Bracing for the New Reality.

Freight Costs Climb As Limits Take Hold

MICHAEL Viering was fuming mad at FedEx Corp. late last week. The president of Los Angeles-based Diagnostic Products Corp., unable to find space on any of the air cargo services his company typically uses, eagerly agreed to pay a $50,000 premium to have FedEx rush 10,000 kilos of his company's medical test kits to its manufacturing plant in Manchester, England.

The flight left LAX on Sunday, Sept. 16, with assurances from FedEx that the delivery would be made in England the next day. Of the 500 test kits in the shipment, only 200 had arrived as of Sept. 20.

"The other 300 are sitting. in Memphis or Indianapolis -- FedEx told us this morning that they don't even know where they are," Viering said. "We're going to have a serious discussion with FedEx."

Similar frustrations were being felt all over Los Angeles last week, as companies dependent on international air shipments struggled to get their goods in and out of LAX.

While much of the attention has centered on the economic damage to L.A.'s tourism industry following the Sept. 11 terrorist attacks, much broader economic pain may be felt from reduced airfreight capacity in Los Angeles.

Last year, $77.6 billion worth of cargo - everything from electronics to books to apparel to jewelry and more - was, shipped by air into and out of the Los Angeles Customs District, according to the U.S. Commerce Department.

By comparison, total overnight visitor spending in L.A. County last year - on hotel rooms, meals, amusement parks, everything - was $13.6 billion. And foreign visitors, who comprise most of the airborne travel expected to be lost in the wake of the terrorist attacks, only spent $4.4 billion of that total.

In short, the impact on air cargo could be a far bigger deal to a much bigger portion of the L.A. economy.

Shortage of cargo space

About 90 percent of all airfreight handled at LAX is carried in the holds of passenger jets. With the number of passenger flights slashed, L.A. importers and exporters were scrambling last week to secure available space.

Further depleting precious air-cargo space is that passengers are now increasingly likely to check bags that in the past they would have carried on. That's because a wide variety of items - scissors, nail clippers and anything else even remotely resembling a weapon - is being confiscated from carry-on luggage.

The resulting dearth of air-cargo space on passenger planes is prompting high-volume shippers to resort to charter aircraft, but even that is being stymied.

"The problem is there aren't enough aircraft right now to charter, so if a department store wants to charter an aircraft to ship 100,000 pounds of cargo, they're going to have trouble finding one," said W. Guy Fox, chairman of Global Transportation, a customs brokerage firm in Redondo Beach.

Kris Leathers, spokeswoman for Polar Air Cargo, which is based in Long Beach and operates out of LAX, confirmed that demand for the company's charter service has jumped since the attacks.

"Our load factors are up significantly in both directions (imports and exports), and our rates are up significantly as a result of a lot of our customers using our priority service," Leathers said.

Several industry sources confirmed that airfreight rates have jumped between 20 percent and 40 percent since the attacks - for those who can find available space. The rate increase has been even more dramatic for shipments out of various parts of Asia and especially the Middle East. Service to many parts of the Middle East and South Asia, like Pakistan, is essentially nonexistent.

"I just got a note from our office in Dubai this morning that everything coming out of the Middle East now comes with a war-risk surcharge of 10 to 20 percent," said S.K. Leong, a vice president at Target Logistic Services, a freight forwarder in Compton.

On certain shipments, rate increases of 100 percent or more are being instituted. In addition, airfreight insurance costs are being raised, and carriers are tacking on surcharges to help cover the costs of heightened security.

"We just handled a 5,000-pound shipment of books that came in from Hong Kong, where a lot of printing is done, for delivery to a bookstore in Orange County," said Fox. "That same shipment cost $4,000 before the attacks, and now it cost $10,000."

Further complicating the situation is that airlines have imposed strict security measures on air cargo. All shipments are being put on 24- to 48-hour holds before being loaded onto planes, and only shipments from known shippers are being accepted.

"Air freight will never be express again," said Desiree Wensauer, lead export agent at Target Logistic.

Any company without a pre-existing relationship with a freight forwarder or airline shouldn't even bother trying to ship anything by air, several sources said.

"If you've never shipped air freight before, you probably never will," said Wensauer. "Right now I'm trying to send out a two-pound box to Warsaw and I can't do it because (the customer) has never shipped before."

The situation is prompting many shippers to shift to alternate modes of transport. International shipments are increasingly being shifted from air to sea, and domestic shipments are being shifted from air to ground.

Big cost savings

"The cost of shipping by sea is one-tenth the cost of shipping by air, and ships can now make it from Hong Kong to L.A. in 12 to 14 days," said freight forwarder Leong. "So if you keep just 14 days of inventory on hand, you can save 90 percent on your shipping costs."

Another alternative gaining popularity is expedited "air truck" service, which involves teams of drivers in 53-foot-long tractor-trailers "deadheading" from coast to coast in three or four days, taking turns behind the wheel so they can drive straight through.

"We've had a nice surge in business on the West Coast," said Kerk Apperson, area sales director for Forward Air Inc., a national firm specializing in "air truck" service.

Many "air freight" deliveries are actually transported partially or entirely on the ground by companies like Forward Air. "If the airfreight service is selling a second-day product, what they're really selling is the transit time, not how it gets there," Apperson explained. "The word 'air' is an affectation - we have it in our name and we don't own a single plane.

"A lot of the general Carriers - Yellow Freight, Watkins, Roadway - are trying to get into the (air truck) business because that's where the demand is," said Apperson.