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Cargo transportation; changes in motion.

ALASKA'S CARGO MARKETS IN a word: Flat. Overall capacity continues to exceed cargo in th 49th state. Says one carrier representative:

So many salesmen are chasing the business that of ten the person last in the door gets the freight."

Flat, but not stagnant. Because the complexion of freight handling and shipping in Alaska changes constantly, the industry's players are on guard against further erosion of already lean margins. Among the top concerns of transportation professionals today: cost control, competitors' restructurings, the losses and gains of other businesses, policy shifts by regulatory agencies and initiatives in the state legislature.

Cargo transportation's managers must run day-to-day operations efficiently, while also preparing to compete on tomorrow's battlefields. Although. competition creates fierce rivalries, car- riers and freight handlers band together to address common concerns. Only then can they hope to weight the scales of the volatile and constantly changing cargo business in their favor.

By Air

Alaska's air carriers have become more unified in recent months, burying old hatchets to fight common foes. Membership in the Alaska Air Carriers Association has soared to 66, up from 49 a year ago.

Orin Seybert, president of Peninsula Airways, was president of the Air Carriers Association for two years in the early 80s. He says membership dwindled to 29 in 1987 primarily because of differences over the bypass mail issue and the dominant role played by MarkAir.

New rules governing bypass mail allocations were established in January 6f last year, and although all were not

happy with the outcome, a page was turned on the industry's discordance. Firms that have rejoined the association in the past year include Era Aviation, Reeve Aleutian Airways, Northern Air Cargo and Peninsula Airways.

President of the organization this year is John Hajdukovich, president of Frontier Flying Service in Fairbanks. "We're a pretty unified group. Individually we have clout, but each needs the whole group to be heard in dealing with the state or in Washington, D.C.," he says.

Hajdukovich lists among the chief concerns facing the association's members this year: compliance with drug testing implementation required by the end of the year, the rising number of regulations, proposed legislation for carriers transporting big game-also a source of increased regulation - and the oversight activities of the Federal Aviation Administration's Flight Standards Division regional office in Anchorage.

Dick Reeve, president of Reeve Aleutian Airways, says the FAA has initiated "a reign of terror in Alaska." In particular, he cites a heavy-handed approach recently employed by the FAA in dealings with carriers. "There's no bidirectional communication taking place," says Reeve. "It's unidirectional and, in many instances, it's dictatorial in nature."

Reeve believes the government agency is neglecting one role it was assigned-development of aviation-and is overzealously regulating the industry. For one, he faults agency requirements affecting the ability of carriers to resume flights to airports after an interruption in service. "That's contrary to deregulation and open entry," he says.

Alaska Air Carriers Association passed its first 1989 resolution on Feb. 4, condemning the FAA:s handling of high pressure conditions three days earlier. FAA banned all flights at night and into airports with poor visibility, arguing that safety was jeopardized because barometric pressure above 31 inches can't be dialed into altimeters, gauges that indicate altitude.

Says Hajdukovich, "Carriers lost revenue from cancelled and diverted flights, and the airport (Anchorage International Airport) lost money when Russian overflights were granted on an emergency basis." Air carriers and the FAA dispute whether planes could have operated safely under the barometric conditions. But the air carriers argue that, regardless, they should have been allowed some say in the decision-making process.

Three carriers have had been shut down by the FAA in the past year, reflecting a tougher stance on enforcement following the Ryan Air crash in 1987 that killed 18 people. They are Armstrong Air and Yute Air Alaska, both of Dillingham, and Troy Air based in Anchorage.

Among carriers that expanded service in 1988 are Peninsula Airways and MarkAir. Peninsula's new Dutch Harbor route helped to boost 1988 revenues to more than $13 million, a 30 percent increase over 1987. Seybert, who does not anticipate further growth in 89, says, "We'll be looking over our shoulders. Those guys (competitors are really after us."

Passenger revenues for Peninsula dipped early this year, when the carrier slashed the one-way price of passenger tickets between Anchorage and Dillingham and Anchorage and King Salmon from $160 to $49, meeting MarkAir's initiative. Several carriers in the Interior also have lowered fares to match half-price fares MarkAir introduced to launch expanded service in the area.

In January, both MarkAir and its subsidiary MarkAir Express began providing service to Galena and Tan- ana. MarkAir Express also now flies to Anaktuvuk Pass, Bettles, Fort Yukon and Ruby. The entry of mainline carriers into area's previously served only by Bush carriers has changed the applicable mail rate paid by the U.S. Postal Service. "The Fairbanks market is in big turmoil because of MarkAir's mainline service," says Frontier's Hajdukovich.

