Air Cargo: Growth and Issues Thomas R Leinbach Department of

Air Cargo: Growth and Issues Thomas R Leinbach Department of Geography University of Kentucky

World Air Travel Growth Two Effects Determine Air Travel Growth 1. Most significant is : Economic Growth 2. But also Value is created as airlines reduce prices and increases their services in contributing to international trade Intra-North American share will decline as result of maturity from 24% to 20% Intra-Asia Pacific share will increase from 15% to 18%

World Cargo Growth Detail

World Air Cargo Trends Dramatic, 5.8%, drop of world air cargo in 2001-Why? Simultaneous slowing of world’s largest economic groupings Collapse of the “technology bubble” Terrorist attacks Despite SARS outbreaks annual growth jumped nearly 4% in 2003 Further 10.7% increase in traffic for first 5 months of 2004 compared to 2003 Long-term air cargo growth is expected to average 6.2% per year

Recent Air Cargo Trends http://www.boeing.com/commercial/cargo/01 01.ht ml

Air Freight Growth by Major Market Growth in markets linked to Asia will continue to lead the rest of the industry at rates exceeding the world average The Intra-Asian freight market will grow fastest among all world markets and is expected to display growth of nearly 7% per year- Domestic China 9.4% Asian markets will account for more than 50% of the world market by 2019

Air Cargo Freighter Fleets The world fleet is expected to more than double by 2023, with total fleet size growing to 34,764 airplanes. Over the 20-year forecast period, 6,397 airplanes will be retired from active commercial service and will be replaced. An additional 18,596 airplanes will be needed to fill capacity demand Wide bodies dominate future fleet

World Freight Fleet 2003

World Freighter Fleet Growth

Yield Declines Yield: A standard unit of airline prices, defined as average revenue per revenue passenger mile or revenue ton mile The profit squeeze within the passenger industry has focused attention on the cargo market lower hold revenue opportunities. Industry yield for both cargo and passenger services have steadily declined since 1970. Such declines reflect airline productivity gains, technical improvements, and intensifying competition. Scheduled freight yields firmed slightly in the late 1990s and now have begun to increase somewhat.

But Yield Trends Decline

Wet Lease Airlines The competitive nature of the air cargo industry requires innovation and flexibility. The freighter "wet-lease "airline, or ACMI (aircraft, crew, maintenance, and insurance) provider, has provided traditional airlines a new competitive option. Wet-lease carriers can offer airlines the flexibility to contract for air transportation services on a trial basis if demand is uncertain, augment existing markets, or provide service in markets that are highly seasonal without the investment in dedicated equipment.

ACMI Providers

Rise of the Integrators Integrator is a firm that both flies the cargo between airports and handles ground pick up from and delivery to customers Tremendous growth of integrators over past five years because of time sensitivity of goods movement Major competitors for an increasingly lucrative market are: Federal Express, United Parcel Service, TNT, Airborne

International Air Express The definitions of express versus nonexpress air cargo are blurred Traditional airlines, particularly in Europe, expand their offerings of time-definite services. Also, government postal authorities have become full-fledged "logistics providers, "largely through the acquisition of established firms. But regardless of the entity that provides the express service, the air cargo customer will benefit from increased service and lower prices as competing products enter the market.

International Express Market

Air Cargo Services and Internationalization of Manufacturing Firms in Southeast Asia

Air Cargo in Southeast Asia Why have air cargo services grown so rapidly in Southeast Asia? How have the quality, diversity, and sophistication of air cargo services changed? How do different electronics manufacturers use air cargo services to link their globally dispersed operations? What are some explanations for the intensity of air cargo usage by electronics manufacturers?

Reasons for Growth of Air Cargo Until financial crisis, strong growth in the economies: Malaysia 4530 PCI, Philippines 1,200, Singapore 32,810 1980-98: Rate GDP 7%, 2.3%, 7.7% Commonalities: export-oriented economies, impact of electronics, recent economic crisis Adoption of just-in-time (JIT) practices by manufacturers and integrated logistics Lower air freight rates due to superior aircraft

Specific Research Questions Is air cargo use behavior among firms diverse or homogeneous? How to measure the intensity of air cargo use? And does this vary by local economy and its level of development? How do differences in user firms’ size, ownership, structure, level of internationalization, and local context affect the use of air cargo services?

Phase I Data Gathering-User Firms Random sampling of electronics firms in Singapore (n 38), Penang (n 41), Kuala Lumpur (n 23), Manila (n 24) On average one hour interviews were carried out with management (logistics) personnel Information gathered on firm type, size,ownership,products and destinations, raw materials and origins, sourcing, product cycle time

Firm Ownership by Place 100% 80% 60% 40% 20% 0% Other USA Korean/Taiwanese Japanese European Local

Product Class by Place 100% 80% 60% 40% 20% 0% Semiconductors Computers & Peripherals Consumer Electronics Wires & Cables Precision Equipment

Average Distance in Firm Production Linkages 9,000 8,000 7,000 Miles 6,000 5,000 4,000 3,000 2,000 1,000 Singapore Penang Kuala Lumpur Manila

