September 2009 Newsletter
Air Freight’s Biggest Challenge; the 90 Lb. Housewife
What a nutty business we’re in! Here is a $100 billion
industry depending ultimately on the shopping habits of
a 90 lb. housewife. All the huge container ships with
their 10,000 TEU capacity; all the triple 7s designed to
fly halfway around the world without refueling are no
more than scraps of metal if that housewife and her
husband stop visiting the mall or car dealership and
bank their money instead. Both air and ocean freight
seem to be slightly pulling out of the deep recession,
but we’re not out of the woods until pocketbooks fly
open.
What are the chances of the American consumer returning
to her spendthrift ways, to going deeply into debt once
again? Economists and psychologists seem to be in rare
agreement, stating that no return to a splurge in
spending is on the horizon. The Great Recession has left
deep scars on the American psyche. Even normally
optimistic retailers seem to agree. In the latest
monthly statements reporting retail sales, executives
from high fashion chains like Saks to discount stores
like T.J.
Maxx are cautioning that a major uptick in sales won’t
occur until the second half of 2010 at the earliest.
Since almost 90 per cent of merchandise in U.S. stores
arrive from overseas by sea or air, the very cautious
predictions by retailers do not bode well for our
industry. Restocking inventory, which is the principal
reason for currently improved air and sea freight
volume, can’t last forever. Unless that inventory is
sold, the supply chain is broken.
"All the huge container ships
with their 10,000 TEU
capacity; all the triple 7s
designed to fly halfway
around the world without
refueling are no more than
scraps of metal if that
housewife and her husband
stop visiting the mall or car
dealership and bank their
money instead."
Will we see the boom times return in air and ocean
freight? And if they don’t, do we really need all those
container ships plying the oceans and the airplanes
flying over them? Hardly. At least 20 per cent of the
aircraft and 30 per cent of the container ships now in
active service could be retired. Those percentages are
tough to accept, but they are realistic. As the saying
goes, “when the going gets tough, only the tough will
survive.”
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New Vice President Takes Charge At Backstage Cargo
CII has been pursuing “niche” markets with great determination
and persistence during the past few years in addition to our
traditional freight forwarding and wholesaling business. We
already have discussed in an earlier Newsletter CII’s Tuna
Support division, supplying parts and equipment to the
multi-billion dollar tuna industry. This division is growing
exponentially since started at the beginning of 2009. Another
one of our niche markets, targeting the huge entertainment
business, also is getting greater attention at CII’s Los Angeles
headquarters.
A major step in providing greater and more complete services to
the film, TV and concert business is the appointment of Maggie
Martinez as Vice President of our entertainment division,
Backstage Cargo. Maggie’s coming on board adds great strength
and know-how to our entertainment division. She brings to CII a
wealth of experience and knowledge in this highly specialized
business, having worked with film companies, TV networks and
concert organizations all over the world. Maggie numbers dozens
of film, TV and concert personnel as her valued contacts. Says
Maggie, “this is a very personal business. The world of
entertainment is where emergency is routine 24 hours a day,
seven days a week.”
We welcome Maggie to our staff and are confident Backstage Cargo
will grow in importance to CII in the months and years ahead.
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Exactly What Are 3PLs & 4PLs?
Every so often, I’m asked by current and potential CII
customers, “are you a 3PL?” Occasionally I’m even asked, “are
you a 4PL?” My answer invariably is, “I’m a freight forwarder
and wholesaler, proud of my industry’s traditions and services
to the shipper.”
Customers’ questions made me stop and think. “Just what are 3PLs
and 4PLs? What role do they play in the transportation
business?” I asked.
In my view, 3PLs and 4PLs are no more than fancy terms for
marketing purposes. A 3PL to those few in our industry who are
not familiar with the term, merely means, “third party logistics
company.” A 4PL is simply a term of one upmanship rather like
7-Up is better than 6-Up or Formula 409 cleans better than
Formula 408. The terms are really no more than the creations of
clever advertising and sales people who wanted to place their
transportation companies on a more exalted level. The trade
press, to their discredit, cooperated in this effort by
accepting without scrutiny this nomenclature and listing
basically freight forwarders as 3PLs and 4PLs. The reality is
that the traditional freight forwarder like CII provides just
about all of the services of a 3PL or 4PL—at a much cheaper
cost. You name it; moving freight efficiently and hassle-free,
warehousing, providing inventory control—the “old fashioned”
consolidator does it all.
"...CII provides just about
all of the services of a 3PL
or 4PL—at a much cheaper
cost. You name it; moving
freight efficiently and hasslefree,
warehousing, providing
inventory control—the “old
fashioned” consolidator does
it all."
Like so much in American business, 3PLs and 4PLs sell the
sizzle, not the steak. One unintended, positive consequence of
the current Recession is that shippers are taking a harder look
at their 3PLs and 4PLs. “Just what are we paying for?” they ask.
Increasingly, they are not getting satisfactory answers and
either are dumping entirely their 3PLs and 4PLs or cutting back
on their services. They are finding the emperor has no clothes.