According to Hajdukovich, the mail rate paid between Fairbanks and Fort Yukon, which now functions as a hub for mail delivery to area villages, fell from 64 to 22 cents per pound. He reports his firm and other carrier's have scaled back considerably and likely will be dropping some service.

The new competition and the cold spell that grounded equipment contributed to the closing of Fairbanks' Friendship Air Alaska in February. Larry Chenaille, president and owner of Larry's Flying Service of Fairbanks, says due to the new competition his operation has laid off employees and is going back to the drawing boards to devise a new strategy for survival.

According to Chenaille, not only has the mail rate for his service from Fairbanks to Galena, another hub, dropped from the Bush rate of 1.08 to the mainline rate of 27 cents per pound, but the Bush carrier now needs facilities to hold mail at the hub. Ed Peebles, marketing manager for Larry's, says the lower mail rate doesn't cover the cost of flying the company's planes. "We're in trouble," he adds. "The competition has been fun the last few years, but now it's predatory. We're being eaten up." How Four Fared. Although MarkAir failed to make its charter goals last year, scheduled freight was up considerably over 1987, reports Ed Rogers, director of cargo sales. The state's extremely cold weather early this year also helped to boost first quarter charter revenues. "We did more charters of bulk fuel in one month than the total of four years previous, " says Rogers. After delivering fuel to Galena for the military, a MarkAir freighter spent several days in Canada ferrying fuel to a mining operation closed to road access.

According to Rogers, MarkAir's 1988 fish volumes were the highest in four years, and mining and construction cargoes bound for Northern Alaska were strong. Bright spots for 1989 include Prudhoe Bay, Red Dog near Kotzebue and mining operations in Southeast and across the Canadian border.

Todd Wallace, Anchorage manager of cargo marketing and contract services for Seattle-based Alaska Airlines, says 1988 marked the 16th year of profitability for the carrier. The airline moved 17 million pounds of fresh and frozen Alaska seafood to markets in the Lower 48, an increase of 36 percent over 1987. According to Wallace, Alaska Airlines expects to launch one of the most aggressive summer schedules it's ever operated in the state, offering more frequent flights and, hopefully, scheduled service to Provideniya.

Reeve Aleutian Airways, an airline specializing in service to the Aleutian and Pribilof islands, regained a contract to haul military passengers and cargo between Anchorage and Adak and Anchorage and Shemya. Says Reeve, "We're doing business in the part of Alaska we know best and enjoying better utilization."

He notes that although the additional service meant a few more jobs at the carrier, volume still fell below that of 1986 by about 5 percent. "We've remained profitable, but are not seeing the rate of return the hard work should bring," says Reeve.

Anchorage International Airport freight figures show that although Northern Air Cargo's tonnage increased slightly in 1988 over 1987, the carrier was replaced in the top position by MarkAir. Following last year's bypass mail changes, Northern Air Cargo made good on its promise to drop direct service between Anchorage and several villages. But many in the industry expect the carrier to revive service to some of those destinations.

Sam Krogstad, owner of Bush Con- solidators in Anchorage, says the all-cargo airline has changed since the recent departures of its general manager and director of cargo sales. "The days of dealing with Northern Air Cargo are gone. I used to be able to call and negotiate a price on a large load, but no more," he says.

Krogstad, a bypass mail and general freight consolidator, made the pages of several national publications last year when he shipped 600,000 pounds of concrete block to Wainwright via bypass mail. In the aftermath the U.S. Postal Service no longer accepts construction materials in the bypass mail system.

Undaunted, Krogstad still finds economical means to move construction goods to rural Alaska. Now he's chartering aircraft to ship the materials to Bush sites - 50-75 plane loads last year. Interstate Links. Like consolidators, freight forwarders-except those such as Federal Express and United Postal Service that fly their own planes-juggle their business according to cargo-carrying capacity and availability of volume rates. Although rates for moving goods to and from the state have been stable, cargo lift has continued to deteriorate, according to John Frey, Alaska district manager for Atlanta-based SurfAir.

Several wide-body aircraft were pulled from the market in 1987, and the jumbo freighters operated by Northwest Airlines and Flying Tigers offer little space on return trips from Asia. Frey says Alaska Airlines freighter service six nights a week is "one saving grace.

Air Land Transport in Anchorage has been forwarding fish out of Anchorage during the summer months for 14 years. "With more air capacity, we could definitely increase the business," says John Snead, president and co-owner of the firm.

Alaska's freight forwarders wonder how the combination of Federal Express, which specializes in small packages and does not ship items heavier than 150 pounds, and Flying Tigers, a leader in the large shipment market, will affect rates and space. They also are concerned that incentives now available to freight forwarders and large commercial shippers from Flying Tigers may be eliminated.