Air Cargo Intensity Index 1. Degree to which a firm used air cargo services in general. : regular basis (3) or to meet peak season demand only (0.5) 2. Move the most important raw material/component and the second most important raw material/component: 1 point for each of the two inputs moved mainly by airfreight. 3. Used air cargo to move its principal product to its most important and second destination market : 5 points if airfreight was the main mode used to ship goods to both destinations. 4. Degree to which a firm uses express air cargo services: no express (0), only in emergencies (.5),meet peak season demand only (1), regular basis for some products (2.5), regular basis for most or all products (5)

Mean Air Cargo Intensity Index 7 Air Cargo Intensity 6 5 4 3 2 1 0 Singapore Penang Kuala Lumpur Manila

C om on su ls ct or s Pe ri ph er a Se m ic on du & le ct ro ni cs Ca bl es Eq ui pm en t m er E pu te rs C on W ir es & Pr ec isi Average Air Intensity Index 10 8 6 4 2 0 50 45 40 35 30 25 20 15 10 5 0 Cycle Time (Days) Average Cargo Intensity and Cycle Time Air Cargo Intensity Cycle Time (Days)

Intel-Philippines and Air Cargo

Brady-Singapore and Air Cargo

AVX-Kyocera Singapore and Air Cargo

Hypotheses The intensity of air cargo use is positively related to the degree to which a firm’s production linkages are internationalized-(total distance). YES The intensity of air cargo use varies directly with a firm’s local employment size. NO The intensity of air cargo usage is higher among firms with a primarily knowledge-intensive workforce versus those with a primarily laborintensive workforce. NO The intensity of air cargo usage is inversely related to the average cycle time of a firm’s operation YES

Preliminary Findings Air cargo usage among electronics firms is quite diverse Intensity of air cargo use is strongly related to a firm’s internationalization of production and distribution linkages

Preliminary Findings Product type is also clearly a useful predictor of air cargo use: e.g. semiconductors versus consumer electronics Perhaps most critical are factors such as product obsolescence, firm competitive policy, customer preferences, and supply chain management strategies of individual firms

Subic Bay: Air Cargo Services, Development and Policy Subic Bay Largest US military base in Asia during Cold War -deepwater port and 8,000 foot runway. 1991 Eruption of Mt Pinatubo buries base under 1218 inches of ash. Philippine Senate rejects 10 year bases treaty to continue American control beyond 1991. Last American forces leave in 1992 Former base and adjacent areas governed by semiautonomous Subic Bay Metropolitan Authority.

Subic Bay, Philippines

Subic Bay: Air Cargo Services, Development and Policy Federal Express established “Asia One” hub at converted airbase in 1995. Principal reasons for hub selection: underutilized airport infrastructure liberal Philippine aviation policy geographic centrality within Pacific Asia trained, English-speaking workforce free trade zone incentives/flexibility

FedEx “Asia One” Network

Subic Bay: Air Cargo Services, Development and Policy FedEx “Asia One” Network linked to 18 Asian markets by daily flights, mainly by 85-tonne capacity McDonnell Douglas MD-11, allowing overnight intra-Asia shipments subcontracted ground transport for links to Metro Manila via 110 km poorly maintained highway hub employs 650 directly; 2000 indirectly

Subic Bay: Air Cargo Services, Development and Policy Acer site selection based in part on availability of air cargo services to Taiwan, USA and other markets intended as mass production complement to more advanced facilities in Taiwan Subic Bay operations include personal computer motherboards since 1995 notebook computers since 1998 (25-30% of all Acer notebook production) 2,700 employees

Subic Bay: Air Cargo Services, Development and Policy Acer Logistical Operations low value components (e.g. capacitors) shipped by sea to Philippines high value Taiwanese components (e.g. processor chips) shipped by air to Subic Bay daily some components (IBM TFTs, Hitachi CD-ROMs) shipped from manufacturing zones elsewhere in Philippines breakdown of export markets: [1/3 Asia; 1/3 Europe; 1/3 America]

Subic Bay: Air Cargo Services, Development and Policy State policies favoring Subic Bay development: free trade zone liberal aviation policy Philippine domestic deregulation liberal policy towards US flag carrier (FedEx) hub highway infrastructure development linking Subic to Manila linking Subic to Clark airfield (planned)

Subic Bay: Air Cargo Services, Development and Policy Philippine-Taiwan Air Services Conflict Philippine Airlines owner Lucio Tan pressures Philippine government to rollback liberalization Escalating conflict over carriage of PhilippineUSA traffic via Taipei on Taiwanese carriers October 1999 Philippines suspends direct services to/from Taiwan by respective national carriers Cessation of direct Philippine-Taiwan services forces traffic through alternate hubs (e.g. HKG)

Subic Bay: Air Cargo Services, Development and Policy Philippine-Taiwan Air Services Conflict Acer forced to reroute Taiwanese traffic via alternate hubs (e.g. HKG) Notebook computer output at Subic facility: 84,000 sets per month before crisis 30,000 sets per month currently Employment cut in response Acer evaluating shift of operations to mainland China -cites “fear” of Philippine government decision-making