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Where has all the heavyweight gone?

What happened to the U.S. domestic overnight, heavyweight freight business over the past six years? FedEx and UPS have some of the higher-yielding, mostly second-day traffic on board today. BAX Global, Emery, CF Air Freight, DHL and Kitty Hawk all operated five-night-per-week overnight delivery systems via their own dedicated Midwest hubs and carried, collectively, 57 million pounds a night of door-to-door heavyweight traffic.

The answer: It's gone, due to poor service, low yield and limited IT investment and performance available to shippers/customers. The less-than-truckload (LTL) truckers at the same time added online tracking with linehaul at roughly 30 percent of air service costs for roughly comparable service and delivered much, if not most, of this traffic door-to-door in two to five days, coast-to-coast. The value proposition for air transportation-based service was judged by shippers to not be worthwhile.

FedEx and UPS today carry 2 million pounds per night of "domestic express freight" and currently have no real competition for this domestic next-day and second-day door-to-door traffic. Airfreight forwarders and third-party logistics providers today use a combination of passenger airline bellies, road feeder services, and LTL truckers for their remaining domestic "airfreight accounts."

Further, UPS and FedEx today offer extensive LTL options of their own, along with their overnight and second-day guarantee service, which in most cases requires air linehaul.

Another capacity change is represented by the substitution of 777 and A330 aircraft on many scheduled domestic passenger flights providing four to seven LD 7-sized containers on each frequency. Innovators like Southwest Airlines designate the aft belly compartment on 737s solely for airfreight on most flights providing predictable, low-cost air linehaul capacity that generated more than US$250 million in annual revenue in 2014 for SWA.

With jet fuel at $2.50 per gallon in late March, the incremental cost of carrying freight on passenger aircraft has been reduced by 50 percent on larger aircraft over the previous nine months. Freighter operations, where fuel represented 50 percent-plus of direct operating costs at $120 barrel oil, may see a revival if oil remains at current prices through 2015. The 747-400F and MD-11F were rendered uneconomical due to high fuel prices following the 2008 market collapse. Some of these aircraft may return from the desert if oil remains below $50 per barrel.

Do these current economic circumstances suggest a return of U.S. domestic overnight freighter aircraft operations? Probably not now, or ever, except for growth of premium express freight for UPS and FedEx at the top end of the service/yield curve. While FedEx originated premium guaranteed delivery, the heavyweight commodity sector never provided sufficient value for money, nor was the service offered on a consistent basis that could be measured by forwarders and shippers with robust IT systems.

International air cargo transport, which is still controlled for the most part by freight forwarders, has different service characteristics requiring individual customs procedures, ground-handling, and often distribution services at destinations that vary from one shipper or commodity to the next. These are difficult for UPS/FedEx/DHL to provide, especially for large consignments.

Expeditors, Kuhne + Nagle, Schenker and Nippon Express have successfully defended their key customers from significant penetration by the integrators in most markets due to the specific shipment handling characteristics of heavyweight freight consignments. Adoption of e-freight by carriers and forwarders, which is moving very slowly, is an absolute must if forwarders/air carriers are to maintain control of international air tonnage in the future. IATA says about 25 percent of forwarders, by volume, have embraced e-freight to date. The higher prices charged by FedEx/DHL/ UPS for international express freight, door-to-door, will eat into the legacy air cargo business, if the services offered by the forwarder/air carrier partnership does not improve, near-term. Universal e-air waybill (e-AWB) adoption made mandatory is a good starting place.

The rollup of Purolator/CF/Emery to create UPS supply chain solutions, now called "UPS Logistics," has given shippers almost all the transport options required from one company. DHL, likewise, has a complete service offering and FedEx is currently building out the forwarder and 3PL piece of its offering as well.

Will the forwarders and air carriers add seamless IT capability, using the e-AWB, which the integrators created in the 1990s? Or will the international air cargo business go through the same migration back to surface transportation as the U.S. domestic air cargo industry experienced over the past six years?

The handwriting is on the wall. The growing Middle East giants, led by Emirates, are in the vanguard of change in e-freight. Qatar Airways Cargo, now led by Ulie Ogiermann, former CEO of Cargolux, clearly understands forwarder needs and air carrier deficiencies on the service side.

Lower oil prices may be the catalyst that gets air cargo growth back on a solid, sustainable footing. Let's hope the lessons of the last six years have been well-learned by both carriers and forwarders.

Ned Laird, the founder of Air Cargo Management Group (acmg.aero) and the Cargo Facts newsletter, is a longtime air cargo industry professional and former Boeing executive. The Manifest will appear quarterly.
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Title Annotation:The Manifest
Comment:Where has all the heavyweight gone?(The Manifest)
Author:Laird, Ned
Publication:Air Cargo World, International ed.
Date:Apr 1, 2015
Words:851
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