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Flying through market turbulence.

While Alaska's international cargo-handling activity was strengthened, market shakeups caused by bold competitive strategies created foul-weather flying conditions for many air carriers in 1991. The coming year surely will provide more navigation challenges ... and, perhaps, new opportunities.

A year of aviation setbacks around the world and increased competition in local and regional markets has unsettled the air-cargo industry in Alaska. But despite the short-term pressure on profit margins produced by these difficulties, industry analysts point to a number of positive developments that could benefit the 49th state's air-transport sector.

In general, Alaska's air-cargo indicators for 1991 ranged from poor to fair. At Anchorage International Airport, where analysts keep a close watch on the cargo pulse, domestic cargo volumes were down. International cargo offset those losses, however, and the airport posted a relatively strong showing.

According to figures maintained by Avtech Alaska Inc., an independent aviation research and consulting firm, the amount of domestic cargo handled at Anchorage International Airport dropped from approximately 386 million pounds in calendar year 1990 to a little more than 361 million pounds last year.

Anders Westman, the airport's marketing manager, says the drop in domestic cargo was an anomaly caused by the diversion of carriers and cargo to the Persian Gulf war. He also points out that despite a long-anticipated loss of passenger stopovers in Anchorage, airport revenues were down only a couple of million dollars, from $55.26 million in fiscal year 1990 (July 1, 1989, to June 30, 1990) to $53.30 million in FY 1991. "Our overall cargo landings were up 2.2 percent (in FY 1991)," says Westman.

Westman estimates that the aircraft landed weight for cargo at the Anchorage airport will tally up at 8.20 billion pounds for calendar year 1991, compared with 8.15 billion pounds in 1990 and 8.06 billion pounds in 1989. Landed weight is a unit of measure that combines aircraft weight with the weight of cargo on board. It is part of the methodology used by airports to measure cargo activity and to support requests for federal airport assistance.

Westman notes that international cargo traffic continues to be especially strong, with growth projected for the next 5 to 15 years.

Several carriers, both domestic and international, noted sharp drops in the amount of fish products they hauled in 1991. "Last year was very much an off year. Seafood, especially salmon, was a disaster in some parts of the state. We made only a couple of crab trips," says Ed Rogers, director of cargo sales and marketing for Anchorage-based MarkAir. He estimates the volume of fish product hauled by his company within Alaska was down as much as 40 percent.

Another factor in cargo traffic at Alaska's largest airport last year was the flux produced by carrier routing changes. That shuffling kept carriers scrambling for business that remained virtually unchanged from the previous year.

MarkAir shook up Alaska Airlines and other competitors in December and January by adding new passenger and cargo service within Alaska, including Southeast, and making a bid for the Anchorage-Seattle market. MarkAir's Rogers concedes the company will have to prove itself on the Seattle run.

Carriers flying cargo to intrastate markets also had to deal with a new kid on the block when Wilbur's Inc. of Anchorage began hauling freight to a number of Alaskan communities. Because a huge volume of intrastate cargo is U.S. mail, which, by regulation, is divided equally among all certified carriers serving a given community, Wilbur's competitors were immediately affected. Recently, though, Wilbur's closed indefinitely.

World Wise. According to Westman, last year was the worst for the airline industry since World War II, thanks to disruptions from the gulf war and the deepening global recession. But he says many analysts agree that the air-cargo segment of the industry is and will continue to be a bright spot, especially in Anchorage.

"International cargo is one of the few areas of continued projected growth in the aviation industry. For Alaska, 1991 was indicative of that trend. Its growth will probably outpace all other activity here," says Westman.

While Anchorage has lost ground as a stopover for international passenger flights, it has expanded its market share as an air-cargo hub. Only six to eight hours from three giant markets -- Asia, Europe and North America -- Anchorage now serves more than 90 percent of trans-Pacific air-cargo flights as a refueling stop. As much as 75 percent of the air-cargo traffic between Northern Asia and Europe similarly takes advantage of the city's strategic location.

A crucial difference between airline passengers and air cargo makes these gains possible, according to Westman. Passengers are interested in speed and convenience, above all else. Because they want to get where they're going in a hurry, with as little interruption as possible, airlines profit by designing schedules that offer passengers "seamless travel."

