they are shrinking it
by a considerable margin. In a $2 billion restructuring,
DHL is reducing its U.S. air and ground network by 30
per cent, is throwing out Airborne and another airline,
Astar, as its carriers while substituting UPS. DHL also
will close a number of its sorting facilities and reduce
its pickup and delivery network.
UPS comes out the big winner in the restructuring of
DHL, carrying all of its air package business in a $10
billion, ten year deal. DHL’s parent, Deutsche Post, the
German post office, probably would be in much better
shape if it simply retired completely from the U.S.
domestic market, but its loss of face in abandoning the
world’s single biggest market would have been too great.
Heads already have rolled at Deutsche Post’s German
headquarters over the U.S. fiasco with DHL’s CEO getting
the heave-ho. It will be interesting to see how even a
shrunken DHL fares in the U.S. market.
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From A Small Base, Russian Air Freight Growing Rapidly
 One interesting country worth watching is the air freight scene in
Russia. Amongst all the gloom and doom of our recession with
slow, if any, air cargo growth, Russian air freight is
increasing at a rapid pace. Our company has experienced this
growth first hand, shipping an increasing number of helicopters
to Russia needed for their oil and gas exploration. While
Russian air cargo volume remains small by western standards, it
is expanding at a far more rapid pace than in the west.
Aeroflot, which in the not too distant past evoked little
respect because of antiquated Soviet equipment and poor
maintenance, has put its house in order with modern aircraft and
on time reliability. The Russian all-cargo carrier, Polet Cargo,
is doing well taking advantage of the booming oil and gas
market. Perhaps the greatest surprise of all has been the Volga-Dneper
Group, operating huge Antonov aircraft. They generated more than
$1 billion in revenues in 2007, a jump of more than 50 per cent
over the previous year. This airline also can thank the boom in
oil exploration as their aircraft is perfect for oversized oil
equipment.
Of course, the prime stimulant for the fast growing Russian air
cargo market is its booming oil and gas operations which has
made the country second only to Saudi Arabia in oil production.
With rapidly increasing wealth, Russian imports should continue
to grow with air freight taking its share of high value
merchandise. Russia’s new found wealth based on its huge oil
production, has provided a welcome windfall to an increasingly
pressured air freight industry.
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China May No Longer Keep Its Title, “Factory To The World”
 China, which expected to present its best foot forward during next
month’s Olympics, is instead grappling with a host of serious if
not intractable problems. The devastating 7.1 earthquake in
Sichan Province, with deaths approaching 100,000 and destruction
of almost an entire region, is just one of the many problems
facing the once proud Chinese government.
Inflation is hitting China in a big way. Wages are rising
rapidly to placate a restless population who see great wealth in
the cities and poverty in the countryside. Cost of staple foods,
particularly rice, is escalating rapidly.
“Outsourced” factories from the U.S. and other nations,
primarily located along the Chinese coast, depend on a constant
supply of cheap labor from rural areas to make them cost
effective. This low cost labor is particularly important today
when transportation rates are heading skyward. Yet, these
skilled workers are returning home in droves due to low wages
and unsatisfactory working conditions, leaving huge manpower
shortages. All of these factors are contributing to higher
manufacturing costs and are forcing many multi-national
companies to painfully reevaluate their operations in China.
What countries will be next on American companies’ lists when
they turn away from China? India, Pakistan, Bangladesh,
Indonesia, Vietnam? Or will industry return to its roots in the
U.S.? My bet is on the United States.
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Huge Pressure On All-Freighter Aircraft
The recently announced cutbacks in passenger flights by American,
United, Continental and U.S. Air are harbingers of things to
come. For the first time since the demise of the CAB thirty
years ago, airlines are eliminating flights not with a scalpel
but with a cleaver. CII experienced this cutback first hand when
one of our principal carriers to Australia, Qantas, canceled two
of their flights for lack of passengers. We had to scramble to
rebook our customers’ cargo on substitute flights.
It is obvious that senior management at the combination carriers
care little about cargo stashed in their aircraft’s bellies. If
flights are not economically viable on the passenger side,
flights will be canceled on short notice despite full bellies of
high value cargo. Let the cargo departments worry about
rebooking consigned freight, is senior management’s attitude.
With all the publicity about Boeing’s new 777 all freighter
aircraft and the newest version of the 747 cargo airplane, let’s
not forget that passenger airplanes still carry 75 per cent of
all air freight. Current and future cutbacks in passenger
schedules will place huge pressures on the freighter fleets of
the combination carriers and the all-cargo airlines.
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What Next For Asiana Passenger; Live Entertainment?
Asiana Airlines is taking passenger service to new heights. The
Korean airline now is teaching its flight attendants card tricks
to amuse passengers on the long Asia-U.S. flights. In addition
to asking passengers if they want coffee or tea, the flight
attendants now ask them to pick a card.
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Julian
Keeling
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