October 2007 Newsletter
As FedEx Goes, So Goes The Nation
 While Alan Greenspan’s new book, “The Age of
Turbulence,” has received widespread attention with the
bespectacled Mr. Greenspan appearing on multitudes of TV
shows and giving dozens of newspaper interviews, one of
his more interesting observations in the book is
generating almost no attention. That is his conviction
that FedEx plays an important role in anticipating
general economic trends. Starting in the mid-nineties as
FedEx became an increasingly important factor in moving
air and surface freight, Greenspan, head of the Federal
Reserve at the time, began following closely the package
company’s quarterly statistics. He believed then as he
does now that FedEx, with its broad band of industrial
and commercial customers, is perhaps an even more
accurate predictor of our economy than the more
traditional economic indicators as auto sales, steel
production and railroad car loadings.
There is little doubt today that when FedEx shows tepid
growth, there is trouble ahead for the economy. What is
Memphis telling us now? The company’s latest quarterly
statistics indicate that while international volume
continues to show strength, domestic cargo shipments,
particularly by air, declined rather sharply. Fred Smith
sees little or no growth during the upcoming Holiday
season. Odds are growing that the U.S. economy, the
largest in the world, may be on the brink of that
dreaded condition; recession. As Bette Davis remarked
memorably in the film, All About Eve, “fasten your seat
belts; it’s going to be a bumpy landing.”
"Odds are growing that the U.S. economy, the
largest in the world, may be on the brink of that
dreaded condition: recession."
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More Confusion On Iraq
 The Iraq war undoubtedly is the most confusing in American
history. Latest example, the famous or infamous “surge” in
troops. We start with 130,000 troops in Iraq, add 30,000 for the
surge, then subtract 30,000 after the surge has been completed.
What do we end up with after all this expansion and contraction?
Exactly 130,000 troops. If the amount of troops remains the
same, why bother? That’s a good question which no one seems to
have the answer although President Bush and his surrogates are
trying mightily to come up with some persuasive responses—with
little success. If, as Bush & Co. contend, the additional 30,000
troops have turned the tide in Iraq in our favor in just a few
months, why be in such a hurry to pull them out? Using
Bush-math, if 30,000 troops are aiding the cause of “freedom” in
Iraq, why not ensure victory with 60,000 additional troops or
even 90,000?
"Although
54% of the American public believes the “surge” was unsuccessful
and that we should get out of Iraq now, it is becoming
increasingly clear that our armed forces will remain in that
benighted country for years to come."
Problem is we’ve heard that song before. Each time, the American
public is tantalized with the assurance that we need a little
patience to win that final “victory.” But didn’t that same
President Bush back in April of 2004 claim that “most of Iraq is
relatively stable” and in December, 2005 declare flatly that “we
are winning the war in Iraq.”
Although 54% of the American public believes the “surge” was
unsuccessful and that we should get out of Iraq now, it is
becoming increasingly clear that our armed forces will remain in
that benighted country for years to come. A number of Bush
loyalists now are comparing Iraq to Korea where American troops
have been stationed for the past sixty years. As a famous
general once aptly remarked, “it’s much easier to start a war
than to finish it.”
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U.S., Japan Extend Air Pact
Buried in the trade press last month was the announcement that the
U.S. and Japan have agreed to expand their air services agreement
for the first time in a decade. If such an agreement had been signed
with China, it would have been front page news. Like most other
people in the cargo business, I have given little thought to Japan.
Yet, it is the world’s second largest economy and a major trading
partner with the U.S. Perhaps we take the Japanese market too much
for granted. Perhaps we feel the Japanese economy is a “closed”
system where a few, traditional home grown cargo firms dominate the
market with little chance of outsiders making serious inroads into
it.
Maybe our industry should pay a little more attention to this huge
trade market rather than obsessing with China. Perhaps we should
show more patience and subtlety in soliciting Japanese customers.
Generating more business in Japan is not an easy task, but I believe
not an impossible one. Among foreign companies, the Japanese market
has been left primarily to the very biggest American cargo
organizations like UPS and FedEx and a few very large forwarders
like Schenker and BAX. Mid-sized and even smaller forwarders have
the pricing flexibility and high service levels which could attract
Japanese shippers if we make a determined effort.
An interesting contrast.
The U.S.-Japanese negotiators reached an agreement in just three
days. Previous U.S.- Chinese agreements have taken five years.
"Maybe our
industry should pay a little more attention to this huge trade
market rather than obsessing with China."
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Trouble for BA And Its Partners In Crime
 Despite the Bush Administration’s friendship with the business
community, anti-trust legal mechanisms are alive and well in the
U.S. Prosecutors have been able to prove in court that the Fuel
Surcharge (FSC) was a conspiracy where airlines got together and
colluded over price. Some airlines buy fuel and currencies in
the futures market (Southwest is the most conspicuous example)
to lessen the impact of any fluctuations. Others take their
chances in the marketplace and hope (and pray) that any
increases will be passed onto their customers with double quick
speed. What has always bothered me is the way arbitrary rates
have been applied irrespective of destination and flight time.
Why should a “bunny hop” from Miami to some point in the
Caribbean carry the same FSC as an eighteen hour flight from
Chicago to Singapore? Every country applies different taxes to
jet fuel suppliers so the cost varies from nation to nation. The
cost of fuel would be significantly higher, say, in Fiji, than
in Australia. Air Pacific’s costs would be far greater than
Qantas’.
