Global Logistics—June 2006

Global Air Cargo Flying Steady

Manufacturers, retailers, and distributors shipping goods around the world have kept air cargo carriers busy lately—and the effort is showing up on carrier balance sheets. This increase in global trade, coupled with the airlines’ successful efforts to reign in costs, is starting to pay off.

"Recent air cargo data from airlines and statistical bureaus show the air cargo industry is enjoying a period of growth and increased profitability," says Chris Morgan, lead analyst, logistics and express, for London-based research firm Datamonitor.

Air freight traffic, for example, grew by 6.2 percent in March 2006 (the most recent month with complete data available), up from 5.4 percent in February 2006, and has now grown at levels above 5 percent for four consecutive months, according to the International Air Transport Association (IATA).

IATA’s first quarter 2006 report shows a year-on-year improvement in air cargo traffic, with growth spread across all regions. The largest improvement comes in the Africa/Middle East region (a 16.6-percent aggregate year-on-year rise in freight tonne kilometers), followed by Asia-Pacific (5.7-percent growth), North America (4.4 percent), and Europe (2.2 percent).

This traffic growth translates into surging revenue for air cargo carriers. Air France-KLM, for instance, recently announced a 3-percent increase in cargo traffic as well as a nearly 12-percent year-over-year increase in air cargo revenue for the year ending Mar. 31, 2006.

But not everything is coming up roses for the industry. "The air cargo marketplace still faces three significant challenges," warns Morgan. They are:

1. The potential shifting of cargo to dedicated freighters. Because cargo and passenger routes are currently mismatched—air cargo traffic in the Asia-Pacific trading lanes, for example, is increasing rapidly, while passenger traffic on the same routes is not—limiting cargo to passenger planes may not be the best strategy. But shifting cargo from the bellies of passenger airlines to space in dedicated freighters is not a simple solution, says Morgan.

Cargo holds and freighters are usually full on outbound flights from Asia, but relatively empty on the return leg, which hurts airlines’ efficiencies. This shift is likely to lead to price increases for shippers, which could, in turn, dampen airline growth.

2. Increased security measures. Beefed-up security rules are particularly troubling for air cargo carriers. U.S. regulations now state any pallets being moved via air must be tagged by category, which can trigger fines or delays—a significant problem because cargo can only be shipped on a limited number of flights.

3. The threat of further fuel price increases. "The industry faces a potential rise in fuel prices due to the maturing of existing hedging programs," says Morgan. Though the airlines have made strides countering high fuel prices through efficiency plans and increased use of technologies such as RFID, escalating fuel costs could still be a serious roadblock to the industry’s continued growth.

SoCal Shines in International Trade

The 2003 labor dispute shutdown made "West Coast ports" dirty words for some global shippers. But the West Coast—and Southern California in particular—still remains a leader in U.S. international trade capacity.

In 2005, Southern California retained its national first-place ranking for two measures of international trade, according to Los Angeles County Economic Development Corporation’s (LAEDC) annual review, International Trade Trends & Impacts.

The L.A. Customs District was number one in two-way trade in 2005, with $293.9 billion, and the combined ports of Long Beach/Los Angeles handled more than 9.2 million loaded containers. New York was second on both counts, moving nearly 3.4 million containers through the Port of New York/New Jersey for a $267.5-billion two-way trade value, according to LAEDC.

What is Southern California trading with the rest of the world?

"Electrical apparatus" was the largest export commodity out of the Los Angeles District in 2005, with a value of $10.8 billion, while the top import commodity was electronic machinery, with a value of $31.8 billion.

The fashion industry also depends on Southern California for its international supply chain. Fashion exports from Los Angeles in 2005 totaled $3.1 billion, with the largest chunk, $1.9 billion, coming from textile products.

China continues to be Los Angeles’ top trading partner, with a 2005 two-way trade value of $102 billion, followed by Japan, a distant second with $46.4 billion in trade.

The region does face some threats to its top-trader status, however. Among the major challenges for Southern California’s international trade industry are infrastructure concerns; environmental problems caused by heavy use of diesel fuel; port security; and tenuous U.S. trade relations with China, according to Bill Allen, president and CEO, LAEDC.

Global Spin…

UPS Ups the Ante: Reflecting its growing international air package volumes, UPS recently announced a $1-billion expansion of its Louisville, Ky., global transportation hub, UPS Worldport. The expansion brings Worldport’s footprint to 5.1 million square feet, will increase sorting capacity by 60 percent over the next five years, and will include a new vehicle loading facility and ramp space to accommodate A380 and 747-400 cargo planes

Orient Express: German rail operator Deutsche Bahn AG plans to run daily freight trains from Germany to Shanghai by 2008, according to CEO Hartmut Mehdorn. The company recently signed an agreement with a Russian rail operator to set up a joint logistics operation that would run trains from Europe to China via Siberia. The train would reach Shanghai from Germany in nine days

Economic Expectations: The EU economy will expand by 2.3 percent this year, up from 1.6 percent last year, due to increased investment and sustained world growth, predicts The European Union head office. The expected growth, however, pales in comparison with world economic growth, which should hit 4.6 percent in 2006…

Express Market Shakeup: Though the U.S. express and delivery market is the world’s largest, Asia-Pacific is the fastest-growing global region, finds market analyst Datamonitor. Thanks to growing exports with Europe and the United States, China should eclipse Canada to become the sixth-largest express market in the world by 2010, according to the study.

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