July 2009 Newsletter
Economic Forecasts; Based On Facts Or Wishful Thinking?
President Harry Truman once was asked what he thought of
economists. He replied, “I wish I could find a one
handed economist. In that way, I wouldn’t always get an
opinion, “on the other hand.” In today’s miserable
economy, economists are falling all over themselves
attempting to forecast when the U.S. and the world will
climb out of the recession and when world trade will
recover its former robust self. On one hand they say,
“green shoots are coming out of the earth.” But on the
other hand, they caution, “these shoots may turn to
weeds.”
Supposedly cold, hard economic facts turn mushy when
analyzed more closely. Let’s take a look at China and
its recent declaration that the nation will spend $500
billion in modernizing its infrastructure. Sounds like a
bonanza for U.S. industrial companies like Caterpillar
and others. But wait. A second announcement soon
followed; China would be using only equipment and
machinery made in China to carry out its ambitious
construction efforts. A potentially lucrative market
vanishes.
It’s not just China. The financial press both in the
U.S. and abroad are full of stories quoting economists
who declare, “we will be out of the recession starting
in the final quarter of 2009 with increased economic
activity going forward in 2010.” Other economists, just
as certain, claim the recession will last through next
year. Some economic thinkers call our recession V
shaped; others U shaped and still others say W shaped.
Who’s right with this alphabet soup?
We in air freight need solid, reliable information about
the future. Our business is so tied to economic cycles.
We don’t ship
agricultural products which must move in good times and
bad. We carry time sensitive, industrial products that
rise and fall with economic conditions. Whether we are a
huge, multinational forwarder or a small consolidator
with a modest amount of customers and limited lane
segments, we want to know what our customers will be
doing so that we can plan for the future.
Economics long has been known as the “dismal science.”
Dismal or not, forwarders want accuracy in forecasts
based on facts and not wishful thinking. Just hoping
things will get better will not make them so. Do we
continue to hunker down, cut staff or expand operations
with our hard earned dollars based on these forecasts.
Forecasting is an inexact science, but let’s have facts
to back up the prognostications—not wishful thinking.
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CII’s Tuna Business Growing So Fast, New Division Formed
One of CII’s bright spots in a very tough cargo market is our new tuna business. It is growing by leaps and bounds. This “niche” market has become so successful, we have created a new division within CII, Tuna Support. Tuna Support is devoting its facilities and energies exclusively to supply the vast Pacific Ocean tuna business. We are handling every phase of tuna logistics; inbound, outbound, ocean and air for both the tuna fleets and facilities ashore. Under the direction of Tony Feist, long experienced in supplying these fleets, canneries and support operations, we expect a quadrupling of business in 2009. Tony recently completed a tour of tuna facilities among the islands of the western Pacific and returned with a major contract, in addition to winning other business.
"Under the direction of
Tony Feist, long
experienced in supplying
these fleets, canneries and
support operations, we
expect a quadrupling of
business in 2009"
Tuna Support is moving every type of equipment needed by the tuna industry; from massive booms to finely meshed nets for the boats and parts and equipment for the canneries on shore. We recently have created a website ,
www.tunasupport.com to provide current information on the industry and answer any inquiries.
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No Wishful Thinking By FedEx
While economists debate about the future, there are no debates at once high flying FedEx. The company anticipates many grim months ahead. FedEx released its fiscal fourth quarter results late last month, which did not make happy reading. Its prime express operations, accounting for about 60 per cent of company revenues, was down while the company’s ground services held steady. No surprise there. In these tough times, shippers obviously are moving their freight at considerably lower surface rates.
"The current deep and
painful recession has
changed many minds
permanently on the need for
speed at premium prices."
While the disappointing results were expected, of greater interest was FedEx’ prediction for the future. Fred Smith was not particularly optimistic about the months ahead. He sees no immediate upturn in package deliveries either in the U.S. or abroad. FedEx has cut its China flights by 30 per cent. The company which famously started as a revolutionary express package delivery service, increasingly is becoming just another trucker as its ground business takes on growing importance. Will the express package division duplicate its once glory days of 15-20 per cent growth per year? I doubt it. The current deep and painful recession has changed many minds permanently on the need for speed at premium prices.
On a personal note, five years back
when FedEx acquired Kinko’s print shops, I wrote in the
Newsletter that the purchase was one of Fred Smith’s few serious
mistakes. FedEx just wrote down $1.2 billion related to the
purchase of Kinko’s.
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Hollywood Loses As Airlines Cut Back
In a bizarre twist on the declining fortunes of the
airline business, Hollywood is losing out. Carriers are
not happy about the rising price of first run movies for
their in-flight entertainment. They are turning to
“classic” films like film noir and MGM musicals made
during the so-called golden age of Hollywood. These
classics are only one fifth the price of new, first run
films. In-flight entertainment is hardly a minor expense
for the airlines. They spent $410 million last year for
movies shown on both domestic and international flights.
Old moves are not only much cheaper, they actually are
more popular with passengers than most of the new films
issued by the studios. Classic film noirs like “Laura,”
“Dial M For Murder” and musicals like “Singin’ In The
Rain” are finding new audiences on airplanes. One
passenger complained that he was losing sleep on a
flight because he kept watching those oldies.
