Air Cargo: Growth and Issues

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Air Cargo Growth and Issues

• Thomas R Leinbach
• Department of Geography
• University of Kentucky

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World Air Travel Growth

• Two Effects Determine Air Travel Growth
• 1. Most significant is Economic Growth
• 2. But also Value is created as airlines reduce
  prices and increases their services in
  contributing to international trade
• Intra-North American share will decline as result
  of maturity from 24 to 20
• Intra-Asia Pacific share will increase from 15
  to 18

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World Cargo Growth Detail
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World Air Cargo Trends

• Dramatic, 5.8, drop of world air cargo in
  2001-Why?
• Simultaneous slowing of worlds largest economic
  groupings
• Collapse of the technology bubble
• Terrorist attacks
• Despite SARS outbreaks annual growth jumped
  nearly 4 in 2003
• Further 10.7 increase in traffic for first 5
  months of 2004 compared to 2003
• Long-term air cargo growth is expected to average
  6.2 per year

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Recent Air Cargo Trendshttp//www.boeing.com/comm
ercial/cargo/01_01.html
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Air Freight Growth by Major Market

• Growth in markets linked to Asia will continue to
  lead the rest of the industry at rates exceeding
  the world average
• The Intra-Asian freight market will grow fastest
  among all world markets and is expected to
  display growth of nearly 7 per year- Domestic
  China 9.4
• Asian markets will account for more than 50 of
  the world market by 2019

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Air Cargo Freighter Fleets

• The world fleet is expected to more than double
  by 2023, with total fleet size growing to 34,764
  airplanes.
• Over the 20-year forecast period, 6,397 airplanes
  will be retired from active commercial service
  and will be replaced. An additional 18,596
  airplanes will be needed to fill capacity demand
• Wide bodies dominate future fleet

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World Freight Fleet 2003
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World Freighter Fleet Growth
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Yield Declines

• Yield A standard unit of airline prices, defined
  as average revenue per revenue passenger mile or
  revenue ton mile
• The profit squeeze within the passenger industry
  has focused attention on the cargo market lower
  hold revenue opportunities.
• Industry yield for both cargo and passenger
  services have steadily declined since 1970.
• Such declines reflect airline productivity gains,
  technical improvements, and intensifying
  competition.
• Scheduled freight yields firmed slightly in the
  late 1990s and now have begun to increase
  somewhat.

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But Yield Trends Decline
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Wet Lease Airlines

• The competitive nature of the air cargo industry
  requires innovation and flexibility.
• The freighter "wet-lease "airline, or ACMI
  (aircraft, crew, maintenance, and insurance)
  provider, has provided traditional airlines a new
  competitive option.
• Wet-lease carriers can offer airlines the
  flexibility to contract for air transportation
  services on a trial basis if demand is uncertain,
  augment existing markets, or provide service in
  markets that are highly seasonal without the
  investment in dedicated equipment.

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ACMI Providers
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Rise of the Integrators

• Integrator is a firm that both flies the cargo
  between airports and handles ground pick up from
  and delivery to customers
• Tremendous growth of integrators over past five
  years because of time sensitivity of goods
  movement
• Major competitors for an increasingly lucrative
  market are Federal Express, United Parcel
  Service, TNT, Airborne

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International Air Express

• The definitions of express versus nonexpress air
  cargo are blurred
• Traditional airlines, particularly in Europe,
  expand their offerings of time-definite services.
  
• Also, government postal authorities have become
  full-fledged "logistics providers, "largely
  through the acquisition of established firms.
• But regardless of the entity that provides the
  express service, the air cargo customer will
  benefit from increased service and lower prices
  as competing products enter the market.

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International Express Market
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Air Cargo Services and Internationalization of
Manufacturing Firms in Southeast Asia
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Air Cargo in Southeast Asia

• Why have air cargo services grown so rapidly in
  Southeast Asia?
• How have the quality, diversity, and
  sophistication of air cargo services changed?
• How do different electronics manufacturers use
  air cargo services to link their globally
  dispersed operations?
• What are some explanations for the intensity of
  air cargo usage by electronics manufacturers?

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Reasons for Growth of Air Cargo

• Until financial crisis, strong growth in the
  economies Malaysia 4530 PCI, Philippines
  1,200, Singapore 32,810
• 1980-98 Rate GDP 7, 2.3, 7.7
• Commonalities export-oriented economies, impact
  of electronics, recent economic crisis
• Adoption of just-in-time (JIT) practices by
  manufacturers and integrated logistics
• Lower air freight rates due to superior aircraft

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Specific Research Questions

• Is air cargo use behavior among firms diverse or
  homogeneous?
• How to measure the intensity of air cargo use?
  And does this vary by local economy and its level
  of development?
• How do differences in user firms size,
  ownership, structure, level of internationalizatio
  n, and local context affect the use of air cargo
  services?

