Revisiting an Industry Trend
In September 2007, we featured an article titled, "When Air Freight becomes Ocean Freight." Before fuel surcharges reached their record peaks of $1.50+/kg for U.S. exports and close to $2.00/kg for some U.S. imports, the air cargo industry was seeing signs that customers were seeking lower cost and longer transit time options by opting to move their commodities via ocean transport. Could these companies identify their freight to a point of operating two distinct supply chains for freight that had typically moved solely by air? Indeed by January 2008 after the Peak Season of 2007 and prior to and immediately after Chinese New Year, many companies did cut back on air transportation in lieu of ocean freight to save money.
Since that September article, our industry has seen several carriers serving particular regions or markets go out of business, mostly due to the dramatic rise in fuel prices. As of this publication's publishing date, the price per barrel has teetered around the $100/barrel mark, slightly bringing down fuel surcharges. IATA has reported a dramatic downturn in air cargo demand, and signs are indicating that the ultimate customers are looking at ocean freight alternatives again, one year after our September 2007 article.
Will a certain amount of air freight be converted to ocean freight? No one knows for certain. After all, there isn't exactly an excess of TEU capacity out there. Steamship lines have done an excellent job in controlling supply to maintain price levels. They have successfully implemented fluctuating BAF charges and moved larger TEU vessels to more revenue producing port pairs. As with so many things in life, only time will tell.
In the article below, a noted industry author explains how this trend has carried over to the integrator segment of the transportation industry.
Integrators change course as clients go for ocean transport
By Ian Putzger Toronto
This summer, FedEx opened two new gateways on the US West Coast for traffic entering its home market from Asia by ocean vessel. The integrator's trade networks unit created gateway offices at the ports of Seattle and Oakland for traffic that moves in consolidations to the US and after breakdown is fed into the domestic FedEx network.
"There's a tremendous movement of the lower value-added traffic off the traditional freighter planes on to the water," said FedEx chairman, president and chief executive officer Fred Smith.
The focus on waterborne traffic is indicative not only of the weakness of the US economy and the impact of high oil prices on supply chain costs and strategies, it also shows a change in strategic thinking at FedEx.
Following the announcement of the integrator's first quarterly loss in 11 years, Smith said that FedEx was reviewing its strategy in order to position itself better to deal with an expected change in the way how its clientele was doing business. He outlined a new situation, where reliance on aircraft for shorter hauls is diminishing further. Increasingly, customers are cutting back on premium services, Smith warned.
With the domestic US market forsaking overnight air transportation for slower, less expensive solutions, the function of intra-US traffic is changing for the integrators, according to Smith.
"Increasingly in the international market the movement of goods by air will be in smaller lots and door-to-door express movements rather than in the large consolidations that marked the industry structure several years ago," he said.
For companies such as FedEx, this means a need for greater emphasis on the interface between intra-US and international networks, Smith added.
The weak US market was a major factor behind the poor result in the most recent quarter for FedEx, the three-month period that ended May 31. The company tabled a $241 million net deficit, down from a $610 million plus a year earlier. FedEx suffered an operating loss of $163 million. At the FedEx Express unit, the integrator's core division, operating income dropped 31 percent to $426 million during the quarter. Its domestic express volume fell three percent.
UPS fared little better, with net profit tumbling 21 percent in the second quarter of 2008. The company's operating profit on domestic packages dropped 24.6 percent, fuelled by a 6.1 percent drop in overnight air shipping volume. Management blamed the results on the weak US economy and the soaring price of petrol.
Unlike FedEx, UPS can expect a windfall in its intra-US air express business courtesy of DHL's retrenchment of its US operations, which produced a $1 billion a year agreement under which DHL will use UPS for the line-haul of its intra-US air traffic. It speaks volumes about the market when a spokesman for UPS insisted that the Atlanta-based company would continue to have capacity for forwarders available on its domestic flights after it accommodates the DHL traffic and its own volumes.
