Get It Here -- Quick!

REVOLUTION IN AIR CARGO ENRICHES REGION, BUT COULD EXCEED LAX CAPACITY

GLOBALIZATION is driving air cargo volume to record heights, turning Los Angeles International Airport into an economic juggernaut. But it's also, raising concerns that the airport may soon be overwhelmed by growth.

LAX already generates $61 billion annually in regional economic activity and supports 393,000 jobs. By 2015, those numbers are projected to reach $90 billion and 470,000 jobs, respectively.

"The lines of supply are growing longer and the world is speeding up," said David Hoppin, principal with MergeGlobal Inc., a freight transportation and logistics consulting firm in Arlington, Va. "Historically, world trade is growing twice as fast as the world economy, and air cargo is expected to grow twice as fast again as international trade."

L.A. finds itself at the crossroads of that explosive global growth -- sandwiched between the low-cost factories of Southeast Asia and Mexico and the voracious U.S. consumer markets.

While crude oil, import cars and other seabound shipments comprise most of the tonnage of L.A. trade, the most valuable shipments -- the kind required in. today's information age -- are increasingly shipped by air.

LAX alone handled $62.5 billion in two-way trade during 1998 (the most recent year available) -- 34.4 percent of the total $181.5 billion flowing through the sprawling L.A. Customs District, which includes the seaports of Los Angeles and Long Beach.

"LAX is already straining at the seams," said Walter Johnson Jr., chairman of the education committee of the International Air Cargo Association. "But it is the predominant origin, destination, transfer and distribution center for air cargo on the West Coast, and it will see a lot more growth as world trade continues to expand."

Much of that comes from the shift of high-volume manufacturing to overseas assembly plants, with air cargo serving as the conduit for supplying these overseas plants with components for assembly and equipment to keep the assembly lines running.

The biggest export-product category in dollar terms that passed through LAX in 1998 was semiconductors and integrated circuit boards. At $8.3 billion, these accounted for 26.2 percent of all exports out of LAX. The components were shipped to Malaysia, Taiwan, and the Philippines, where they are assembled into computers and other finished electronic goods.

Once those products are assembled, many of them are flown back to the United States, via LAX. As evidence of this, computer equipment from Southeast Asia was the largest single import category at LAX in 1998, at $7.6 billion.

"We expect that Malaysia, China, Indonesia, and Thailand will be the fastest growing markets for international air cargo," said Edwin Laird, managing director with Air Cargo Management Group, a Seattle-based consulting firm. "These countries produce consumer electronics, fashion and entertainment products, high-value and time-sensitive goods which get shipped by air, and these markets may grow as fast as 18 percent annually. LAX will see a substantial part of this growth because it is already the largest cargo airport on the West Coast and because of its position next to a huge consumer market."

LAX expansion

While the growth of air cargo is generally viewed as positive for the local economy, there are concerns about the ability of already-congested LAX to handle the load.

In response, LAX is adding two new cargo handling facilities and, separately, there are plans by United Airlines to add another 100,000-square-foot cargo facility. The city of El Segundo, however, is challenging the proposed United expansion because it fears it would cause additional congestion and noise.

At some point, carriers may be forced to look for alternative West Coast routes for international cargo shipments to and from the United States. Federal Express and United Parcel Service, for example, already use Anchorage as an Asian gateway, and that airport saw a booming 19.9 percent growth in cargo volume through the first 10 months of 1999.

Other alternatives to LAX are closer - like the former George Air Force Base in Victorville, where SwissGlobalCargo plans to direct its weekly flights from Asia. A number of other regional airports, including the one in Palmdale, could handle increasing amounts of international air cargo in the years ahead. Yet LAX is expected to continue to be the area's air cargo hub for the foreseeable future.

"(LAX) will always have a tremendous advantage because it is the No. 1 gateway for passenger flights on the West Coast," said Hoppin. "All these flights offer belly cargo space at very competitive prices, and they fly much more frequently than freight carriers. Both New York and Los Angeles are like vacuums that suck up the cargo traffic for their regions, simply because of the frequency of (passenger) flights. I don't see more than maybe a handful of new airports that concentrate on freight only."

Quick turnarounds

In addition, shippers often can't afford the several hours it would take to truck cargo from their L.A.-area warehouses to outlying airports.

"The lifecycle of consumer products, whether it is in fashion or electronics, is more and more compressed," said Hoppin. "It is absolutely crucial for manufacturers of these goods to minimize the time they spend in transport."

Another factor driving the need for quick turnaround is the reliance on just-in-time inventory systems. As manufacturers and retailers try to minimize their inventories on hand, to avoid having their cash needlessly tied up in idle products sitting in warehouses, the use of air cargo provides more flexibility.

"No one measures the price of air transport vs. the price of surface transport," said Johnson of the International Air Cargo Association. "What people measure is the cost of air transport vs. the cost of inventory. And if an assembly plant can achieve $100 million in inventory savings by using air rather than surface transport, that's the number they will be looking at."

Of course, there is a cost attached. Air freight can be 10 times as expensive as ocean freight. But the expense is often outweighed by the resulting speed and flexibility.

"When a customer needs the product, they usually needed it by yesterday," said Roger Bloxberg, chief executive of software developer Nova Development Corp. in Calabasas. "It's not a good option to tell them that it is in the middle of the ocean and will arrive in a week or so."

Likewise, Candle Corp. in El Segundo relies exclusively on air transportation for its international shipments.

"Speed of delivery is the key issue," said Al Cossey, director of worldwide product distribution. "We have customers in all major metropolitan areas of the world, and most of them are corporations who need the software to fix problems, and they need to get it as soon as possible."