But with cargo, air carriers make their money by flying as full as possible. The more filled to capacity planes are, the more fuel they consume, hence the need for a refueling stop on the longer international routes.

"Cargo operators opt for maximum payload whether it involves a refueling stop or not," Westman notes.

Although a new generation of cargo jets coming off aircraft assembly lines offers greater range than the current fleet options -- a feature that theoretically could jeopardize Alaska's hub position -- to date there have been few orders for those planes. Westman says carriers are apparently balking at the prices, which run approximately $140 million for the Boeing 747-400 and $120 million for the MD-11 made by McDonnell-Douglas.

Instead, companies such as Japan Air Lines and Korean Air are opting to turn older passenger planes into freighters, with conversions running a more reasonable $35 million to $50 million. These older aircraft still will require a stop in Alaska, which is good news for airport operators and the state's air-freight future.

Anchorage Assets. State and local agencies recently made a number of recommendations to help Alaska attract more international cargo business by expanding its activities and services as a cargo hub. According to Bill Blessington, chair of the City-State Airport Marketing Task Force appointed by the governor and mayor, international air cargo offers the greatest opportunity to make up some of the $20 million a year in airport revenues that used to be generated by international passenger layovers through spending at the Anchorage airport's duty-free shop. He says there should be a strong emphasis on developing facilities that encourage off-loading of freight in Anchorage.

"If the cargo stays on the plane, all you see is a little bit of fuel and a couple of hotel rooms for the crew. We're trying to create the opportunity to get that cargo off the airplane, so a little of the money falls through the cracks. Otherwise, you're just a gas station," explains Blessington.

Industry analysts say large, integrated operations such as Federal Express and United Parcel Service, are geared toward keeping cargo on the plane. Typically, such companies handle relatively compact, high-value cargoes.

But another, discrete segment of the air-cargo industry, which actually moves the bulk of the air freight tonnage, overlaps and competes with the giants. These so-called "second-tier" companies rely on forwarders and consolidators to relay cargo to destinations.

Many are Asian carriers headquartered in places such as Hong Kong and Singapore. Often these carriers have no U.S. base of operations or have landing rights only in congested hubs such as Los Angeles.

Congestion is not a problem for Alaska, and the second-tier carriers are eager to cash in on prolific trade between Asia and North America. "That's where the receptivity to our proposal is highest, (but) they have to take a risk to position themselves against the leaders," says Blessington.

While the opportunities are great, establishing such a facility will require substantial marketing efforts. Westman, who is responsible for selling Alaska's position, sits on the task force. He says, "There is some danger that the concept (of a cargo-staging facility within easy range of customers) has evolved to a more focused, regional scale. Our challenge is that there are other locations that offer even quicker distribution."

Another air-cargo-development recommendation is marketing Anchorage as the best location for an international parts bank and logistics center for European and Pacific manufacturers and distributors. Blessington says the task force would like to tap the Alaska Permanent Fund, public and teacher retirement funds and other capital sources to partially finance construction of air-cargo facilities, "with the caveat that such investment be tied to a reciprocal investment in Alaska as a major aircraft-maintenance and service center."

Blessington adds that a world shortage of air-cargo planes and good maintenance facilities makes that idea a highly salable one. "The need is going to become more and more critical as you approach the year 2000 and the critical maintenance thresholds for the bulk of the current fleet," he says.

As if in answer to the task force recommendations, Federal Express of Memphis, Tenn., has acknowledged signing a 25-year lease for a 279,000-square-foot lot at the Anchorage airport for construction of an aircraft maintenance facility. This news follows reports of company concern over major losses stemming from its international operations, particularly in Europe.

Although the company's manager of media relations, Armand Schneider, refuses any comment on the losses and says Federal Express has no "imminent" plans for expanding its Anchorage base, both a maintenance facility and a parts bank have long been in the discussion stage. The parts bank concept involves development of a holding and sorting facility equidistant between spare parts suppliers and their customers, which facilitates rapid delivery of the parts without substantial inventory costs or logistics at either end. Instead, a carrier such as Federal Express manages the inventory in the middle.