Ever since 1991, airlines have been in a bind to hold onto their
rating structure. In fact, prices may have declined. Since 2000,
thanks to spikes in fuel costs (fuel now accounts for a higher
percentage of airline costs than labor), carriers have been in a
catch-up mode simply because the vast percentage of the FSC has
gone straight to their bottom lines. That is an unequivocal
fact. Unlike shipping lines who have had a thirty-year history
in applying BAF’s/CAF’s for a month or two. If it looked like
there would be no significant changes, they would incorporate
that cost into their rates. Airlines knew if they copied that,
the increased rate would not hold.
British Airlines, Korean Airlines and their buddies deserve
their substantial fines. The FSC and Security surcharge for the
most part is a ploy to increase rates. The TACT went the way of
mechanical adding machines twenty five years ago and was
replaced by “contract” rates. Freight always has been considered
incremental income for passenger carriers much to the chagrin of
all-cargo airlines. As airlines’ financial fortunes have taken
tumbles, so has the quality of senior management. In a nutshell,
airlines have been gutless for far too long in charging
compensatory rates That is until the windfall and security
surcharges caused by 9/11.
"The quicker you decide to sell rates with a fair margin
of profit and get rid of security and FSC charges, the better
off you will be."
To my airline friends, you certainly have screwed up this time.
the simple fact is that you have been caught with your pants
down; colluding in formulating security and fuel surcharges. As
individual airlines, you have had a horrible history of not
getting rate increases to stick. Along come increases in costs
by way of insurance, fuel and “whoompty do” and you found you
could slam the freight industry with ridiculous hikes with FSC
charges. That was your way to compensate for quoting freight
rates below your costs. The quicker you decide to sell rates
with a fair margin of profit and get rid of security and FSC
charges, the better off you will be. By the time the courts are
finished, you—the airlines— will be shelling out billions of
dollars. Pity you didn’t take my advice a year ago!
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Bruce McCaffrey; Ultimate Survivor
 Airline executives rarely last long at their jobs. At the
combination carriers, where cargo is an incremental item on
their balance sheets, cargo executives are expendable. At
the all-cargo carriers, where red ink is more common than
black, heads of cargo also are the fall guys. One exception
to the rule is the long lasting career of Bruce McCaffrey,
Director of Cargo at Qantas.
Bruce has been on the Qantas hot seat for the past twenty
years. He has seen innumerable changes in airlines’ cargo
operations. From being tightly supervised by governments to
relatively laissez faire in pricing and routes; from being
carriers of primarily emergency shipments to becoming vital
partners in the Just-In-Time system of minimal inventory at
the assembly line, Bruce also has witnessed vast changes at
his own airline. Qantas has changed from a bureaucratic,
government-owned organization to one of the most profitable
publicly held companies in Australia. The airline’s board,
once run by government bureaucrats, now has a board and
officers who are dynamic and entrepreneurial driven. Aided
by shareholders’ revolt, Qantas did not fall into the hands
of a predatory, American-based hedge fund. The shareholders
had great respect for the direction Qantas was heading and
saw no need for change.
Bruce has reported to at least a dozen bosses in almost as
many years. Many were Aussies, but most were outsiders with
little or no cargo experience—par for the course at most
passenger airlines. Some brought good ideas to the table;
some were good administrators, but others quickly
demonstrated they were plainly fools. Over the years, many
experienced, competent executives either fell on their
swords or were turned out because they didn’t fit the
corporate mold.
Through all this turmoil, Bruce hunkered down, kept his eyes
open and his mouth shut and did his job. Twenty two years
ago, he took command of U.S.-Australian cargo from his boss,
George Stark. It was and remains the crown jewel of the
airline’s freight operations. He has kept it that way for
the past two decades.
Bruce never has taken any Dale Carnegie courses. He is
basically a hard guy to get to know. He also has had a
number of health setbacks. Like many other corporate
executives, he has faced the nights of long knives with
smart Alecs determined to unseat him. In spite of these
distraction, Bruce has concentrated on achieving the only
goals that matter—running a tight, cost effective ship and
delivering profits each year—to stifle his critics.
My hat is off to you, Bruce. Although we have shared just a
few social moments together, our twenty-year relationship
has been almost always strictly business. I could hardly say
our working together as forwarder and airline has generated
a friendship. Yet, I remain in awe on how much you have
achieved for Qantas by remaining steadfast in your
principles. It demonstrates once again that if one possesses
integrity and stands up to be counted when the chips are
down no matter what the consequences, one cannot only
survive but prosper.
Bruce is an outstanding example of this timeless truism.
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Forwarders Succumbing To Commodity Pricing
It’s remarkable that airlines remain in business. They either are
too greedy (see above analysis of FSC pricing), or too stupid to
realize they are dumbing down their service levels to commodity
pricing. Unfortunately, forwarders are closer than we think in
emulating the airlines by selling air freight as a commodity and
not as a premium service at a premium price. Our friends at the
carriers have turned their business into one huge commodity.
Their profits derive not from their rates in carrying our
freight, but in their wholly unsupported charges for FSC and
security. Let’s not fall into the same trap as the airlines. The
kind of sub-par pricing among the carriers melts their brands
and erodes passenger and forwarder loyalty.
In the not too distant past, the major carriers had distinct
personalities. American was the glamorous trans-con airline;
United the solid workhorse; TWA with its Howard Hughes
background, the adventuresome airline. Customers responded to
these distinctions. Today, all the airlines offer the same,
cattle-car coach service with a few, overhyped differences in
international first and business class.
What was once an industry proud of its passenger and cargo
standards, now offers only one inducement—price. We forwarders
cannot allow commodity pricing to dominate our industry. We
offer unique and special skills in the complicated process of
moving a shipment across a continent or above an ocean. Let’s
not undersell these efforts.
Competitive pricing, yes. Commodity pricing, no.
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Julian
Keeling
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