November 2007 Newsletter
Price Fixing Investigation Just Getting Warmed Up
 What was once a little cloud on the horizon is turning
into a major thunderstorm. The air freight price fixing
case is ramping up as reports come in that a number of
managers at several major air freight forwarders were
arrested. When people get arrested, you know it’s a
serious matter.
The spreading anti-trust case has to do with fuel and
security surcharges. Investigative authorities both in
Europe and the U.S. have been targeting the large,
international forwarders. In seizing their files,
government authorities are discovering the forwarders’
partner airlines either have not been adding surcharges
or if added, have been tacked on at a discounted price.
While the big forwarders were either wholly or partially
“forgiven” these fuel and security surcharges, small and
mid-sized forwarders were given no such relief.
"While the big forwarders
were either wholly or partially
“forgiven” these fuel and
security surcharges, small and
mid-sized forwarders were
given no such relief."
They have been hit with maximum charges.
IATA’s CASS is the collection agency for the carriers.
Their records would show clearly what the real facts
are. CNS, the cargo arm of IATA and whose advisory board
is made up of representatives of the big airlines and
large forwarders, has been very tight lipped about the
entire situation. It is clear to this observer that
collusion has taken place with either no charges at all
to the big forwarders or fairly substantial discounts.
While the “big boys” are paying less than their fair
share or nothing at all to the carriers, it has been at
the expense of the small and mid-sized forwarder who as
usual, “gets no respect.”
Let’s hope the authorities on both sides of the Atlantic
get to the bottom of this mess and prosecute
accordingly.
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Air New Zealand Showing How To Make Money And Keep Staff Happy
 During the past few years, almost all the news about
airline management and relationship with their workers were
negative. Pay and staff cuts; benefits either eliminated
entirely or cut to the bone; longer working hours with no
increase in pay—the depressing litany goes on and on. It’s a
pleasure to turn to an airline whose management is making a
concerted effort to work closely with its staff. This management
is improving company morale, providing its passengers with a
more enjoyable flying experience and making heaps of money at
the same time. As a New Zealander born and bred, I’m proud to
say the airline is Air New Zealand (ANZ). Here is a born again
airline, which was close to bankruptcy in 2001. Yet, in its last
fiscal statement ending June 30th, just six years later, the
airline reported its best results in a decade. Net profits rose
a staggering 123 per cent to (U.S.) $155 million while revenues
climbed 13 per cent to $4.3 billion.
Under CEO Rob Fyfe, the airline is breaking new ground in staff
and passenger relations. It is rewriting the management
relations book, with executives rolling up their sleeves and
working closely with ANZ’ staff. They are taking actions that
most other airline executives would consider unimagineable.
Senior management actually dons flight attendant uniforms and do
all the work of FAs on the aircraft including serving passenger
meals, chatting with them and doing all the safety
announcements. They also spend a day manning the check-in
counters and even load baggage. Fyfe and his crew believe that
change is inevitable in the airline business and they want to be
in the forefront of this change. Hopefully, next on their list
will be cargo. ANZ already is a solid player on South Pacific
routes, but improvement always can be made.
The other major South Pacific carrier, Qantas, also hasn’t done
too badly in the financial department. For the same fiscal year
as Air New Zealand, Qantas reported a net profit of almost
(U.S.) $600 million and revenues of close to $14 billion. Good
things are happening down under.
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If Boeing Is So Smart, Why Can’t They Predict The Status Of The 787?
 Boeing is a remarkable company. It can predict air cargo growth for
the next twenty years down to the last decimal point, but can’t
project accurately the progress of its 787 “Dreamliner” for the next
six months. If Boeing’s air cargo predictions twenty years ago were
accurate, our industry would be triple its size today. Boeing is
similar to those brokers who keep predicting the future of the stock
market. If they really could predict the future, they all would
become millionaires and retire early.
Boeing says flatly that air freight will increase at a 6.2 per cent
annual rate for the next twenty years. Why are they so confident in
this prediction? Is it because they want to sell more freighters? If
truth be known, air cargo has not attained a consistently 6 per cent
growth rate for the past number of years. Domestic air cargo
actually is showing a negative growth rate with reduction in volume
of about 2 to 3 per cent per year. Air cargo is bumping up against a
number of formidable obstacles which may get worse in the coming
years.
Contrary to what Boeing and many other cheerleaders for air freight
are predicting, it is ocean, not air, that is taking great leaps
forward.
One almost never hears of shippers converting to air from ocean. If
any conversions are taking place, it is from air to sea. The reasons
are many. Ocean, of course, is far cheaper than air. Many shippers,
even those who used air almost exclusively, are starting to rethink
their priorities, relinquishing speed for lower rates. Shipping
companies have become more aggressive in selling their services as
greater number of huge, 10,000-TEU container vessels come into
service.
These enormous fast ships can make U.S. west coast ports from Asia
in less than two weeks.; With many companies more interested in
slower, less expensive yet time definite deliveries, air freight is
feeling the pinch. Already there is overcapacity on many
routes—particularly the vital China-U.S. segment.
Jim McNerney, Boeing’s CEO, is a prime example of what the Greeks
call hubris, or overweening arrogance. He began to believe his own
press clippings as the savior of Boeing. He then fell into the same
trap as Airbus, overpromising and under-delivering. Airbus’ flagship
airplane, the 380, is two years behind schedule and $6 billion over
budget. Despite the recent hoopla over Singapore Airlines receiving
its first 380, the aircraft is hopelessly unprofitable. Boeing, of
course, initially promised the first test flight of the 787 to be
this autumn, but now is conceding that the initial flight of the
aircraft will be no earlier than the spring of 2008. Boeing’s many
customers for the airplane are bitterly disappointed for the
inevitable late deliveries, particularly its first customer, ANA, as
the Japanese carrier wanted to use the aircraft to fly passengers
next summer between Tokyo and Beijing for the 2008 Olympic Games.