Although Federal Express' $880 million purchase of Flying Tigers parent company, Tiger International, has been approved by federal agencies, the carriers cannot merge operations until the U.S. Department of Transportation gives the nod to transferring route authorities. The real plum for Federal Express in the acquisition is Flying Tigers' overseas landing rights. Although, as one freight professional points out, Flying Tigers packages will never fit through the Federal Express automated sorting center, Flying Tiger's large package expertise likely will be retained.

Says Shirley Finley, spokeswoman for Federal Express in Memphis, Tenn., Fred Smith has said we are acquiring a company, and one attractive thing about Flying Tigers is its definite market niche."

Other changes in national firms: CF Air Freight recently acquired Emery Worldwide, and Emery, along with Burlington Air Express and Profit Freight Systems, replaced employees in Anchorage with agents during the past year. SurfAir moved the other way, expanding its presence in the state. The forwarder opened an office in Dutch Harbor and moved to its own terminal in 1988.

Frey says SurfAir's Alaska revenues doubled from 1987 to 88, but adds, "When you're small and growing that's easy to do." Encouraged by more business in Anchorage and projects such as Red Dog Mine and Bradley Lake hydroelectric project, he expects 89 to be a relatively good year for freight forwarders. But Frey cautions, "Anything can happen in this business, and I'm selling Amway products just in case."

By Sea

Sea-Land Service Inc.'s new fleet of larger vessels, specially designed for the Alaska trade, has seen more than a year of service now, putting to rest fears of a disrupted market and price wars because of the added capacity. Michele Bowser, director of marketing in Seattle, says the carrier's forecasters believe the third quarter of 1988 marked the bottoming out of Alaska's recession.

Admittedly more optimistic than others in the trade, Sea-Land's staff believes the fourth quarter's strength accounted for I percent growth last year in the trade. Their five-year outlook calls for 3 percent growth in 1989 and continued improvement into the early '90s.

According to Bowser, one bright area in 1988 was increased southbound fish cargoes originating in Southwest Alaska. To capitalize on opportunities in the commodity, Sea-Land recently established a new seafood-targeted marketing group.

Alaska's other large vessel operator, Totem Ocean Trailer Express (TOTE), reports no improvement in 1988; instead the decline in freight continues. Construction-related cargoes remain well below prior levels and declined still further last year, only partially compensated by minor increases in oil field-related traffic.

According to Everett Trout, vice president of operations, "The only mildly encouraging or less unencouraging news is that in the last three months of the year volumes were at least the same or slightly more than the same period in '87." He does not expect 1989 to improve much over 1988.

The CN Auaqtrain barge operated by Canadian National's CN Rail hauls rail cars to and from the Lower 48 and Canada, using the ports of Prince Rupert, B.C., and Whittier. The largest rail car barge operated in the world, its bimonthly service provides approximately 25 percent of the carrying capacity of its competitor, Crowley Maritime's Alaska Hydro-Train, which transports both rail cars and truck trailers weekly between Seattle and Whittier.

According to Laurie Gray, Aquatrain's Anchorage representative, the barge line operated at 40 percent of capacity in 1987. But largely due to increased sales efforts, 1988 volume increased to 65 percent of capacity. Gray estimates 40 percent of the carri- er's traffic originates in the Lower 48; 60 percent in Canada.

In 1988 Aquatrain began offering consolidation of truck loads into rail cars and transloading into trailers in Alaska to increase its market share. Gray says it's become clear diversification is required for survival in the transportation industry today. "It's not like operating in the 70s," he adds.

Barge service has increased to Southwest Alaska, where bottomfishing activity has created opportunities to haul seafood as well as general merchandise to restock fishing vessels. In October, Jim Ferguson and Fred Dahl jr., barge operators for the Alaska Outport Transportation Association, launched the Alaska Transportation Co. and joined several other barge lines calling on Southwest ports.

Ferguson says the Alaska Outport Transportation Association, a nonprofit organization providing service to 10 small Southeast communities, saw northbound volumes continue to decline in 1988, due largely to a scarcity of capital projects. Bill Troy, president of Alaska Marine Lines, the marine subsidiary of Lynden Inc. of Seattle, labels 1988 a "relatively good year."

Troy says a healthier Southeast economy last year helped to boost volume above 1987 levels. Consumable items were up, but fish cargoes declined for the Southeast barge operator. "When one town's volume falls off, another's picks up," explains Troy. "But overall business was well-balanced in 88 and has been in 1989. We're looking for slow growth in 1989."