This concept is similar to the kind of staging facility being touted by Alaska's air-cargo planners, which would be operated by forwarders or consolidators serving carriers that compete with Federal Express. But state and local planners are banking that the international air-cargo industry is robust and resilient enough, and Alaska's strategic position attractive enough, that both can be accommodated.

Traffic Trends. Officials at Fairbanks International Airport are buoyed by the decision of a second major international cargo carrier, Air France, to begin landings for refueling and crew changes. In March, four Air France 747 freighters flying the Europe-to-Asia route began stopping weekly in Fairbanks. In 1990, Lufthansa initiated 12 weekly stopovers.

While additional stopover decisions are not imminent, the airport's marketing director, Dave Carlstrom, says Fairbanks offers unique advantages over Anchorage for carriers flying between Europe and Asia, which could result in increased international cargo traffic for the Interior city. Fuel is cheaper; the flights are shorter via Fairbanks; and most importantly, the shorter routing means larger payload capacities.

Although currently there's no need for a lot more capacity on these routes, the ability to carry 2,000 to 10,000 pounds more flying via Fairbanks than by stopping in Anchorage could benefit the carriers' "bottomline economics," says Carlstrom. The new traffic helps Fairbanks build a track record, he adds.

Although the Fairbanks airport handles less cargo than does the Anchorage airport, its 1991 growth was impressive. Fairbanks International's gross landed weight of 587 million pounds, which includes the transiting international cargo, represents 100 percent growth over the 1990 volume. In addition, enplaned/deplaned freight, mostly intrastate cargo destined for rural areas, grew by about 13 percent.

Carlstrom predicts less steep growth for 1992. "A few years ago, Fairbanks was just a bad-weather alternative. Now we've gained some modest stature in international aviation. We're kind of on the map," Carlstrom says.

Other ideas to build Alaska's cargo business are on the drawing boards, too. As the Alaska economy recovers, some international carriers are looking for ways to improve their position in the Alaska market. Japan Air Line's Anchorage cargo manager, Andy Amman, says his company is looking into the possibility of quick delivery service, but no firm decisions have been made.

Amman doesn't foresee such a major strategic decision being made for another two to three years. But he hopes that long before then, some stability may come to the Alaska seafood industry. "I do hope something comes out of the effort to produce halibut more than two to three days a year. That would be a plus for the air-cargo industry," he explains.

Amman also is looking for improvement in the Alaska economy. "The air-cargo business as a whole did not do too well last year. It was just an average year, really. If the economy turns around, that would be a plus for everybody. Everybody's having a rough time. I haven't seen the upturn yet."

Domestic Duel. Air-cargo carriers hauling freight in Alaska's intrastate and interstate markets haven't witnessed an upturn, either. The recent development most visible to Alaskans has been the decision by MarkAir to go head-to-head with Alaska Airlines for freight and passenger business on certain routes within the state and connecting Anchorage, Southeast and Seattle.

As do other air-freight analysts, Todd Wallace, cargo marketing manager for Alaska Airlines, blames war in the Persian Gulf and the resulting spike in fuel prices for the poor showing that many carriers made on their balance sheets last year. "Profitability was non-existent for most carriers last year. Alaska Airlines was one of the few who made money," says Wallace. He adds that, if not for the misfortunes of war, his company's earnings would have been "phenomenal."

The challenge from MarkAir came at the end of the year, prompting counter moves by Alaska and a cargo and passenger rate war. Alaska and MarkAir already competed in hauling cargo to communities where one or the other carried passengers, but MarkAir decided to add passenger service to communities formerly considered Alaska territory, and, more importantly, to enter the market for hauling freight and passengers on routes connecting Anchorage, Southeast Alaska and Seattle.

While MarkAir's move is widely viewed as a gamble by owner Neil Bergt, no one is discounting the new competition. Says Wallace, "He's a shrewd businessman. We're taking this threat seriously. We will continue to provide excellent service throughout the state and be competitive in the marketplace, fly competitive schedules and look to expand." Adds the Alaska Airlines manager, "He might find a niche, I don't know."

MarkAir's Rogers admits, "We're the new bad guys in Southeast right now." He notes his company's bid has "ruffled some feathers."

But he adds that while MarkAir has some catching up to do on the Seattle route, he's happy with the numbers so far. Freight volumes for January and February were "very significant," Rogers says.