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Phase I Data Gathering-User Firms

• Random sampling of electronics firms in Singapore
  (n38), Penang (n41), Kuala Lumpur (n23),
  Manila (n24)
• On average one hour interviews were carried out
  with management (logistics) personnel
• Information gathered on firm type,
  size,ownership,products and destinations, raw
  materials and origins, sourcing, product cycle
  time

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Firm Ownership by Place
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Product Class by Place
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Average Distance in Firm Production Linkages
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Air Cargo Intensity Index

• 1.  Degree to which a firm used air cargo
  services in general. regular basis (3) or to
  meet peak season demand only (0.5)
• 2.  Move the most important raw
  material/component and the second most important
  raw material/component 1 point for each of the
  two inputs moved mainly by airfreight.
• 3. Used air cargo to move its principal product
  to its most important and second destination
  market 5 points if airfreight was the main mode
  used to ship goods to both destinations.
• 4. Degree to which a firm uses express air cargo
  services no express (0), only in emergencies
  (.5),meet peak season demand only (1), regular
  basis for some products (2.5), regular basis for
  most or all products (5)

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Mean Air Cargo Intensity Index
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Average Cargo Intensity and Cycle Time
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Intel-Philippines and Air Cargo
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Brady-Singapore and Air Cargo
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AVX-Kyocera Singapore and Air Cargo
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Hypotheses

• The intensity of air cargo use is positively
  related to the degree to which a firms
  production linkages are internationalized-(total
  distance). YES
• The intensity of air cargo use varies directly
  with a firms local employment size. NO
• The intensity of air cargo usage is higher among
  firms with a primarily knowledge-intensive
  workforce versus those with a primarily
  labor-intensive workforce. NO
• The intensity of air cargo usage is inversely
  related to the average cycle time of a firms
  operation YES

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Preliminary Findings

• Air cargo usage among electronics firms is quite
  diverse
• Intensity of air cargo use is strongly related to
  a firms internationalization of production and
  distribution linkages

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Preliminary Findings

• Product type is also clearly a useful predictor
  of air cargo use e.g. semiconductors versus
  consumer electronics
• Perhaps most critical are factors such as product
  obsolescence, firm competitive policy, customer
  preferences, and supply chain management
  strategies of individual firms

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Subic Bay Air Cargo Services, Development and
Policy

• Subic Bay
• Largest US military base in Asia during Cold War
  -- deepwater port and 8,000 foot runway.
• 1991 Eruption of Mt Pinatubo buries base under
  12-18 inches of ash.
• Philippine Senate rejects 10 year bases treaty to
  continue American control beyond 1991. Last
  American forces leave in 1992
• Former base and adjacent areas governed by
  semi-autonomous Subic Bay Metropolitan Authority.

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Subic Bay, Philippines
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Subic Bay Air Cargo Services, Development and
Policy

• Federal Express established Asia One hub at
  converted airbase in 1995. Principal reasons for
  hub selection
• underutilized airport infrastructure
• liberal Philippine aviation policy
• geographic centrality within Pacific Asia
• trained, English-speaking workforce
• free trade zone incentives/flexibility

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FedEx Asia One Network
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Subic Bay Air Cargo Services, Development and
Policy

• FedEx Asia One Network
• linked to 18 Asian markets by daily flights,
  mainly by 85-tonne capacity McDonnell Douglas
  MD-11, allowing overnight intra-Asia shipments
• subcontracted ground transport for links to Metro
  Manila via 110 km poorly maintained highway
• hub employs 650 directly 2000 indirectly

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Subic Bay Air Cargo Services, Development and
Policy

• Acer
• site selection based in part on availability of
  air cargo services to Taiwan, USA and other
  markets
• intended as mass production complement to more
  advanced facilities in Taiwan
• Subic Bay operations include
• personal computer motherboards since 1995
• notebook computers since 1998 (25-30 of all Acer
  notebook production)
• 2,700 employees

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Subic Bay Air Cargo Services, Development and
Policy

• Acer Logistical Operations
• low value components (e.g. capacitors) shipped by
  sea to Philippines
• high value Taiwanese components (e.g. processor
  chips) shipped by air to Subic Bay daily
• some components (IBM TFTs, Hitachi CD-ROMs)
  shipped from manufacturing zones elsewhere in
  Philippines
• breakdown of export markets 1/3 Asia 1/3
  Europe 1/3 America

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Subic Bay Air Cargo Services, Development and
Policy

• State policies favoring Subic Bay development
• free trade zone
• liberal aviation policy
• Philippine domestic deregulation
• liberal policy towards US flag carrier (FedEx)
  hub
• highway infrastructure development
• linking Subic to Manila
• linking Subic to Clark airfield (planned)

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Subic Bay Air Cargo Services, Development and
Policy

• Philippine-Taiwan Air Services Conflict
• Philippine Airlines owner Lucio Tan pressures
  Philippine government to rollback liberalization
• Escalating conflict over carriage of
  Philippine-USA traffic via Taipei on Taiwanese
  carriers
• October 1999 Philippines suspends direct services
  to/from Taiwan by respective national carriers
• Cessation of direct Philippine-Taiwan services
  forces traffic through alternate hubs (e.g. HKG)

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Subic Bay Air Cargo Services, Development and
Policy

• Philippine-Taiwan Air Services Conflict
• Acer forced to reroute Taiwanese traffic via
  alternate hubs (e.g. HKG)
• Notebook computer output at Subic facility
• 84,000 sets per month before crisis
• 30,000 sets per month currently
• Employment cut in response
• Acer evaluating shift of operations to mainland
  China -- cites fear of Philippine government
  decision-making