By Road

A universal concern of highway haulers is the increasing likelihood of higher fuel taxes. Backed by Gov. Steve Cowper, legislation has been introduced to double the motor fuel tax f rom 8 cents to 16 cents per gallon. Says Harry McDonald, general manager of Carlile Enterprises of Anchorage, Fuel is a hard cost. If fuel taxes raise the price of fuel, our cost per mile takes a jump."

Rich Whitbeck, vice president and general manager of Anchorage-based Mammoth of Alaska, says that more serious than the fact that the industry will be forced to drive up rates if the fuel tax increases is that trucking firms will be less able to compete with the stateowned railroad.

Another long-standing problem plaguing Alaska's trucking industry is the lack of enforcement of safety compliance and insurance requirements. The larger operators, more so than small trucking enterprises, can't afford the risk of flaunting safety guidelines. Finally some relief is in sight: A commercial vehicle inspection is expected to be operating at the state and federal level before the year is over.

Overall the trucking industry enjoyed a more stable year in 1988 than in 1989, settling into a new equilibrium after the intensely hot competition in '86 and 87. Dean McKenzie, president of Frontier Transportation Co., an Anchorage trucking firm specializing in heavy hauling, says he's encouraged by activity in early'89. "There are drilling companies back on the North Slope that haven't been there in three years," he adds.

McKenzie says Frontier cut back dramatically in 1986, after witnessing the bottom fall out of its business in '85. The firm had used company-owned trucks but switched to a mix of its own trucks and those of owner/operators. Last year business improved for the firm and McKenzie says of 1989, "We're in a positive position for profitability."

Mammoth invested more than $1 million in improvements: 20 new tractors for use in the Anchorage market and a state-of-the-art vehicle tracking computer system. Whitbeck says the computer system allows the carrier to employ manpower and equipment more productivety. "We installed it not so much for profit making as to control costs and increase efficiencies. It's more of a survival mech- anism," he says.

Whitbeck adds that such tools are invaluable in an industry for which operating margins are notoriously narrow, nationally and, these days, even thinner in Alaska. The contract carrier for TOTE, Mammoth saw no improvement in Port of Anchorage traffic but did benefit from unusually large salmon catches in Kenai and Homer in 1988.

Business also improved in 1988 for Carlile, which specializes in less-than-truck-load LTL), or consolidated shipments, and trailer loads. "The business is more stable than a couple of years ago. It's not as cutthroat, especially in LTL," says McDonald.

According to Snead, Air Land, which specializes in LTL and local cartage as well as air freight, saw business turn around in 1988 after two slow years. "We grew almost 4 percent in '88 and should see revenues increase another 3-4 percent in 1989," he says. Much of that growth was in the firm's consolidation activities. With signs th economy is stabilizing, Snead expect LTL to continue to benefit as more businesses are able to settle down and build inventories slowly.

Air Land is evidence of the far-reaching impact of the future combination o Flying Tigers and Federal Express. Two of its trucks are painted wit Tigers' red and white stripes and are operated exclusively for Flying Tigers.

By Rail

Vivian Hamilton, spokeswoman for the Alaska Railroad Corp., points out that the railroad-unlike trucking firms-must bear the sole cost of improving and maintaining its road be and track improvements. The firm's revenues from trailer and containers of flatcars-freight for which trucks also compete - increased 9 percent last year, climbing to $6.3 million (unaudited) from $5.8 million in 1987.

Total 1988 freight revenues increased 14 percent over the previous year, rising to about $44.9 million. Other categories that increased in 1988: pipe, coal, petroleum, and interline traffic. Revenues for gravel and miscellaneous local movements dropped slightly.

The sum of more freight revenues and less expense equaled 1988 profit of $5.8 million (prior to audit). The stateowned rail carrier expects to do at least as well in 1989. CONCLUSION. The year ahead holds greater promise for Alaska's cargo transportation firms. Following years of industry shakeouts, downsizing and layoffs, stability is returning.

Most managers still hedge their bets, however, vowing not to be caught overextended if the decline unexpectedly resumes. By its very nature the industry is one of ups and downs. Says Alaska Airlines' Wallace, "The business is feast or famine. Some days I can't get the phone off my ear."

Flexibility and adeptness at change remain key ingredients for success in the freight industry. Says Bush Consolldators' Krogstad, "You've got to be ready to jump sideways and run that way for a while."
COPYRIGHT 1989 Alaska Business Publishing Company, Inc.
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Author:Griffin, Judith Fuerst
Publication:Alaska Business Monthly
Date:Apr 1, 1989
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