Winding down its own US air network should stop DHL's blood-letting in North America over time, but now it is still a drag on the balance sheet. DHL parent Deutsche Post World Net posted a drop of $48 million in net profit for the second quarter to $396 million, which it attributed in part to the restructuring costs in North America, which weighed in with $73 million in the period.
The integrators remain bullish about their international express package business, particularly in Asia. FedEx and UPS are due to open their new Asian hubs in Guangzhou and Shanghai respectively this year.
Elsewhere in Asia, UPS bought out Korea Express's share in their joint venture to assume full control of its express business in Korea.
According to some unconfirmed reports, FedEx is about to take a giant leap to boost its strength in the market, particularly on intra-European and Asia-Europe trade lanes. The integrator is allegedly seeking to acquire TNT. Both sides declined to comment on what they described as "speculation."
The recent expansion moves from FedEx and UPS in the international arena have been concerned with expedited rather than top-of-the-line express offerings, reflecting the downward pressure on premium products from high oil prices and sluggish economic conditions.
FedEx expanded its international economy product, which had been launched in January, to three new Asian markets - Vietnam, the Philippines and Indonesia - bringing the number of countries covered in Asia to 13.
After having introduced its day-specific expedited freight service in Asia late last year, UPS decided to extend the offering to the Middle East in May.
CargonewsAsia.com
American Airlines requests delay of Chicago-Beijing flights
American Airlines has asked the US Department of Transportation for a waiver that will allow it to delay for one year its launch of non-stop service between Chicago and Beijing, Dow Jones reported.
Citing the high cost of fuel and other timely issues plaguing the airline industry, American Airlines asked to launch the service on April 14, 2010.
The original launch date was April 9, 2009.
Earlier this year, Northwest Airlines received permission from the government to suspend for a year seven weekly all-cargo flights it was operating between the US and Guangzhou.
Access to routes between the US and China is highly competitive because air service between the two countries is restricted by bilateral agreements.
Cargo News Asia
September 1, 2008
American Airlines defends tie-up with British Airways
American Airlines on Wednesday rejected charges by Virgin Atlantic that a proposed alliance between American and British Airways would create a monopoly on trans-Atlantic service from London Heathrow Airport.
The American carrier's response came in a filing with the U.S. Transportation Department, which is reviewing a request by American and British Airways for antitrust immunity.
If they receive approval, the airlines would service a total of 443 destinations in 106 countries, with nearly 6,300 daily departures.
The bid marks the third time in the past dozen years that American and British Airways have sought permission to enter into so-called code-sharing agreements on flights between the United States and Heathrow. Under such agreements, different airlines put their own flight numbers on the same trip, expanding the potential number of customers who might take the flight and eliminating an overlap in service.
British Airways is in merger talks with the Spanish airline Iberia, which is part of the antitrust immunity request, along with Royal Jordanian and Finnair.
Two earlier efforts by British Airways and American failed after U.S. authorities told the airlines they would have to give up some flights at Heathrow.
Since the airlines' last attempt in 2002, the United States and Europe have signed an "open skies" treaty that has expanded competition at Heathrow, where American and United previously had been the only U.S. airlines with approval to operate.
Meanwhile, two other airline alliances - the Star Alliance and SkyTeam - have received antitrust immunity, allowing their members to combine their flight codes.
Still, Richard Branson, the head of Virgin Atlantic, has denounced the combination of American and British Airways as a "monster monopoly" that would be bad for competition and for the U.S. and British aviation markets.
Branson maintained that the two airlines would have nearly 60 percent of passengers between the United States and Heathrow, and up to 79 percent of the seats on some routes. Virgin Atlantic, which has challenged the combination in a complaint filed with the Transportation Department, has launched a publicity campaign, painting some of its planes with the slogan, "No Way, AA/BA."