"Equipment selection and commitment to the market are going to be a very vital thing there. You've got to have a little patience. Customers are not going to move (from Alaska Airlines) right away. We've got to prove ourselves," explains Rogers.

Some observers say equipment is an area where MarkAir may be much less competitive, because the carrier uses slower planes to haul cargo and passengers. But they say a recent decision by the company to abandon much-touted first-class sections on its Seattle flights in favor of more economy-class seats, as the market is currently dictating, is the kind of smart business move that counters the equipment disadvantage and keeps Bergt in the game.

Wallace says Alaska Airlines is taking no chances in the competition, however, and is acquiring new planes for the Seattle route to match what he calls MarkAir's "hodge-podge" of aircraft.

Intrastate Scramble. While volumes of air cargo carried within the state remained essentially unchanged between 1990 and 1991, air carriers found their slices of the pie quickly shrinking when Wilbur's Inc. began flying freight to some of the communities already served by the state's intrastate leaders: Alaska Airlines, MarkAir and Northern Air Cargo.

Alaska's intrastate carriers are profoundly affected by postal regulations governing air transport of mail. Those rules dictate that mail to a given market will be divided equally among all certified carriers serving that market. For some intrastate carriers, mail represents up to 60 percent of cargo volumes. This means that the entry of a new carrier or decisions by the Postal Service to utilize transport other than air, as has occurred in a number of coastal communities, can cut substantially into revenue.

Wilbur's, established in 1952, was owned until last year by its founders. Since they sold out, the airline has gone through several major internal changes. In March 1991, the carrier was purchased by Pacific Northern Airways, which later was acquired by WAA Leasing of Dallas, Texas. WAA Leasing also owns some of the former Wien Air Alaska's assets.

In mid-March of this year, after an insurance lapse forced Wilbur's to halt flights, the airline was grounded by a U.S. Department of Transportation regulation that requires the carrier to demonstrate economic "fitness" after operations cease for a 24-hour period. According to Junior Johnson, general manager of the carrier, Wilbur's earlier this year had been departing Anchorage with two DC-6 flights daily, one to Bethel and St. Mary's, the other to Nome and Kotzebue, hauling a total of 45,000 to 60,000 pounds a day.

The DC-6s that had been flown on Wilbur's routes through a code-share agreement are owned by Universal Airlines of Detroit, Mich., another Pacific Northern Airways subsidiary. For a short time, Wilbur's resumed air-taxi service with smaller aircraft. But on April 3, both Wilbur's and Universal closed operations in Alaska indefinitely.

Scott Thorsen, Northern Air Cargo's marketing manager, notes that Wilbur's expansion last year had an impact on what once was a fairly stable business environment. "They're very, very tough and fierce competitors," he says. "Until 1991, the intrastate air-cargo market had been fairly static. The playing field stayed real level, everybody knew what everybody was doing. Our growth averaged 7 to 8 percent a year."

Thorsen estimates the price wars prompted by Wilbur's entry resulted in a 10 to 12 percent decline in NAC's share of the intrastate market. "It hasn't helped any of the carriers, but it certainly has helped the customers. The rate wars are having an effect on us," Thorsen adds.

Given the absence of significant economic growth in Alaska, the outlook for the domestic cargo markets is flat. Says Thorsen, "1992 overall, if I had to guess, would be pretty much a break-even year for everybody, but it could be a loser, depending on what happens this summer."

Anchorage International Airport's Westman is a little more positive about future opportunities: "Domestic cargo is going to be a consistent performer, although I don't see any explosive growth. It's a matter of a market that's mature and healthy here. I think the prognosis is going to parallel the economy, which shows signs of rebound."

Westman predicts that the industry will recover from the ill effects of the gulf war and post airport volumes at or a little above last year's levels.

Looking ahead, airport planners will continue their efforts to lure new international air-cargo activity from existing hubs by marketing Alaska's competitive advantages: strategic location, uncongested infrastructure and vacant, developable land.

Ultimately, however, the long-term vitality of air-cargo's international, interstate and intrastate sectors hinges on the performance of regional, national and global economies. In the meantime, all the carriers can do is buckle in for more turbulence ahead.
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Air Cargo Outlook
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:May 1, 1992
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