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Will Other Asian Airlines Follow JAL’s and ANA’s Example?
The recent announcement stating that the cargo divisions
of the two major Japanese airlines, JAL and ANA, will
merge their air and ground operations is another
powerful indication that Asian air cargo is not what it
used to be. These two proud carriers are banding
together to staunch the enormous flow of red ink both
are experiencing. The Great Recession is leveling
everyone; large and small. The JAL-ANA cargo merger also
tells us the few modest mergers among smaller carriers
in China and India may only be a start in the Asian
merger derby. Unlike the merger and acquisition
activities among European carriers like KLM-Air France
and British Airways-British Midlands, the big Asian
airlines have remained independent. As the decline in
Asian air freight volume continues with little hope of a
substantial upturn, this go-it-alone attitude,
encouraged by their governments’ desire for national
flag carriers, will change.
The merger of cargo operations at Malaysian and Thai
Airlines would make both economic and operational sense.
Both carriers are losing tons of money in their cargo
operation. Both airlines have almost exactly similar
routes from their hubs at Kuala Lumpur and Bangkok. Both
utilize similar aircraft and avionics so that flight and
ground handling crews could easily adapt to each other’s
operations. Both share that intangible but important
quality of similar cultures and interests. Another
merger, this time between Korean Air and the smaller
China Airlines also would make sense. Both carriers are
losing money in their freight operations and both
duplicate many of the routes of the other. Air Vietnam
is another example of the wisdom in merging with another
carrier.
"As
the decline in
Asian air freight
volume continues with little
hope of a substantial upturn,
this go-it-alone attitude,
encouraged by their
governments’ desire for
national flag carriers, will
change."
How long will the Vietnamese government pour millions
of dollars into an inherently unprofitable airline just
for the prestige of being a flag carrier?
Airline management talk constantly about “rationalizing”
their operations. A little less rationalizing and a
little more honesty about their predicament would place
the Asian carriers, now responsible for about 75 per
cent of Asian cargo traffic, on a much more realistic
footing. Mergers and acquisitions would lead inevitably
to higher rates, allowing the carriers and their
forwarder agents finally to earn a decent return on some
of the most important international air traffic lanes.
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CII Joins Cargo2000
CII has just joined Cargo2000, the organization
sponsored by IATA to improve the quality standards of
the worldwide cargo industry. We thought long and hard
before signing on the dotted line. Cargo2000 had been
known throughout the air freight business as the home of
the “big boys,” the major airlines and the big,
international forwarders. That is changing, however. The
Recession is making everyone; large and small,
reconsider their positions. The goal of Cargo2000 is a
quality management system that improves procedures and
processes. It is an objective that is applicable to
everyone associated with our industry. This includes
airlines, forwarders, ground handling agents and
truckers. We think our membership in Cargo2000 will help
us in providing enhanced quality services while aiding
CII in retaining current customers and generating new
business. Our membership is under the title of Regional
Association Member.
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Spectacular Example Of Airline Mistiming
A midst the rubble of the
air cargo industry devastated by the current Recession,
a new cargo airline has just taken to the skies.
Aerologic, the joint venture of DHL Express and
Lufthansa Cargo, now is flying three Boeing all-cargo
767s between Europe and Asia, ironically paralleling the
same routes flown by their parents.
What a spectacular example of mistiming! The air freight
industry needs another cargo airline like airports need
longer security lines. True, DHL and Lufthansa started
to plan for this operation about two years ago when air
freight was booming. Why did they stubbornly push ahead
while watching air freight volume go down the tubes?
Even Aerologic’s manager now admits, “our original
business plan is totally obsolete.” As another example
of management’s blind stubborness in the midst of
disaster, DHL can be excused for making this
catastrophic blunder. After all, they have been making
mistake after mistake during the past few years
culminating in its disastrous foray into the U.S.
package express business. DHL and its parent, Deutsche
Post lost a cool $10 billion on that venture. Lufthansa,
however, normally is a shrewd and cautious operator in
the cargo business. The airline rarely commits serious
mistakes. In this instance, Lufthansa management must
have been dreaming in Frankfurt as chaos descended on
their business. It proves once again the human tendency
to stick to a path when common sense says, abandon it. I
predict hundreds of millions of dollars in losses over
the next few years if Aerologic indeed keeps flying.
Aerologic is issuing statements right out of the
corporate handbook stating that cargo volume “is on
track” and “meeting all expectations.” Either its people
are living in a dreamworld or Aerologic is cannibalizing
cargo from both its parents. Or perhaps a combination of
both. It will be interesting to watch the progress or
lack of it in this ill-starred joint venture.
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How About Cash For Clunker Stocks?
The U.S. government has seen fit
to offer up to $4,500 for customers trading in their old gas
guzzling “clunkers” for new, fuel efficient cars. Why stop with
autos? Why not have a “cash for clunker stocks?” All those
stockholders with losing investments would be paid by the
Treasury Department to make up for their losses. Just imagine
what a shot in the arm for the economy. It would make the $3
billion paid out by the government for old cars look like petty
cash!
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Julian
Keeling
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