But American, in its own filing Wednesday, said that it and British Airways would hold an overall market share of 43.6 percent on flights from Heathrow to the United States.
The greatest market share would be on flights from John F. Kennedy Airport in New York to Heathrow, where the airlines would have 52.3 percent of flights. American said it based the estimates on market data for July.
"Virgin has a history of being a bit fast and loose with the numbers, and it is incumbent on us to set the record straight," said Don Casey, managing director for international planning at American.
American Airlines executives have said they hope to get a ruling on their request before the Bush administration leaves office in January.
The European Commission also has opened an investigation into the airlines' request for antitrust immunity.
International Herald Tribune
By Micheline Maynard
Wednesday, September 3, 2008
Book Review: Introduction to Air Transport Economics: From Theory to Applications
Bijan Vasigh, Embry-Riddle Aeronautical University, USA, Ken Fleming, Embry-Riddle Aeronautical University, USA, and Thomas Tacker, Embry-Riddle Aeronautical University, USA
Introduction to Air Transport Economics: From Theory to Applications uniquely merges the institutional and technical aspects of the aviation industry with their theoretical economic underpinnings. In one comprehensive textbook it applies economic theory to all aspects of the aviation industry, bringing together the numerous and informative articles and institutional developments that have characterized the field of airline economics in the last two decades as well as adding a number of areas original to an aviation text. Its integrative approach offers a fresh point of view that will find favor with many students of aviation.
The book offers a self-contained theory and applications-oriented text for any individual intent on entering the aviation industry as a practicing professional in the management area. It will be of greatest relevance to undergraduate and graduate students interested in obtaining a more complete understanding of the economics of the aviation industry. It will also appeal to many professionals who seek an accessible and practical explanation of the underlying economic forces that shape the industry.
Recommended by Aerlines Magazine, www.aerlinesmagazine.com
Review by Ashgate Publications, www.ashgate.com
Environmental campaign
"My Cargo Climate Care"
Under the title "Cargo Climate Care," Lufthansa Cargo is bundling all its activities for a responsible approach to dealing with nature and natural resources. With its engagement Lufthansa Cargo makes a clear commitment to environmental protection as well as to the recently defined environmental guidelines and environmental targets.
At the beginning of September, the internal "My Climate Cargo Care" campaign will begin in Frankfurt. While "Cargo Climate Care" includes all the activities of Lufthansa Cargo relating to environmental protection, "My Cargo Climate Care" is intended to make it clear to all employees that the individual involvement of each one of them is important - and is supported by Lufthansa Cargo. In accordance with the motto: "Small steps, great successes!" it is hoped that people will be involved both at the place of work and at home. Because environmental protection is not only a matter for employers, but also for employees.
As partners, among other companies, we have gained the support of ADAC Hesse Thuringia, FES Frankfurt, Mainova, Soda Club and Deutsche Energieagentur.
Lufthansa Cargo Newsletter
August 2008
U.S. Airlines Cut Emissions
U.S. airlines improved fuel efficiency 110 percent in the last thirty years, according to a report from their trade organization. From 1978 to 2007, the airlines cut 2.5 billion metric tons of carbon dioxide (CO2) emissions, said the Air Transport Association in its 2008 Economic Report.
"The key to connecting and protecting our planet is investment in new technology," said ATA President and CEO James C. May in the introduction to the report. Airlines' ability to invest is critical to the ATA's commitment to improve fuel efficiency by another 30 percent through 2025, he said. Also critical said May, "is the investment we are seeking in a modern, satellite-based, digitally enabled, vastly more energy-efficient air traffic management system."
9/2/2008
Thomas L. Gallagher, Web Editor
Traffic World Online
New equipment
improves airline efficiency
Air New Zealand (NZ) is reinforcing its claim to the title of the world's most environmentally responsible airline by installing new equipment that will reduce the carbon emissions from its international jet fleet. The airline will retrofit zonal dryers across four of its jet fleets to reduce fuel burn and consequent emissions.