While classic films are becoming more popular, the
entire In-Flight Entertainment Systems (IFE) remote
controls are becoming so complicated, you practically
have to be an engineer to figure out how to operate
them. Flight attendants on international flights, which
have the most complicated systems, report their most
often asked question from passengers is, “how do we
operate these *********** remote controls?” Once again,
technology is running faster than people’s ability to
catch up to it.
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Falling Car Demand Causes Downshift In Transportation
For those few forwarders who have money to burn in this
age of recession, it’s a great time to buy a car. With
car sales way down and with dealers by the thousands
being forced out of business by the auto manufacturers,
once unthinkable deals can be made. There’s always a
flip side to good news, however.
"It is estimated that volume in
auto parts traffic will decline
by about 32 per cent this year,
an enormous drop."
The auto industry is one of the largest users of
transportation both in the U.S. and abroad. There is a
vast network of transportation companies and logistics
providers who move and manage the thousands of parts
that go into the modern automobile. As the car
manufacturers become a shadow of themselves, so do their
suppliers and those who move parts and equipment. The
entire supply chain pipeline for both manufacturers and
servicers is shrinking.
It is estimated that volume in auto parts traffic will
decline by about 32 per cent this year, an enormous
drop. We’re not talking petty change here. Car makers
and their suppliers spent $38 billion with transport
companies in 2008. While air freight receives only a
small percentage of this amount (trucks get the lion’s
share of auto transport expenditures), our industry is
losing an even greater proportion of dollars as parts
suppliers move more of their product by cheaper surface.
Cars are not only getting smaller; so are their supply
chains.
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On The Job A Year, Qantas CEO Changing The Airline
Qantas CEO, Alan Joyce,
has held the reins at Qantas for about a year now, and
the airline slowly is changing for the better. Under his
predecessor, Geoff Dixon, Qantas was a basket case.
Dixon’s greed and avarice, culminating in his attempting
to sell Qantas to financial types (including an American
investment firm) who knew nothing about operating an
airline, finally forced his resignation. Under Joyce’s
leadership, Qantas management is concentrating on
running an airline, not manipulating stock.
"New competition from
Delta and V Australian, the
international arm of Virgin
Blue, on its lucrative
Australian-U.S. route, plus
a fare war with Singapore
Airlines, is hurting Qantas’
bottom line."
Joyce faces a tough environment. Both domestic and
international passenger count has been declining
sharply. New competition from Delta and V Australian,
the international arm of Virgin Blue, on its lucrative
Australian-U.S. route, plus a fare war with Singapore
Airlines, is hurting Qantas’ bottom line. Aircraft have
been grounded and new orders, particularly for the jumbo
380, have been deferred.
Originally a state owned airline, Qantas for years has
been known for its bureaucratic structure combined with
a confrontational stance toward its labor unions. It
always has been top heavy with managers. The company is
attempting to mend fences with its labor force and Joyce
has taken an axe to “redundant” managers. He’s fired 500
of them.
On the cargo side, Qantas, unlike many other carriers,
shows no signs of lessened interest. The airline
recently arranged the leasing of a wide-bodied 767
freighter from ABX Air for its cargo operations. As
Australia is CII’s major market, we obviously have a
strong interest in the fortunes of that nation’s largest
airline. We think Joyce may be the man to steer Qantas
through turbulent times.
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At Last; A Sensible Airplane For Cargo
The Brazil based airplane maker, Embraer, best known for
its producing smaller, express passenger jets, recently
announced it was planning to produce an all-cargo
airplane for the Brazilian Air Force and commercial
markets. The aircraft’s cargo carrying capacity is
small, with a payload of about 19 tons compared to the
100 tons carried by Boeing’s long range triple 7
freighter. That small capacity seems just about right,
however, for much of the air freight business with its
sharply diminished volume. Why fly a half empty 777 with
its huge costs when a smaller, full aircraft at less
than half the expense can be making money for the
airlines and their forwarding agents? With half empty
airplanes, rates hit bottom. With full aircraft, prices
move north.
"Why fly a half empty 777
with its huge costs when a
smaller, full aircraft at less
than half the expense can be
making money for the airlines
and their forwarding agents? "
The high winged, twin engine aircraft called the KC-390
by Embraer, will not have the intercontinental range of
the jumbo jets, but there is plenty of markets where
this new airplane can be a money maker for the airlines.
The U.S. domestic cargo market badly needs an efficient,
economical airplane to revive an almost completely
moribund business. Perhaps the new Embraer is the
answer. This new aircraft also could be a profitable
means of transport intra Asia, within Europe and Latin
America. At least one aircraft manufacturer believes
there is a future for an airplane designed just for
cargo; unlike Boeing and Airbus who basically convert
their passenger
airplanes to all-freighters.
"At least one aircraft
manufacturer believes there
is a future for an airplane
designed just for cargo;
unlike Boeing and Airbus
who basically convert their
passenger airplanes to all freighters."
The good news is that finally an airplane is designed
and to be built strictly for air freight. The bad news
is the KC-190 will not be available until 2015..
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Julian
Keeling
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