Home-grown cargo

It's not just local manufacturers who fuel the flow of exports through LAX. Los Angeles serves as the gateway for exporting California-grown fruits and vegetables to Asian markets, such as Hong Kong and Tokyo. In 1998, 24.8 million tons of fruits, nuts, and vegetables were flown out of LAX, the largest export category in terms of weight.

Meanwhile, huge volumes of perishables such as fish, meat, vegetables, and flowers from Asia, South America and Europe are imported into the airport.

But a more valuable category is U.S.-made technology headed to markets in Asia and the South Pacific.

"The bulk of our exports out of LAX are high-tech products for Australia and New Zealand," said Peter Burn, vice president of cargo for North America and Europe with Air New Zealand. "These include Compaq computers, Nortel and Lucent telecommunications equipment that is manufactured in the U.S. and Canada, transported to LAX by truck or train, and put on airplanes to Sidney and Auckland."

That trend is expected to accelerate rapidly as the Internet makes U.S. products easily accessible to both consumers and businesses overseas.

"Internet sales are going to be a very significant international growth factor," said Burn. "The world is going to be the marketplace, with country boundaries falling away. Some of it will go to ocean shipping, depending on the type of products, but I suspect that a lot of it will be shipped by air."

                         World's Busiest Airports
     LAX ranks near the top in terms of passengers, cargo and flights.
Passengers               Total    % Chg.
Atlanta (ATL)          65,177,160    6.3
Chicago (ORD)          61,000,480    0.3
Los Angeles (LAX)      53,410,988    4.2
London (LHR)           52,960,462    2.8
Dallas/Ft. Worth (DFW) 47,102,978   (1.2)
Tokyo (HND)            45,644,883    6.4
Frankfurt (FRA)        39,186,656    7.7
Paris (CDG)            37,083,239   13.0
San Francisco (SFO)    34,109,438    0.6
Denver (DEN)           32,129,455    3.9
Cargo                Total    % Chg.
Memphis (MEM)      1,981,885     1.1
Hong Kong (HKG)    1,586,081    18.0
Los Angeles (LAX) 158,210,700   33.4
Tokyo (NRT)        1,499,112    11.6
New York (JFK)     1,424,520     7.4
Miami (MIA)        1,367,315    (8.2)
Anchorage          1,356,746    19.9
Seoul (SEL)        1,341,651    15.2
Chicago (ORD)      1,262,293     7.9
Frankfurt (FRA)    1,254,101     4.5
Landings & Takeoffs     Total
Atlanta (ATL)          755,103
Chicago (ORO)          745,565
Dallas/Ft. Worth (DFW) 690,985
Los Angeles (LAX)      647,250
Detroit (DTW)          467,446
Phoenix (PHX)          464,639
Las Vegas (LAS)        447,909
Oakland (OAK)          434,974
Miami (MIA)            430,227
Minneapolis (MSP)      425,423
Source: Airports Council International
                          Top LAX Trade Partners
Imports         Value   Exports         Value
Japan          $5,786.0 Japan          $4,554.5
Singapore       4,561.8 Taiwan          2,538.0
Malaysia        3,311.9 South Korea     2,387.5
Taiwan          2,714.1 Australia       2,250.0
China           1,799.1 Singapore       2,227.4
South Korea     1,660.7 Malaysia        2,191.0
Philippines     1,349.5 United Kingdom  2,086.8
Australia         980.2 Hong Kong       1,455.7
United Kingdom    969.2 Philippines     1,414.7
Italy             848.9 Netherlands     1,270.5
Source: LAX

The Players in Air Cargo

WITH international air cargo expected to grow 7 percent a year, a number of players are scrambling for a piece of the action.

They range from old-school forwarders and freight carriers to super-slick, service-oriented express services, which take care of pick-ups, deliveries and all the particulars in-between.

The express services, also known as integrated operators, include Federal Express Corp., United Parcel Service of America Inc., DHL Airways Inc., and Airborne Freight Corp., which does business as Airborne Express.

Express services captured only 6 percent of the market in 1997, but that's expected to expand to 36 percent by 2017, according to a study by Boeing Co.

"Integrators are growing faster than anybody else because they offer a superior brand of service," said Walter Johnson Jr., chairman of the education committee of the International Air Cargo Association. "They are more expensive than traditional forwarders, but customers are happy to pay more in exchange for speed and convenience."

Federal Express, the single largest cargo handler at LAX, last year transported 18.1 percent of all freight in and out of the airport. "Even though we're best known for our envelope business, we do a very substantial share of large business-to-business shipments," said company spokesman Jess Bunn.

The fast growth of these integrated operators is bad news for traditional freight forwarders and carriers.

Air Express International, Fritz Cos. and Expeditors International of Washington are all multibillion-dollar companies with large L.A. operations that still control 85 percent of all international shipments, according to Hoppin.

"They don't sell just airfreight anymore; they've been busy adding other services as well," he said. "Also, the top 20 forwarders have been buying up smaller players and these alone control 50 percent of all international trade. They can use their clout with the carriers to keep prices down and be more competitive with integrated operators."

In fact, many forwarders contract for space on airplanes operated by FedEx and UPS, much to the chagrin of the passenger and cargo airlines that have served as their traditional carriers.

Besides large forwarders that dominate the trade, there are numerous small, local forwarders that offer specialized services.

"There will always be a niche for small operators because they can fill their role better than the big conglomerates," said Johnson. "It is the in-betweens that are at risk as the industry consolidates. Air Express International is the No. 1 forwarder in the U.S., and in the past four years alone acquired 13 to 14 companies."

And while FedEx may lead the pack among all cargo carriers, passenger airlines like United, Korean Air, American and Delta are important players as well. Freight carriers have more room in their aircraft than passenger planes, but they fly less frequently. As a result, more freight is transported by passenger lines.