McNerney broke the wise rule to under-promise and over-deliver.
Let’s hope that our nation’s premier airplane builder suffers only a
hiccup and not a major illness in this 787 embarrassment.
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New Security Rules May Knock Out Just-In-Time
 We in the air freight industry realize the need for security—
even enhanced measures. But we worry about how heavy-handed
lawmakers, whose closest contact with air freight is sitting as
passengers above an airplane’s cargo hold, will literally take
the law into their own hands by determining what added security
measures are necessary and what the costs will be.
As envisioned by Congress and the Transport Security
Administration (TSA), the added costs won’t be cheap. The
Congressional Research Service, a respected, non-profit
organization dedicated to analyzing government expenditures,
estimates the cost of added security measures to be almost $4
billion over the next decade. What it does not estimate is
perhaps a more important determinant—the loss of transit time in
meeting these more stringent security demands.
In the universe of air freight, time is our most important
asset. Despite all the highflown, detailed analyses by
supply-chain gurus; plain, simple speed in transit, shortening
the time span in moving freight, is what justifies our value to
shippers. Any obstacle to rapid transit of goods makes us less
desireable in the eyes of shippers. Longer delivery schedules
may deal a knock-out blow to the most utilized and favored
method of distribution today—Just-In-Time or J-I-T.
"Everyone in the logistics
business—shippers, airline
people, forwarders—keep
haranguing our government
to proffer security rules that
are effective, not entwined
in red tape..."
J-I-T is predicated on a fast, dependable flow of goods to the
assembly line or distribution point. J-I-T allows inventory to
be cut to the bone. It saves manufacturers millions in lessened
inventory and interest costs. Take away speed and reliability
and the entire J-I-T concept collapses. So does one of the most
important reasons for air freight.
Everyone in the logistics business— shippers, airline people,
forwarders—keep haranguing our government to proffer security
rules that are effective, not entwined in red tape, and most
importantly, allow free and unhindered flow of goods. Yet,
Congress and the TSA seem to ignore our industry advice, based
on our direct, practical experience. Let’s get our trade groups;
the Air Forwarders Association, ATA and IATA, to work together
on this vital issue. We need a full court press to awaken our
legislators and bureaucrats to the real world of air freight.
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Costs & Recalls Prompt Second Thoughts About China
 Readers of our Newsletter are
well aware of my belief that we should not put all our eggs
in one basket—China. China’s position as the undisputed
center of world low cost, outsourced manufacturing, has
eroded these past few months and may well continue to
decline into 2008.
A small, but growing number of transnational manufacturers
either are leaving China or are seriously considering
pulling out of that nation because of higher costs and
uncertainty about production standards. Techtronic
Industries, makers of the famous Hoover vacuum cleaner as
well as one of the world’s largest makers of power tools,
is expanding investments elsewhere and cutting back on
production facilities in China. The Dutch electronics giant,
Philips, is directing its subcontractors to move from China
to Vietnam because China has become “too expensive.”
"Business always will look for
the lowest costs wherever it
may take them. Mexico
learned this harsh lesson
some years ago.....China may
also be a victim in the not too
distant future."
There is a variety of negative factors causing company
executives to take a second look at China. These include
dwindling industrial space near ports and airports, spot
labor shortages and higher wages for those working, and
longer supply chains as shippers move operations inland.
China now has an industrial base that often is higher in
cost than surrounding Asian nations like Vietnam, India and
Malaysia. To its credit, Chinese manufacturers are improving
their productivity, but costs are rising much faster. It’s a
race that I believe China will not win. It’s an old story.
Business always will look for the lowest costs wherever it
may take them. Mexico learned this harsh lesson some years
ago. Many of its maquiladora plants went on reduced shifts
or shut down entirely when the great sucking sound from
China was heard. China may also be a victim in the not too
distant future.
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What Investors Don’t Want To Hear
 With the bull market turning into a bear, many stocks are
underwater. There are certain statements by corporate CEOs and
their chief financial officers that flash warning lights when
pronounced. These statements can include:
“We’re postponing our earnings release.” When that statement
hits the wires, nine times out of ten, the earnings will not be
good. Always assume the worse and watch your stock drop 10-15%.
“Our chief financial officer has resigned.” CFOs never resign
when the company is doing well. The auditors have caught
irregularities on the company’s books and it is the CFO who must
walk the plank. “We’ve found accounting irregularities.” (see
above) The new CFO can explain these “irregularities” until the
cows come home, but Wall Street hates to hear messy accounting
results. Out come the sell recommendations.
“We’re lowering our guidance.” The kiss of death, particularly
if a company has been less than truthful about its earnings in
the past.
Of course, if a company gives all of the above excuses in one
quarter, rush to telephone your broker and pray you can get rid
of the stock before a deluge of sell orders.
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When All Else Fails; Why Not Try Animal Sacrifices?
Normal maintenance procedures
just weren’t working at Nepal Airlines for one of its two
Boeing 757s. In desperation, the maintenance staff decided
to sacrifice two goats to appease Akash Bhairab, the Hindu
sky god. The sacrifice seemed to work. The airplane now is
flying its regular schedule.
Perhaps I should stick pins in my voodoo doll the next time
one of CII’s airlines leaves my cargo behind.
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Julian
Keeling
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