The electrically-powered dryers, mounted in the space above the ceiling or under the floor, reduce moisture trapped in insulation between the aircraft outer skin and cabin lining. They typically remove around 200 kilogram's of water from each aircraft, which reduces fuel consumption.
The carrier expects to save 500,000 US gallons of fuel a year across 42 aircraft, reducing carbon emissions by 4700 tonnes a year.
General manager airline operations Captain David Morgan says Air New Zealand was already a world leader in refining flight operations to reduce its environmental impact and fuel burn long before rising fuel costs put the focus on fuel efficiency.
Over the four years from 2004 until March 2008, the airline's fuel saving initiatives have saved 9.7 million US gallons of fuel and reduced carbon dioxide emissions by 90,963 tonnes. The carrier is using 36 million liters less fuel on an annual basis delivering a saving of approximately NZ$43 million each year.
In another significant move the airline is fitting performance-enhancing blended winglets to its five B767-300ER aircraft, an initiative that is expected to save more than NZ$7.5 million in fuel and 16,000 tonnes of CO2 emissions annually.
The B767 fleet, which operates to Australia, the Pacific Islands and Honolulu, will be fitted with the winglets progressively from July next year.
The winglets are 3.4m high wing-tip devices which make the aircraft's wing more efficient by reducing the drag near the wing tip. This means aircraft use less fuel, and can climb faster.
Air Cargo Asia Pacific
September 19, 2008
Air NZ shows how to save fuel
New Zealand carrier Air New Zealand has operated a flight Auckland-San Francisco, USA using technology, optimal flying conditions and the co-operation of US, New Zealand and Australian aviation authorities to save 4600 litres of avgas. The plane tapped Auckland airport's electricity supply rather than generate its own power until it was ready to take off, then it climbed quickly to cruise height, used GPS to avoid bad weather and made a slow gradual descent at the end of the journey.
Air Cargo Asia Pacific
September 19, 2008
NWA Cargo goes green
As a part of the NWA EarthCaress program, NWA Cargo has replaced engines on five of its freighter aircraft with more fuel efficient and higher performance engines, achieving a 5 percent improvement in fuel efficiency.
This will save the airline an estimated 2.4 million gallons of fuel per year and eliminate over 26,000 tons of carbon emissions.
NWA Cargo also made a progressive environmental move to purchase 4,200 lightweight cargo/luggage containers (LD3s), driving significant fuel savings of up to 1.3 million gallons of fuel per year.
September 17, 2008
WorldACD 2008
NWA Employee in MSP Recognized
for Energy Cost Saving Efforts
Minnesota energy company, Xcel Energy, recently recognized Northwest's commitment to energy efficiency. On Tuesday, Xcel recognized NWA employee Ron Toward, MSP facilities maintenance and operations manager, for his dedication to implementing cost savings in the workplace by presenting him with an award.
"Ron's determined efforts have helped Northwest become one of Xcel's top model corporate customers in terms of embracing energy efficiency and making it a standard business practice," said Stephen May, NWA director - facilities.
Even though Northwest has been partnering with Xcel Energy in reducing energy costs for nearly 20 years, Ron took leadership of this project in recent years. "Because our energy systems - from lighting to heating to cooling - have a dramatic affect on one another, it makes sense for us to continually re-examine our systems to ensure we are taking the best approach," said Ron. "Like any organization, we want to run as efficiently and effectively as possible. But we can't focus solely on the financial impact without considering the well being of our customers or employees."
Airport and Technical Operations teams helped contribute to the cost savings as some of the energy efficiencies were achieved through air compressor systems replacement and lighting changes in hangars and heating and cooling changes on concourses, among other things. These efforts have helped NWA realize energy savings of more than 18 million kWh annually; $963,405 in conservation rebates; and $1,070,000 in electricity costs each year.
09-03-08
NWA'a Employee Newswire
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